THORSON,
P.
:—This
is
an
appeal
from
the
decision
of
the
Income
Tax
Appeal
Board
((1955),
13
Tax
A.B.C.
88),
dated
May
25,
1955,
dismissing
the
appellant’s
appeals
from
its
income
tax
assessments
for
the
years
1948,
1949,
1950
and
1951.
The
appellant,
hereinafter
usually
called
the
association,
was
originally
incorporated
on
June
19,
1924,
as
Manitoba
Co-Operative
Poultry
Marketing
Association
under
The
Co-Operative
Associations
Act,
Statutes
of
Manitoba,
1916,
c.
23,
upon
the
co-operative
plan,
pursuant
to
a
memorandum
of
association,
dated
June
12,
1924.
The
Co-Operative
Associations
Act
was
repealed
in
1932
by
The
Companies
Act,
Statutes
of
Manitoba,
1932,
e.
5,
and
co-operatives
were
brought
under
Part
VI,
subsequently
Part
VII,
of
the
said
Act.
Section
118
of
that
Act
carried
forward
into
Section
123
of
The
Companies
Act,
R.S.M.
1940,
c.
36,
which,
as
amended
in
1943,
Statutes
of
Manitoba
1943,
c.
6,
provided:
"123.
This
Part
shall
apply
to
applications
for
letters
patent
for
the
creation
of
corporations
to
be
operated
on
a
co-operative
basis,
and
to
those
corporations
when
incorporated;
and
to
corporations
heretofore
incorporated
under
"The
Co-Operative
Associations
Act”
or
any
Act
for
which
it
was
substituted
in
the
same
manner
as
if
they
had
been
incorporated
by
letters
patent.”
Thus
the
association,
Which
had
been
incorporated
as
a
memorandum
of
association
company,
became,
in
effect,
a
letters
patent
company
and
stood
in
the
same
position
as
if
it
had
been
incorporated
under
Part
VII
of
The
Companies
Act.
The
appellant’s
capital,
Which
had
originally
consisted
of
20,000
shares
of
the
par
value
of
$1
each,
was
increased
on
March
11,
1939,
to
40,000
shares
of
the
par
value
of
$1
each
and
on
April
30,
1946,
to
200,000
shares
of
$1
each,
the
increase
in
each
case
being
authorized
by
supplementary
letters
patent
under
The
Companies
Act.
Prior
to
the
years
in
question
in
this
appeal,
there
was
another
marketing
association
operating
in
Manitoba,
known
as
Manitoba
Co-Operative
Dairies
Ltd.,
but
early
in
1947
the
appellant
took
it
over
by
acquiring
its
shares
and
assuming
its
liabilities.
Then
by
supplementary
letters
patent,
dated
May
14,
1947,
the
appellant’s
capital
was
further
increased
to
500,000
shares
of
$1
each
and
its
name
changed
to
its
present
one.
The
issue
in
the
appeal
is
a
narrow
one.
It
turns
on
the
nature
of
the
transactions
between
the
appellant
association
and
its
members
and
the
character
of
the
surplus
in
its
hands
at
the
end
of
each
year
of
its
operations.
Was
this
surplus
taxable
income
of
the
association
or
was
it
held
by
it
for
its
members
to
whom
it
must
account?
The
association’s
membership
consisted
entirely
of
producers
of
poultry,
eggs
and
dairy
products
who
marketed
their
produce
through
it.
This
appears
from
its
by-law
relating
to
membership.
Article
11(1)
provided:
‘‘The
term
‘Member’
when
used
herein
shall
include
'Shareholder’
and
‘Membership
Fee’
shall
include
the
cost
of
a
share
of
capital
stock.’’
And
Article
11(2)
(a)
read
as
follows:
"Membership
in
the
Association
shall
be
extended
to
all
persons
who
market
agricultural
products
through
the
Association.
A
formal
written
application
for
membership
shall
not
be
necessary,
but
delivery
of
agricultural
products
for
marketing
shall
be
accepted
by
the
Association
as
the
equivalent
of
an
application
for
membership.’’
And
Article
11(2)
(b)
should
also
be
considered.
It
provided:
There
shall
be
deducted
and
retained
by
the
Association
out
of
the
first
and
subsequent
settlements
to
any
person
who
has
marketed
products
through
the
Association,
including
shareholder
members,
a
total
amount
equal
to
the
par
value
of
sufficient
shares
in
the
capital
stock
of
the
Association
to
bring
such
persons’s
holdings
up
to
a
total
of
ten
shares
of
$1.00
each
:
provided,
however,
that
deduction
from
members’
settlements
for
the
purpose
of
payment
of
the
purchase
price
of
shares
shall,
unless
the
purchasing
member
directs
larger
deductions,
be
limited
to
the
following
amounts
:
(1)
Deductions
for
purchase
of
shares
of
new
members
shall
be
limited
to
$1.00
for
the
first
year,
and
$2.00
per
annum
thereafter
until
paid
;
(2)
Deductions
for
purchase
of
additional
shares
by
members
already
holding
one
share
shall
be
limited
to
$2.00
per
annum
until
paid.”
Moreover,
it
appears
to
have
been
intended
that
the
membership
should
be
confined
as
far
as
possible
to
bona
fide
producers.
