CAMERON,
J.:—At
the
request
of
the
parties,
these
appeals
were
heard
together.
As
the
two
appellant
corporations
were
at
all
relevant
times
owned
and
controlled
by
the
same
shareholders
and
directors
and
as
many
of
the
issues
in
appeal
arose
out
of
transactions
in
which
both
appellants
participated,
it
will
be
convenient
to
dispose
of
all
the
issues
in
one
opinion.
For
the
sake
of
brevity,
I
shall
hereinafter
refer
to
Western
Leaseholds
Ltd.
and
Western
Minerals
Ltd.
as
‘‘Leaseholds’’
and
“Minerals”
respectively.
In
1943,
Mr.
Erie
L.
Harvie
of
Calgary,
Alberta,
a
barrister
and
the
senior
partner
in
the
firm
of
Harvie
and
Arnold,
acquired
the
freehold
mineral
rights
in
some
496,000
acres
in
the
province
of
Alberta
from
the
receivers
of
British
Dominions
Land
Settlement
Corporation
and
Anglo-Western
Oils
Ltd.,
the
former
company
being
the
registered
owner
of
the
mineral
rights
therein
and
the
latter
company
holding
a
999-year
lease
of
such
minerals.
While
he
had
made
the
agreement
to
purchase
in
his
own
name,
Mr.
Harvie
was
minded
to
turn
it
over
to
what
was
called
‘‘the
Harvie
Group’’,
consisting
of
Mr.
Harvie,
his
three
children,
his
two
law
partners,
Messrs.
Arnold
and
Crawford,
Miss
Connor,
who
was
Mr.
Harvie’s
secretary,
and
a
geologist,
Mr.
W.
G.
Dekoch.
Both
in
the
Group
and
in
the
companies
later
formed,
Mr.
Harvie
had
at
all
times
the
controlling
interest.
In
order
to
eliminate
the
difficulties
which
might
be
met
by
disagreement
among
or
the
death
of
any
of
the
members
of
the
Group,
it
was
decided
to
incorporate
two
companies,
one
of
which
would
own
the
freehold
rights
in
the
minerals
(Minerals)
and
the
other
of
which
would
be
the
operator
(Leaseholds).
Accordingly,
under
the
Alberta
Companies
Act,
Minerals
and
Leaseholds
were
incorporated
in
April,
1944.
From
Exhibits
2,
3,
4
and
5,
it
appears
that
the
Memorandum
of
Association
and
the
Articles
of
Association
of
each
company
were
in
identical
terms.
In
each
case,
the
company
was
authorized
to
issue
50,000
Class
A
common
shares
and
50,000
Class
B
common
shares,
without
nominal
or
par
value.
Later
herein
it
will
be
necessary
to
refer
in
more
detail
to
the
objects
and
powers
set
out
in
the
Memorandum
of
Association.
By
agreement
dated
July
7,
1944
(Exhibit
8),
Mr.
Harvie
agreed
to
sell
to
Minerals
all
his
interest
in
said
minerals.
There-
by,
Minerals
(as
purchaser)
agreed
to
convey
to
Harvie
(as
vendor),
or
his
nominees,
the
100,000
shares
representing
all
its
authorized
capital.
Harvie
agreed
to
pay
all
unearned
increment
taxes
and
fees
payable
on
the
preparation
and
registration
of
the
documents
and
all
municipal
and
mineral
taxes
to
the
end
of
1944.
Minerals
agreed
to
assume
and
carry
out
all
obligations
agreed
to
be
assumed
or
carried
out
by
Harvie
under
the
provisions
of
his
agreement
to
purchase
and
to
indemnify
him
in
respect
thereof.
Clause
3(c)
thereof
provided
as
follows:
3.
As
consideration
herefor
the
Purchaser
shall:
(c)
Grant
to
the
Vendor,
or
at
his
request,
to
his
nominee
an
option
in
the
form
and
on
the
terms
set
forth
in
Agreement
for
Leases
of
even
date
hereto,
between
the
Purchaser
herein
as
‘Owner’
and
Western
Leaseholds
Ltd.
(the
nominee
of
the
Vendor
herein)
as
‘Operator’,
a
copy
of
which
Option
Agreement
has
been
approved
by
the
parties
thereto
and
the
Vendor
herein
and
signed
by
them
for
identification.
The
purchaser
doth
hereby
release
and
forever
discharge
the
Vendor
of
all
claims
and
demands
hereunder
which
are
assumed
by
Western
Leaseholds
Ltd.
under
the
said
Agreement
for
Leases.”
On
the
same
date,
Harvie
entered
into
an
agreement
with
Leaseholds
(Exhibit
7)
by
which
he
assigned
to
it
all
the
rights
acquired
by
him
under
his
agreement
with
Minerals,
except
the
100,000
shares
allotted
to
him.
In
consideration
therefor,
Leaseholds
agreed
to
allot
to
him
or
his
nominees
all
its
authorized
capital;
to
issue
to
him
perpetual
redeemable
participating
income
debentures
of
a
face
value
of
$250,000;
and
to
perform
all
the
obligations
it,
as
Operator,
had
entered
into
in
the
Agreement
for
Leases
next
referred
to.
Exhibit
10
is
the
Agreement
for
Leases
dated
July
7,
1944,
between
Minerals
(therein
called
the
‘‘Owner’’)
and
Leaseholds
(therein
called
the
‘‘Operator’’).
It
related
to
all
the
minerals
in
respect
of
which
the
Owner
became
the
registered
owner
under
the
transfers.
Jnter
alia
it
provided:
“2.
The
owner
hereby
grants
the
Operator
up
to
and
including
the
31st
day
of
December
A.D.
2940,
the
sole
and
exclusive
right
to
acquire
a
lease
and/or
leases
of
the
said
minerals
in
the
form
and
upon
the
terms
and
conditions
included
in
the
draft
lease
attached
hereto
as
Schedule
‘B’,
and
subject
to
the
terms
and
conditions
hereinafter
set
forth.
3.
The
Owner
will
grant
the
Operator
a
lease
or
leases
covering
any
or
all
of
the
said
minerals
in
respect
to
any
or
all
of
the
said
lands
as
may
be
from
time
to
time
requested
by
the
Operator.
Each
lease
shall
be
for
such
term
as
specified
by
the
Operator
and
the
Owner
agrees
to
renew
any
such
lease,
cancel
Same,
or
grant
a
new
lease
or
leases
in
respect
to
the
said
minerals,
as
from
time
to
time
requested
by
the
Operator;
PROVIDED
that
the
term
of
any
lease
so
granted
shall
not
extend
beyond
the
31st
of
December,
A.D.
2940.
4.
IT
IS
UNDERSTOOD
AND
AGREED
that
the
Operator
shall
be
entitled
to
operate
under
the
said
leases
on
its
own
behalf
or
may
at
its
sole
election
grant
subleases
in
respect
to
any
or
all
of
the
said
minerals,
which
subleases
may
be
on
such
terms
and
conditions
specified
by
the
Operator,
provided
the
terms
and
provisions
of
the
leases
between
the
parties
hereto
are
given
effect
to,
the
Owner
agrees
to
consent
and
approve
of
any
such
sublease
if
requested
by
the
Operator/’
By
clause
5,
the
Operator
agreed
to
pay
the
Owner
during
the
term
of
the
agreement
(a)
all
municipal
and
mineral
taxes
assessed
against
or
payable
by
the
Owner
in
respect
of
the
said
minerals;
(b)
a
minimum
annual
sum
of
$1,000
exclusive
of
taxes
but
inclusive
of
any
royalties
payable;
and
(c)
costs
of
preparation
and
registration
of
documents.
Then
Section
6
provided
that,
when
not
in
default,
the
Operator
could
from
time
to
time
surrender
its
right
to
acquire
lease
or
leases
on
fulfilling
certain
conditions.
Schedule
B
thereto
is
a
draft
lease
which
inter
alia
provides
that
the
Operator
shall
pay
the
Owner
(Minerals)
a
royalty
in
cash
of
10
per
cent
of
the
current
market
value
of
all
leased
substances
produced,
saved
and
sold
from
the
said
leased
lands.
In
January
1945,
the
Receivers
of
the
former
corporate
owners
and
lessees
conveyed
the
mineral
rights
direct
to
Minerals.
Exhibit
6
is
a
sample
of
the
duplicate
certificate
of
title
showing
Minerals
to
be
the
owner
of
an
estate
in
fee
simple
in
‘all
mines
and
minerals
other
than
gold
and
silver
which
may
be
found
to
exist
within,
upon
or
under’’
the
lands
therein
described.
In
a
few
of
the
other
titles
there
were
other
specific
reservations
of
certain
minerals
such
as
coal.
As
a
result
of
these
transactions,
Minerals
became
the
registered
owner
of
the
mineral
rights
so
registered
in
its
name,
subject
to
the
right
of
Leaseholds
to
lease
such
part
or
parts
thereof
as
it
desired
until
the
year
2940
on
the
terms
mentioned.
Exclusive
of
taxes
and
the
minimum
annual
payment
of
$1,000,
Minerals’
sole
prospect
of
benefiting
from
the
ownership
of
the
minerals
was
to
be
derived
from
the
royalties
of
10
per
cent
reserved
to
it
in
any
lease
it
might
grant
to
Leaseholds,
unless,
of
course,
Minerals
and
Leaseholds
later
agreed
to
a
modification
of
the
agreement.
Leaseholds,
on
the
other
hand,
had
nothing
except
the
right
to
call
upon
Minerals
for
such
lease
or
leases
as
it
might
require.
Harvie
and
his
nominees—presumably
the
members
of
the
‘‘
Harvie
Group’’—had
received
all
the
authorized
stock
in
both
companies
and
$250,000
in
debentures
of
Leaseholds.
Exhibit
16
is
an
agreement
dated
May
15,
1946,
between
Minerals
and
Leaseholds.
Therein
it
is
recited
that
Leaseholds
had
received
from
the
Shell
Oil
Company
of
Canada
an
offer
to
acquire
an
option
to
purchase
the
petroleum,
natural
gas
and
related
hydrocarbons
(other
than
coal)
in
approximately
300,000
acres
of
the
lands
referred
to
in
the
Agreement
for
Leases
dated
July
7,
1944,
between
Minerals
and
Leaseholds
(Exhibit
10);
that
Shell,
under
the
provisions
of
its
offer,
would
be
acquiring
the
interest
of
both
companies
in
such
products
in
the
said
lands
and
had
requested
that
both
companies
enter
into
the
agreement;
and
that
it
was
in
the
interest
of
both
companies
to
accept
the
said
offer.
The
agreement
provided
that
both
companies
would
sign
the
proposed
Shell
agreement;
that
in
the
event
of
Shell
purchasing
any
mineral
rights
thereunder,
Minerals
would
be
entitled
to
receive
out
of
the
purchase
price
$2
per
acre
in
settlement
of
its
interest
in
the
mineral
rights
so
purchased
and
Leaseholds
should
be
entitled
to
the
balance
of
the
fixed
price.
