KEARNEY,
J.:+-This
action
concerns
a
profit
of
$10,957.25
realized
by
the
appellant
in
its
taxation
year
1961
on
the
sale,
early
in
1961,
of
a
shopping
centre
which
it
had
caused
to
be
erected
on
a
site
consisting
of
two
adjacent
parcels
of
land
situated
on
97
th
Street
and
129B
Avenue
in
the
City
of
Edmonton,
which
it
had
acquired
in
1959.
On
June
30,
1959,
Killarney
Properties
Limited
(hereinafter
called
Killarney
Ltd.)
acquired,
for
the
sum
of
$1
and
other
good
and
valuable
consideration,
from
Kisbey
Properties
Limited
(hereinafter
called
Kisbey
Ltd.),
with
the
exception
of
the
westerly
thirty-one
feet
throughout
Lots
Twenty-one
(21)
to
Twenty-
four
(24),
inclusive,
in
Block
Twenty-four
(24),
in
the
City
of
Edmonton
(Ex.
2),
but,
according
to
an
affidavit
of
G.
Edward
Trott,
agent
for
Killarney
Ltd.,
attached
to
the
deed,
the
true
consideration
paid
by
the
transferee
amounted
to
$20,000.
Kisbey
Ltd.
had
acquired
the
said
property
from
the
City
of
Edmonton.
On
September
4,
1959,
as
appears
by
Exhibit
3,
the
City
of
Edmonton,
in
consideration
of
$3,500
paid
to
it
by
Kisbey
Ltd.
and
Killarney
Ltd.
(the
said
Kisbey
Ltd.
having
assigned
its
interest
to
the
said
Killarney
Ltd.
by
assignment
dated
July
16,
1959),
transferred
to
Killarney
Ltd.
an
adjoining
piece
of
property
described
as
Lot
20
of
Block
24.
Attached
to
the
deed
is
an
affidavit
of
the
aforesaid
agent
of
Killarney
Ltd.
in
which
he
declares
that
the
present
value
of
the
land,
in
his
opinion,
amounted
to
$10,000:
Asked
how
did
Killarney
Ltd.
happen
to
be
receiving
transfer
of
Lot
20
from
the
City
of
Edmonton,
he
replied:
‘‘Lot
20
was
adjacent
to
the
other
lands
and
so
Killarney
undertook
to
buy.’’
The
witness
filed
as
Exhibit
4
a
list
giving
the
names
and
occupations
of
his
friends
and
associates
who
became
shareholders
of
the
Company,
together
with
their
respective
shareholdings
;
it
showed
110
shares.
The
first
name
on
the
list
is
his
own.
He
owned
three
shares
and
his
loan
to
the
Company
amounted
to
$600.
The
last
name
on
the
list
is
Kisbey
Ltd.
;
the
latter
held
twenty
shares.
Kisbey
Ltd.
was
not
only
the
largest
shareholder
but.
also
the
largest
lender,
and
its
loan
amounted
to
$11,798.
The
witness
stated
that
before
Kisbey
Ltd.
sold
the
land
to
Killarney
Ltd.
it
had
not
taken
any
steps
toward
construction
of
a
shopping
centre,
nor
had
it
arranged
for
any
leases,
but
it
had
consulted
architects.
“Q.
Who
arranged
for
these
shareholders
of
Killarney
to
put
money
into
the
company
?
A.
Myself.
Q.
What
was
done
with
this
money
?
A.
It
was
used
to
pay
for
the
land.’’
The
anticipated
yield,
based
on
the
net
return
on
the
project
before
depreciation
and
on
the
cash
invested,
which
amounted
to
$30,000,
would
rise
to
56
per
cent
when
the
mortgage
had
been
retired,
which,
it
was
estimated,
would
be
in
ten
years
time.
In
the
opinion
of
the
witness,
such
return
was
much
higher
than
normally
found
in
most
revenue
properties
due,
to
a
large
extent,
to
the
increase
in
the
value
of
the
land
as
a
result
of
development.
After
selling
the
property
in
1961
for
$150,000—of
which
$133,000
was
paid
in
cash
and
$17,000
in
the
form
of
a
second
mortgage—a
cash
balance
of
close
to
$30,000
remained
in
the
treasury
and
the
Company,
the
witness
said,
re-invested
it
in
an
office-and-retail-type
development
of
a
larger
size,
in
Edmonton,
being
handled
by
the
group
of
which
Killarney
was
a
part.
Returning
to
the
history
of
the
shopping
centre,
Mr.
Martenson
stated
that
the
building
contract
was
given
to
the
lowest
bidder,
Prince
Construction
Company
Limited,
for
an
amount
of
$78,000
(Ex.
5).
Construction
began
in
September
1959
and
it
was
anticipated
that
the
building
would
be
completed
in
six
or
eight
weeks,
which
would
be
in
late
October
or
November,
but
it
was
near
Christmas
when
the
tenants
were
able
to
move
in
and
the
shopping
centre
was
not
completely
finished
until
February
1960.
The
work
was
carried
out
much
more
slowly
than
most
contracts
of
the
same
nature.
The
contractor,
without
the
consent
of
the
Company,
made
many
changes
at
the
request
of
tenants
with
respect
to
leasehold
improvements.
This
led
to
difficulty
in
negotiating
a
settlement
with
the
tenants,
but,
finally,
under
threat
of
legal
action
against
them,
‘‘the
contractor
settled
rather
than
face
this
thing
in
court’’.
The
shopping
centre
was
completely
leased
in
March
1960.
Messrs.
Walden
and
Gourlay,
both
directors
of
Killarney
Ltd.,
were
in
receipt
of
modest
salaries
for
looking
after
collection
of
rents
and
dealings
with
the
tenants.
No
mortgage
money
had
been
arranged
for
until
after
the
construction
contract
had
been
allotted.
Unsuccessful
efforts
had
been
made
to
secure
a
loan
from
regular
life
insurance
companies
at
interest
rates
of
7
to
714
per
cent
with
no
bonus,
and
an
interim
construction
type
of
mortgage
was
obtained
on
September
11,
1959
from
First
Investors
Corporation
Limited
for
$90,000
at
7
per
cent
and
a
$10,000
bonus,
the
due
date
of
which
was
November
1,
1961
(Ex.
6).
The
witness
stated
that
the
following
offers
of
purchase
were
reecived.
On
August
6,
1959,
Vergil
Chambers,
of
Edmonton,
offered,
through
his
solicitors,
to
purchase
the
shopping
centre
for
$130,000,
payable
$40,000
cash
and
a
mortgage
for
$90,000,
amortized
over
ten
years,
with
interest
at
7
per
cent
(Ex.
7).
The
Company,
by
letter,
refused
the
offer
and
informed
the
pur-
chaser
that,
at
the
price
and
on
the
conditions
mentioned,
there
was
no
possibility
of
a
sale.
The
letter
went
on
to
say:
‘The
only
thing
we
could
suggest
is
that
Mr.
Chambers
offer
to
purchase
all
the
outstanding
shares
in
Killarney
Properties
Ltd.
for
$40,000.
If
all
the
shareholders
agree
to
this
he
would
then
take
over
the
company
as
is.’’
(Ex.
8).
Mr.
Martenson
stated
that
the
property
was
never
listed
for
sale
with
any
real
estate
agent
and
added
that
he
was
interested,
from
an
agent’s
point
of
view,
in
having
the
property
for
sale
and
earning
a
commission,
but
that
his
request
to
obtain
the
listing
was
rejected
by
the
directors
as
a
whole.
On
June
1,
1960,
an
offer
was
received
from
Nielsen
Investment
Ltd.
for
$155,000,
payable
$15,000
cash,
plus
an
equity
in
a
certain
piece
of
property,
and
the
balance,
amounting
to
$98,000,
payable
$1,000
per
month,
with
interest
at
7
per
cent
(Ex.
9).
The
aforesaid
offer
was
rejected.
On
December
20,
1960,
an
offer
was
received
from
George
Mah,
which,
the
witness
said,
resulted
in
the
ultimate
sale
of
the
property.
The
price
was
$137,500,
payable
$4,000
cash,
with
an
additional
$45,000
payable
on
the
possession
date,
$84,000
by
way
of
mortgage—to
be
arranged
by
the
purchaser—and
$4,500
by
a
second
mortgage
to
Killarney
Ltd.
as
vendor
(Ex.
10).
The
offer
was
refused,
but
on
January
17,
1961,
Mr.
Mah,
through
his
attorneys,
made
a
second
offer
(Ex.
11)
amounting
to
$150,000,
payable
$133,000
in
cash
and
$17,000
by
way
of
second
mortgages
payable
over
a
period
of
ten
years
at
seven
and
one-half
per
cent
interest.
The
offer
contained
the
following
condition
:
“This
offer
is
subject
to
the
confirmation
by
North
American
Life
that
they
will
grant
a
mortgage
to
Mr.
Mah
on
the
above
referred
property
in
the
sum
of
$85,000.
All
adjustments
will
be
as
at
the
date
of
possession
and
the
date
of
possession
is
set
at
February
1st,
1961.”
The
offer
was
accepted.
The
Company
paid
to
the
agent,
Melton
Real
Estate
Co.,
which
handled
the
transaction,
$1,000
as
commission.
The
regular
tariff,
the
witness
said,
would
amount
to
$6,500.
Mr.
Martenson
stated
that,
at
the
date
of
purchase,
the
First
Investors
mortgage
was
not
discharged
because
the
Company
was
unable
to
obtain,
to
repay
it,
a
conventional
mortgage
from
another
source.
Mr.