For
example,
Article
4(1)
provided:
"‘The
Directors
shall
have
the
general
management
and
control
of
the
business
of
the
Association
and
shall
have
power:
(a)
To
allot,
and
approve
the
transfer
of
shares
in
the
capital
stock
of
the
Association,
but
with
power
to
refuse
the
allotment,
or
transfer
of
any
of
the
said
shares
to
anyone
other
than
a
bona
fide
producer
of
poultry
and
dairy
products.
‘
‘
The
members
were
not
bound
by
contract
to
deliver
any
products
to
the
association
but
its
by-laws
were
made
binding
on
it
and
its
members
by
subsection
(3A)
of
Section
127
of
The
Companies
Act,
which
was
added
to
it
in
1947.
Statutes
of
Manitoba,
1947,
c.
7.
This
subsection
provided
as
follows:
"‘The
by-laws
of
the
corporation
shall
bind
the
corporation
and
its
members
to
the
same
extent
as
if
they
had
respectively
been
signed
and
sealed
by
each
member,
and
contained
covenants
on
the
part
of
each
member,
his
heirs,
executors
and
administrators,
to
observe
all
the
provisions
of
the
said
bylaws,
subject
to
the
provisions
of
this
Act.”
This
enactment
obviated
the
necessity
or
desirability
of
individual
contracts
between
the
association
and
its
members.
One
of
the
association’s
by-laws,
Article
8A,
provided
for
the
manner
in
which
the
surplus
in
the
appellant’s
hands
at
the
end
of
each
year
of
its
operations
must
be
dealt
with
and
for
the
creation
of
a
revolving
fund
by
the
association
borrowing
sums
of
money
from
the
members
and
subsequently
repaying
the
borrowed
amounts.
While
this
article
was
passed
prior
to
the
enactment
of
subsection
(8A)
of
Section
127
of
The
Companies
Act
I
assume
that
the
subsection
gives
statutory
binding
effect
to
it.
Article
8A
provided
:
"‘(1)
After
payment
of
expenses,
making
proper
allowance
for
depreciation,
and
after
setting
aside
necessary
reserves,
the
surplus
arising
from
the
yearly
business
of
the
Association
shall
be
credited
to
the
members
entitled
thereto
in
proportion
to
the
volume
of
business
which
they
have
respectively
done
with
the
Association,
with
appropriate
differences
for
the
different
kinds
of
produce
delivered
by
each.
(2)
In
consideration
of
the
Association
promising
to
repay
to
each
member,
without
interest,
and
as
soon
as
monies
become
available
for
that
purpose
in
the
revolving
fund
heretofore
established
by
it,
such
sums
as
the
Association
may
borrow
hereunder
from
year
to
year,
each
member
of
the
Association
agrees
to
lend
to
the
Association
this
year,
and
in
each
year
hereafter
upon
said
terms,
a
sum
of
money
equal
to
the
amount
of
the
patronage
dividends
credited
to
him
by
the
Association,
or
such
part
thereof
as
the
Association
may
desire
to
borrow,
and
the
Association
is
by
virtue
hereof
authorized
to
apply
the
said
dividends
of
each
member
on
the
said
loan
during
such
time
as
he
remains
a
member
of
the
Association.
(3)
The
Association
may
repay
the
said
loans,
or
any
part
thereof,
at
any
time
without
notice
or
bonus.’’
The
association’s
fiscal
year
ended
on
January
31
in
each
year
and
its
annual
meeting
was
held
soon
thereafter.
At
each
of
the
annual
meetings
held
in
1948,
1949,
1950
and
1951
following
soon
after
the
close
of
the
fiscal
year
in
such
years
the
following
resolution
was
passed
:
"BE
IT
RESOLVED,
that
pursuant
to
provisions
of
Section
8-A
of
the
general
By-laws
of
the
Association,
the
surplus
for
the
past
year
be
allocated
and
credited
to
the
Members
entitled
thereto
and
that
the
Association
do
borrow
from
the
said
Members
a
sum
equal
to
the
amount
of
patronage
dividends
so
credited
to
them
to
be
repaid
as
soon
as
monies
become
available
for
that
purpose.’’
A
description
of
the
organization
of
the
appellant
association
and
the
manner
in
which
it
operated
was
given
by
Mr.
J.
T.
Monkhouse,
its
president
and
managing
director.
The
area
served
by
the
association
was
the
Province
of
Manitoba
but
a
few
shippers
from
Saskatchewan
used
its
marketing
facilities.
The
control
of
the
association
was
vested
in
its
members
who
were
39,000
in
number,
distributed
among
70
locals
divided
into
7
districts.
The
members
of
each
local
met
at
least
once
a
year
to
elect
a
delegate
or
delegates
to
attend
the
annual
meeting
of
the
association.
There
were,
of
course,
other
meetings
of
the
locals
called
for
the
discussion
of
questions
affecting
their
co-operative.
The
delegates
elected
by
the
locals
attended
the
annual
meeting
of
the
association
which
was
held
shortly
after
the
end
of
its
fiscal
year.
At
such
meeting
the
delegates
received
reports
from
the
management
on
the
operation
for
the
fiscal
year
just
concluded
and
passed
a
resolution
pursuant
to
Article
8A
allocating
to
the
credit
of
the
individual
members
the
surplus
in
the
hands
of
the
association
from
such
operation.
The
delegates
also
elected
directors
for
the
current
year,
one
for
each
of
the
districts.
During
the
year
the
members
were
kept
fully
informed
of
the
activities
of
the
association.
Mr.
Monkhouse
then
gave
a
general
description
of
the
association’s
facilities
for
handling
its
members’
products,
consisting
principally
of
poultry,
eggs
and
cream,
and
of
a
member’s
transaction
with
it.