On
the
same
date,
the
agreement
(Exhibit
15)
was
signed
with
Shell,
the
vendors
of
the
first
part
being
Minerals
and
Leaseholds.
Thereby,
Shell
agreed
to
pay
$30,000
as
payment
for
the
option
to
purchase
said
products
in
the
said
acreage.
The
option
granted
was
for
the
calendar
year
1946,
with
provisions
for
extensions
on
certain
terms.
If
Shell
took
up
the
option
in
1946
or
1947,
it
was
to
pay
$20
per
acre
for
the
first
10,000
acres;
$15
per
acre
for
the
second
10,000
acres;
$10
per
acre
for
the
third
10,000
acres;
and
$5
per
acre
for
additional
acreage.
If
it
purchased
in
1948,1949
and
1950,
these
rates
were
increased
by
$5
per
acre.
Shell
was
under
no
obligation
to
drill
for
or
produce
any
petroleum
it
might
so
purchase,
but
it
was
obligated
to
pay
“royalty
shares’’
of
all
petroleum
produced,
sold
or
removed
at
the
rate
of
214
per
cent
on
acreage
purchased
in
1946
;
that
rate
increased
by
1
per
cent
per
annum,
according
to
the
year
of
purchase,
to
a
maximum
of
614
per
cent
if
purchased
in
1950—the
last
year
to
which
the
option
could
be
extended.
Shell
paid
the
sum
of
$30,000
for
the
option
which
expired
on
December
31,
1946,
without
being
exercised.
That
amount
was
entered
in
the
accounts
of
Leaseholds
as
“capital
reserve’’.
By
letter
dated
February
4,
1947
(Exhibit
18)
Minerals
and
Leaseholds
confirmed
to
Imperial
Oil
Ltd.
the
terms
of
an
option
granted
that
day
to
the
latter.
The
option
was
to
purchase
the
petroleum,
natural
gas
and
related
hydrocarbons
(other
than
coal)
in
approximately
193,000
acres,
until
December
31,
1951.
The
purchase
price
was
to
be
at
the
rate
of
$25
per
acre
for
the
first
10,000
acres;
$20
and
$15
per
acre
respectively
for
each
of
the
next
two
additional
10,000
acres;
and
$10
per
acre
for
any
additional
acreage.
There
was
to
be
no
drilling
commitment
on
the
part
of
Imperial,
but
royalties
were
reserved
as
follows—on
acreage
purchased
in
the
first
year,
3
per
cent;
but
increasing
by
1
per
cent
for
acreage
purchased
in
each
of
the
succeeding
years
to
a
maximum
of
7
per
cent
on
acreage
purchased
in
the
fifth
year.
The
option
payments
were
fixed
at
$50,000
annually,
payable
in
advance
‘‘with
the
privilege
to
us
of
acquiring
prepayment
of
all
the
annual
option
payments,
provided
that
you
are
notified
of
our
election
to
acquire
prepayment,
on
or
before
the
1st
day
of
June,
1947”.
Pursuant
to
that
provision,
Imperial
was
required
to
pay
and
did
pay
$250,000
in
full
of
‘‘the
option
payments’’
in
1947.
The
full
sum
of
$250,000
was
carried
by
Leaseholds
to
“capital
reserve’’.
The
agreement
further
provided
that
all
option
payments
could
be
applied
on
account
of
the
purchase
price
up
to
the
extent
of
one-half
of
the
purchase
price.
As
shown
by
Exhibit
18,
the
full
sum
of
$250,000
was
later
applied
on
account
of
the
“purchase
price’’.
In
assessing
Leaseholds
for
the
taxation
years
1946
and
1947,
the
respondent
added
to
its
declared
income
the
two
sums
of
$30,000
and
$250,000
received
from
Shell
and
Imperial
for
their
options
to
purchase.
An
appeal
was
taken
to
the
Income
Tax
Appeal
Board
and,
by
a
majority,
the
appeals
were
disallowed.
An
appeal
is
now
taken
by
Leaseholds
to
this
Court.
All
other
matters
now
in
issue
in
these
appeals
were
brought
directly
to
this
Court.
Pursuant
to
the
agreement
of
February
4,
1947,
Imperial
Oil
on
February
2,
1949,
exercised
its
option
in
respect
of
2,208.50
acres
at
the
purchase
price
of
$25
per
acre—a
total
of
$55,212.50
(Exhibit
18).
It
elected
to
pay
one-half
of
the
purchase
price
out
of
the
pre-paid
option
payments
of
$250,000—as
provided
for
in
the
option—and
forwarded
its
cheque
for
the
sum
of
$27,606.25.
That
amount
was
placed
by
Leaseholds
in
its
capital
reserve.
Again,
in
1950,
Imperial
Oil
exercised
its
option
to
purchase
all
these
products
in
specified
acreages,
the
balance
of
the
optioned
lands
being
taken
up
in
full
on
December
29,
1950
(Exhibit
18).
The
total
payments
made
by
Imperial
in
1950,
after
allowing
for
the
balance
of
the
option
payments
of
$250,000,
amounted
to
$1,953,771.65.
That
amount
was
retained
by
Leaseholds
and
added
to
its
capital
reserve.
In
assessing
Leaseholds,
the
respondent
added
to
its
declared
income
the
sum
of
$27,606.25
in
1949,
and
the
sum
of
$1,754,227.10
(being
the
payments
of
$1,953,771.65
received
from
Imperial
Oil
less
certain
deductions
of
$199,544.55)
for
the
taxation
year
1950;
Leaseholds
now
appeals
from
these
assessments.
On
January
1,
1949,
Minerals
entered
into
an
agreement
(Exhibit
20)
with
Barnsdall
Oil
Company
and
three
other
corporations—collectively
called
therein
the
‘‘Operator’’
and
referred
to
hereinafter
as
‘‘the
Barnsdall
Group’’—by
which
Minerals
“hereby
grants,
leases,
lets
and
demises
unto
the
Operator
the
sole
and
exclusive
right
and
privilege
to
explore
for
by
geological,
geophysical
and
other
means
(whether
now
known
or
hereafter
discovered
or
adapted
to
petroleum
exploration),
drill
for,
mine,
produce,
store
and
thereafter
remove
from
the
Operator’s
Lands
and
dispose
of
the
Petroleum
Substances
the
property
of
the
Owner,
which
may
be
found
to
exist
within,
upon
or
under
the
Operator’s
Lands,
in
each
separate
Operator’s
Unit.”
As
shown
by
Exhibit
21,
a
letter
dated
February
22,
1949,
from
Leaseholds
to
Minerals,
that
agreement
with
the
Barnsdall
Group
was
negotiated
by
Leaseholds
and
was
entered
into
by
Minerals
at
the
request
and
direction
of
Leaseholds
pursuant
to
the
latter’s
right
to
call
for
leases
by
the
agreement
of
July
7,
1944
(Exhibit
10).
The
agreement
covered
about
146,000
acres.
As
shown
by
Exhibit
21,
the
consideration
received
by
Minerals
for
the
agreement,
namely,
$914,243.75
in
cash,
and
the
reservation
of
a
royalty
of
1214
per
cent
of
petroleum
substances
taken
from
the
land,
was
to
belong
to
Leaseholds
except
for
the
overriding
royalty
of
10
per
cent
reserved
to
Minerals
by
the
agreement
with
Leaseholds
of
July
7,
1944.
In
1949,
Leaseholds
received
the
cash
payment
of
$914,243.75
and
carried
it
to
its
capital
reserves.
In
assessing
Leaseholds,
however,
this
amount
(less
certain
deductions)
was
added
to
the
declared
income
and
from
that
assessment
Leaseholds
now
appeals.
Leaseholds
also
appeals
from
assessments
made
upon
it
for
the
years
1949
and
1950,
such
appeals
relating
to
certain
deductions
claimed,
but
disallowed
in
the
assessments.
I
shall
postpone
consideration
of
these
matters
and
of
the
appeals
of
Minerals
Ltd.
until
I
have
disposed
of
the
issues
to
which
I
have
referred.
These
matters
are
as
follows
:
(a)
The
receipt
of
$30,000
from
Shell
Oil
and
of
$250,000
from
Imperial
Oil
for
their
respective
options
in
1946
and
1947.
As
I
have
said,
the
Income
Tax
Appeal
Board
dismissed
the
appeals
in
reference
to
these
two
matters.
(b)
The
receipt
of
$27,606.25
from
Imperial
Oil
and
of
$914,243.75
from
the
Barnsdall
Group
in
1949.
(c)
The
receipt
of
$1,754,227.10
from
Imperial
Oil
in
1950.
What,
then,
is
the
nature
of
these
receipts?
The
assessments
as
to
the
receipts
in
1946
and
1947
were
made
on
the
basis
that
they
constituted
income
from
a
business
and
were
therefore
within
the
definition
of
income
in
Section
3(1)
of
the
Income
War
Tax
Act.
As
to
the
receipts
in
1949
and
1950,
the
assessments
were
made
on
the
basis
that
they
were
income
from
a
business
or
property
and
therefore
within
the
provisions
of
Section
3
of
the
Income
Tax
Act,
1948,
as
amended.
For
Leaseholds,
it
is
submitted
that
its
business
is
and
always
has
been
that
of
exploring
for
and
developing
oil
properties;
that
it
had
never
been
the
intention
to
deal
in
options
and
leases
as
a
business
and
that,
in
fact,
it
had
not
carried
on
such
business;
that
the
transactions
which
resulted
in
these
receipts
were
all
transactions
of
a
capital
nature
and
that
the
receipts
were
merely
the
realization
of
part
of
its
capital
assets,
that
capital
asset,
it
is
said,
being
the
right
to
call
for
mineral
leases
from
Minerals
under
the
agreement
of
July
7,
1944.
Counsel
for
Leaseholds
attached
great
importance
to
the
evidence
of
Mr.
Harvie
as
to
his
intentions
regarding
that
company
at
the
time
he
had
it
incorporated.
For
many
years,
he
had
been
interested
in
the
natural
resources
of
the
province
and
his
policy
had
generally
been
to
acquire
rights,
to
hold
and
develop
them
himself,
and
if
unable
to
do
so,
to
abandon
them.
His
personal
wish
was
to
develop
these
minerals,
find
out
what
we
have
and
proceed
to
develop
them
ourselves’’.
He
said
that
if
he
had
not
brought
in
partners,
he
might
well
have
carried
out
that
intention.
His
associates,
Arnold
and
Dekoch,
having
other
ideas,
he
acceded
to
their
suggestions
to
take
another
approach.
By
another
approach’’,
I
assume
that
he
meant
the
disposal
of
at
least
some
of
the
minerals
either
by
leases
or
by
options
to
purchase
instead
of
having
the
development
and
production
carried
out
by
the
company
itself.