Mah
arranged
a
new
mortgage
and
retired
the
existing
mortgage.
Asked
what
considerations
influenced
the
directors
in
deciding
to
sell,
the
witness
replied
:
“They
were
concerned
by
that
time
that
they
had
been
unable
to
arrange
a
mortgage
to
pay
this
First
Investors
mortgage
which
was
due
that
same
year.
This
was
a
large
debt
which
.-
was
about
to
mature,
and
many
attempts
had
been
made
to
obtain
a
long-term
mortgage
through
a.
conventional
company
at
conventional
rates
of
7
or
714
per
cent,
and
we
had
been
unsuccessful,
so
this
was
a
consideration
from
the
point
of
view
of
servicing
this
debt.
There
was
also
the
consideration
that
the
tenants
still
were
fairly
unhappy,
and
we
had
not
solved
all
our
problems
with
them
by
this
time,
and
this
was
a
frustrating
thing
for
the
property
manager,
and
the
directors.
A
third
factor
was
also
that
the
building
was
not
well
built
and
there
were
a
series
of
problems,
none
really
large
in
themselves,
but
many
in
number
and
quite
irritating,
things
like
doors
not
closing
properly,
sidewalks
in
front
falling
away
from
the
building
and
that
type
of
thing,
so
this
was
a
consideration
also
that
there
might
be
extensive
maintenance
problems
in
the
future
that
would
not
only
cost
money
but
further
create
tenant
and
landlord
problems.
And
I
think
a
fourth
factor
is
that
this
was
the
first
building
or
development
ever
undertaken
by.
this
group
and
they
were
quite
inexperienced,
and
most
problems
probably
loomed
much
larger
than
they
would
appear
to
a
developer
who
was
experienced
in
this
sort
of
thing,
and
this
was
definitely
another
factor
in
influencing
the
directors
to
accept
this
offer.’’
The
witness
stated
that,
in
the
fall
of
1960,
he
contacted
at
least
five
mortgage
companies
and
that
other
directors
contacted
at
least
another
five.
None
of
the
companies
showed
any
interest
except
North
American
Life
Assurance
Co.
John
Klink,
the
manager
of
that
firm,
agreed
in
principle
to
the
idea
but
he
had
exhausted
his
quota
of
funds
and
could
give
no
assurance
that
the
Company
would
get
any
conventional
mortgage
funds
in
the
future
through
his
firm.
The
witness
added
that,
in
fact,
North
American
Life
Assurance
Company
eventually
did
grant
a
mortgage.
In
cross-examination,
counsel
for
the
respondent
elicited
the
following
information
from
Mr.
Martenson.
This
was
not
the
first
business
venture
that
he
and
a
number
of
associates
had
entered
into.
He
and
a
number
of
them,
in
1959,
bought
substantial
acreage,
sold
enough
to
pay
back
the
cost
and
held
the
balance.
About
105
shares
of
the
Company
were
issued
and
the
price
paid
was
one
cent
a
share.
Apart
from
Kisbey,
which
was
the
original
owner
of
the
property,
the
amounts
advanced
as
loans
by
the
other
shareholders
amounted
to
about
$17,000,
and,
together
with
the
price
of
their.
equity
stock,
their
investment
in
the
Company
totalled
$18,000.
.
e
The
witness
was
asked
to
file
a
copy
of
minutes
of
a
directors’
meeting
of
the
Company
dated
July
6,
1959
(Ex.
A),
which
sets
out
the
memorandum
of
association;
I
shall
comment
upon
it
later.
The
witness
agreed
that
the
construction
was
started
in
September
1959
and
that
prior
to
this
the
Company
had
already
received
the
Vergil
Chambers
offer
of
August
9.
The
witness
was
asked
to
file
as
Exhibit
B
an
extract
from
the
minutes
of
the
meeting
which
considered
the
said
offer;
this
extract
reads
in
part
as
follows:
“On
motion
duly
made
and
unanimously
passed
it
was
resolved
that
solicitors
for
the
company
should
write
to
solicitors
for
Vergil
Chambers
and
advise
him
that
the
only
offer
we
can
consider
at
the
present
time
is
one
to
acquire
all
the
shares
in
Killarney
Properties
Ltd.
with
the
understanding
that
the
leasing
commissions
have
been
paid
in
full
and
the
architects
fees
will
be
paid
in
full.
All
other
benefits,
rights
and
obligations
would
be
assumed
by
Mr.
Chambers.
(I
will
not
I
read
the
last
two
paragraphs,
my
Lord.)
”’
The
witness
was
asked:
“Q.
So
that
the
directors
on
this
9th
day
of
August,
1959
are
.
already
giving
consideration
to
under
what
conditions
that
the
property.
might
be
sold?
A.
Yes.”
The
witness
agreed
that
construction
was
started
in
September
1959
and
that,
prior
to
this,
the
Company
had
already
received
the
Vergil
Chambers
offer
of
August
9.
In
reference
to
the
construction
mortgage
the
Company
received
only
$80,000
in
mortgage
money
because
of
having
to
pay
a
$10,000
bonus.
The
witness
agreed
that
the
ordinary
mortgage
company
which
grants
a
conventional
mortgage
does
not
require
a
bonus
of
this
type.
The
witness
was
asked
to
produce
a
copy
of
a
meeting
of
directors
of
April
4,
1960,
held
following
the
completion
of
the
building
(Ex.
C),
an
extract
from
which
reads
thus:
“2.
Mr.
Martenson
reported
that
except
for
some
minor
deficiencies
the
building
was
complete.
One
unit
remains.
unleased
but
three
applications
are
in
hand
from:
prospective
tenants.
The
building
will
be
fully
leased
by
May
1,
1960,
3.
Mr.
Walden
reported
that
all
tenants
had
paid
their
rents
according
to
schedule
and
that
all
bills
had
been
paid,
except
those
relating
to
the
balance
of
construction.
$3,750
-has
been
paid
on
the
mortgage.
4.
À
letter
from
Prince
Construction
Company
Ltd.
re
final
settlement
was
studied.
The
final
price
is
to
be
$95,000.
Alternatives
of
financing
were
discussed
by
the
Board
and
it
was
decided
to
approach
the
mortgagor
to
obtain
additional
funds
to
pay
the
contractor.
Mr.
Walden
to
attend
to
the
details.
5.
It
was
decided
that
a
sign
would
not
be
erected
on
the
building
at
this
time.
7.
Future
plans
of
the
company
in
connection
with
the
shopping
centre
revolved
around
selling
the
property.
A
price
of
$160,000
would
be
acceptable,
the
Board
felt.’’
The
witness
agreed
that
once
the
leases
were
completed
the
Company
planned
to
apply
for
what
is
called
‘‘a
conventional
mortgage’’,
as
it
then
would
be
in
a
position
to
show
a
mortgage
company
the
rental
income
that
could
be
obtained.
Mr.
Martenson
declared
that,
in
the
latter
part
of
1960,
he
contacted,
among
five
others,
Mr.
Klink
of
North
American
Life
Assurance
Company,
who
informed
him
that
the
shopping
centre
was
a
development
on
which
the
insurance
company
conceivably
would
grant
a
mortgage
but
that
his
allotment,
at
that
time,
had
been
expended.
After
reminding
the
witness
that
the
last
paragraph
of
Mr.
Mah’s
offer
of
January
17,
1961,
states:
“This
offer
is
subject
to
the
confirmation
by
North
American
Life
that
they
will
grant
a
mortgage
to
Mr.
Mah
on
the
above
reference
to
property
in
the
sum
of
$85,000.”
counsel
for
the
respondent
asked
the
following
questions
and
received
these
answers:
‘
‘
Q.
And
with
this
offer
you
knew
that
the
offer
was
contingent
upon
North
American
Life
loaning
the
money?
The
company
knew
that?
A.
Yes.
Q.
And
did
the
company
then,
in
looking
for
mortgage
money,
go
to
North
American
Life
or
Mr.
Klink
and
say—■
Now,
you
have
some
money,
will
you
loan
it
to
us?’
A.
No.
Q.
You
didn’t?
A.
No.
Q.
Nor
after
January
17th,
1961,
did
the
company
approach
any
other
mortgage
institution
in
order
to
borrow
money
for
this
purpose?
A.
No.
Q.
Now,
Mr.
Martenson,
the
offer
to
purchase
from
Mr.
Mah,
the
first
one
which
I
think
was
Exhibit
No.
10,
that
is
Mah’s
earlier
offer
dated
December
20th,
1960,
and
this
offer
came
to
you
through
Melton’s
Real
Estate
?
A.
Yes.
Q.
And
by
a
man
called
Pat
Turner?
A.
Yes.
Q.
You
were
at
this
time
the
commercial
manager
of
Imperial
Realtors
?
A.
Yes.’’
An
offer
for
the
property
in
the
amount
of
$155,000,
dated
June
1,
1960,
whereof
$42,000
was
to
be
paid
by
a
transfer
of
the
purchaser’s
equity
in
another
property,
was
declined.
The
Company
likewise
declined
an
offer
of
$137,000,
dated
December
20,
1960,
by
George
Mah
who,
on
January
17,
1961,
made
a
new
offer
of
$150,000,
of
which
$133,000
was
payable
in
cash,
and
which
the
Company
accepted.
‘“@.
And
Mr.
Turner
had
a
similar
position
with
Meltons?
A.
Yes.
Q.
And
you
were
close
friends?
A.
Yes.
Q.
Your
office
buildings
were
for
all
practical
purposes
next
door?
A.
Yes.
Q.
And
you
visited
and
had
coffee
together
and
you
discussed
various
things
intimately
all
the
time
we
are
concerned
with?