The
association
had
5
killing
plants,
41
egg
stations
and
9
creameries.
If
a
farmer
wished
to
deliver
live
poultry,
that
is
to
say,
turkeys,
ducks
or
fowl,
to
the
association
he
delivered
it
to
one
of
the
killing
stations.
There
the
poultry
was
killed,
packed
and
sent
to
a
local
market
or
into
storage
for
future
sale
either
in
one
of
the
Manitoba
cities
or
outside.
On
the
delivery
of
the
poultry
the
farmer
received
an
advance
payment
on
the
basis
of
a
grade
statement
handed
to
him
and
then
awaited
final
payment
in
respect
of
the
poultry
delivered
by
him
during
the
year,
knowing
that
the
association
would
make
a
full
accounting
to
him
at
the
end
of
the
year’s
operations.
If
the
farmer
wished
to
dress
the
poultry
himself
he
could
deliver
his
dressed
poultry
and
was
dealt
with
in
the
same
way
as
if
he
had
delivered
live
poultry,
the
only
difference
being
that
if
he
delivered
live
poultry
he
was
charged
with
the
cost
of
killing
and
such
cost
was
deducted
from
his
advance.
If
a
farmer
delivered
eggs
to
one
of
the
association’s
egg
stations
the
procedure
was
similar.
He
received
an
advance
payment
on
the
basis
of
a
grade
statement
of
the
eggs
delivered
and
a
final
payment
later.
When
a
farmer
shipped
cream
to
one
of
the
association’s
creameries
it
was
graded
and
he
received
an
advance
payment
based
on
its
grade
and
butter-fat
content.
The
creamery
then
manufactured
the
cream
into
butter
and
this
was
sold
by
the
association
for
the
best
price
obtainable.
At
the
end
of
the
year
a
full
accounting
was
made
to
the
cream
shipper
on
the
basis
of
his
total
shipments,
with
a
proper
deduction
for
the
cost
of
manufacturing
the
butter.
There
was
one
creamery,
namely,
at
Brandon,
that
received
milk.
The
shipper
received
an
advance
on
the
milk
delivered
by
him
based
on
the
price
fixed
by
the
Milk
Control
Board.
The
association
pasteurized
the
milk,
bottled
it
and
sold
it
to
residents
of
Brandon.
The
final
accounting
to
milk
shippers
was
based
on
the
butter-fat
content
of
the
milk
in
the
same
way
as
if
they
had
delivered
cream.
And
it
should
be
noted
that
the
milk
shippers
were
all
also
cream
shippers.
At
the
end
of
the
year’s
operation
there
was
a
final
accounting
by
the
association
to
its
members.
At
the
annual
meeting
called
after
the
close
of
the
fiscal
year
a
resolution
was
passed
whereby,
pursuant
to
Article
8A
of
the
by-laws,
an
appropriate
amount
out
of
the
year’s
surplus
was
credited
to
each
member
by
allocating
the
same
to
him.
But
the
amount
so
allocated
and
credited
was
not
then
paid
to
him
but
was
loaned
to
the
association,
also
pursuant
to
a
resolution
under
Article
8A,
and
the
amount
of
such
loan
was
repaid
to
the
member
later.
Mr.
Monkhouse
also
gave
particulars
of
some
other
matters.
In
1949,
1950
and
1951
the
association
conducted
what
was
called
a
Turkey
Pool’’.
This
was
a
seasonal
activity
of
short
duration.
When
the
shipper
delivered
his
poultry
to
this
pool
he
received
an
advance
payment
at
the
time
of
the
delivery
and
his
final
payment
at
the
end
of
the
year.
There
were
several
activities
of
the
association
which
Mr.
Monkhouse
described
as
incidental.
One
of
these
was
the
operation
of
hog
ranches..
Hogs
were
purchased
in
order
to
make
use
of
the
buttermilk
from
the
creameries,
which
would
otherwise
have
had
to
be
hauled
away.,The
hogs
were
sold
and
the
proceeds
of
their
sale
in
excess
of
their
cost
were
considered
as
a
reduction
in
the
cost
of
butter
manufacture.
Another
auxiliary
operation
was
the
renting
of
cold
storage
lockers
for
the
use
of
members
living
near
the
creameries
at
Dauphin
and
Brandon.
This
was
a
service
to
such
members
and
was
rendered
at
cost.
Another
incidental
operation
was
that
of
a
subsidiary
called
Canadian
Poultry
Sales.
The
association
had
originally
employed
a
sales
agency
to
sell
its
members’
products
in
markets
other
than
its
local
ones
such
as
in
Montreal,
Toronto
and
overseas,
but
in
the
years
in
question
it
used
Canadian
Poultry
Sales,
a
subsidiary
co-operative
established
by
it
in
conjunction
with
the
Saskatchewan
Co-operative
Creameries,
to
dispose
of
its
members’
products
in
such
outside
markets.
The
association
paid
this
sales
agency
for
the
service
rendered
by
it.
It
collected
the
amounts
for
which
the
products
had
been
sold
and
returned
the
net
proceeds
of
the
sales
to
the
association
thus
rebating
to
it
the
cost
of
selling
less
expenses.
The
amount
thus
returned
was
a
reduction
in
expense
and,
consequently,
entered
into
the
association’s
surplus.
Another
small
operation,
the
sale
of
ice
cream,
was
carried
on
at
one
creamery
only,
namely,
at
Brandon.