A
statement
of
the
intention
with
which
a
transaction
is
entered
into
is
not
of
itself
the
only,
nor
the
most
important
test
to
be
applied.
As
stated
by
the
President
of
this
Court
in
Cragg
v.
M.N.R.,
[1952]
Ex.
C.R.
40
at
46;
[1951]
C.T.C.
322
at
327:
“Nor
can
it
rest
on
statements
of
intention
on
the
part
of
the
taxpayer.
The
question
in
each
case
is
what
is
the
proper
deduction
to
be
drawn
from
the
taxpayer’s
whole
course
of
conduct
viewed
in
the
light
of
all
the
circumstances.
The
conclusion
in
each
case
must
be
one
of
fact.’’
As
I
have
stated
above,
Leaseholds
was
incorporated
in
April,
1944.
Its
objects
as
disclosed
by
the
Memorandum
of
Association
(Exhibit
3)
are
very
wide
and
include
the
following:
“(a)
To
acquire
by
purchase,
lease,
concession,
license,
exchange
or
other
legal
title,
mineral
properties,
mines,
mining
lands,
real
estate,
leases,
easements,
permits,
reservations,
concessions
or
any
interest
therein,
minerals
and
ores
and
mining
claims,
options,
powers,
privileges,
water
and
other
rights,
patent
right,
letters
patent
of
invention,
processes,
and
mechanical
or
other
contrivances,
and
either
absolutely
or
conditionally
and
either
solely
or
jointly
with
others
and
as
principals,
agents,
contractors,
or
otherwise,
and
to
lease,
place
under
license,
sell,
dispose
of,
and
otherwise
deal
with
the
same
or
any
part
thereof,
or
any
interest
therein.
(c)
To
prospect
for,
open,
explore,
develop,
work,
improve,
maintain
and
manage
gold,
silver,
copper,
nickel,
coal,
iron,
petroleum,
natural
gas,
and
other
mines,
quarries,
mineral
and
other
deposits
and
properties,
and
to
dig
for,
raise,
crush,
wash,
smelt,
assay,
analyze,
reduce,
amalgamate,
and
otherwise
treat
ores,
metals,
and
minerals,
whether
belonging
to
the
company
or
not,
and
to
render
the
same
merchantable,
and
to
sell
and
otherwise
dispose
of
the
same
or
any
part
thereof,
or
any
interest
therein.
(n)
To
make,
acquire,
manage,
produce,
hold,
operate,
use,
dispose
of,
import
and
export,
and
otherwise
deal
in
and
with
the
said
substances
and
products,
rights
to
and
interests
in
lands
and
other
properties
from
which
they
may
be
derived;
drilling,
pumping,
mining,
milling,
reducing,
refining,
smelting,
and
other
plants,
equipment
or
apparatus
for
producing,
manufacturing,
or
otherwise
working
such
substances
and
products;
pipe
lines,
pumping
stations,
tank
cars,
tank
ships,
boats,
barges,
towboats
and
other
conveyances;
tanks,
terminals,
docks,
and
any
other
rights
and
properties,
real,
personal
or
mixed,
which
may
be
necessary
or
convenient
to
the
conduct
of
any
of
the
said
businesses.
’
’
The
acquisition
and
disposal
of
mineral
rights
was
therefore
clearly
within
the
objects
and
powers
of
Leaseholds,
as
shown
by
its
Memorandum
of
Association.
Prima
facie,
therefore,
any
profit
realized
from
such
transactions
would
be
income
derived
from
its
business.
In
Anderson
Logging
Co.
v.
The
King,
[1925]
S.C.R.
45
at
56:
[1917-27]
C.T.C.
198
at
207,
Duff,
J.
(later
C.J.C.),
in
delivering
the
judgment
of
the
Court,
said:
The
sole
raison
d’être
of
a
public
company
is
to
have
a
business
and
to
carry
it
on.
If
the
transaction
in
question
belongs
to
a
class
of
profit-making
operations
contemplated
by
the
Memorandum
of
Association,
prima
facie,
at
all
events,
the
profits
derived
from
it
is
a
profit
derived
from
the
business
of
the
company.”
In
a
later
case,
Sutton
Lumber
&
Trading
Co.
Ltd.
v.
M.N.R.,
[1953]
2
S.C.R.
77
at
93;
[1953]
C.T.C.
237
at
253,
Locke,
J.,
in
delivering
the
judgment
of
the
Court,
said
:
‘'The
question
as
to
whether
or
not
the
present
appellant
was
engaged
in
the
business
of
buying
timber
limits
or
acquiring
timber
leases
with
a
view
to
dealing
in
them
for
the
purpose
of
profit
is
a
question
of
fact
which
must
be
determined
upon
the
evidence.
It
may
be
noted
that
the
memorandum
of
the
appellant,
while
including
the
power
to
sell
or
dispose
of
timber
properties,
to
deal
in
timber
licences
is
not
one
of
the
objects
stated
as
it
was
in
the
Anderson
case.
Had
it
in
fact
included
such
an
object,
the
evidence
in
this
ease
demonstrated
that
the
company
at
no
time
carried
on
or
intended
to
carry
on
any
such
business.
Unlike
that
case,
in
the
present
matter
all
the
available
evidence
as
to
the
activities
carried
on
or
intended
to
be
carried
on
by
the
company
in
the
fifty
years
prior
to
the
time
of
the
trial
of
this
action
was
given
or
tendered
by
the
appellant.
The
decision
in
that
case
does
not,
in
my
opinion,
affect
this
matter.’’
In
the
instant
case,
counsel
for
Leaseholds
submits
that
upon
the
whole
of
the
evidence
it
should
be
found
as
a
fact
that
the
company
was
not
engaged
in
the
business
of
acquiring
mineral
rights
with
a
view
to
dealing
in
them
for
the
purpose
of
profit.
An
effort
was
made
at
the
trial
to
minimize
the
importance
of
these
stated
objects
in
the
Memorandum
of
Association.
Mr.
Arnold,
who
was
Mr.
Harvie’s
junior
partner,
prepared
the
original
Memorandum
of
Association
in
what
is
called
the
Short
Form,
intending
to
rely
to
a
substantial
extent
on
statutory
powers
conferred
on
all
companies
by
The
Companies
Act
of
Alberta.
Mr.
Harvie,
however,
was
accustomed
to
using
the
longer
form
and
on
his
insistence
the
objects
were
set
out
in
full.
They
were
therefore
included
deliberately
and
not
by
chance
as
was
suggested.
Then
it
will
be
noted
that
by
clause
4
(supra)
of
the
basic
agreement
of
July
7,
1944
(Exhibit
10)
between
Minerals
and
Leaseholds,
the
parties
clearly
contemplated
the
possibility
of
Leaseholds
granting
subleases,
in
respect
to
all
or
any
of
the
minerals
on
such
conditions
as
it
might
determine
and
suitable
provision
was
made
therefor.
In
this
connection,
it
may
be
noted
that
while
the
royalty
reserved
to
Minerals
w
as
10
per
cent
of
production,
the
customary
royalty
in
such
matters
was
12^
per
cent.
On
the
evidence,
I
have
no
hesitation
in
finding
that
one
of
the
purposes
in
the
minds
of
the
officers
of
Leaseholds
was
that
of
ultimately
going
into
production
on
its
own
account.
But
from
the
outset,
it
was
also
apparent
that
they
could
not
do
so
without
disposing
of
substantial
portions
of
their
minerals
by
sublease
or
sale.
Mr.
Arnold
made
the
position
quite
clear
when
he
stated
that
there
were
tremendous
areas
involved
and
“we
could
not
possibly
do
it
ourselves.
We
had
to
have
help,
and
we
had
to
have
help
from
major
companies
who
could
afford
to
speculate
in
a
very
cold
area
which
they
had
abandoned
before.’’
In
explaining
why
the
agreement
with
Shell
Oil
was
entered
into,
he
said,
‘‘
Well
as
I
said
before,
our
primary
interest
in
any
negotiation
there
was
two-fold.
We
were
extremely
anxious
to
interest
the
major
companies
in
going
back
into
that
area
and
exploring
for
oil
and
if
they
spent
money
there—it
was
either
a
question
of
us
going
in
and
doing
it
ourselves.
We
did
not
have
the
money
to
do
it
and
we
were
anxious
that
someone
go
in
there
and
explore.”
Lacking
the
necessary
capital
to
satisfactorily
explore
the
lands
and
drill
wells,
they
were
obliged
to
resort
to
other
steps
to
attain
their
objectives.
What
they
actually
wanted
was
to
enter
into
agreements
with
others,
including
some
of
the
major
oil
and
gas
companies,
by
which
the
latter
would
undertake
to
explore
and
do
the
drilling,
a
very
costly
operation
and
at
that
time
considered
to
be
also
a
very
risky
operation.
These
companies,
however,
were
unwilling
to
undertake
the
obligation
of
drilling
and
in
the
result,
Leaseholds
finally
consented
to
modify
their
original
requests
and
consented
to
the
options
to
purchase
(as
in
the
case
of
Shell
and
Imperial
Oil)
and
to
the
leases
to
the
Barnsdall
Group.
It
was
hoped
by
Leaseholds
that
the
very
substantial
downpayments
for
these
options
to
purchase
and
for
the
lease,
coupled
with
the
rentals
and
increasing
royalties
in
succeeding
years
would
spur
the
other
parties
to
complete
their
exploration
and
drill
wells
at
an
early
date.
If
that
were
done,
the
company
would
benefit
not
only
by
the
rentals
and
royalties
received,
but
by
the
benefit
that
would
accrue
to
the
lands
still
held,
if
gas
or
oil
were
discovered
by
the
purchasers
or
lessees.
When
one
takes
into
consideration
the
number
of
such
transactions,
the
acreages
involved,
the
rapidity
with
which
Leaseholds
disposed
of
its
rights
after
they
were
actually
acquired,
it
is
apparent
that
such
transactions
were
not
characteristic
of
a
company
which
merely
wishes
to
hold
an
investment.
On
the
contrary,
they
indicate
the
carrying
out
of
a
policy
which
was
followed
continuously
from
almost
the
inception
of
the
company
to
dispose
of
the
mineral
rights
at
a
profit
by
selling
or
leasing
them.
I
do
not
suggest
that
they
at
any
time
abandoned
the
other
plan
they
had
in
mind,
namely,
to
go
into
production
themselves
when
they
were
in
a
position
to
do
so.
The
fact
is
that
at
least
until
the
end
of
1947
they
did
no
drilling
or
development
on
their
own
account,
their
field
activities
being
confined
to
certain
surveys
and
mapping
of
the
land.
In
later
years
Leaseholds
went
into
production
on
a
very
large
scale,
and
at
the
date
of
the
trial
was
said
to
be
the
second
largest
producer
in
the
field.
The
financing
of
this
part
of
its
operations
was
made
possible
by
the
funds
derived
from
its
sales
or
subleases
of
mineral
rights.
In
all,
Leaseholds
entered
into
some
nine
agreements
to
sublet
or
sell
their
mineral
rights.