A.
We
discussed
things,
yes.
Q.
And
the
letter
and
the
offer
from
Mah
of
December
20th
came
as
no
surprise
to
you.
Pat
Turner,
the
Melton
man,
talked
to
you
about
it
prior
to
the
offer
being
made,
did
he
not?
A.
Yes.
Q.
And
in
between
the
first
offer
that
Mr.
Mah
made
of
December
20th,
1960
and
the
second
offer
of
January
17th,
1961,
you
and
Pat
Turner
negotiated
further
in
respect
of
this
?
A.
We
said
merely
what
we
wanted.
We
didn’t
make
a
counter-offer.
Q.
In
other
words
you
and
Turner
discussed
this
matter
over
quite
sometime?
A.
We
did
discuss
it,
yes.’’
On
re-examination
by
his
own
counsel,
he
was
asked
who,
among
the
members
of
the
Company,
including
the
witness,
were
interested
in
land
development
companies
prior
to
1959.
The
witness
replied:
“Some
of
the
members
were
with
me
in
Kisbey
Properties
Limited
and
some
were
with
me
in
the
development
of
a
golf
and
country
club.
Q.
Who
were
they?
A.
I
probably
can’t
tell
you
without
referring
to
the
shareholder
list.
Those
that
had
shares
in
each
were
myself,
Mr.
Walden,
Mr.
Sawatzky,
Mr.
Gillmore,
and
I
believe
that
is
all.
Q.
Was
Mr.
Black
in
Kisbey
?
A.
Yes.”
After
indicating
to
the
witness
that
the
cost
of
the
shopping
centre
was
$95,000,
which
is
$17,000
in
excess
of
the
contract
price,
counsel
for
the
appellant
put
the
following
question
:
,
“How
did
the
company
obtain
the
funds
on
which
to
pay
the
contract
?
A.
These
funds
were
obtained
primarily
from
the
mortgage
we
received
and
the
balance
from
the
bank
loan.
’
’
(I
might
here
observe
that
reference
to
the
bank
loan
appears
on
Exhibit
1,
where
a
caveat
which
was
placed
on
the
property
by
the
Bank
of
Nova
Scotia
is
shown.)
“Q.
Now,
Mr.
Martenson,
for
the
period
with
which
we
are
concerned,
Mr.
Martenson,
you
were
president
of
Killarney
Properties
Limited
and
also
a
real
estate
salesman
?
A.
Yes.
Q.
Now,
which
were
you
during
the
discussions
with
Mr.
Turner
that
you
spoke
about
to
my
learned
friend
?
A.
I
was
both.
I
was
wearing
two
hats
at
the
time
in
that
I
represented
both
a
real
estate
agency
and
the
company
that
owned
the
property.”
The
following
is
an
extract
from
the
questions
and
answers
given
by
Mr.
Martenson
on
examination
for
discovery
read
into
the
record
by
counsel
for
the
respondent
:
117.
“Q.
Was
the
amount
of
the
bonus
partly
because
of
the
location
of
the
shopping
centre
in
that
perhaps
it
was
somewhat
of
a
speculative
investment
in
comparison
to
perhaps
others?
<A.
Partly
because
it
is
speculative,
yes,
in
that
all
the
leases
were
not
acquired
at
that
time
and
partly
because
of
the
shorter
duration
their
overhead
or
handling
costs,
or
what
have
you,
have
to
be
amortized
over
a
shorter
period
of
time.
273.
Q.
Now
I
notice,
sir,
that
in
the
paragraph
immediately
above
the
adjournment
paragraph
the
last
sentence
read,
‘The
directors
felt
the
company
is
best
suited
to
invest
in
real
estate
and
that
the
company
should
try
to
increase
its
assets
by
fifty
per
cent
per
year.’
A.
Yes.
274,
Q.
And
the
increase
in
assets
at
fifty
per
cent
per
year
would
be:
by
carrying
on
business
?
A.
Yes.
275.
Q.
And
I
presume
that
this
would
involve
buying
and
sell-
/
.
ing?
A.
It
would,
it
could
involve
buying
and
selling
or
straight
development
work.
277.'
Q.
So
that
it
was
then
the
company’s
view
that
in
order
to
achieve
a
fifty
per
cent
increase
in
assets
per
year
the
best
way
to
do
it
was
by
development
of
real
estate?
A.
Yes.
278.
Q.
And
the
real
estate,
upon
development
would
either
be
retained
by
the
appellant
company
or
sold,
whichever
seemed
more
favourable?
A.
Yes.
279.
Q.
And
this,
I
presume,
has
at
all
times
been
the
intention,
if
a
company
has
an
intention,
of
the
appellant.
A.
What
would
be
the
intention
?
280.
Q.
Of
attempting
to
increase
its
assets
as
fast
as
possible
in
the
way
we
have
described
?
A.
Yes.’’
In
support
of
the
appellant’s
claim,
his
counsel
submitted
that,
in
the
early
days
of
the
Company,
there
was
no
intent
on
the
part
of
its
directors
and
shareholders
to
sell
the
property
and
that
the
compelling
reason
which
led
them
to
do
so,
instead
of
retaining
it
as
an
investment,
was
because
they
encountered
what
he
described
as
a
‘‘big
stumbling
block’’.
The
said
obstacle
rested
on
the
allegation
that
the
Company,
despite
repeated
efforts
by
its
directors,
was
unable
to
obtain
a
conventional
mortgage
to
replace
the
$90,000
construction
mortgage
negotiated
with
First
Investors
Corporation
Limited
and
which
fell
due
on
November
1,
1961.
In
my
opinion,
there
i
is
to
be
found.
in
the
evidence
previously
referred
to,
abundant
proof
that
those
who
directed
the
affairs
of
the
Company
had
a
dual
or
alternative
intention.
As
appears
by
questions
and
answers
Nos.
173,
277
and
278,
supra,
Martenson,
on
discovery,
testified
that
the.
Company,
by
real
estate
development,
would
try
to
increase
its
assets
by
50
per
cent
per
annum,
and,
thereupon,
to
either
retain
the
project
so
developed
or
sell
it—whichever
seemed
more
favourable.
The
Company,
it
may
be
recalled,
was
incorporated
in
June
1959
and
the
first
offer
for
the
property
of
$130,000
was
made
by
Mr.
Chambers
on
August
6,
1959
(Ex.
7),
whereupon
the
Company,
on
August
10
(Ex.
8),
while
declaring
that
the
offer
was
unacceptable,
showed
its
interest
in
selling
the
property
by
informing
the
intended
purchaser
that,
subject
to
ratification
by
the
shareholders,
it
would
be
interested,
if
the
said
purchaser
would
make
an
offer,
to
buy
all
the
outstanding
shares
I
in
‘
‘
Killarney
Properties
Limited
for
$40,000’’.
The
above
occurrence
took
place
less
than
a
month
after
the
Company
had
signed
the
building
contract
(Ex.
5)
and
a
month
before
any
construction
had
commenced
or
the
construction
mortgage
with
First
Investors
Corporation
Ltd.
had
been
signed
(Ex.
6).
Mr.
Martenson’s
testimony
discloses
that,
in
February
1960,
the
shopping
centre
was
nominally
completed
and
lessees
were
in
occupation.
The
minutes
of
the
directors’
meeting
of
the
Company
held
on
April
4,
1960
(Ex.
D)
provide
another
piece
of
revealing
evidence
of
intent
to
sell.
The
said
meeting
began
with
a
most
encouraging
statement
made
by
the
secretary,
Mr.
Walden,
who
reported
that
the
one
remaining
vacant
unit
in
the
shopping
centre
would
be
occupied
by
May
1;
that
all
tenants
had
paid
their
rents
on
schedule;
that
all
bills,
except
those
relating
to
the
balance
of
construction
cost,
had
been
paid;
and
that
the
final
price
for
construction
was
to
be
$95,000.
After
discussing
alternative
methods
of
financing,
it
was
decided
to
approach
The
First
Investors
Corporation
Ltd.
to
obtain
additional
funds
to
pay
the
contractor,
and
Mr.
Walden
was
instructed
to
attend
to
the
details.
The
evidence
does
not
disclose
whether
such
approach
had
been
made.
The
meeting
concluded
with
the
following
declaration
of
intent
:
“Future
plans
of
the
Company
in
connection
with
the
shopping
centre
revolved
around
selling
the
property.
A
price
of
$160,000
would
be
acceptable,
the
Board
felt.’’
The
foregoing
evidence,
in
my
opinion,
establishes
that
what
might,
previously,
have
been
regarded
as
a
secondary
alternative
of
intent
to
sell
the
property
had
now
become
a
preferred
alternative.
Indeed
it
would
hardly
be
overstatement
to
say
that
the
intent
to
sell
had
become
a
determination
to
do
so.
The
financial
set-up
of
the
Company,
in
my
opinion,
had
the
earmarks
of
a
promotional
and
profit-making
scheme
entered
into
more
particularly
by
Mr.
Martenson
and
three
or
four
close
associates,
who,
through
Kisbey
Ltd.,
in
which
they
were
shareholders,
held
a
controlling
interest
in
Killarney
Properties
Ltd.
The
capital-stock
of
the
Company
consisted
of
30,000
n.p.v.
shares,
which
could
be
issued
for
such
consideration
as
the
directors
might
determine,
but
not
to
exceed
$1
a
share.
All
the
issued
shares
of
the
Company
were
acquired
by
its
original
shareholders
for
1
cent
a
share
and
they
were
entitled
to
obtain
further
shares,
at
the
same
price,
up
to
some
11,000
shares,
to
be
apportioned
among
the
shareholders
according
to
the
amount
of
money
they
lent
to
the
Company,
which
totalled
approximately
$30,000.