It
was
dealt
within
the
same
way
as
if
butter,
instead
of
ice
cream,
had
been
made
and
sold.
Reference
was
also
made
to
the
purchase
of
some
butter
from
Canadian
Government
stores
but
Mr.
Monkhouse
explained
that
this
had
been
purchased
to
meet
the
association’s
sales
commitments
and
any
earnings
from
the
transaction
had
been
used
to
reduce
selling
costs
and,
consequently,
to
increase
the
amount
of
the
association’s
surplus.
Mr.
Monkhouse
stated
that
any
member
could
ship
his
produce
to
the
association
and
only
a
member
could
do
so.
All
shippers
to
it
became
members.
The
directors
fixed
the
amount
of
the
advance
payment
from
time
to
time.
This
was
usually
less
than
the
market
price
but
might
be
equal
to
it.
The
final
payment
was
by
way
of
an
allocation
or
credit
of
the
appropriate
part
of
the
surplus
pursuant
to
Article
8A,
as
already
described.
Mr.
Monkhouse
gave
as
an
example
of
a
transaction
between
a
member
and
the
association
what
had
happened
in
his
own
ease.
He
had
shipped
poultry,
eggs
and
cream
in
each
of
the
years
in
question.
On
each
shipment
he
received
an
advance
based
on
a
grade
statement
of
the
produce
delivered.
At
the
end
of
each
year
an
allocation
of
the
surplus
was
made
to
him
pursuant
to
Article
8A.
And,
to
illustrate
the
conclusion
of
his
transaction,
he
stated
that
the
amount
allocated
to
his
credit
in
respect
of
his
deliveries
in
1948
was
finally
all
repaid
to
him
in
1955.
Three
witnesses
were
called
for
the
appellant
to
show
the
course
of
a
transaction
between
a
member
and
the
association
from
the
delivery
of
the
member’s
produce
to
the
receipt
of
his
final
payment,
Mr.
A.
McPhail,
a
poultry
and
egg
shipper,
Mr.
A.
Guild,
a
poultry,
egg
and
cream
shipper,
and
Mr.
E.
S.
Jackson,
the
appellant’s
secretary-treasurer.
I
shall
deal
first
with
the
evidence
of
Mr.
McPhail.
He
had
been
a
member
of
the
appellant
association
since
1926
and
had
shipped
poultry
and
eggs
to
it.
He
participated
in
the
Turkey
Pool
of
1948.
On
December
11,
1948,
he
delivered
poultry
to
the
association’s
local
agent
at
Rossburn
and
received
a
grade
statement
showing
the
number
of
birds,
the
number
of
pounds
of
each
and
the
amount
to
his
credit,
together
with
a
cheque
for
$34.92.
He
considered
this
to
be
a
first
payment
on
his
poultry.
On
March
1,
1949,
he
received
another
statement
showing
the
grade
of
the
poultry
delivered
by
him,
the
number
of
pounds,
the
price,
and
the
value,
which
came
to
$38.55.
From
this
amount
the
advance
of
$34.92
had
been
deducted
leaving
a
balance
of
$3.63
and
a
cash
ticket
for
this
amount
was
attached
to
the
statement.
This
closed
his
1948
Turkey
Pool
transaction.
I
now
turn
to
his
deliveries
other
than
as
a
participant
in
a
Turkey
Pool.
For
example,
on
July
28,
1948,
he
delivered
poultry
to
the
association’s
shipping
point
at
Brandon
and
received
a
grade
statement,
called
a
dressed
poultry
produce
voucher,
showing
number
of
birds,
grade,
number
of
pounds,
price
and
value
coming
to
a
total
of
$68.37,
less
processing
and
transportation
charges
of
$9.49,
and
received
a
cheque
for
$58.88.
This
was
a
sample
transaction.
Similarly,
on
December
4,
1948,
he
delivered
eggs
to
the
association
and
received
a
statement,
called
a
produce
record,
showing
the
grade
of
the
eggs,
the
number
of
dozens,
the
rate
and
the
amount
coming
to
a
total
of
$5.49
and
a
cheque
for
that
amount.
This
was
another
sample
transaction.
Mr.
McPhail
stated
that
he
had
made
other
shipments
of
poultry
and
eggs
to
the
association
in
each
of
the
years
in
question
and
that
when
he
made
deliveries
he
received
statements
from
the
association
similar
to
the
ones
referred
to.
Subsequently,
he
received
statements
showing
the
amounts
of
the
additional
payments
that
had
been
allocated
to
him.
These
are,
in
my
opinion,
important.
I
set
out
the
statement
regarding
his
poultry
shipments
as
follows:
“MANITOBA
DAIRY
&
POULTRY
CO-OPERATIVE
LTD.
Owned
and
Operated
By
Over
30,000
Farmers—1950
A.
McPhail,
Vista,
Man.
Dear
Member:
Your
Association
being
a
co-operative
finances
on
a
revolving
surplus
fund.
This
means
that
your
savings
are
not
immediately
payable
in
cash,
but
are
allocated
each
year
and
then
borrowed
from
the
members
to
provide
the
necessary
finances
for
carrying
on
the
business.
At
this
time
we
are
pleased
to
advise
you
that
your
additional
payments
based
on
the
savings
realized
by
your
Association
are
as
follows:
|
Lbs
of
Poultry
shipped
in
1947
|
@
2.
