Everett's Truck Stop Ltd. v. The Queen, 93 DTC 965, [1993] 2 CTC 2658 (TCC)

Bowman, T.C.C.J.:—This appeal, from an assessment for the appellant's 1987 taxation year, has to do with the inclusion in the appellant's income by the Minister of National Revenue of $119,658 under paragraph 12(1)(x) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The facts and legal issues are somewhat complex, but the question essentially boils down to whether the assumption by a supplier of the appellant of an obligation owing by the appellant to a third party in return for certain concessions is an "inducement" within the meaning of paragraph 12(1)(x).

Paragraph 12(1)(x) was enacted in 1986 and applied, with certain exceptions, to amounts received after May 22, 1985. The wording of paragraph 12(1)(x), as it read in the appellant's 1987 taxation year was as follows:

(x) any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(i) a person who pays the amount (in this paragraph referred to as "the payor") in the course of earning income from a business or property or in order to achieve a benefit or advantage for himself or for persons with whom he does not deal at arm's length, or

(ii) a government, municipality or other public authority

where the amount can reasonably be considered to have been received

(iii) as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or

(iv) as a reimbursement, contribution, allowance or as assistance, whether as a rant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an expense

to the extent that the amount

(v) was not otherwise included in computing the taxpayer's income for the year Or a preceding taxation year,

(vi) except as provided by subsection 127(11.1), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the expense, as the case may be,

(vii) does not reduce, pursuant to subsection 13(7.4) or paragraph 53(2)(s), the cost or capital cost of the property, as the case may be, or

(viii) may not reasonably be considered to be a payment made in respect of the acquisition by the payor or the public authority of an interest in the taxpayer, his business or his property.

In 1990 subparagraph (v) was amended, applicable after May 22, 1985, to read as follows:

(v) was not otherwise included in computing the taxpayer's income, or deducted in computing, for the purposes of this Act, any balance of undeducted outlays, expenses or other amounts, for the year or a preceding taxation year.

Other amendments were made in 1990 to subparagraphs (iv), (vi) and (vii) but those amendments applied only to amounts received after January 1990.

Virtually all of the facts alleged in the notice of appeal were admitted by the respondent.

Paragraphs 2 to 16 of the notice of appeal are as follows:

1. At all relevant times, the appellant was incorporated pursuant to the laws of the Province of Saskatchewan.

2. At all relevant times, Chief Joe Everett was the sole shareholder of the appellant and is an aboriginal individual.

3. At all relevant times Polar Oils Ltd. was incorporated pursuant to the laws of the Province of Saskatchewan.

4. On May 16, 1986, the appellant made an offer to purchase the business and assets of Mel’s Truck Stop Ltd., which said company carried on business as a service station business at Beauval, Saskatchewan. As part of the offer to purchase Joe Everett also provided a promissory note in favour of Mel's Truck Stop Ltd. dated May 16, 1986 in the amount of $150,000, as part of the said offer to purchase.

5. On July 16, 1986, the appellant, Mel’s Truck Stop Ltd., James Esau and Unita Esau entered into a memorandum of agreement for the purchase of the business Mel's Truck Stop Ltd. The memorandum of agreement provided for a purchase price of $450,000, which said purchase price was to be paid as follows:

(a) The sum of $1,000 in trust pending completion of the agreement;

(b) The sum of $299,000 to be paid on or before possession date;

(c) The balance of $150,000 to be paid in accordance with the terms of a promissory note dated May 16,1986 by Joe Everett in favour of Mel's Truck Stop Ltd., payment of which was to be guaranteed by Polar Oils Ltd.

6. The memorandum of agreement referred to in paragraph 4 above, provided that the breakdown of the purchase price was to be allocated among the business assets being purchased as follows:

(a) Building	$135,000
(b) Equipment	65,000
(c) Inventory	25,000
(d) Trailer	30,000
(e) Goodwill	195,000
	$450,000

7. On October 1, 1986 Polar Oils Ltd. executed a guarantee guaranteeing to Mel's Truck Stop Ltd. the due and punctual payment by Joseph Everett of all principal moneys, interest, and other moneys owing to Mel's Truck Stop Ltd. by Joe Everett.

8. Polar Oils Ltd. was owned by the Meadow Lake Tribal Council. At the time of the execution of the said guarantee, the Meadow Lake Tribal Council was interested in seeing native ownership of business in northern Saskatchewan increase.