In
other
words,
the
shareholders
practically
received
their
equity-holdings
in
the
Company
as
a
bonus
for
the
money
which
they
loaned
to
the
Company.
Before
passing
on
to
consideration
of
the
main
items
of
defence,
I
might
here
comment
on
the
speculative
nature
of
the
undertaking
and
the
background
of
the
prime
movers
of
the
venture.
The
president
of
the
Company
acknowledged
that
because
of
the
district
in
which
the
shopping
centre
was
to
be
located,
and
since,
at
the
beginning,
they
were
not
sure
of
obtaining
tenants
for
the
various
units
of
the
shopping
centre,
the
project
was
a
speculative
one.
We
are
not
here
dealing
with
a
case
in
which
it
was
the
first
time
that
the
prime
movers
in
the
enterprise
ever
engaged
in
a
similar
project.
They
had
previously
organized
and
developed
Kisbey
Ltd.
from
which
the
instant
property
had
been
purchased
and
an
unnamed
golf
club.
In
my
opinion,
the
acquisition,
development
and
sale
of
the
instant
property
was
a
further
adventure
in
the
nature
of
trade.
Now,
with
respect
to
the
main
defence,
viz.,
that
it
was
because
it
was
impossible
to
procure
a
conventional
mortgage
that
the
Company
was
left
with
little
or
no
alternative
but
to
dispose
of
the
shopping
centre,
in
my
opinion,
the
appellant
has
failed
to
adduce
any
convincing
evidence
in
support
of
this
submission
and
there
is
cogent
proof
in
the
record
to
the
contrary.
It
was
only
in
November
1960
that
the
president
and
some
of
his
associates
endeavoured,
without
success,
to
obtain
a
conventional
mortgage,
and,
at
this
time,
the
president
was
informed
that,
but
for
the
fact
that
North
American
Life
Insurance
Co.
had
used
up
their
quota
for
the
year,
they
would
have
been
prepared
to
grant
a
mortgage.
After
the
turn
of
the
year,
the
president
of
the
Company
admitted
that
he
had
not
approached
the
aforesaid
insurance
company
notwithstanding
that
he
was
well
aware
that
Mr.
Mah
was
negotiating
with
the
same
insurance
company
for
a
$85,000
construction
loan
and
that
the
latter’s
offer
to
purchase
the
property
in
issue
for
$150,000,
dated
January
17,
1961,
was
made
conditional
upon
the
insurance
company
granting
the
said
loan.
I
consider
that
the
only
logical
conclusion
to
be
drawn
from
the
aforesaid
evidence
is
that
the
directors
and
the
shareholders
of
the
Company,
far
from
intending
to
keep
the
shopping
centre
as
an
investment,
were
anxious
to
sell
it
and
thus
realize
over
a
33
per
cent
profit
on
their
investment.
Counsel
for
the
appellant
raised
other
arguments,
such
as:
trouble
of
an
irritating
nature
with
tenants;
some
evidence
of
defective
workmanship
;
doors
not
closing
properly
;
and
the
like.
Mr.
Martenson,
in
his
evidence,
said
that
such
troubles,
although
they
would
appear
large
to
some
inexperienced
shareholders,
to
a
man
like
himself
they
did
not
mean
much,
but
that
they
were,
however,
a
factor
in
influencing
the
directors
to
accept
Mr.
Mah’s
offer.
However,
I
regard
these
irritations
as
being
of
minor
importance
and
as
having
little
probative
value.
Mention
of
the
fact
was
made
that
the
very
first
object
of
the
Company,
as
inscribed
in
its
memorandum
of
association,
was
to
acquire
the
site
in
issue
to
construct
a
shopping
centre
thereon
and
to
lease
the
stores
contained
therein.
I
place
little
stock
in
the
above
described
point,
because
also
included
in
the
said
objects
were,
inter
alia:
“(c)
To
carry
on
business
as
investors,
brokers
and
agents
and
to
undertake
and
carry
on
and
execute
all
kinds
of
financial,
commercial,
trading
and
other
operations
which
may
seem
to
be
capable
of
being
conveniently
carried
on
or
in
connection
with
any
of
these
objects
or
calculated
directly
or
indirectly
to
enhance
the
value
of
or
facilitate
the
realization
of
or
render
profitable
any
of
the
Company’s
property
or
rights.
(k)
To
establish,
promote
and
otherwise
assist
any
company
or
companies
for
the
purpose
of
furthering
any
of
the
objects
of
this
Company.
(m)
To
sell
or
dispose
of
the
undertaking
of
the
Company
or
any
part
thereof
for
such
consideration
as
the
Company
may
think
fit
and
in
particular
for
shares,
debentures,
or
securities
of
any
other
Company
wheresoever
incorporated
having
objects
altogether
or
in
part
similar
to
those
of
this
Company
and
to
distribute
any
of
the
property
of
the
Company
among
the
members
in
specie.”
It
was
alleged
that
the
Company
did
not
hire
a
real
estate
agent
nor
advertise
the
property
for
sale.
The
president
was
himself
a
real
estate
agent
who
was
anxious
to
earn
a
fee
upon
the
sale
of
the
Company,
which
fee,
it
was
said,
would
have
amounted
to
over
$6,000,
but
instead
of
paying
anything
to
Martenson,
the
Company
paid
$1,000
to
Mr.
P.
Turner,
who
was
supposed
to
be
the
agent
of
the
purchaser,
Mr.
Mah.
I
am
unable
to
accept
the
submission
of
counsel
for
the
appellant
that,
although,
perhaps,
not
important
in
themselves,
the
cumulative
effects
of
the
above-
mentioned
occurrences
are
sufficient
to
establish
that
the
appellant
was
not
engaged
in
any
adventure
in
the
nature
of
trade
and
did
not
intend
to
turn
the
property
to
account
but
to
retain
it
as
an
investment.
The
present
instance
was
not
the
first
occasion
that
he
had
entered
into
an
undertaking
of
a
similar
nature
and
the
evidence
disclosed
that
Mr.
Martenson
and
three
or
four
others,
at
his
instigation,
had
joined
him
as
associates
on
at
least
two
other
occasions
in
undertakings
similar
to
the
instant
one,
and
there
is
no
evidence
whether
or
not
the
same
can
be
said
with
regard
to
other
shareholders
of
the
Company.
I
consider
that
the
present
case
is
exceptional
because
it
is
one
of
the
very
rare
cases—see
also
the
judgment
of
Noël,
J.
in
M.N.R.
v.
Clifton
Lane,
[1964]
C.T.C.
81
at
87—wherein
there
is
an
admission
by
the
taxpayer
of
an
alternative
intent
to
sell.
Such
direct
evidence
does
not
appear
in
Regal
Heights
Ltd.
v.
M.N.R.,
[1960]
S.C.R.
907;
[1960]
C.T.C.
384;
nevertheless,
as
noted
by
counsel
for
the
respondent,
the
taxpayer
was
found
liable
and
the
Court
inferred
from
the
surrounding
circumstances
that
sensible
businessmen,
if
they
were
unable
to
develop
the
property
as
they
hoped
to
do,
could
and
would
re-sell
it
at
some
gain
to
themselves.
Counsel
for
the
appellant
placed
a
great
deal
of
reliance
on
Dorwin
Shopping
Centre
v.
M.N.R.,
[1964]
Ex.
C.R.
234;
[1963]
C.T.C.
411,
a
judgment
of
Cattanach,
J.
in
which
it
was
held
that
the
taxpayer
was
not
liable
for
tax.
In
my
opinion,
the
Dorwin
case
is
readily
distinguishable
upon
its
particular
facts.
The
preponderance
of
evidence
confirmed
the
sworn
statements
(albeit
self-serving)
of
the
directors
that
the
Company
did
not
intend
to
turn
the
property
to
account
by
re-sale,
and,
unlike
in
the
instant
case,
there
was
no
admission
of
a
preferred
or
alternative
intention
to
do
so.
Furthermore,
in
contrast
to
the
case
at
bar,
wherein
it
is
clear
that
the
directors
knew
where
a
conventional
mortgage
could
have
been
had
but
refused
or
neglected
to
obtain
it,
the
directors
of
the
Dorwin
Co.
had
reasonable
expectations
of
obtaining
from
an
insurance
company
sufficient
mortgage
money
to
complete
their
building
project,
but
despite
their
best
efforts
they
were
unsuccessful
in
obtaining
it,
with
the
result
that
the
Company’s
plans
were
frustrated.
F'or
the
foregoing
reasons,
I
consider
that
the
present
appeal
must
be
dismissed
with
taxable
costs
in
favour
of
the
respondent.
JOHNSTON
TESTERS
LTD.
Appellant,
and
MINISTER
OF
NATIONAL
REVENUE,
Respondent.
Exchequer
Court
of
Canada
(Gibson,
J.),
February
26,
1965,
on
appeal
from
a
decision
of
the
Tax
Appeal
Board,
reported
Sip
Tax
A.B.C.
!•
Income
tax—Federal—Income
Tax
Act,
R.S.C.
1952,
c.
148—Section
12(1)(a);
(b)—Commutation
payment—Lump
sum
payment
to
obtain
release
from
liability
to
make
future
royalty
payments
on
annual
basis
—Whether
deductible
as
commutation
of
revenue
expenditures
or
nondeductible
as
capital
expenditure.
In
issue
was
the
deductibility
of
a
commutation
payment
of
$146,850
made
in
1958
by
the
appellant
to
obtain
the
release
of
an
obligation
to
pay
royalties
for
the
use
of
certain
patents,
which
obligation
would
otherwise
continue
on
an
annual
basis
until
1972.