52%
|
—$
8.97
|
|
“
“
|
“
|
“
1948
@4.94%—$18.46
|
|
u
|
u
|
H
1949
@1.24%—$
5.57
|
These
will
be
paid
out
in
accordance
with
our
By-laws,
subject
to
the
approval
of
our
members
at
each
General
Annual
Meeting.
On
this
basis
1947
savings—less
deductions
for
shares—
must
be
paid
in
full
before
any
additional
earnings
for
1948,
or
later
years,
can
be
made.’’
This
statement
was
filed
as
Exhibit
12.
There
were
similar
statements
regarding
his
additional
payments
in
respect
of
eggs,
filed
as
Exhibits
15
and
16.
Exhibits
12,
15,
and
16
show
the
totals
of
the
amounts
of
his
additional
payments
as
follows
:
for
1947,
$8.97
for
poultry
and
$8.61
for
eggs,
or
a
total
of
$17.58;
for
1948,
$18.46
for
poultry
and
$1.43
for
eggs,
or
a
total
of
$19.89
;
and
for
1949,
$5.57
for
poultry
and
$6.98
for
eggs,
or
a
total
of
$12.55.
On
June
15,
1951,
Mr.
McPhail
received
$4.31
on
account
of
his
$8.61
for
eggs
and
in
September
1951
$4.49
on
account
of
his
$8.97
for
poultry.
In
each
case
he
received
a
statement
with
his
cheque
showing
for
the
year
ending
January
31,
1948,
his
share
of
the
surplus
at
$8.61
for
eggs
and
$8.97
for
poultry.
These
statements
were
filed
as
Exhibits
17
and
13
respectively.
I
now
turn
to
Mr.
Jackson’s
evidence
to
show
what
finally
happened
in
Mr.
McPhail’s
case.
He
stated
that
there
wasa
list
showing
what
produce
each
member
had
delivered.
This
list
was
compiled
by
stations
and
he
had
gone
through
the
lists
that
would
include
Mr.
McPhail’s
name
and
verified
the
amounts
of
his
deliveries
of
poultry
and
eggs.
Mr.
Jackson
then
produced
a
statement,
called
Patronage
Dividend
Record,
filed
as
Exhibit
22.
This
showed
the
total
allocations
to
Mr.
McPhail
of
$17.58
for
1947,
$19.89
for
1948
and
$12.53
for
1949.
The
record
showed
that
these
amounts
were
all
borrowed
by
the
association
and
that
the
amounts
so
borrowed
were
repaid
later.
For
example,
the
amount
of
$17.58
was
repaid
by
$8.80
in
1951,
corresponding
with
the
amounts
of
the
cheques
for
$4.31
and
$4.49
received
with
the
statements,
Exhibits
17
and
13,
and
the
balance
of
$8.78
in
1953;
the
amount
of
$19.89
for
1948
was
repaid
in
1954
and
the
amount
of
$12.53
for
1948
in
1956.
The
evidence
of
Mr.
A.
Guild
was
of
a
similar
nature.
He
shipped
cream
as
well
as
poultry
and
eggs.
With
each
shipment
he
received
a
grade
statement
and
a
cheque
for
the
amount
shown
on
it.
Later,
he
received
statements
similar
to
Exhibits
12,
15
and
16
and
then
statements
similar
to
Exhibits
13
and
17
and
with
them
a
cheque
for
the
amount
of
the
payment
shown
on
them.
His
Patronage
Dividend
Record,
filed
as
Exhibit
23,
showed
that
his
total
allocations
came
to
$112.53
for
1947,
$73.44
for
1948
and
$92.14
for
1949.
The
Record
also
showed
that
$2.00
was
deducted
for
shares
from
the
amount
of
$112.53
for
1947
and
that
the
balance
of
$110.53,
all
of
which
was
loaned
to
the
association,
was
repaid
to
him
by
$57.03
in
1951
and
$53.50
in
1953,
that
the
amount
of
$73.44
for
1948
was
repaid
in
1954
and
that
of
$92.14
for
1949
in
1956.
Mr.
McPhail,
whose
evidence
impressed
me
favorably,
explained
that
he
could
have
delivered
his
produce
to
organizations
other
than
the
appellant
association
but
made
his
deliveries
to
it
because,
to
use
his
words,
"
‘we
had
formed
a
local
to
handle
our
own
products,
poultry
and
eggs,
and
we
believed
we
could
obtain
a
better
price
than
we
could
obtain
from
other
organizations”.
The
association
told
its
members
in
advance
what
they
were
to
get.
In
most
cases
it
was
equal
to
the
price
quoted
by
competitors
but
in
some
cases
it
could
be
less.
The
members
expected
that
the
association
would
sell
their
produce
to
the
best
advantage
and
anticipated
that
it
might
be
shipped
and
sold
at
outside
points
or
stores
until
prices
might
be
higher.
Mr.
McPhail
was
familiar
with
Article
8A
of
the
by-laws
and
it
was
his
understanding
of
the
reference
in
it
to
the
term
"‘the
surplus
arising
from
the
yearly
business
of
the
Association’’
that
the
association
was
carrying
on
a
business
and
that
a
surplus
would
arise
from
it.
In
his
view,
the
business
consisted
of
"‘the
handling
of
our
produce
until
it
reached
the
consumer’’
and
he
considered
that
a
surplus
would
arise
on
the
sale
of
the
products
in
various
markets
for
a
price
that
would
allow
a
surplus,
meaning
thereby
an
excess
of
receipts
over
expenses
and
the
advance
payments
that
had
been
made.