In
addition
to
the
Shell,
Imperial
Oil
and
Barnsdall
agreements
already
mentioned,
there
were
the
following
:
A
reservation—i.e.,
a
right
to
explore
with
an
option
to
purchase—was
granted
to
A.
E.
Verner
by
letter
dated
October
4,
1944,
over
some
2,300
acres
in
consideration
of
the
payment
of
$1,146.35
(Exhibit
34).
That
reservation
(called
P.R.3)
also
refers
to
an
earlier
petroleum
reservation
No.
2
granted
to
Verner
on
June
1,
1944,
the
rights
in
which
were
cancelled
by
P.R.3.
A
further
reservation
was
granted
for
about
20,000
acres
to
Rusylvia.
In
both
of
these
cases,
while
there
were
no
legal
obligations
on
Leaseholds
to
grant
these
reservations,
it
is
said
there
was
a
moral
obligation
to
continue
them
due
to
verbal
promises
made
by
the
original
owners.
Then
by
letter
dated
October
10,
1945
(Exhibit
12)
a
similar
reservation
was
granted
to
one
Cameron
over
some
5,000
acres,
the
consideration
being
$682.30.
A
reservation
was
also
granted
to
one
Evans,
the
particulars
of
which
are
not
clear.
Again
on
November
1,
1946,
Minerals
granted
a
lease
to
Leaseholds
over
three-quarter
sec-
tions
in
the
Leduc
area
(Exhibit
29),
and
on
the
same
date
Leaseholds
issued
a
sublease
(Exhibit
17)
on
the
same
property
to
Imperial
Oil
for
a
period
of
ten
years
or
so
as
long
as
gas
and
oil
could
be
found
thereon.
The
rental
was
one
dollar
per
acre
and
the
royalty
reserved
1214
per
cent
of
the
market
value
of
production.
It
is
important
also
to
note
the
magnitude
of
the
acreages
leased
or
sold.
As
I
have
said,
the
original
acreage
acquired
by
Minerals
and
which
Leaseholds
had
the
right
to
lease,
was
496,000.
The
Shell
option
to
purchase
related
to
some
300,000
acres
and
after
it
expired,
the
new
option
to
purchase
to
Imperial
Oil
covered
193,000
acres.
The
later
agreement
with
Barnsdall,
entered
into
while
the
Imperial
Oil
option
was
in
effect,
covered
146,000
acres.
These
facts
seem
to
indicate
clearly
that
Leaseholds
had
adopted
a
definite
plan
to
turn
its
rights
to
account
by
leasing
or
selling
them
at
a
profit.
It
may
be
noted
here
that
the
main
Imperial
Oil
option
was
for
the
purchase
in
fee
of
the
minerals
and
their
options
were
taken
up
in
succeeding
years
on
that
basis.
In
the
final
result,
however,
Imperial
requested
that
it
be
given
a
979
years’
lease
of
the
hydrocarbons
instead
of
a
conveyance
and
by
the
agreement
Exhibit
E,
Minerals,
with
the
concurrence
of
Leaseholds,
granted
such
a
lease
dated
December
30,
1950,
the
royalty
reserved
being
9
per
cent.
The
evidence
indicates
that
Imperial
requested
the
lease
instead
of
the
conveyance
due
to
difficulties
experienced
in
the
Land
Titles
Office
in
the
registration
of
titles
in
fee
with
royalties
reserved.
Finally,
by
agreement
dated
December
30,
1950
(Exhibit
E),
Minerals
signed
an
agreement
of
Settlements
and
Adjustments
and,
subject
to
the
adjustments
and
agreements,
the
Agreement
for
Leases
dated
July
7,
1944,
was
terminated.
Inter
alia,
the
new
lease
to
Imperial
Oil
was
to
remain
in
effect.
All
monies
payable
for
the
purchase
price
by
Imperial
Oil
were
to
be
the
property
of
Leaseholds
excepting
for
$234,394.68,
being
the
amount
paid
by
Leaseholds
to
Minerals
as
consideration
for
reducing
the
royalty
payable
under
the
Agreement
for
Leases
(10
per
cent)
to
9
per
cent,
which
was
the
royalty
reserved
to
Minerals
by
the
new
agreement
with
Imperial
Oil.
This
latter
item
will
be
referred
to
later
in
connection
with
Minerals’
appeals.
Minerals
also
granted
a
petroleum
and
natural
gas
lease
to
Leaseholds
for
996
years
over
293,568
acres
(including
the
land
covered
in
the
Barnsdall
lease).
The
royalty
reserved
to
Minerals
by
the
new
lease
was
10
per
cent
of
production.
It
is
of
particular
interest
to
note,
also,
that
Leaseholds
had
actually
negotiated
the
Shell
Oil
option
befgre
it
entered:
‘into
the
agreement
with
Minerals,
by
which
both
Minerals
and
Leaseholds
would
enter
into
the
agreement
with
Shell.
Similarly,
the
main
agreement
with
Imperial
Oil
was
signed
by
both
Minerals
and
Leaseholds
on
the
same
day
(Exhibit
18).
The
Leduc
lease
to
Imperial
Oil
was
sublet
by
Leaseholds
on
the
same
day
it
took
up
the
lease
from
Minerals.
In
the
same
way,
Leaseholds
negotiated
the
Barnsdall
Agreement,
authorized
Minerals
to
enter
into
the
agreement
directly
with
Barnsdall
without
having
itself
actually
acquired
the
mineral
leases.
There
is,
therefore,
the
clearest
indication
that
as
to
these
very
substantial
acreages,
Leaseholds
had
no
intention
of
retaining
any
rights
therein
(except
for
rents
and
royalties
reserved)
or
of
drilling
for
and
producing
oil
or
gas
therefrom.
It
had
prevented
itself
from
doing
so
unless,
of
course,
the
options
to
purchase
leases
were
surrendered.
In
my
view,
no
distinction
can
be
drawn
between
the
five
items
of
profit
now
under
consideration.
They
are
all
gains
which
fall
within
the
test
laid
down
in
Californian
Copper
Syndicate
v.
Harris,
5
T.C.
159,
namely,
whether
the
amount
in
dispute
is
‘fa
gain
made
in
an
operation
of
business
in
carrying
out
a
scheme
for
profit-making’’.
That
principle
was
approved
in
a
judgment
of
the
Privy
Council
in
Commissioner
of
Taxes
v.
Melbourne
Trust,
[1914]
A.C.
1001,
and
in
Ducker
v.
Rees
Roturbo
Development
Syndicate,
[1928]
A.C.
132;
it
has
been
followed
in
a
great
many
Canadian
cases.
Generally
speaking,
a
business
is
operated
for
the
purpose
of
making
a
profit
and
the
pursuit
of
profits
may
be
carried
on
in
a
variety
of
ways
and
by
different
operations.
In
the
instant
case,
it
seems
to
me
that
the
business
of
Leaseholds
was
carried
out
in
two
stages
and
involved
two
different
operations.
While
the
purpose
of
ultimately
developing
its
own
resources
may
have
been
kept
in
mind
throughout,
the
first
operation
necessarily
consisted
of
the
acquisition
and
disposition
of
mineral
rights
so
as
to
acquire
funds
with
which
to
enter
into
the
second
stage,
namely,
the
drilling
for
and
operation
of
oil
and
gas
wells
on
its
own
account.
The
possibility
of
disposition
of
the
mineral
rights
had
been
contemplated
since
the
company
was
formed.
In
dealing
with
its
mineral
rights
in
this
fashion,
it
did
not
do
so
accidentally
but
as
part
of
its
business
operations,
and
although
possibly
that
line
of
business
was
not
of
necessity
the
line
which
it
hoped
ultimately
to
pursue,
it
was
one
which
it
was
prepared
to
undertake,
and,
by
its
charter,
had
power
to
undertake.
Reference
may
usefully
be
made
to
the
case
of
Ducker
v.
Rees
Roturbo
Development
Syndicate,
Ltd.,
cited
above.
The
facts
and
findings
are
set
out
in
the
headnote
as
follows:
“The
respondent
company
was
formed
primarily
for
the
purpose
of
acquiring
the
benefit
of
an
invention
relating
to
centrifugal
pumps,
and
it
acquired
from
the
inventor
his
existing
patent
and
two-thirds
of
any
foreign
patent
rights
in
respect
of
the
invention,
the
invention
reserving
to
himself
the
remaining
one-third.
In
the
course
of
its
business
the
company
acquired
further
English
and
foreign
patents
in
connection
with
the
invention.
The
main
business
of
the
company
was
the
granting
of
manufacturing
licences
under
its
patents,
but
it
always
contemplated
the
possibility
of
a
sale
of
its
interest
in
the
foreign
patents.
The
respondent
company
and
the
inventor
granted
to
an
American
company
a
licence
to
manufacture
under
a
United
States
patent
with
an
option
to
purchase,
which
was
exercised.
Upon
an
appeal
by
the
respondent
company
against
assessments
to
income
tax
and
excess
profits
duty
upon
a
sum
representing
the
company’s
share
of
the
proceeds
of
the
sale
of
the
United
States
patent,
the
company
claimed
that
the
sum
in
question
was
a
capital
asset
and
not
a
profit
of
its
circulating
capital.
The
Special
Commissioners
decided
that
profits
on
the
sale
of
patents
arose
in
the
course
of
the
company’s
business
and
were
chargeable
to
tax
and
duty
:
Held,
that
the
Special
Commissioners
had
not
wrongly
directed
themselves,
and
that
there
was
ample
evidence
to
support
their
conclusion
of
fact.
The
test
laid
down
by
the
Lord
Justice-Clerk
(Macdonald)
in
Californian
Copper
Syndicate
v.
Harris
(1904),
6
F.
894;
5
Tax
Cas.
159
approved.”
Lord
Buckmaster
in
delivering
the
judgment
in
the
House
of
Lords
(all
the
other
judges
concurring)
said
at
p.
141:
‘“Turning
to
the
findings
of
the
Commissioners,
I
find
that
they
set
out
in
detail
the
circumstances
connected
with
the
working
of
this
company,
and,
in
particular,
the
reports,
which
begin
in
1907
and
continue
down
to
1918.
These
reports
show
that
the
directors
were
contemplating
from
the
beginning
the
possibility
of
the
sale
of
some
of
these
patents.
It
is
quite
true
that
they
preferred
not
to
sell
them
if
a
sale
could
be
avoided,
but
the
statement
in
para.
11
of
the
case
is
quite
plain,
that
‘the
possibility
of
the
sale
of
the
foreign
patents
or
rights
has
always
been
contemplated
by
the
appellant
company
in
respect
of
such
interest
as
it
possessed
in
the
foreign
patents’.