9. For six months after the purchase of Mel's Truck Stop Ltd., Polar Oils Ltd. paid $6,873 per month to Everett's Truck Stop Ltd., who in turn paid the sum to the vendor in accordance with the terms of the aforementioned memorandum of agreement. These payments were recorded as income by Everett's Truck Stop Ltd.'s accountants.

10. On March 31, 1987, the appellant and/or Joe Everett and Mel's Truck Stop Ltd. and Polar Oils Ltd. entered into an agreement whereby Polar Oils Ltd. agreed with the appellant and/or Joe Everett to assume responsibility of the debt of $150,000 as set out in the promissory note dated May 16, 1986. As consideration for the assumption of this debt by Polar Oils Ltd. the appellant and/or Joe Everett agreed inter alia, as follows:

(a) For a period of five years from the date of the agreement, the appellant agreed to utilize and sell only gasoline, diesel, and oil and other fuel products supplied by Polar Oils Ltd. and not to purchase any products from any other suppliers;

(b) For a period of five years from the date of the agreement the appellant agreed to seek assistance from Polar Oils Ltd. in the management of its business and in consequence thereof, was to provide Polar Oils Ltd. with monthly statement showing the level of sales and expenses associated with the operation of the service station business of the appellant;

(c) For a period of five years from the date of the agreement Polar Oils Ltd. was granted a right of first refusal to match any bona fide offer made to the appellant for the sale of the property and/or business.

11. In consequence of the agreement referred to in paragraph 7 above, Polar Oils Ltd. assumed and paid to Mel's Truck Stop Ltd. the amount of $119,658, being the amount owing to Mel's Truck Stop Ltd. under the terms of the promissory note dated May 16, 1986.

12. When the appellant's 1987 income tax return was filed the sum of $119,658 was credited to the cumulative eligible capital account of the appellant for income tax purposes.

13. By notices of reassessment dated February 8, 1991 the respondent reassessed the appellant's 1987 income tax returns by:

(a) Adjusting active business income by adding to income the amount of $119,658, and make such adjustment on the basis that the said amount was an inducement payment received from Polar Oils Ltd.

14. The accountants for the appellant requested by letter dated August 30, 1991 that Revenue Canada apply the provisions of subsection 13(7.4) of the Act to the above transaction and made a request to Revenue Canada to adjust the reassessment to apply the provisions of subsection 13(7.4) of the Act. However, Revenue Canada refused to accede to such a request on the basis that an election under subsection 13(7.4) must be made on or before the day on or before which the taxpayer is required to file his return of income for the year and that such election was not properly made by the appellant.

15. The appellant filed notices of objection to the 1987 notices of reassessment in prescribed form and in a timely manner.

16. By notice of confirmation dated September 25, 1991 the respondent confirmed the 1987 notice of reassessment.

The respondent, in her reply, states that the assessment was based upon a number of facts that do not differ substantially from those set forth in the appellant’s notice of appeal. The facts relied upon by the Minister in assessing are as set out in paragraph 5:

(a) in May of 1986, the appellant offered to purchase an existing business, operating under the name of Mel's Truck Stop Ltd., at Beauval, Saskatchewan. A formal memorandum of agreement for the purchase was signed in July, 1986, by the parties.

(b) the purchase price of the business was $450,000 payable by:

(i) $1,000 paid in trust;

(ii) $299,000 to be paid on or before the possession date;

(iii) $150,000 by promissory note dated May 16, 1986, the payment of which is guaranteed by Polar Oils Ltd.;

(c) by the terms of this purchase agreement the breakdown of the purchase price was to be:

Buildings	$135,000
Equipment	65,000
Inventory	25,000
Trailer	30,000
Goodwill	195,000
Total Purchase:	$450,000

The purchase was recorded on this basis in the appellant's records;

(d) on March 31, 1987, an agreement was made between the appellant, Mel's Truck Stop Ltd. and Polar Oils Ltd. By terms ofthe agreement, in return for certain guarantees from the appellant, Polar Oils Ltd. assumed the balance of the $150,000 promissory note given to Mel's Truck Stop Ltd.;

(e) the balance of that note at March 31, 1987, was $119,658;

