Minister of National Revenue v. Ottawa Car and Aircraft Limited, [1957] CTC 59, [1957] DTC 1076

THORSON, P.:—This is an appeal from the decision of the Income Tax Appeal Board, sub nom. No. 260 v. M.N.R. (1955), 13 Tax A.B.C. 27, dated April 29, 1955, allowing the respondent’s appeal against its income tax assessment for 1951.

The issue is similar to that in M.N.R. v. Eastern Textiles Ltd., in which I have just delivered judgment, namely, whether the respondent in computing its income for 1951 was entitled to deduct the business losses sustained by it in 1946 and 1947.

The statutory provision to be considered is the same as in the Eastern Textiles Ltd. case {supra), namely, Section 26(1) (d) of the Income Tax Act, S.C. 1948, e. 52, as amended in 1949.

The facts may be stated briefly. The respondent was incorporated under The Companies Act, R.S.C. 1906, chapter 79, by Letters Patent, dated September 25, 1913, under the name of Ottawa Car Manufacturing Company, Limited but it name was subsequently changed to its present one by Supplementary Letters Patent, dated November 14, 1939. It had its head office at Ottawa and its manufacturing plant was there. It carried on a wide variety of business activities involving the manufacture and sale of various products such as motor cars and parts, aircraft engines, aircraft and aircraft parts, street cars, seats for trucks, buses, street cars, railway cars and tanks. It also overhauled and reconditioned aircraft engines, carried on a general metal working business and provided engineering services. In addition, it acted as agent for other companies such as the A. V. Roe Company and the Armstrong Siddeley Company for the sale of aircraft and aircraft engines.

In its income tax return for 1946 the respondent described the nature of its business as that of manufacturers of special machinery, car seats, logging equipment and casters and its sales consisted of logging equipment, car seats, foundry castings and dies, general parts, tooling, shop work and sundries. It also received rental income amounting to $7,026 but its financial statement for 1946 showed a business loss of $228,266.31.

In its income tax return for 1947 the respondent described the nature of its business as that of manufacturers of street cars, transportation seats, logging and miscellaneous equipment. In that year its rental income came to $30,746 but its financial statement for 1947 showed a business loss of $128,604.62.

There was little evidence of what happened to the respondent after 1947 and prior to 1951 but such evidence as there was I set out briefly. In 1946 and 1947 it still operated its manufacturing plant at 325 Slater Street in Ottawa and had its head office there. It still owned the machinery in its plant, some of it having been left over from the war years. But after its heavy losses in 1946 and 1947 it decided not to continue to operate its manufacturing. As. Mr. W. Montgomery put it, the company could not continue to operate at a loss. It proceeded, therefore, to sell its machinery and rent its premises. By the end of 1949 it had sold about 80 per cent of its machinery and it stored the remaining 20 per cent in the premises of J. H. Connor and Son Limited in Hull. Then on February 1, 1950, it rented most of of its building to the Canadian Government for a period of 10 years at a rental of $72,500 per year. By that time the respondent had ceased its manufacturing business and has never resumed it.

In October or November of 1950 the respondent entered into the joint venture agreement with Eastern Textiles, Ltd., to which I referred in the Eastern Textiles, Ltd. case {supra), for the purchase of Packard and Merlin Rolls Royce engines, related aircraft parts and 87 twin Diesel motors with a view to selling them. These articles were sold in 1951 by Bancroft Industries Limited as commission agent for the parties to the joint venture and the respondent made a profit of $217,487.19 on the transaction.

There are only a few other facts to be stated. In 1951 the respondent’s head office, which had been at 325 Slater Street in Ottawa, had been moved to 4026 St. Catherine Street in Montreal and its books and records were also there. The respondent had an Ottawa office at 88 Metcalfe Street in Ottawa. In 1946 and 1947 it had about 150 employees but prior to 1951 this number had been reduced to 3 on the cessation of its manufacturing business and these were all in Montreal. In 1951 it still owned about 20 per cent of its former machinery but made no use of it. It still, of course, received income from rentals including that from its own building.

In its income tax return for 1951 the respondent reported its profit of $217,487.19 on its joint venture together with other items including rental income but claimed a deduction of the business losses sustained by it in 1946 and 1947 to the extent of $244,510.77, that being sufficient to offset its income, so that in the result it reported a nil taxable income.

When the Minister assessed the respondent for 1951 he disallowed the deduction claimed by it and added $244,510.77 to the nil amount of taxable income reported by it, which meant a tax of $111,496.88. The respondent objected to the assessment but the Minister confirmed it whereupon the respondent appealed to the Income Tax Appeal Board which allowed the appeal. It is from that decision that the appeal to this Court is brought.

The reasons for judgment in the Eastern Textiles, Ltd. ease (supra) are, mutatis mutandis, applicable in this one and need not be repeated. But some comment on the facts should be made. I must say that I do not see how it could be reasonably contended that in 1951 the respondent had any income from the business in which its losses were sustained. These occurred in 1946 and 1947 at which time its business was that of manufacturing. But it had ceased manufacturing long before 1951, 80 per cent of its machinery had been sold and the building in which it had carried on its manufacturing had been leased for a period of 10 years. Its employees had been laid off and its head office had been moved. It is true that it continued to receive rental income but it could not be said that it had been or was in the rental business. However its business in 1951 might be described it was not the business of manufacturing in which its losses were sustained.

An effort was made to show that there had been continuity in the respondent’s business. There was evidence that at the beginning of 1946 it had some aircraft parts and that it sold them in 1946 and 1947 at a loss. There was no separate record of these parts but Mr. W. Green, who had been the respondent’s accountant, produced a balance sheet as at February 28, 1946, Exhibit 9, showing under the head of "‘Inventories, Material Supplies” $53,724.40 of General Stores as at January 31, 1946, and said that about 50 per cent of these stores consisted of aircraft parts, some of which had been manufactured by the respondent and some purchased by it. But this was during the war years and the respondent was disposing of them to the Canadian Government and to flying clubs. Most of the parts were sold in 1946 but some were sold in 1947. Mr. Green said that there had been a loss on the sale of these parts but could not give any particulars. The respondent did not manufacture any aircraft parts in 1946 or 1947. On these facts it was argued that since in 1946 and 1947 the respondent had some aircraft parts in stock and sold them at a loss and since in 1951 it was also engaged in the sale of aircraft parts it had a profit in 1951 from the business in which its losses were sustained. But this argument is fanciful. The business in which the respondent’s losses were sustained in 1946 and 1947 was that of manufacturing and that business had been abandoned long before it made its profit in 1951 from its joint venture with Eastern Textiles, Ltd.

Consequently, since the respondent ceased its manufacturing business prior to 1951 and that was the business in which its losses in 1946 and 1947 were sustained, and in 1951 it did not make any profit from such business but made it from something else its case comes within the limitation of subsection (iii) of Section 26(1) (d) and it is not entitled to deduct from its income for 1951 any of the business losses sustained by it in 1946 and 1947.

It follows that the appeal herein must be allowed with costs and the Minister’s assessment restored.

Judgment accordingly.