By
‘‘our
produce’’
Mr.
McPhail
meant
his
own
produce
and
that
of
his
neighbours
who
were
members
of
the
association
and,
while
he
had
no
contract
whereby
the
property
in
his
produce
continued
to
be
his
and
expected
only
money
in
return
for
it,
he
considered
that
the
net
proceeds
of
its
sale
was
his.
Mr.
Guild’s
evidence
was
essentially
to
the
same
effect
although
on
his
cross-examination
he
was
confused
in
some
of
his
statements,
but
I
am
satisfied
that
this
confusion
was
one
of
terminology
and
not
of
substance.
Mr.
Guild
was
not
alone
in
his
confusion
of
terminology.
It
showed
on
the
forms
used
by
the
association.
But
the
confusion
was
substantially
cleared
away
by
Mr.
Jackson.
He
stated
that
the
amount
received
by
a
member
on
the
delivery
of
his
produce
to
the
association
was
a
first
payment
or
an
advance.
Its
amount
was
determined
by
the
management
on
a
day
to
day
basis
and
approximated
the
price
paid
by
competitors.
When
a
member
delivered
his
produce
to
the
association
it
did
not
purchase
the
produce
from
him
and
Mr.
Guild’s
statement
that
it
did
so
was
erroneous.
The
use
of
the
term
‘‘purchase’’
to
describe
the
association’s
receipt
of
its
members’
produce
was
erroneous
and
such
terms
as
‘‘price’’
and
‘‘value’’,
appearing
on
the
statement,
called
dressed
poultry
produce
voucher,
were
inaccurate.
The
term
"price”
should
have
been
read
as
meaning
"initial
payment”
or
"advance”.
Then
Mr.
Jackson
explained
the
so-called
final
payments.
The
member’s
entitlement
to
his
share
of
the
surplus
was
that
it
was
his
portion
of
the
proceeds
from
the
sale
of
his
produce
after
deducting
the
expense
of
selling
it
and
the
advances
or
first
payments
that
had
been
made
to
him.
In
that
view,
there
were
errors
in
the
headings
used
in
such
statements
as
Exhibit
17
and
15
which
Mr.
McPhail
received.
For
example,
Exhibit
13
showed
certain
headings,
one
of
which
was
‘‘your
share
of
surplus’’,
under
which
the
sum
of
$8.61
appeared,
which,
as
I
have
stated,
was
Mr.
McPhail’s
allotment
of
surplus
for
eggs
delivered
in
the
year
ending
January
31,
1948.
This
statement
was
accurate.
The
other
headings
were
""
Credit
to
Share
Acc’t”,
$4.30
and
“
“
Patronage
Dividend”,
$4.31.
"Credit
to
Share
Acc’t”,
according
to
Mr.
Jackson,
was
not
a
correct
heading.
It
should
have
been
called
"Balance
Still
to
be
Paid”,
for
that
is
what
it
really
was.
I
agree
with
this
view.
The
amount
of
$4.30
was
never
credited
to
Mr.
McPhail’s
share
account.
The
heading
"Patronage
Dividend”
$4.31
was,
likewise,
not
accurate.
Actually,
it
was
part
of
the
sum
of
$8.80
shown
as
Exhibit
22
as
a
loan
repayment
made
to
Mr.
McPhail
in
1951.
And
the
said
sum
of
$8.80
was
a
part
repayment
of
the
loan
of
$17.58
which
Mr.
McPhail
had
made
to
the
association
of
the
amount
of
the
total
allocation
to
his
credit
out
of
the
surplus
for
the
year
ending
January
31,
1948,
for
his
deliveries
of
poultry
and
eggs
during
the
fiscal
year.
And
the
heading
"Patronage
Dividend
Record”
on
Exhibits
22
and
23
was
not
an
accurate
one.
It
should
have
been
simply
"‘Credit
Record”
or
something
of
that
sort
for
what
the
statement
recorded
was
the
amount
of
the
allocation
out
of
surplus
and
what
was
done
with
it,
such
as
allocation
in
payment
of
shares
and
allocation
to
loan
account,
and
then
the
statement
recorded
the
repayments
of
the
loans
and
the
balance
of
loans
remaining
unpaid.
This
closes
the
statement
of
the
facts.
I
now
come
to
the
conclusion
to
be
drawn
from
the
facts.
Counsel
for
the
appellant
relied
strongly
on
the
decision
of
this
Court
in
The
Horse
Co-Operative
Marketing
Association
Limited
v.
M.N.R.,
[1956]
EX.
C.R.
393;
[1956]
C.T.C.
115.
But
before
I
deal
with
its
applicability
I
should
refer
to
counsel
for
the
respondent’s
admission
regarding
the
appellant
association’s
Turkey
Pool
operations
and
his
argument
in
support
of
the
assessments.
During
the
course
of
the
hearing
he
stated
that
the
amounts
of
the
final
payments
made
to
members
in
respect
of
the
Turkey
Pools
operated
in
1949,
1950
and
1951
were
not
taxable
income
to
the
appellant
association
and
that
it
had
been
improperly
assessed
in
respect
of
them.
I
agree.
It
follows
that
to
the
extent
that
such
amounts
were
included
in
the
assessments
the
appeals
against
them
must
be
allowed.
Here
I
must
say
that
I
do
not
see
any
fundamental
difference
between
the
association’s
Turkey
Pool
operations
and
its
ordinary
ones.