The
appellant
was
the
subsidiary
of
a
U.S.
corporation
and
carried
on
in
Canada
the
business
of
performing
specialized
tests
in
oil
wells
as
they
were
being
drilled,
employing
for
the
purpose
certain
tools
which
it
was
licensed
to
use
and
for
which
it
paid
royalties.
On
January
31,
1956
all
of
the
assets
of
the
appellant's
parent
company,
including
the
shares
of
the
appellant,
were
acquired
by
Schlumberger
Well
Surveying
Corp.
and
at
the
same
time
a
new
licensing
agreement
was
executed.
Under
this
agreement
both
the
appellant
and
its
parent
company
agreed
to
pay
royalties
to
the
Johnston
family
over
a
period
of
years
ending
in
1972
for
the
use
of
the
said
tools.
Subsequently,
the
Johnston
family
sold
its
entire
interest
in
these
patents
to
Schlumberger
Foundation,
a
charitable
organization,
which
then
released
the
licensees
from
the
royalty
agreement
for
a
lump
sum
of
which
the
appellant’s
share
was
the
said
$146,850.
The
Minister
evidently
questioned
the
basis
for
the
1956
agreement
on
the
grounds
that
it
was
really
part
of
the
consideration
for
the
transaction
with
S.
Well
Surveying
Corp.
and
that
in
any
event
the
U.S.
parent
company
and
not
the
Johnston
family
owned
the
patent
to
the
principal
testing
tool
in
use.
HELD
:
(i)
That
the
1956
licensing
agreement
was
a
binding
contract
made
at
arm's
length
between
the
appellant
and
its
parent
company,
as
licensees,
and
the
Johnston
family,
as
licensors;
(ii)
That
there
was
no
evidence
in
support
of
the
Minister’s
suggestion
that
the
1956
agreement
was
part
of
the
consideration
for
the
purchase
of
the
parent
company's
assets
and
that
the
Minister’s
objection
to
the
basis
of
the
1956
agreement
was
of
little
real
concern
because,
in
any
event,
the
appellant
itself
had
no
title
to
the
tool
in
question
and
the
royalties
payable
were
reasonable;
(iii)
That
the
Tax
Appeal
Board
had
erred
in
viewing
the
S.
Foundation
as
the
agent
for
the
S.
Well
Surveying
Corp.
and
in
holding
that
the
latter
purchased
the
patents
in
a
capital
transaction
for
the
purpose
of
terminating
the
liability
of
the
licensees;
(iv)
That
the
payment
in
question
was
based
on
good
commercial
practice
and
was
clearly
made
“for
the
purpose
of
gaining
or
producing
income”
within
the
meaning
of
Section
12(1)
(a)
;
(v)
That
in
deciding
whether
a
commutation
payment
was
of
a
revenue
nature
or
of
a
capital
nature
no
one
criterion
was
applicable
and
a
correct
determination
depended
on
a
careful
analysis
of
each
particular
case;
(vi)
That
the
payment
in
question
was
made
to
get
rid
of
an
onerous
annual
business
expense
and
that
as
a
result
no
advantage
or
benefit,
either
positive
or
negative,
accrued
to
the
capital
account
of
the
appellant
but,
instead,
all
the
advantage
or
benefit
obtained
was
of
a
revenue
character
and
therefore
the
payment
was
not
a
capital
outlay
within
the
meaning
of
Section
12(1)
(b).
(vii)
That
the
appeal
be
allowed.
,
!
•'
CASES
REFERRED
to:
,.
.
.
Royal
Trust
Co.
v.
M.N.R.,
[1957]
C.T.C.
32
;
Anglo-Persian
Oil
Co.,
Ltd.
v.
Dale,
16
T.C.
253;
Noble,
B.
W.,
Ltd.
v.
Mitchell,
11
T.C.
37
:
Mallett
v.
Staveley
Coal
&
Iron
Co.,
Ltd.,
13
T.
C.
772;
Dain
v.
Auto
Speedways
Ltd.,
38
T.C.
525
;
C.I.R.
v.
William
Sharp
&
Son,
38
T.C.
21
;
Bedford
Overseas
Freighters
Ltd.
v.
M.N.R.,
[1959]
C.T.C.
58;
B.C.
Electric
Railway
Co.
Ltd.
V.
M.N.R.,
[1957]
Ex
.C.R.
1;
[1957]
C.T.C.
120;
Falaise
Steamship
Co.
Ltd.
v.
M.N.R.,
[1959]
C.T.
G.
67;
Halifax
Overseas
Freighters
Ltd.
v.
M.
N.
R.,
[1959]
C.T.
C.
71;
Stow
Bardolph
Gravel
Co.
V.
Poole,
35
T.C.
459
;
Knight
V.
Calder
Grove
Estates,
35
T.
C.
447
;
J.
P.
Hancock
v.
General
Reversionary
&
Investment
Co.
Ltd.,
TT.
C.
358;
Shove
v.
Dura
Manufacturing
Co.
Ltd.,
23
T.C.
779
;
Green
v.
Cravens
Railway
Carriage
&
Wagon
Co.
Ltd.,
32
T.C.
359
;
ye?
C.
I.R.
v.
British
Salmson
Aero
Engineers
Ltd.,
22
T.
C.
29
;
Cowcher
v.
Richard
Mills
&
Co.,
Ltd.,
13
T.C.
216;
West
African
Drug
Co.
v.
Lilley,
28
T.
C.
140
;
Peters
v.
Smith
(1963),
41
T.C.
264;
James
Snook
v.
Blasdale,
33
T.
C.
244;
Royal
Insurance
Co.
v.
Watson,
[1897]
A.C.
1
;
Pyrah
v.
Annis,
[1957]
1
All
E.R.
196;
Associated
Portland
Cement
Manufacturers
Ltd.
v.
C.I.R.,
[1946]
1
All
E.R.
68;
.
-
.
.
Glenboig
Union
Fireclay
Co.,
Ltd.
v.
C.I.R.,
12
T.C.
427;
Dominion
Natural
Gas
Co.
Ltd.
v.
M.N.R.,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155;
Atherton
v.
British
Insulated
&
Helsby
Cables,
Ltd.,
[1926]
A.C.
205;
10
T.C.
155;
Van
Den
Berghs
Ltd.
v.
Clark,
[1935]
A.C.
431:
De
Souter
Bros.
Ltd.
v.
Hanger
&
Co.
Ltd.,
[1936]
1
All
E.R.
999
;
Constantinesco
v.
The
King,
[1927]
11
T.C.
730;
Eagle
Motors
v.
M.N.R.,
37
Tax
A.B.C.
118.
H.
Howard
Stikeman,
Q.C.,
and
P.
N.
Thorsteinsson,
for
the
Appellant.
D.
J.
Wright
and
D.
Bowman,
for
the
Respondent.
GIBSON,
J.:—This
is
an
appeal
from
the
decision
of
the
Tax
Appeal
Board
dated
October
28,
1963,
in
respect
of
the
income
tax
assessment
of
the
appellant
dated
December
9,
1959,
for
the
taxation
year
1958
whereby
a
tax
in
the
sum
of
$67,418.10
plus
interest
in
the
sum
of
$2,792.77
was
levied
for
the
said
taxation
year.
The
monies
which
are
the
subject
matter
of
this
appeal
were
a
commutation
payment
made
by
the
appellant
in
the
taxation
year
1958
in
the
sum
of
$150,000
(U.S.)
or
$146,850.18
(Can.).
The
purpose
of
such
commutation
payment
was
to
obtain
the
release
of
an
obligation
to
pay
certain
royalties
on
patents
which
obligation
otherwise
would
have
continued
on
an
annual
basis
until
the
year
1972
.
The
annual
royalty
payments
which
had
been
made
annually
up
to
the
taxation
year
1958
by
the
appellant
approximated
$20,000
per
year,
and
the
appellant
charged
against
income
the
said
whole
payment
of
$146,850.18
(Can.)
made
in
the
1958
taxation
year.
The
Tax
Appeal
Board
disallowed
in
part
this
expense,
allowing
as
a
charge
against
income
only
the
accrued
royalties
up
to
January
31,
1958,
which
was
the
date
of
the
release
agreement
under
the
terms
of
which
the
said
commutation
payment
was
made
by
the
appellant.
This
allowance
amounted
to
$5,872.22
(Can.).
The
balance
of
$140,997.96
the
Tax
Appeal
Board
found
was
an
outlay
of
capital
or
a
payment
on
account
of
capital
the
deduction
of
which
in
computing
the
appellant’s
income
for
the
1958
taxation
year
was
prohibited
by
reason
of
paragraph
(b)
of
subsection
(1)
of
Section
12
of
the
Income
Tax
Act.
The
appellant
at
the
material
time
was
a
wholly
owned
subsidiary
of
a
United
States
company
known
as
Johnston
Testers
Inc.,
of
Houston,
Texas,
and
it
carried
on
in
Canada
the
business
of
performing
certain
oil
well
tests
for
others
and
earned
its
income
by
charging
such
other
persons,
who
were
owners
of
oil
wells,
fees
for
its
testing
service.
This
service
provided
is
called
a
drill
stem
test
which
the
evidence
discloses
is
a
procedure
whereby
a
sample
of
the
hydrocarbons
or
other
fluids
from
the
bottom
of
an
oil
well
that
is
in
the
process
of
being
drilled
are
trapped
in
a
device
fixed
to
the
end
of
the
drilling
shaft
or
stem
and
then
are
brought
to
the
surface
for
examination
and
evaluation.