It
is
one
of
the
foreign
patents
with
which
this
appeal
has
to
do,
and
the
agreements
which
are
set
out,
showing
the
way
in
which
the
foreign
patents
in
the
case
of
France
and
of
Canada
have
also
been
dealt
with,
show
that
that
statement
was
not
a
statement
of
a
mere
accidental
dealing
with
a
particular
class
of
property,
but
that
it
was
part
of
their
business
which,
though
not
of
necessity
the
line
on
which
they
desired
their
business
most
extensively
to
develop,
was
one
which
they
were
prepared
to
undertake.
My
Lords,
I
find
myself
unable
to
see
that
in
this
case
the
Commissioners
have
wrongly
directed
themselves,
and
if
they
have
not
wrongly
directed
themselves,
there
appears
to
me
to
be
abundant
evidence
upon
which
their
conclusion
of
fact
could
be
supported.
It
is
for
this
reason
that
I
think
this
appeal
should
be
allowed.”
In
my
opinion,
the
profits
here
in
question
were
gains
made
in
the
carrying
on
or
carrying
out
of
a
business
and
in
the
scheme
for
profit-making.
Those
relating
to
the
years
1946
and
1947
are
therefore
within
the
definition
of
income
as
found
in
Section
3(1)
of
the
Income
War
Tax
Act;
as
a
result,
the
appeals
from
the
Income
Tax
Appeal
Board
in
respect
of
these
years
will
be
dismissed
with
costs,
and
the
assessments
made
upon
Leaseholds
affirmed.
Those
profits
relating
to
the
years
1949
and
1950
fall
within
the
provisions
of
Sections
3
and
4
of
the
Income
Tax
Act,
1948,
and
are
therefore
taxable
profits.
The
respondent
therefore
was
right
in
adding
these
amounts
to
the
declared
income
of
the
appellant
and
the
appeals
in
regard
thereto
will
be
dismissed.
I
turn
now
to
certain
deductions
claimed
by
Leaseholds
for
the
years
1949
and
1950
and
disallowed
in
part
by
the
respondent.
In
1949,
Leaseholds
caused
to
be
incorporated
Prairie
Leaseholds
Limited
as
a
wholly-owned
subsidiary
for
the
purpose
of
acquiring
and
taking
title
to
gas
and
oil
leases
in
the
provinces
of
Saskatchewan
and
Manitoba.
In
1949,
Leaseholds
for
and
on
behalf
of
Prairie
Leaseholds
disbursed
$63,404
to
individual
lease
brokers
in
payment
for
such
leases,
covering
108,510
acres,
all
of
which
were
taken
in
the
name
of
Prairie
Leaseholds.
In
its
annual
return
for
that
year,
Leaseholds
claimed
as
a
deduction
$10,851
of
that
amount
which
represented
the
amounts
which
the
lease
brokers
had
paid
to
owners
as
lease
rentals’’
and
that
amount
was
apparently
allowed
as
a
proper
deduction.
In
addition,
Leaseholds
claimed
a
further
deduction
of
the
balance
of
$52,553,
that
amount
having
been
kept
by
the
lease
brokers
as
their
profit
on
the
transaction.
This
deduction
was
disallowed
in
full
by
the
respondent.
Similar
transactions
took
place
in
1950,
Leaseholds
expending
$157,225.12
for
leases
on
approximately
240,000
acres.
It
claimed
and
was
allowed
$37,086.52
as
“lease
rentals’’,
but
its
claim
for
the
balance
of
$120,138.60—which
was
of
a
like
nature
as
the
claim
for
$52,553
in
1949—was
likewise
disallowed.
Counsel
for
the
respondent
submits
that
these
two
items
of
$52,553
and
$120,138.60
are
deductible
under
the
provisions
of
Section
53
of
c.
25,
Statutes
of
Canada,
1949
(Second
Session)
as
amended,
the
relevant
portions
thereof
being
as
follows:
“53.
(1)
A
corporation
whose
principal
business
is
production,
refining
or
marketing
of
petroleum,
petroleum
products
or
natural
gas
or
exploring
or
drilling
for
petroleum
or
natural
gas
may
deduct
in
computing
its
income,
for
the
purposes
of
The
Income
Tax
Act,
the
lesser
of
(a)
the
aggregate
of
the
drilling
and
exploration
costs,
including
all
general
geological
and
geophysical
expenses,
incurred
by
it,
directly
or
indirectly,
on
or
in
respect
of
exploring
or
drilling
for
oil
and
natural
gas
in
Canada
(i)
during
the
taxation
year,
and
(ii)
during
previous
taxation
years,
to
the
extent
that
they
were
not
deductible
in
computing
income
for
a
previous
taxation
year,
or
(b)
of
that
aggregate
an
amount
equal
to
its
income
for
the
taxation
year
(i)
if
no
deduction
were
allowed
under
paragraph
(b)
of
subsection
one
of
section
eleven
of
the
said
Act,
and
(ii)
if
no
deduction
were
allowed
under
this
subsection,
minus
the
deduction
allowed
by
section
twenty-seven
of
the
said
Act.
(2)
(Not
relevant)
(2A)
In
computing
a
deduction
under
subsection
(1)
or
(2)
no
amount
shall
be
included
in
respect
of
a
payment
for
or
in
respect
of
a
right,
licence
or
privilege
to
explore
for,
drill
for
or
take
petroleum
or
natural
gas
other
than
an
annual
payment
not
exceeding
$1.00
per
acre.’’
In
the
appellant’s
Notice
of
Objection
for
1949
it
was
stated:
‘‘In
the
year
1949
through
its
wholly-owned
subsidiary,
Prairie
Leaseholds
Limited,
the
taxpayer
acquired
certain
petroleum
and
natural
gas
leases
in
the
province
of
Saskatch-
ewan
and
paid
the
sum
of
$52,553
to
various
lease
brokers.
The
said
payments
were
annual
payments
made
in
respect
of
a
right,
licence
or
privilege
to
explore
for,
drill
for
or
take
petroleum
or
natural
gas
and
did
not
exceed
one
dollar
per
acre.”
A
similar
statement
appears
in
the
Notice
of
Objection
for
1950.
It
is
unnecessary
for
me
to
say
anything
as
to
the
amounts
which
were
allowed
as
deductible
expenses
for
these
two
years.
Whether
or
not
those
amounts
were
properly
deductible
under
Section
53
(supra),
does
not
now
concern
me
as
they
were,
in
fact,
allowed
by
the
assessment.
I
am
fully
satisfied,
however,
that
the
amounts
now
in
dispute
were
properly
disallowed.
In
no
proper
sense
can
it
be
said
that
these
payments
were
annual
payments
within
the
meaning
of
subsection
(2A)
of
Section
53.
In
my
view,
the
‘
annual
payment”
therein
referred
to
relates
to
a
payment
made
or
to
be
made
by
the
taxpayer
for
its
right
to
explore
for,
drill
for
or
take
petroleum
or
natural
gas,
during
each
year
for
which
the
taxpayer
has
the
right,
licence
or
privilege
in
question.
Here
the
amounts
in
question
represent
the
profit
of
the
lease
brokers
who
upon
the
completion
of
each
transaction
dropped
out
of
the
matter
entirely
and
were
not
thereafter
entitled
to
any
further
payment
by
the
appellant
in
respect
of
that
transaction.
The
real
nature
of
these
payments
was
revealed
by
the
evidence
at
the
trial.
It
is
true
that
they
were
made
by
the
appellant
to
the
lease
brokers,
but
in
every
case
the
payments
were
made
by
Leaseholds
for
and
on
behalf
of
Prairie
Leaseholds
Limited
which
was
itself
without
funds
to
pay
for
the
leases.
Exhibit
27
is
a
copy
of
an
agreement
dated
January
2,
1950,
between
Prairie
Leaseholds
Limited
(as
owner)
and
Western
Leaseholds
Limited
(as
operator).
The
recitals
therein
are
as
follows:
“WHEREAS
the
Owner
has
acquired
and
is
continuing
to
acquire
in
the
Provinces
of
Alberta,
Saskatchewan
and
Manitoba
mineral
rights,
including
petroleum
and
natural
gas
leases
and/or
other
mineral
leases,
by
the
purchase
of
such
rights
and
leases
or
of
interests
therein;
AND
WHEREAS
the
owner
has
applied
to
the
Operator
for
a
loan
to
finance
the
purchase
of
such
mineral
rights
including
leases
as
aforesaid
and
has
agreed
to
grant
leases
or
subleases
thereof,
as
the
case
may
be,
to
the
Operator
on
the
terms
and
conditions
hereinafter
set
forth
;
’
’
The
evidence
of
Mr.
Meech,
general
manager
and
director
of
Leaseholds,
was
that
this
agreement
related
to
all
the
leases
acquired
by
Prairie
Leaseholds
whether
in
1949,
1950
or
later.
In
cross-examination,
Mr.
Meech
was
referred
to
certain
questions
asked
him
on
his
examination
for
discovery
and
admitted
that
they
were
correctly
reported.
They
are
as
follows
:
“Q.—Did
Western
Leaseholds
lend
this
money
to
Prairie
Leaseholds
or
do
you
remember
how
the
transaction
was
handled?
A.—I
believe
Western
advanced
an
open
account
to
Prairie
Leaseholds
but
I
will
have
to
inform
myself.
Q.—What
do
you
mean
exactly
by
open
account?
A.—
Loans.
’
’
Then
as
a
result
of
undertakings
given
at
the
examination
for
discovery
to
produce
further
information,
Mr.
Meech
on
behalf
of
Leaseholds
wrote
to
his
counsel,
Mr.
Stikeman,
a
letter
dated
August
4,
1955,
giving
certain
additional
information
which
was
conveyed
to
counsel
for
the
respondent
(Exhibit
F).
It
includes
the
following
questions
and
answers.
“(c)
Q.—Who
actually
made
the
payment
of
$52,533
to
the
lease
brokers?
A.—Western
Leaseholds
Limited
on
behalf
of
Prairie
Leaseholds
Limited.
(d)
Q.—Did
Western
Leaseholds
lend
this
money
to
Prairie
Leaseholds?
A.—Yes.”
While
these
answers
relate
specifically
to
the
year
1949,
there
is
nothing
to
indicate
that
they
do
not
also
apply
to
the
year
1950.
From
this
evidence
it
is
abundantly
clear
that
these
amounts,
while
paid
out
by
Leaseholds
directly
to
the
lease
brokers
were,
in
fact,
considered
by
both
Leaseholds
and
Prairie
Leaseholds
to
be
loans
by
the
former
to
the
latter.
There
is
not
a
tittle
of
evidence
to
suggest
that
they
ever
were
anything
but
loans.
As
such,
Section
53
above
referred
to
is
of
no
assistance
to
the
appellant.
The
appeal
as
to
these
amounts
for
the
years
1949
and
1950
will
therefore
be
dismissed.
The
Minister
also
disallowed
the
claim
of
Leaseholds
to
deduct
from
its
income
the
sum
of
$750
paid
by
it
in
1949
to
the
province
of
Alberta
as
a
filing
fee
on
three
reservations
in
respect
of
a
right,
licence
or
privilege
to
explore
for,
drill
for
or
take
petroleum
and
natural
gas,
which
amount
is
said
not
to
exceed
one
dollar
per
acre.