The
only
difference
appears
to
have
been
that
a
member
who
participated
in
a
Turkey
Pool
received
his
final
payment
at
the
end
of
the
appellant’s
fiscal
year
instead
of
lending
it
to
the
association
and
waiting
for
the
repayment
of
the
loan.
I
now
set
out
counsel
for
the
respondent’s
argument
in
support
of
the
assessments,
as
I
understood
it
to
be.
He
confined
it
to
his
interpretation
of
the
meaning
and
effect
of
subsection
(3A)
of
Section
127
of
The
Companies
Act
and
Article
8A(1)
of
the
appellant
association’s
by-laws.
His
submission
was
that
the
members
of
the
association
contemplated
that
it
would
carry
on
a
business
from
which
a
surplus
would
arise
and
that
such
surplus
as
had
arisen
had
been
earned
by
it
from
its
business
and
belonged
to
it.
This
was
not
a
case,
so
the
argument
went,
where
the
association
was
required
to
account
to
its
members
for
the
portion
of
the
surplus
that
belonged
to
them
but
rather
one
where
they
contracted
for
a
portion
of
such
surplus
after
it
had
been
earned
by
the
association
and
it
was
urged
that
what
was
to
happen
to
it
after
it
had
been
earned
could
not
alter
the
fact
that
since
it
had
been
earned
by
the
association
from
its
business
it
belonged
to
it
and
was
taxable
income
in
its
hands.
It
was
also
submitted
that
this
case
differed
from
the
Horse
Co-Operative
case
(supra)
in
that
there
was
no
by-law
in
this
case
similar
to
By-law
No.
15
in
that
case,
but
that,
on
the
contrary,
Article
8A
of
the
by-laws
of
the
appellant
association
was
quite
different
from
By-law
No.
15
in
the
case
referred
to.
I
am
unable
to
accept
counsel’s
submissions
in
support
of
the
assessments
and
have
come
to
the
conclusion
that
this
case
is
not,
in
reality,
essentially
different
in
principle
from
the
Horse
Cooperative
ease
(supra).
There
are
several
reasons
for
this
conclusion.
It
is,
I
think,
clear
that
the
appellant
association
was
a
true
co-operative
within
the
meaning
of
Section
125
of
The
Companies
Act
which
provided
:
"125.
A
corporation
hereafter
incorporated
shall
be
deemed
to
be
operated
on
a
co-operative
basis,
if
provision
is
made
in
its
letters
patent
or
by-laws,
(a)
that
no
member
have
more
than
one
vote;
(b)
that
no
member,
other
than
a
corporation
member,
vote
by
proxy
;
and
(c)
that
the
surplus
funds
arising
from
the
business
be
distributed
wholly
or
in
part
among
the
members
or
amongst
members
and
patrons,
in
proportion
to
the
volume
of
business
which
they
have
done
with
or
through
the
corporation.”
I
am
also
of
the
view
that
Article
8A
of
the
appellant
asso
ciation’s
by-laws
was
within
the
ambit
of
Section
138(1)
of
The
Companies
Act
which
provided:
"‘138.
(1)
A
corporation
may,
subject
to
its
letters
patent
and
memorandum
of
agreement,
enter
into
any
contract
or
arrangement
with
its
members
or
patrons
for
or
incidental
to
dealing
with
commodities
of
the
kinds
the
corporation
may
lawfully
deal
in
and
for
carrying
out
the
objects
and
purposes
of
the
corporation,
and
may
advance
money
to
its
members
or
patrons
as
part
payment
for
commodities
delivered
or
agreed
to
be
delivered
to
it.’’
and
that
the
appellant
association
operated
under
this
section
rather
than
under
Section
139.
It
is
essential
in
a
case
such
as
this
that
regard
should
be
had
to
the
substance
of
the
transaction
under
consideration
rather
than
its
form:
vide
C.I.R.
v.
Eccentric
Club
Ltd.,
[1924]
1
K.B.
390,
at
414.
Thus,
it
is
the
true
nature
of
the
transactions
between
the
members
and
the
appellant
association
that
falls
to
be
determined.
As
I
see
it,
it
would
be
contrary
to
the
fact
to
say
that
when
the
members
delivered
their
produce
to
the
association
they
sold
it
for
the
amount
received
by
them
on
their
delivery
of
it.
They
did
not.
The
evidence
is
conclusive
to
that
effect.
The
members
delivered
their
produce
to
the
association
to
be
marketed
by
it
for
them.
That
was
the
reason
for
the
association’s
existence.
It
had
been
formed
so
that
the
members
could
cooperate
with
one
another
through
it
in
the
marketing
of
their
produce,
and
the
fact
is
that
they
did
market
their
produce
through
it.
That
it
was
intended
that
they
should
do
so
appears
clearly
from
the
provision
in
Article
11(2)
(a)
of
the
by-laws
that
"Membership
in
the
Association
shall
be
extended
to
all
persons
who
market
agricultural
products
through
the
Association”.
Membership
in
the
association
implied
of
necessity
marketing
through
it.
The
evidence
of
Mr.
McPhail
is
to
the
same
effect.
Conversely,
and
notwithstanding
the
terms
used
in
some
of
the
documents
referred
to,
the
association
did
not
purchase
its
members’
produce
from
them.
It
was
not
a
trading
corporation,
in
the
ordinary
sense
of
the
term,
engaged
in
the
buying
and
selling
of
poultry,
eggs,
and
dairy
products
for
its
own
profit.