The
device
in
which
the
fluids
are
trapped
is
called
a
testing
tool.
The
drill
testing
tools
which
we
are
concerned
about
on
this
appeal
are
called
firstly
a
main
valve
testing
tool
for
which
U.S.
patent
No.
2,126,641
was
issued
to
one
M.
O.
Johnston
and
a
hydraulic
valve
tool
for
which
U.S.
patent
No.
2,703,696
was
issued
to
Johnston
Testers
Inc.,
of
Houston,
Texas.
A
copy
of
each
of
these
patents
was
filed
as
Exhibits
1
and
2
on
this
appeal.
The
main
valve
testing
tool
devised
by
the
inventor
M.
O.
Johnston
in
the
early
1930’s,
in
part
was
assigned
by
him
to
certain
members
of
his
family
and
then
on
June
1,
1951,
M.
O.
Johnston
and
his
family
entered
into
a
written
contract
with
the
appellant
and
the
other
Johnston
companies
including
Johnston
Testers
Ine.,
whereby
the
latter
was
given
the
exclusive
right
to
use
the
patent
on
this
main
valve
tool
on
a
royalty
basis.
This
agreement
was
filed
as
Exhibit
3
on
this
appeal.
This
1951
royalty
agreement
was
subsequently
amended
several
times
by
agreements
dated
December
2,
1953,
January
31,
1955,
and
August,
1955,
which
agreements
purported
to
extend
the
terms
under
which
the
licensees
would
be
required
to
pay
royalty
payments
to
the
licensors.
The
purported
reason
given
for
these
various
amended
agreements
was
that
in
each
instance
there
had
been
an
improvement
to
the
basic
patent
and
for
each
of
such
improvements
a
patent
application
had
been
made
by
the
licensors.
There
was
a
dispute
as
to
the
precise
meaning
of
these
extension
agreements
in
so
far
as
the
same
concerned
the
question
of
whether
these
amending
agreements
in
fact
extended
the
term
during
which
the
appellant
and
the
others
were
obligated
to
make
royalty
payments
to
the
Johnston
family.
In
my
view,
however,
this
is
not
of
any
great
significance
because
the
important
agreement
in
so
far
as
this
appeal
is
concerned
is
the
agreement
dated
January
31,
1956.
This
agreement
was
entered
into
contemporaneously
with
the
purchase
agree-
ment
whereby
a
firm
known
as
Schlumberger
Well
Surveying
Corporation
purchased
all
the
assets
of
Johnston
Testers
Inc.,
of
Houston,
Texas,
which
assets
included
all
the
outstanding
shares
of
the
appellant
company.
The
said
hydraulic
valve
tool
patent
which
we
are
concerned
with
on
this
appeal
was
not
licensed
in
the
above-mentioned
1951
licensing
agreement
with
the
Johnston
family
nor
was
it
included
in
any
of
the
amending
agreements
to
the
1951
agreement,
but
it
was,
however,
included
in
the
said
agreement
dated
January
31,
1956.
The
hydraulic
valve
tool,
embodying
the
principle
of
the
said
patent
for
it,
had
in
substantial
measure
replaced
the
main
valve
tool
because
it
was
a
superior
instrument
and
at
the
material
time
in
1956
the
appellant
and
the
other
Johnston
companies
were
in
the
main
using
the
hydraulic
valve
tool
in
providing
their
services
to
their
customers
to
earn
their
respective
incomes.
However,
the
main
valve
tool
was
not
entirely
supplanted
until
a
year
or
two
after
the
actual
purchase
as
of
the
31st
of
January,
1956,
by
Schlumberger
Well
Surveying
Corporation.
The
evidence
discloses
that
Schlumberger
Well
Surveying
Corporation
as
early
as
1955
entered
into
negotiations
for
the
purchase
of
the
assets
of
Johnston
Testers
Inc.,
of
Houston,
Texas,
but
this
early
date
is
of
no
significance,
and
this
purchase
was
completed
as
of
January
31,
1956.
The
relevant
contract
documents
evidencing
this
transaction
were
filed
on
this
appeal
as
Exhibits
8
and
14.
In
so
far
as
this
appeal
is
concerned,
however,
Exhibit
14
which
is
the
contract
amending
the
royalty
agreement
is
a
significant
agreement.
This
is
the
January
31,
1956,
licensing
agreement
above
referred
to.
By
this
1956
contract
the
appellant
and
Johnston
Testers
Inc.,
of
Houston,
Texas,
agreed
to
pay
royalties
to
the
Johnston
family
on
both
the
main
valve
tool
and
the
hydraulic
tool
notwithstanding
the
fact
that
by
contract
up
to
that
time
neither
the
appellant
nor
Johnston
Testers
Inc.
were
liable
to
pay
royalties
to
the
Johnston
family
for
the
use
of
the
hydraulic
tool
patent.
The
hydraulic
tool
patent
in
fact
was
owned
by
Johnston
Testers
Ine.
The
appellant
had
no
title
to
it
at
any
time.
The
agreement
also
provided
that
there
would
be
a
terminal
date
for
such
obligation
to
pay
royalties
and
it
was
fixed
at
December
1,
1972.
The
latter
provision
was
the
significant
one
in
so
far
as
this
action
is
concerned.
There
were
many
documents
filed
and
much
argument
submitted
for
the
purpose
of
demonstrating
the
reason
the
appellant
and
Johnston
Testers
Inc.
entered
into
this
1956
royalty
agreement
with
the
Johnston
family.
Without
detailing
all
this
evidence
nor
referring
to
the
submissions
made,
it
is
sufficient
for
the
purposes
of
this
appeal
to
state
that
in
my
opinion
the
purchase
contract
between
Schlumberger
Well
Surveying
Corporation
and
Johnston
Testers
Inc.
by
which
the
former
acquired
the
shares
of
the
appellant
company
would
not
have
been
completed
if
this
licensing
agreement
of
1956
had
not
been
consummated.
And
I
am
unable
to
find
on
the
evidence
that
the
substance
of
this
1956
royalty
agreement
is
anything
different
than
the
document
purports
to
state.
I,
therefore,
find
that
this
agreement
was
a
legal
and
binding
contract
made
at
arm’s
length
between
the
appellant
and
Johnston
Testers
Inc.
as
licensees
and
the
Johnston
family
as
licensors
to
pay
an
annual
royalty
on
both
the
main
valve
tool
and
the
hydraulic
valve
tool
until
December
31,
1972.
In
respect
to
the
contract,
the
evidence
was
that
after
January
31,
1956,
and
until
1958,
the
appellant
and
Johnston
Testers
Inc.
did
pay
the
Johnston
family
royalties
on
these
patents.
The
payees
and
payors
were
strangers
in
law
and
the
royalties
paid
were
allowed
as
an
expense
chargeable
against
the
income
of
the
appellant
for
the
years
1956
and
1957.
In
1956
such
payment
by
the
appellant
amounted
to
$19,483.95
and
in
1957
it
amounted
to
$19,459.18.
And
the
royalty
payments
from
1953
under
the
respective
current
agreement
had
consistently
been
about
$19,000
or
$20,000.
In
1958
the
appellant
and
Johnston
Testers
Inc.
entered
into
negotiations
and
did
by
contract
commute
these
royalty
payments.
The
commutation
payment
made
by
the
appellant
was
in
the
sum
of
$150,000
(U.S.)
or
$146,850.18
(Can.)
and
by
Johnston
Testers
Inc.,
$850,000
(U.S.).
At
first
the
negotiations
for
the
release
of
these
royalty
obligations
with
the
Johnston
family
had
been
unsuecessful.
The
apparent
reason
for
this
was
because
the
proposal
first
made
to
the
Johnston
family
would
have
resulted
in
the
payment
to
them
being
categorized
as
income
in
their
hands.
This
was
unacceptable
to
them
because
of
the
income
tax
disadvantage,
and
so
instead
different
arrangements
were
made
which
caused
the
monies
received
by
the
Johnston
family
to
be
categorized
as
a
capital
receipt
in
their
hands.
The
Johnston
family
sold
all
their
right,
title
and
interest
in
these
two
patents
(of
which
they
only
had
title
to
one,
viz.,
the
main
valve
patent—any
claim
to
the
hydraulic
valve
patent
being
questionable)
to
a
charitable
organization
known
as
Schlumberger
Foundation
for
$950,000;
and
then
the
Schlumberger
Foundation
granted
the
release
of
the
royalty
agreements
to
the
Johnston
companies,
including
the
appellant,
for
$1,000,000
and
thereby
the
Foundation
itself
made
a
profit
of
$50,000.
The
Schlumberger
Foundation
being
an
exempt
taxpayer
under
United
States
tax
laws
as
a
charitable
organization
kept
the
$50,000
profit
for
its
organization.
(In
connection
with
this
transaction,
it
should
be
noted
that
the
evidence
disclosed
that
the
Schlumberger
Foundation
at
the
material
time
was
free
of
any
control
by
the
Schlumberger
Well
Surveying
Corporation
or
any
of
its
associate
or
subsidiary
companies
and
also
of
the
appellant
or
any
of
the
other
Johnston
companies.
)
It
was
argued
firstly
that
the
1956
patent
royalty
agreement
with
the
Johnston
family
was
really
part
of
the
purchase
price
of
the
assets
of
Johnston
Testers
Inc.
by
Schlumberger
Well
Surveying
Corporation,
but
I
am
unable
on
the
evidence
to
find
that
this
was
so.