Mr.
Meech
stated
that
in
the
provincial
regulations
under
which
the
fee
was
payable,
it
is
referred
to
as
a
filing
fee’’
and
is
payable
but
once,
at
the
time
of
making
the
application.
The
claim
for
this
deduction
is
made
under
the
provisions
of
Section
53,
above
referred
to.
There
is
very
little
evidence
as
to
the
nature
of
this
expenditure,
neither
the
provincial
regulations
nor
the
reservations
acquired
being
put
in
evidence.
The
only
evidence
is
that
it
is
a
filing
fee
in
respect
of
the
acquisition
of
petroleum
and
natural
gas
reservations
(which
Il
may
assume
gave
the
appellant
certain
rights
of
exploration
and
possibly
an
option
to
later
acquire
a
lease)
and
the
fact
that
it
was
paid
once
only.
In
view
of
my
earlier
comments
as
to
the
meaning
of
an
‘‘annual
payment’’
as
these
words
are
used
in
subsection
(2)
(a)
of
Section
53,
I
am
unable
to
find
that
this
payment
falls
within
the
provisions
of
Section
53.
It
is
not
suggested
that
it
is
deductible
under
any
other
provisions
of
the
Income
Tax
Act.
Accordingly,
the
appeal
on
this
item
will
be
disallowed.
In
the
result,
therefore,
the
appeals
of
Leaseholds
for
the
years
1949
and
1950
must
fail,
and
will
be
dismissed
with
costs.
Inasmuch
as
certain
other
matters
relating
to
the
assessments
for
these
years
were
(by
consent)
referred
back
to
the
Minister
for
reconsideration
and
re-assessment
at
the
trial,
the
matter
which
I
have
now
determined
will
also
be
referred
back
to
the
Minister
for
the
purpose
of
completing
the
re-assessment.
There
remains
for
consideration
the
appeals
of
Minerals
in
respect
of
the
assessments
made
upon
it
for
the
years
1949
and
1990.
Leaseholds
paid
Minerals
$34,850.13
in
1949
and
$199,544.55
in
1950
under
the
circumstances
presently
to
be
mentioned.
Minerals
considered
these
receipts
to
be
on
capital
account
and
did
not
include
them
in
its
income
tax
returns,
but
in
assessing
Minerals,
the
respondent
added
the
full
amounts
thereof
to
its
declared
income.
Minerals
now
appeals
from
such
assessments.
It
will
be
recalled
that
by
the
terms
of
the
main
Agreement
for
Leases
between
Minerals
and
Leaseholds
dated
July
7,
1944
(Exhibit
10),
the
latter
was
required
to
pay
to
the
former
10
per
cent
of
the
current
market
value
of
all
leased
substances
produced,
saved
and
sold
from
the
lands
leased
by
Leaseholds.
By
the
main
agreement
with
Imperial
Oil
dated
February
4,
1947
(Exhibit
18),
Imperial
was
required
to
pay
Leaseholds
a
royalty
of
3
per
cent
on
acreage
purchased
in
the
first
year
of
the
option,
that
royalty
increasing,
however,
by
1
per
cent
per
year
in
each
of
the
succeeding
years
to
a
maximum
of
7
per
cent.
By
a
letter-agreement
dated
December
31,
1947
(Exhibit
19)
between
Minerals
and
Leaseholds,
it
was
agreed
that
Leaseholds
should
retain
the
$250,000
option
money
paid
by
Imperial
and
that
in
respect
of
the
Imperial
agreement,
Minerals
would
grant
to
Leaseholds
an
exclusive
option
to
purchase
from
time
to
time
up
to
7
per
cent
of
its
royalty
on
the
following
basis:
Per
acre
On
the
first
10,000
acres
$2.63
for
each
1%
purchased
''
66
second
7
“
PA
10
é¢
“
“
‘
‘
[ar
4
third
[ar
{C
1.58
''
[4
H
“
**
balance
of
acreage
1.05
“
“
“
The
only
clear
evidence
relating
to
these
payments
of
$34,850.18
and
$199,544.55
is
found
in
a
paragraph
of
Exhibit
32—an
agreement
between
Minerals
and
Leaseholds
dated
December
30,
1950,
and
called
‘‘An
Agreement
of
Settlement
and
Adjustments’’.
Inter
alia
that
agreement
provided:
“1.
Re
Agreement
for
Leases,
dated
the
7th
day
of
July,
A.D.
1944,
hereinafter
referred
to
as
the
‘Agreement
for
Leases’.
It
being
agreed
between
the
parties
hereto
that
the
option
rights
for
leases
under
the
provisions
of
Agreement
for
Leases
shall
be
terminated
after
giving
effect
to
the
following,
namely
:
(a)
The
following
presently
existing
Agreements
shall
remain
in
full
force
and
effect:
(3)
Petroleum
and
Natural
Gas
Lease,
dated
the
15th
of
January,
A.D.
1951
(to
be
effective
from
the
31st
of
December,
A.D.
1950)
made
between
Minerals
as
‘Lessor’
and
Imperial
Oil
Limited
as
‘Lessee’,
hereinafter
referred
to
as
‘Imperial
Oil
Lease’,
covering
One
Hundred
Ninety-three
Thousand,
One
Hundred
Thirtyseven
and
Seventy-nine
One
Hundredths
(193,137.79)
acres
more
or
less.
It
being
agreed
that
Western
Leaseholds
relinquishes
all
rights
and
claims
in
respect
to
the
said
lands
or
lease,
SUBJECT
TO
Leaseholds
being
entitled
to
all
monies
paid
by
Imperial
Oil
Limited
as
the
purchase
price
for
the
said
lease,
under
the
terms
of
the
Option
Letter,
dated
the
4th
of
February,
A.D.
1947,
addressed
to
Imperial
Oil
Limited,
and
signed
by
each
of
the
parties
hereto
excepting
the
sum
of
Two
Hundred
and
Thirty-four
Thousand,
Three
Hundred
and
Ninety-four
Dollars
and
Sixty-eight
Cents
($234,-
394.68),
being
the
amount
paid
by
Leaseholds
to
Minerals
as
consideration
for
reducing
the
royalty
payable
under
the
Agreement
for
Leases
from
Ten
Percent
(10%)
to
Nine
Percent
(9%),
which
sum
was
computed
on
the
basis
set
forth
in
letter
between
the
parties
hereto,
dated
the
31st
day
of
December,
A.D.
1947.”
The
item
of
$234,394.68
mentioned
therein
is
made
up
of
the
two
payments
made
by
Leaseholds
to
Minerals,
namely,
$34,850.13
in
1949
and
$199,544.55
in
1950.
By
an
agreement
of
the
same
date
between
Minerals
and
Imperial
Oil
(Exhibit
E),
Minerals
leased
to
Imperial
Oil
for
nine
hundred
and
seventy-nine
(979)
years
the
petroleum
and
natural
gas
and
all
related
hydrocarbons
other
than
coal
in
193,137.79
acres,
Minerals
reserving
to
itself
a
9
per
cent
cash
royalty.
There
is
no
evidence
as
to
why
Imperial
Oil
agreed
to
pay
a
9
per
cent
royalty
when
under
its
original
agreement
it
was
required
to
pay
smaller
royalties
for
lands
taken
up
under
its
option
in
the
years
1949
and
1950.
Counsel
for
Minerals
submits
that
these
amounts
were
capital
receipts
and
ought
not
to
be
regarded
as
forming
part
of
the
profits
arising
from
the
carrying
on
of
its
trade
or
business.
For
the
Minister
it
is
contended
that
they
were
income
from
the
business
carried
on
by
Minerals
or,
alternatively,
that
they
were
income
from
property
and
that
consequently
the
profit
therefrom
is
taxable
income
under
Sections
3
and
4
of
the
Income
Tax
Act.
I
must
confess
that
I
have
found
more
difficulty
in
reaching
a
conclusion
on
this
point
than
on
any
of
the
other
matters
now
under
appeal
and
the
opinion
which
I
have
finally
arrived
at,
and
will
now
endeavour
to
state,
was
reached
only
after
a
very
complete
examination
of
the
facts
and
after
reaching
a
definite
conclusion
as
to
the
nature
of
the
receipts
in
question.
Counsel
for
Minerals
submits
that
in
effect
Leaseholds
purchased
1
per
cent
of
the
Imperial
Oil
royalty
from
Minerals.
I
do
not
thing
that
that
is
quite
so.
While
the
amount
of
the
payments
may
have
been
computed
on
the
basis
of
the
formula
contained
in
the
agreement
of
December
31,
1947
(Exhibit
19),
Leaseholds
did
not
actually
acquire
1
per
cent
of
the
Imperial
Oil
royalty.
It
is
clear
that
after
December
30,
1950,
Minerals
was
entitled
to
the
full
royalty
of
9
per
cent
and
Leaseholds
was
entitled
to
no
part
thereof.
It
seems
to
me
that
the
only
reasonable
interpretation
to
be
put
upon
that
part
of
the
Agreement
of
Settlements
and
Adjustments,
which
I
have
cited
above,
is
that
Minerals
and
Leaseholds
thereby
agreed
to
cancel
that
part
of
their
contract
of
July
7,
1944
(Exhibit
10)
by
the
terms
of
which
Leaseholds
was
bound
to
pay
Minerals
1
per
cent
more
royalty
than
Imperial
oil
by
the
terms
of
the
new
agreement
of
December
30,
1950,
would.
thereafter
pay
Minerals,
namely
9
per
cent.
The
consideration
for
the
cancellation
of
that
part
of
the
contract
was
the
total
of
the
several
amounts
paid
in
1949
and
1950.
Mr.
Stikeman
submitted
that
compensation
paid
for
the
cancellation
of
the
contract
under
these
circumstances
was
a
capital
receipt.
He
relied
on
certain
statements
in
the
Van
Den
Berghs
Ltd.
v.
Clark,
19
T.C.
390,
case—a
decision
of
the
House
of
Lords.
In
that
case
Van
Den
Berghs,
which
carried
on
the
business
of
manufacturing
and
selling
margarine
and
other
products,
entered
into
a
profit
sharing
and
non-competition
agreement
in
1908
with
a
Dutch
company.
Due
to
difficulties
occasioned
by
the
First
World
War,
the
companies
were
unable
to
compute
their
several
share
of
the
profits
and
it
was
therefore
subsequently
agreed
that
the
agreements
would
be
cancelled
for
the
future
upon
the
payment
to
Van
Den
Berghs
of
the
sum
of
£450,000.
In
the
House
of
Lords
it
was
held
that
such
payment
was
for
the
cancellation
of
the
Van
Den
Berghs’
future
rights
under
the
agreements
which
constituted
a
capital
asset
and
that
the
money
so
received
was
therefore
a
capital
receipt.