-
If
it
had
been
its
members
would
have
been
entitled
to
participate
in
such
profit
by
receiving
dividends
in
their
capacity
as
shareholders.
But
their
rights
to
an
appropriate
portion
of
the
association’s
surplus
did
not
depend
on
their
shareholdings.
That
had
nothing
to
do
with
the
matter.
The
fact
is
that
the
appellant
association
was
a
co-operative
marketing
association
for
the
marketing
of
its
members’
produce,
and
when
it
earned
a
surplus
from
its
business
of
handling
its
members’
produce
for
them
it
did
not
earn
it
for
itself,
but
for
them.
In
my
opinion,
it
is
clear
beyond
dispute
that
the
appellant
association
was
not
engaged
in
"‘an
operation
of
business
in
carrying
out
a
scheme
for
profit
making”
for
itself,
within
the
meaning
of
the
test
laid
down
by
Lord
Justice
Clerk
Macdonald
in
Californian
Copper
Syndicate
v.
Harris
(1904),
5
T.C.
149
at
165.
On
that
ground
alone
it
would
not
be
subject
to
tax
on
its
surplus.
Nor
can
it
be
said
that
the
members
were
entitled
to
their
appropriate
portion
of
the
appellant’s
surplus
as
patronage
dividends.
Their
dealings
with
the
association
were
in
their
capacity
as
members
acting
co-operatively
through
it
as
their
marketing
agent
and
not
in
that
of
patrons
doing
business
with
it.
I
make
this
statement
without
hesitation
and
notwithstanding
the
use
of
the
term
patronage
dividend
in
Article
8A(2)
of
the
by-laws
and
Exhibits
13,
17,
22
and
23.
The
term
was
misdescriptive
and
its
use
erroneous.
The
fact
of
the
matter
is
that
when
the
members
delivered
their
produce
to
the
association
they
did
so
in
order
that
it
should
market
their
produce
for
them
and
on
their
behalf.
It
was
their
marketing
agency
and
the
means
whereby,
in
their
opinion,
they
would
be
able,
by
co-operation
with
one
another
through
it,
to
obtain
more
for
their
produce
than
if
they
sold
it
to
an
outside
organization.
And
when
the
association
received
the
produce
from
its
members
and
sold
it,
it
did
so
as
the
members’
marketing
agent
and
held
the
net
proceeds
from
the
sale
of
the
produce
in
that
capacity.
Moreover,
I
find,
as
I
did
in
the
Horse
Co-Operative
case
(supra),
that
while
it
may
be
conceded
that
the
appellant
association
had
earned
the
surplus
referred
to
it
did
not
own
it.
The
surplus
did
not
have
the
quality
of
income
to
the
appellant
that
was
essential
to
its
being
taxable
income
in
its
hands,
within
the
meaning
of
the
test
used
by
Mr.
Justice
Brandeis
in
delivering
the
judgment
of
the
Supreme
Court
of
the
United
States
in
Brown
V.
Helvering
(1934),
291
U.S.
193,
to
which
I
referred
in
the
Horse
Co-Operative
case
(supra).
The
appellant’s
right
to
the
surplus
was
not
absolute
and
it
was
not
free
to
dispose
of
it
or
to
use
or
enjoy
it.
In
view
of
the
Article
8A
of
the
by-laws
there
was
only
one
thing
that
could
be
done
with
it.
It
had
to
be
credited
to
the
members
in
the
manner
specified
by
the
article
and
the
association
had
no
option
in
the
matter.
Article
8A
is
confirmatory
of
the
fact
that
the
appellant
did
not
own
the
surplus
but
held
it
for
its
members
and
on
their
behalf.
In
the
alternative,
as
in
the
Horse
Co-Operative
case
(supra),
if
it
should
be
considered
that
the
member’s
delivery
of
his
produce
to
the
association
constituted
a
sale
of
it
by
him
to
it,
it
is
manifest
that
it
was
a
condition
of
such
sale
that
the
amount
paid
on
the
delivery
of
the
produce
was
only
a
first
payment
on
account
and
that
the
balance
was
to
be
paid
after
the
close
of
the
year’s
operations,
as
specified
in
Article
8A.
In
that
view
of
the
transaction
between
the
members
and
the
association
the
amounts
credited
to
the
members
pursuant
to
Article
8A
would
be
part
of
the
cost
of
the
produce
to
the
appellant
association
and
there
would
not
be
anything
left
to
constitute
profit
to
it
or
taxable
income
in
its
hands.
Only
one
other
matter
requires
comment.
It
was
intimated
to
the
appellant
association
that
it
might
be
subject
to
income
tax
on
its
surplus
and
it
set
aside
a
portion
of
it
as
a
contingency
reserve
to
pay
it
and
paid
it
under
protest
on
the
understanding
that
if
it
should
be
held
that
it
is
not
subject
to
tax
the
amount
paid
will
be
refunded
to
it
and
the
amount
so
refunded
will
be
credited
to
the
members
pursuant
to
Article
8A
of
the
by-laws
in
the
same
manner
as
the
rest
of
the
surplus.
It
follows
from
what
I
have
said
that
the
appeal
from
the
decision
of
the
Income
Tax
Appeal
Board
and
the
appeals
from
the
assessments
must
be
allowed
and
the
assessments
set
aside.
The
appellant
is
also
entitled
to
costs
to
be
taxed
in
the
usual
way.
Judgment
accordingly.
Email this Content