It
was
next
argued
that
there
was
no
necessity
for
the
appellant
to
covenant
in
this
1956
agreement
to
pay
any
royalties
in
respect
to
the
hydraulic
valve
tool
patents
because
the
latter
in
law
were
at
that
time
owned
by
Johnston
Testers
Inc.
In
this
connection
there
was
some
equivocation
in
the
evidence
of
Mr.
Cox,
the
Texas
attorney
of
Schlumberger
Well
Surveying
Corporation
as
to
the
reason
why
it
was
agreed
to
pay
royalties
in
this
1956
agreement
on
the
hydraulic
valve
tool
to
the
Johnston
family
and
he
did
not
conclusively
explain
why
this
1956
patent
royalty
agreement
called
for
an
undifferentiated
payment
of
royalties,
in
that
there
was
a
bulked
royalty
payment
called
for,
and
no
division
was
made
in
such
payment
as
between
the
main
valve
tool
and
the
hydraulic
valve
tool.
But
in
so
far
as
the
appellant
is
concerned,
this
is
really
of
no
legal
concern
because
as
stated
it
at
no
time
had
any
title
to
the
patent
for
this
tool,
and
the
royalty
it
was
called
upon
to
pay
by
this
1956
agreement
was
reasonable
according
to
the
evidence.
The
documents
evidencing
these
transactions
were
filed
on
this
appeal
and
in
essence
they
demonstrate
that
these
transactions
were
all
made
at
arm’s
length
and
they
establish
that
the
Schlumberger
Foundation
contracted
contemporaneously
with
the
Johnston
family
to
pay
them
$950,000
for
the
assignment
of
their
patent
rights
and
with
the
appellant
and
Johnston
Testers
Ine.
obligating
them
to
pay
it
$1,000,000
for
a
release
from
the
royalty
agreement
of
1956
in
respect
to
these
said
two
patents.
In
other
words,
the
Schlumberger
Foundation
at
the
material
time
was
not
obligated
to
complete
the
contract
with
the
Johnston
family
unless
the
appellant
and
Johnston
Testers
Inc.
completed
their
contract
with
it
for
the
release
of
the
royalty
agreements.
The
issue
on
this
appeal,
therefore,
is
whether
or
not
the
appellant
in
these
circumstances
can
charge
as
an
expense
against
its
income
for
the
year
1958
the
sum
of
$140,997.96
(being
$146,850.18
less
the
sum
of
$5,872.22
paid
in
respect
of
royalty
payments
accruing
to
January
31,
1958).
In
considering
this,
it
should
be
observed
that
the
Tax
Appeal
Board
made
one
main
assumption,
namely,
that
the
Schlumberger
Foundation
acted
as
agent
for
the
Schlumberger
Well
Surveying
Corporation,
the
owner
of
Johnston
Testers
Inc.
and
the
appellant,
in
arranging
the
release
agreement
dated
January
31,
1958,
and
that
‘‘the
Schlumberger
Well
Surveying
Corporation,
in
effect,
purchased
the
patents
in
question
as
a
capital
transaction
for
the
purpose
of
terminating
the
liability
of
its
nominee,
Johnston
Testers
Inc.,
and
in
turn,
that
of
its
subsidiary,
Johnston
Testers
Ltd.,
the
appellant
herein,
in
respect
of
the
royalty
payments
payable
until
December
31,
1972,
under
Exclusive
Licensing
Agreement
dated
June
1,
1951.
I
must
respectfully
disagree
with
this
assumption
and,
therefore,
also
the
opinion
of
the
Board
predicated
on
it.
Instead,
I
am
of
the
opinion
that
Schlumberger
Foundation
in
this
particular
series
of
transactions
was
a
stranger
in
law
with
the
parties
with
whom
it
dealt
and
that
no
relationship
of
agency
existed
in
respect
to
any
of
the
transactions
between
it
and
the
appellant
through
any
of
the
corporate
convolutions
which
took
place
in
completing
the
same.
This
finding,
however,
does
not
resolve
the
matter.
The
problem
here
is
to
determine
on
the
facts
of
this
case
whether
or
not
this
commutation
payment
of
$140,977.96
(Can.)
was
a
trading
or
income
disbursement
or
a
capital
disbursement
of
the
appellant
for
the
income
tax
year
1958
on
a
true
application
of
the
relevant
jurisprudence.
In
all
cases
where
commutation
payments
are
made,
the
application
of
the
distinction
between
income
disbursements
and
capital
disbursements
is
difficult
because
such
payments
lie
on
the
borderline,
and
the
problem
of
assigning
them
to
income
or
capital
is
always
troublesome.
The
Income
Tax
Act,
R.S.C.
1952,
does
not
define
‘‘income”’
or
“capital”.
It
describes
sources
of
income
and
prescribes
methods
of
computing
income.
It
is,
therefore,
necessary
to
find
the
answer
in
a
given
factual
situation
by
reference
to
the
decided
cases;
and
the
answer
in
these
cases
is
to
a
question
of
mixed
fact
and
law.
Counsel
for
the
appellant
referred
to,
mentioned
or
distinguished
the
following
cases
in
support
of
their
submission
that
the
commutation
payment
in
this
case
was
an
income
disbursement:
Royal
Trust
Co.
v.
M.N.R.,
[1957]
C.T.C.
32;
Anglo-
Persian
Oil
Co.,
Ltd.
v.
Dale,
16
T.C.
253
;
Noble,
B.
W.,
Ltd.
v.
Mitchell,
11
T.C.
372;
Mallett
v.
Staveley
Coal
and
Iron
Company
Limited,
13
T.C.
772;
Dain
v.
Auto
Speedways
Ltd.,
38
T.C.
525;
CLR.
v.
William
Sharp
&
Son,
38
T.C.
21
;
Bedford
Overseas
Freighters
Ltd.
v.
M.N.R.,
[1959]
C.T.C.
58;
B.C.
Electric
Railway
Company
Limited
v.
M.N.R.,
[1957]
Ex.
C.R.
1;
[1957]
C.T.C.
120;
Falaise
Steamship
Company.
Limited
v.
M.N.R.,
[1959]
CT.
C.
67
;
Halifax
Overseas
Freighters
Ltd.
v.
M.N.R.,
[1959]
C.T.C.
71;
Stow
Bardolph
Gravel
Co.
v.
Poole,
35
T.C.
459;
Knight
v.
Calder
Grove
Estates,
35
T.C.
447
;
J.
P.
Hancock
v.
General
Reversionary
&
Investments
Co.
Lid.,
7
T.C.
358;
Shove
v.
Dura
Manufacturing
Co.
Ltd.,
23
T.C.
779;
Green
v.
Cravens
Railway
Carriage
&
Wagon
Co.
Lid.,
32
T.C.
359
;
C.I.R.
v.
British
Salmson
Aero
Engineers
Ltd.,
22
T.C.
29
;
Cowcher
v.
Richard
Mills
&
Co.
Ltd.,
13
T.C.
216
;
West
African
Drug
Co.
v.
Lilley,
28
T.
C.
140.
Counsel
for
the
respondent
on
the
other
hand
in
a
similar
manner
referred
to
the
following
cases
to
support
his
submission
that
the
disbursement
in
this
case
was
one
of
capital:
Peters
v.
Smith
(1963),
41
T.C.
264;
James
Snook
v:
Blasdale,
33
T.C.
244;
Royal
Insurance
Co.
v.
Watson,
[1897]
A.C.
1;
Pyrah
v.
Annis,
[1957]
1
All
E.R.
196
affirming
[1956]
2
All
E.R.
858;
Associated
Portland
Cement
Manufacturers
Ltd.
v.
C.I.R.,
[1946]
1
All
E.R.
68;
Glenboig
Union
Fireclay
Co.,
Ltd.
v:
C.I.R.,
12
T.C.
427;
Dominion
Natural
Gas
Co.
Ltd.
v.
M.N.R.,
[1941]
8.C.R.
19;
Atherton
v.
British
Insulated
and
Helsby
Cables,
Ltd.,
[1926}.
A.C.
205;
Cowcher
v.
Richard
Mills
&
Co.,
Ltd:
(1927),
13
T.C.
216;
Mallet
v.
Stavely
Coal
&
Iron
Co.,
Ltd.,
13
T.C.
772;
Van
Den
Berghs
Ltd.
v.
Clark,
[1935]
A.C.
431
;
West
African
Drug
Co.
Ltd.
v.
Lilley
(1947),
28
T.C.
140;
B.C.
Electric
Railway
v.
MN.
R.,
[1958]
C.T.C.
21;
C.I.R.
v.
Sharp
(1959),
38
T.C.
341;
Dain
v.
Auto
Speedways
(1959),
38
T.C.
525;
DeSoutter
Bros.,
Ltd.
v.
Hanger
&
Co.
Ltd.,
[1936]
1
All
E.R.
535
:
Const
ant
inesco
v.
The
King
(1927),
11
T.C.
730;
Anglo-Persian
Oil
Co.,
Ltd.
v.
Dale,
[1932]
1
K.B.
124;
Eagle
Motors
Ltd.
v.
M.N.R.,
37
Tax
A.B.C.
118.
In
coming
to
a
conclusion
in
this
case,
two
questions
have
to
be
resolved,
namely,
(1)
was
the
expenditure
of
$140,977.96
by
the
appellant
in
the
taxation
year
1958
made
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
Section
12(1)
(a)
of
the
Income
Tax
Act
!
and
(2)
if
it
was
so
made,
was
such
payment
an
allowable
expense
or
was
it
a
capital
outlay
within
the
meaning
of
Section
12(1)
(b)
of
the
Income
Tax
Act
.