At
p.
431
Lord
Macmillan
stated
:
“Now
what
were
the
Appellants
giving
up?
They
gave
up
their
whole
rights
under
the
agreements
for
thirteen
years
ahead.
These
agreements
are
called
in
the
Stated
Case
‘‘
pooling
agreements’’,
but
that
is
a
very
inadequate
description
of
them,
for
they
did
much
more
than
merely
embody
a
system
of
pooling
and
sharing
profits.
If
the
Appellants
were
merely
receiving
in
one
sum
down
the
aggregate
of
profits
which
they
would
otherwise
have
received
over
a
series
of
years,
the
lump
sum
might
be
regarded
as
of
the
same
nature
as
the
ingredients
of
which
it
was
composed.
But
even
if
a
payment
is
measured
by
annual
receipts,
it
is
not
necessarily
in
itself
an
item
of
income.
As
Lord
Buckmaster
pointed
out
in
the
case
of
the
Glenboig
Union
Fireclay
Co.,
Ltd.
v.
Commissioners
of
Inland
Revenue,
12
T.C.
427
at
p.
464:
‘There
is
no
relation
between
the
measure
that
is
used
for
the
purpose
of
calculating
a
particular
result
and
the
quality
of
the
figure
that
is
arrived
at
by
means
of
the
application
of
that
test’.’’
That
case,
however,
is
clearly
distinguishable
on
its
facts.
Lord
Macmillan
was
careful
to
point
out
the
special
nature
of
the
“pooling
agreements’’
that
were
there
cancelled
and
to
distinguish
the
cancellation
of
such
agreements
from
the
cancellation
of
ordinary
commercial
contracts
made
in
the
course
of
carrying
on
trade.
In
the
paragraph
immediately
following
that
cited,
he
said:
“The
three
agreements
which
the
Appellants
consented
to
cancel
were
not
ordinary
commercial
contracts
made
in
the
course
of
carrying
on
their
trade;
they
were
not
contracts
for
the
disposal
of
their
products
or
for
the
engagement
of
agents
or
other
employees
necessary
for
the
conduct
of
their
business;
nor
were
they
merely
agreements
as
to
how
their
trading
profits
when
earned
should
be
distributed
as
between
the
contracting
parties.
On
the
contrary,
the
cancelled
agreements
related
to
the
whole
structure
of
the
Appellants’
profit-making
apparatus.
They
regulated
the
Appellants’
activities,
defined
what
they
might
and
what
they
might
not
do,
and
affected
the
whole
conduct
of
their
business.
I
have
difficulty
in
seeing
how
money
laid
out
to
secure,
or
money
received
for
the
cancellation
of,
so
fundamental
an
organization
of
a
trader’s
activities
can
be
regarded
as
an
income
disbursement
or
an
income
receipt.
Mr.
Hills
very
properly
warned
your
Lordships
against
being
misled
as
to
the
legal
character
of
the
payment
by
its
magnitude,
for
magnitude
is
a
relative
term
and
we
are
dealing
with
companies
which
think
in
millions.
But
the
magnitude
of
a
transaction
is
not
an
entirely
irrelevant
consideration.
The
legal
distinction
between
a
repair
and
a
renewal
may
be
influenced
by
the
expense
involved.
In
the
present
case,
however,
it
is
not
the
largeness
of
the
sum
that
is
important
but
the
nature
of
the
asset
that
was
surrendered.
In
my
opinion
that
asset,
the
congeries
of
rights
which
the
Appellants
enjoyed
under
the
agreements
and
which
for
a
price
they
surrendered,
was
a
capital
asset.’’
In
my
opinion,
the
contract
cancelled
in
the
instant
case
was
an
ordinary
commercial
contract
made
in
the
course
of
carrying
on
trade
or
business,
namely,
the
disposal
of
Minerals’
products.
The
evidence
is
clear
that
Minerals
never
intended
to
go
into
production
on
its
own
account.
It
could
make
a
profit
only
by
the
disposal
in
one
form
or
another
of
such
minerals
as
it
owned.
By
the
Agreement
for
Leases
with
Leaseholds,
it
obligated
itself
to
dispose
of
all
its
minerals
to
the
latter
company
(or
its
assigns)—an
ordinary
commercial
transaction
made
in
the
course
of
what
was
undoubtedly
its
business,
and
entered
into
for
the
sole
purpose
of
profit
making,
as
evidenced
by
its
reservation
of
a
10
per
cent
royalty.
It
had
virtually
no
business
operation
other
than
complying
with
the
requirements
of
Leaseholds
(or
its
assigns)
from
time
to
time
and
the
supervision
of
such
contracts
as
it
entered
into
pursuant
thereto.
In
my
opinion,
the
principle
to
be
followed
is
that
stated
in
Short
Brothers
Ltd.
v.
C.I.R.,
12
T.C.
955.
The
facts
appear
in
the
headnote
as
follows
:
“(1)
The
Appellant
Company
in
the
first
case
contracted
in
February
and
March,
1920,
to
build
two
steamers,
but
in
November
of
that
year
agreed
to
the
cancellation
of
the
contracts
in
consideration
of
the
payment
of
the
sum
of
£100,000,
which
was
paid
to
it
on
26th
November,
1920.
The
Commissioners
of
Inland
Revenue
took
the
view
that
this
sum
should
be
included
in
the
computation
of
the
profits
of
the
Company
for
the
accounting
period
of
twelve
months
ending
on
30th
June,
1921
(the
final
accounting
period
of
the
Company
for
the
purposes
of
Excess
Profits
Duty).
The
Company
contended
that
the
said
sum
was
a
capital
receipt,
and
alternatively
that,
if
it
was
a
revenue
receipt,
it
should
be
apportioned
over
the
periods
during
which
the
work
under
the
contracts
would
have
been
performed
and
should
not
be
regarded
as
a
profit
wholly
attributable
to
the
accounting
period
in
question.
Held,
in
the
Court
of
Appeal,
that
the
said
sum
was
chargeable
to
Excess
Profits
Duty
as
a
receipt
in
the
ordinary
course
of
the
Company’s
trade,
and
must
be
included
in
the
profits
for
the
accounting
period
ending
on
30th
June,
1921,
in
which
it
became
payable
and
was
in
fact
paid.”
At
p.
972
Lord
Hanworth,
M.R.,
said:
'It
is
not
denied
that
Messrs.
Short
Brothers,
Limited,
carry
on
a
business
of
building
ships,
and
in
the
course
of
carrying
on
their
business
they
must
enter
into
a
great
number
of
contracts—contracts,
some
of
which
are
fulfilled,
possibly,
some
of
which
are
broken,
some
of
which,
possibly,
are
terminated
;
but
in
all
such
matters
it
is
not
argued
that
Messrs.
Short
Brothers,
Limited,
have
less
power
than
other
business
firms
to
determine
whether
or
not
they
will
bring
to
an
end,
upon
terms
which
they
are
disposed
to
agree,
contracts
which
they
have
entered
into,
contracts
which,
for
one
reason
or
another,
are
to
be
terminated
in
the
interests
of
one
party
or
the
other
to
the
contract.
Once
one
sees
that
a
contract
may
be
determined
in
the
course
of
business,
it
appears
to
me
that
we
have
the
answer
to
the
problem
which
is
put
before
us.’’
Reference
may
also
be
made
to
C.I.R.
v.
The
Northfleet
Coal
and
Ballast
Co.
Ltd.,
12
T.C.
1102,
and
to
Burmah
Steam
Ship
Co.
Ltd.
v.
C.I.R.,
16
T.C.
67.
For
these
reasons,
I
am
of
the
opinion
that
the
compensation
moneys
so
received
for
the
cancellation
of
a
portion
of
the
contract—the
only
portion
thereof
in
which
Leaseholds
had
any
interest—was
taxable
income
of
Minerals
in
the
years
1949
and
1950.
The
appeals
on
this
point
must
therefore
be
dismissed.
Western
Minerals
also
appeals
in
respect
of
an
interest
charge
made
upon
it
by
the
respondent,
dated
September
22,
1953,
for
its
taxation
year
ending
December
31,
1950.
It
filed
its
return
for
that
year
within
six
months
of
the
end
of
its
fiscal
year,
namely,
on
June
30,
1951.
On
July
31,
1951,
the
respondent
forwarded
to
the
appellant
a
Notice
of
Assessment
which
for
the
sake
of
clarity
I
shall
refer
to
as
the
first
Notice
of
Assessment.
That
notice
showed
a
tax
levied
of
$23,789.79,
with
an
equal
amount
paid
on
account
and
no
unpaid
balance.
Under
date
of
September
9,
1953,
the
Minister,
acting
under
the
provisions
of
Section
42
of
the
Income
Tax
Act,
forwarded
a
Notice
of
Reassessment
indicating
a
tax
levied
of
$215,049.32;
after
crediting
the
payments
on
account
of
$23,789.79,
there
was
added
an
interest
charge
of
$25,300.17,
showing
a
balance
unpaid
of
$216,559.70.
This
notice
refers
to
the
Notice
of
Assessment
of
July
31,
1951,
as
the
‘‘original
assessment’’.
Again,
for
the
sake
of
clarity,
I
shall
refer
to
this
notice
of
September
9,
1953,
as
the
second
Notice
of
Assessment.
Subsequently,
on
September
22,
1953,
the
respondent
forwarded
to
the
appellant
a
further
Notice
of
Reassessment
called
“Revised
Assessment
Replacing
Assessment
Issued
September
9,
1953”.
This
final
notice
was
apparently
issued
to
correct
a
mathematical
error
in
the
computation
of
interest
drawn
to
the
attention
of
the
tax
officials
by
the
appellant
and
resulted
in
the
reduction
of
the
interest
charges
by
about
$355.
While
the
appeal
is
taken
from
the
revised
assessment
dated
September
22,
1953,
the
appellant’s
counsel
does
not
contend
that
this
third
notice
has
any
bearing
on
the
particular
‘‘interest’’
point
now
in
issue.
This
portion
of
the
appeal
is
based
on
subsection
(6)
of
Section
50
of
the
Act.
“50.
(6)
No
interest
under
this
section
upon
the
amount
by
which
the
unpaid
taxes
exceed
the
amount
estimated
under
section
41
is
payable
in
respect
of
the
period
beginning
12
months
after
the
day
fixed
by
this
Act
for
filing
the
return
of
the
taxpayer’s
income
upon
which
the
taxes
are
payable
or
12
months
after
the
return
was
actually
filed,
whichever
was
later,
and
ending
30
days
from
the
day
of
mailing
of
the
notice
of
the
original
assessment
for
the
taxation
year.’’
,
In
its
Notice
of
Appeal,
the
appellant
submitted
that
the
first
‘‘genuine
assessment’’
was
that
mailed
to
it
on
September
22,
1953,
but
at
the
trial
his
argument
was
that
the
second
notice
of
September
9,
1953,
was
in
the
circumstances
to
be
mentioned,
the
first
or
original
Notice
of
Assessment.
If
that
be
so,
then
he
submits
that
under
subsection
(6),
the
appellant
is
relieved
from
duty
for
the
period
June
30,
1952
(being
twelve
months
after
the
date
fixed
for
filing
the
return)
to
October
9,
1953
(being
thirty
days
from
the
date
of
mailing
of
the
notice
on
September
9,
1953)
which
the
appellant
says
was
the
notice
of
the
original
assessment.
For
the
Minister,
it
is
submitted
that
the
original
assessment
was
that
contained
in
the
first
notice
of
July
31,
1951,
and
that
consequently,
on
a
proper
interpretation
of
subsection
(6)
of
Section
50,
the
appellant
is
not
relieved
from
payment
of
any
interest
payable
under
the
other
provisions
of
Section
50.
To
support
his
submission,
Mr.
Stikeman
relied
on
the
evidence
of
A.
O.
Ellis,
taken
on
examination
for
discovery
on
October
25,
1955.
Mr.
Ellis
at
all
relevant
times
was
director
of
taxation
at
the
Calgary
office
of
the
Department
of
National
Revenue
(Income
Tax)
where
the
returns
were
filed
and
the
assessments
made
and
the
Notices
of
Assessment
forwarded.
He
personally
had
no
part
in
the
processing
of
the
return
or
in
the
assessment,
but
had
informed
himself
as
to
the
procedure
followed.
From
his
evidence,
it
appears
that
the
T2
return
was
received
by
the
mailing
unit
on
June
30,
1951,
accompanied
by
a
cheque
for
$23,789.79,
the
full
amount
of
the
tax
payable
as
computed
by
the
appellant.
Then
the
cashier
issued
a
receipt
for
the
remittance
which
was
mailed
to
the
taxpayer
and
the
cashier
initialled
the
return
showing
that
the
amount
said
to
have
been
remitted
was
received.
The
return
was
then
sent
to
‘‘assessing
control’’;
a
check
was
made
in
the
ledger
accounts
as
to
any
credits
claimed
or
paid.
It
was
then
sent
to
the
4
assessment
section’’;
then
the
assessor
examined
the
return
and
the
net
profit
shown
therein;
he
reviewed
the
company’s
figures,
reconciling
the
profits
shown
in
the
attached
statements
with
the
profits
shown
on
the
T2
return,
and
thereby
reached
a
basis
for
computing
the
tax
as
estimated
by
the
taxpayer.
He
accepted
the
company’s
reconciliation
and
accepted
the
figures
as
stated
in
the
T2
return,
indicating
on
the
T2
return
that
he
had
assessed
the
return.
Then
the
assessor
computed
the
tax
on
the
income
as
shown
in
the
return.
Having
verified
that
the
tax
as
computed
by
the
appellant
corresponded
with
his
own
computation
of
assessment
and
having
verified
the
amount
of
payments
as
re-
ceived
by
the
accounting
department,
he
completed
Form
T-6-7-L
containing
the
information
from
which
Form
T-6-7-A—the
Notice
of
Assessment—was
prepared
by
a
typist.
Then
the
return
and
the
computation
so
made
were
sent
to
the
checking
unit
where
a
check
was
made
as
to
the
work
of
the
assessor
and
the
typed
Notice
of
Assessment
to
ensure
that
there
were
no
typographical
errors.
This
last
step
was
a
mere
mathematical
computation
and
the
assessor’s
computation
of
the
income
was
not
there
questioned.
One
copy
of
the
Notice
of
Assessment
was
sent
to
the
taxpayer
and
others
were
retained
for
internal
use.
The
procedure
which
I
have
outlined
was
apparently
followed
in
the
case
of
the
first
Notice
of
Assessment
dated
July
31,
1951.
At
some
stage,
the
T2
return
was
segregated
for
further
investigation,
but
whether
this
was
done
before
or
after
the
first
Notice
of
Assessment
was
mailed
is
not
shown.
The
investigation
by
the
assessing
section
took
place
at
some
time
between
the
date
of
issue
of
the
first
and
second
Notices
of
Assessment.
The
assessor
who
reviewed
the
return
had
left
the
department,
but
Mr.
Ellis
outlined
what
steps
were
probably
taken.
He
would
review
the
financial
statements
in
detail,
and
they
are
lengthy
and
involve
a
great
many
claims
for
deductions
of
various
sorts.
He
would
consider
all
the
items
of
a
contentious
nature
bearing
on
the
assessment,
and
after
preparing
a
summary
of
his
requirements
to
complete
the
review,
would
secure
the
necessary
information
either
from
correspondence
with
the
company
or
by
consultation
with
its
officials
or
by
reference
to
its
books
and
records.
Having
secured
the
required
information
and
computed
the
tax
payable,
the
appellant
was
reassessed
and
was
sent
the
second
Notice
of
Assessment
dated
September
9,
1953.
As
I
have
noted
above,
the
contention
is
that
the
second
assessment
dated
September
9,
1953,
is
in
fact
the
‘‘original
assessment”
referred
to
in
Section
50(6).
The
submission
is
that
the
first
assessment
was
invalid
and
incomplete,
that
the
Minister
did
not
comply
with
the
provisions
of
Section
42(1),
namely,
with
all
despatch
to
examine
each
return
of
income
and
assess
the
tax
for
the
taxation
year—and,
more
particularly,
it
is
alleged,
as
the
examination
of
the
return
is
incomplete,
and
as
it
was
at
some
stage
marked
‘‘for
further
review’’.
In
my
opinion,
the
matter
is
concluded
by
the
judgment
of
the
learned
President
in
Provincial
Paper
Ltd.
v.
M.N.R.,
[1955]
Ex.
C.R.
33;
[1954]
C.T.C.
867—a
judgment
with
which
I
respectfully
agree.
In
that
case,
the
Minister
by
his
assessor
had
accepted
the
taxpayer’s
return
as
correct
and
had
assessed
it
accordingly.
Subsequently,
the
return
was
reviewed
and
the
taxpayer
was
reassessed.
There,
as
here,
the
taxpayer
contended
that
the
first
assessment
was
not
the
original
assessment
and
claimed
the
benefit
of
subsection
(6)
of
Section
50.
In
that
case
it
was
held:
“Held:
That
it
is
not
for
the
Court
or
anyone
else
to
prescribe
what
the
intensity
of
the
examination
of
a
taxpayer’s
return
in
any
given
case
should
be.
That
is
exclusively
a
matter
for
the
Minister,
acting
through
his
appropriate
officers,
to
decide.
2.
That
there
is
no
standard
in
the
Act
or
elsewhere,
either
express
or
implied,
fixing
the
essential
requirements
of
an
assessment.
It
is
exclusively
for
the
Minister
to
decide
how
he
should,
in
any
given
case,
ascertain
and
fix
the
liability
of
a
taxpayer.
The
extent
of
the
investigation
he
should
make,
if
any,
is
for
him
to
decide.
9.
That
the
Minister
may
properly
decide
to
accept
a
taxpayer’s
income
tax
return
as
a
correct
statement
of
his
taxable
income
and
merely
check
the
computations
of
tax
in
it
and
without
any
further
examination
or
investigation
fix
his
tax
liability
accordingly.
If
he
does
so
it
cannot
be
said
that
he
has
not
made
an
assessment.”
On
p.
39
the
President
stated:
“But
the
basic
fallacy
in
the
contention
lies
in
the
assumption
that
the
Minister
is
precluded
from
ascertaining
and
fixing
a
taxpayer’s
liability
on
the
basis
of
the
assumed
correctness
of
his
income
tax
return
but
must
do
something
else
and
that
if
he
does
no
do
so
he
has
not
made
an
assessment.
While
the
Minister
is
not
bound
by
the
taxpayer’s
return,
as
was
emphasized
in
the
Dezura
case
(
[1948]
Ex.
C.R.
10
at
15),
there
is
nothing
in
the
Act
to
prevent
him
from
accepting
it
as
correct
and
fixing
the
taxpayer’s
liability
accordingly.
In
Davidson
v.
The
King,
[1945]
Ex.
C.R.
160
at
170,
I
made
the
statement
that
the
taxpayer’s
own
return
of
his
income,
while
not
binding
upon
the
Minister,
may
be
the
basis
of
the
assessment
made
by
him
and
I
pointed
out
that
it
was
reasonable
that
this
should
be
so,
since
the
taxpayer
knew
better
than
anyone
else
what
his
income
was.
The
Minister
may,
therefore,
properly
decide
to
accept
a
taxpayer’s
income
tax
return
as
a
correct
statement
of
his
taxable
income
and
merely
check
the
computations
of
tax
in
it
and
without
any
further
examination
or
investigation
fix
his
tax
liability
accordingly.
If
he
does
so
it
cannot
be
said
that
he
has
not
made
an
assessment.
’
’
Counsel
for
the
appellant
in
this
case
submitted
that
this
case
should
be
distinguished
from
the
Provincial
Paper
case
mainly
on
the
grounds
that
at
some
stage
the
taxpayer’s
return
was
‘‘in
some
fashion
identified
as
being
segregated
for
further
investi-
gation’’.
It
is
urged
that
if
it
was
marked
for
further
investigation
before
the
initial
assessment
was
made,
such
assessment
was
incomplete
and
invalid
in
that
the
Minister
had
failed
adequately
to
comply
with
the
provisions
of
Section
42(1),
his
examination
of
the
return
being
incomplete.
While
the
return
was
at
some
stage
set
aside
for
further
review—a
review
which
led
to
the
reassessment
of
September
9,
1953—there
is
no
evidence
to
establish
when
it
was
so
set
aside.
I
am
therefore
quite
unable
to
distinguish
the
facts
in
this
case
from
those
in
the
Provincial
Paper
case
in
any
essential
matter.
It
follows,
therefore,
that
the
Notice
of
Assessment
dated
July
31,
1951,
was
the
notice
of
the
original
assessment
referred
to
in
subsection
(6)
of
Section
50
and
that
the
appellant
is
not
entitled
to
the
benefits
of
that
subsection.
The
appeal
on
this
point
will
therefore
be
dismissed.
In
the
result,
therefore,
all
the
appeals
of
Leaseholds
and
Minerals
which
were
not
disposed
of
at
the
trial
with
the
consent
of
the
parties
will
be
dismissed
with
costs.
The
assessments
made
upon
Leaseholds
for
the
years
1946
and
1947
will
be
affirmed.
Inasmuch
as
certain
other
matters
in
the
appeals
of
both
Leaseholds
and
Minerals
for
the
years
1949
and
1950
were
referred
back
to
the
Minister
for
reconsideration
and
reassessment
at
the
trial,
I
think
it
inadvisable
to
affirm
the
assessments
made
for
those
years
and
these
matters
will
be
referred
back
to
the
Minister
for
the
purpose
of
enabling
him
to
make
such
further
reassessments
as
may
be
necessary.
Judgment
accordingly.
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