In
this
case
it
is
clear
beyond
all
doubt
that
the
expenditure
was
made
‘‘for
the
purpose
of
gaining
or
producing
income”
within
the
meaning
of
Section
12(1)
(a)
of
the
Income
Tax
Act,
using
as
a
criterion
for.
such
conclusion
that
it
was
made
based
on
good
commercial
practice,
and.
bearing
in
mind
that
it
did
not
have
to
be
incurred
in
gaining
or
producing
the
income
of
the
particular
period
in
which
it
was
expended
and
that
no
causal
connection
had
to
be
established
between
any
particular
receipt
of
income
and
this
expenditure,
and
that
it
was
an
extraneous
and
non-recurring
item
of
expenditure.
And
it
should
be
noted
that
all
this
is
true
whether
this
expenditure
be
classified
as
an
income
expense
or
disbursement,
or
as
a
capital
outlay
or
disbursement.
In
determining
the
second
question
of
whether.
this,
expenditure
is
an
income
disbursement
or
a
capital
disbursement
various
tests
or
criteria
are
employed
in
the
cases,
as
are
hereinafter
referred
to.
But
probably
no
such
determination
would
have
had
to
be
made
in
this
case
except
for
the
fact
that
the
amount
sought
to
be
charged
against
income
is
very
large,
and
except
for
the
fact
that
there
is
no
provision
for
amortizing
commutation
payment
expenditures
such
as
this,
in
any
category
under
Section
11
of
the
Income
Tax
Act,
or
any
regulation
made
thereunder.
However,
neither
comment
is
relevant
in
assisting
in
the
solution
of
the
problem
here.
In
many
cases,
judges
have
used
various
criteria
which
have
assisted
them
in
deciding
this
issue,
based
on
the
respective
facts
of
such
cases.
For
example,
the
criterion
afforded
by
the
economists
and
used
by
some
judges
in
the
solution
of
this
issue
is
their
differentiation
between
fixed
and
circulating
capital.
If
the
payment
can
be
categorized
as
out
of
the
former,
the
economists
say
it
is
a
capital
expenditure
and
if
out
of
the
latter
it
is
an
income
expenditure.
The
criterion
of
the
accountants,
which
has
been
sometimes
used
in
these
cases,
is
their
test
as
to
whether
such
expenditure,
in
good
and
accepted
commercial
accounting
practice,
should
be
recorded
in
the
books
as
a
charge
in
the
profit
and
loss
account
rather
than
a
payment
out
of
capital
account.
Neither
of
these
two
above
criteria,
however,
are
of
much
assistance
in
determining
the
problem
here.
The
criterion
distinguishing
between
a
‘‘once
and
for
all’’
lump-sum
payment
made
in
the
income
account
as
opposed
to
the
capital
account
by
the
House
of
Lords
in
the
case
of
Atherton
v.
British
Insulated
and
Helsby
Cables,
Ltd.,
10
T.C.
155
was
put
this
way
by
Lord
Cave
at
p.
192,
‘‘But
when
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
to
bringing
into
existence
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade,
I
think
there
is
very
good
reason
(in
the
absence
of
special
circumstances
leading
to
an
opposite
conclusion)
for
treating
such
an
expenditure
as
properly
attributable
not
to
revenue
but
to
capital.”
But
Rowlett,
J.
in
Anglo-Persian
Oil
Co.,
Ltd.
v.
Dale
(supra),
considered
that
this
finding
was
inconclusive,
and
that
there
was
fallacy
in
the
use
of
the
word
‘‘enduring’’,
and
stated
that
“What
Lord
Cave
is
quite
clearly
speaking
of
is
a
benefit
which
endures,
in
the
way
that
fixed
capital
endures,
not
a
benefit
which
endures
in
the
sense
that
for
a
good
number
of
years
it
relieves
you
of
a
revenue
payment.’’
And
then
he
held
that
the
commutation
payment
made
in
the
case
before
him
represented
the
future
emoluments
(of
the
agent)
which
were
redeemed,
and
that
it
was
made
in
the
course
and
for
the
purposes
of
a
continuing
business.
Some
other
criteria
adopted
in
the
cases
are
that
if
the
commutation
payment
either
(a)
creates
a
capital
asset
of
enduring
or
permanent
character
as,
e.g.,
plant,
machinery,
etc.
;
or
(b)
if
it
is
a
payment
in
respect
of
a
capital
asset
in
order
to
pro
tanto
go
out
of
business,
it
will
be
categorized
as
a
capital
expenditure,
but
if,
(c),
the
commutation
payment
does
not
create
a
capital
asset
even
though
it
is
made
in
respect
to
a
capital
asset
and
the
business
or
that
part
of
it
continues
after
such
payment,
and
such
payment
was
made
for
the
purpose
of
such
continuing
business,
then
the
payment
will
be
categorized
as
an
income
expenditure.
In
the
final
analysis,
however,
it
would
appear
that
no
one
criterion
can
be
used
universally
in
all
cases.
Instead,
the
business
purpose
of
a
commutation
payment
in
each
case
must
be
analyzed
carefully
for
the
object
of
categorization
and
then
one
or
more
of
the
various
criteria
may
be
employed
to
assist
in
determining
the
correct
category
of
such
payment,
that
is,
whether
the
payment
truly
is
an
income
disbursement
or
one
out
of
capital
account.
In
this
case
by
the
said
1956
agreement
the
appellant
I
find
acquired
a
capital
asset,
viz.,
the
licence
to
use
the
two
patents.
Such
asset
could
have
been
shown
on
the
balance
sheet
of
the
appellant
as
a
capital
asset,
in
which
event
its
value
would
have
been
recorded
as
nominal.
Its
omission
from
the
balance
sheet
in
this
case,
however,
was
commercially
acceptable
accounting
practice
in
that
such
omission
did
not
affect
the
integrity
of
the
balance
sheet.
And
when
it
ceased
to
be
a
capital
asset
of
the
appellant
in
1956,
such
fact
did
not
in
any
significant
way
affect
the
capital
account
of
the
appellant.
The
acquisition
of
this
capital
asset
gave
the
appellant
the
rights
to
use
the
patents,
as
distinguished
from
the
use
or
employment
of
the
machines
embodying
such
patents,
which
latter
was
the
business
carried
on
by
the
appellant
by
which
it
earned
its
income.
In
respect
to
the
latter
only,
the
appellant
paid
the
licensors
of
the
patents
annual
royalties,
calculated
on
actual
use.
For
the
former
there
was
no
actual
dollar
consideration
paid.
The
said
release
agreement
in
1958
accomplished
two
things,
namely,
it
got
rid
of
the
said
capital
asset,
but
the
appellant
paid
no
dollar
consideration
for
this;
and
it
got
rid
of
the
onerous
annual
payments
of
royalties
to
these
licensors
for
use
of
the
patents
until
1972.
In
other
words
this
latter
was
a
payment
to
get
rid
of
an
annual
charge
against
revenue
in
the
future.
It
was
not
made
to
get
rid
of
a
loss
in
business
or
apprehended
loss
in
business
after
the
income
and
expenditure
had
been
put
together,
as
was
the
case
in
all
the
instances
when
there
was
a
pro
tanto
going
out
of
business.
On
the
contrary,
the
money
paid
in
this
case
was
not
paid
in
order
pro
tanto
to
go
out
of
business.
The
money
was
paid
in
the
course
of
and
for
the
purpose
of
a
continuing
business,
and
the
appellant
did
in
fact
after
this
payment
and
still
does
carry
on
this
same
business.
It
was
argued
that
the
appellant
did
pro
tanto
go
out
of
business
in
so
far
as
its
use
of
the
main
stem
valve
tool
was
concerned
because
it
no
longer
could
use
this
machine
after
this
release
agreement
was
executed.
And
it
was
a
fact
that
at
that
time
the
appellant
had
stopped
to
use
the
main
valve
tool
because
it
had
been
supplanted
by
the
superior
hydraulic
valve
tool.
But
the
appellant
was
entitled
after
this
release
agreement
in
1958
to
continue
the
use
of
this
hydraulic
valve
tool
by
arrangements
with
Johnston
Testers
Inc.
who
in
fact
owned
the
patent
to
it,
and
the
appellant
did
continue
in
precisely
the
same
business
as
it
had
been
in
before.
What
it
got
rid
of
by
this
commutation
payment
in
1958
in
exchange
for
the
release
agreement
was
the
large
annual
royalty
charge
against
its
revenue,
payable
to
the
Johnston
family
under
the
said
1956
agreement.
And,
therefore,
I
am
unable
to
find
that
by
ceasing
to
use
the
main
valve
testing
tool
in
1958
the
appellant
could
be
considered
to
be
pro
tanto
going
out
of
any
part
of
its
business.
In
brief,
therefore,
I
find
that
the
true
business
purpose
of
this
commutation
payment
of
$140,977.96
(Can.)
in
1958
by
the
appellant,
in
essence,
was
not
to
get
rid
of
a
capital
asset
(which
was
a
mere
incidental
result),
but
instead
it
was
to
get
rid
of
an
onerous
annual
expense
in
respect
to
a
business
that
it
proposed
to
and
did
carry
on,
and
such
payment
was
made
in
the
course
of
such
continuing
business;
and
that
as
a
result
no
advantage
or
benefit
either
positive
or
negative
accrued
to
the
capital
account
of
the
appellant,
but
instead
all
the
advantage
and
benefit
obtained
was
of
a
revenue
character
and,
therefore,
the
payment
was
not
a
capital
outlay
within
the
meaning
of
Section
12(1)
(b)
of
the
Income
Tax
Act.
‘The
appeal,
therefore,
is
allowed
with
costs.
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