(f) the appellant received this amount, in the course of earning income from a business, as inducement from a person with whom it was dealing at arm's length. The May 16, 1986, promissory note makes reference to this inducement payment;

(g) when the note was paid out by Polar Oils Ltd., the amount of the payment was shown as a reduction in the amount allocated to "goodwill" in the appellant's records;

(h) the agreement of March 31, 1987, shows that the amount was received by the appellant as an inducement in that:

(i) the appellant agreed to purchase and utilize products supplied exclusively by Polar Oils Ltd. for a period of five years;

(ii) the appellant agreed to seek assistance in management of the business from Polar Oils Ltd.;

(iii) Polar Oils Ltd. was provided right of first refusal, should the appellant decide to sell the business, for five years;

The essential questions can be stated as follows:

1. Was the assumption by Polar Oils Ltd. of the balance of the promissory note of $119,658 a receipt by the appellant?

2. If so, was it received in the 1987 taxation year?

3. Was it received by the appellant in the course of earning income from a business or property?

4. Was it paid by Polar Oils Ltd. in the course of earning income from a business or property or in order to achieve a benefit or advantage for itself?

5. Can the amount be reasonably regarded as an inducement?

6. Does it fall within any of the exceptions in subparagraphs (v) to (vi i i) ?

7. Was a valid election made under subsection 13(7.4)?

Paragraph 12(1)(x) is an unnecessarily convoluted provision. I understand that one of its important original purposes was to subject to taxation inducement payments made by landlords to prospective tenants. It casts, however, a much wider net and covers many types of payments that should in all likelihood be taxable on general principles.

The recital of the facts in the pleadings, while accurate, does not entirely describe the business realities that underlay the somewhat complex series of events leading up to the transaction upon which the assessment was based. The facts that emerged from the oral testimony and the documents were as follows.

Chief Joseph Everett in 1986 became interested in buying the business and assets of Mel’s Truck Stop Ltd. which carried on a service station business at Beauval, Saskatchewan. On May 16,1986 he offered to purchase the business and assets of Mel's Truck Stop Ltd. for $300,000 and the offer was accepted on the same day. Also, on May 16, 1986 he gave a promissory note to Mel's Truck Stop Ltd. for $150,000. The note read as follows:

IN CONSIDERATION of Mel’s Truck Stop Ltd. agreeing to sell to the undersigned the business and assets of Mel's Truck Stop Ltd. at Beauval, Saskatchewan and as an inducement to Mel's Truck Stop Ltd. to accept the Offer to Purchase the said business and assets dated May 16, 1986.

THE UNDERSIGNED hereby promises to pay to Mel's Truck Stop Ltd. at Meadow Lake, Saskatchewan, the sum of $150,000 in lawful money of Canada with interest from and after Jul 1, 1986 on so much thereof as shall remain unpaid from time to time at the rate of seven per cent per annum.

IN MONTHLY INSTALLMENTS of principal of $6,873 or a sum equivalent to four cents per litre for all diesel fuel sold from the premises during the preceding month, whichever sum shall be greater, plus interest accrued during the said month.

THE FIRST SUCH INSTALLMENT shall be paid to the vendor on or before August 1, 1986 and the payments shall continue aforesaid on the first day of each and every month thereafter until the said principal sum of $150,000 and interest is paid in full.

UPON DEFAULT in payment of any installment by the undersigned of the principal sum or interest when due hereunder the entire unpaid balance of the said principal sum, together with accrued interest thereon, shall at the option of Mel’s Truck Stop Ltd. forthwith become due and payable without notice.

DATED at the Town of Meadow Lake, in the Province of Saskatchewan, May 16, 1986.

Neither the offer nor the promissory note makes any reference to the appellant, Everett's Truck Stop Ltd., although the offer stated that once accepted the offer could be assigned to a corporation incorporated to complete the agreement.

The appellant was not incorporated until September 17, 1986.

Prior to making the offer Mr. Everett had, on February 4, 1986, applied under the Canada-Saskatchewan Special ARDA program for governmental assistance. The application was based upon a projected cost of $262,800. Ultimately, on September 8,1986 the Department of Regional Industrial Expansion agreed to assist in the acquisition to the extent of $104,150.

The owners of Mel's Truck Stop Ltd. had no intention of selling at any such figure, or, indeed, at the $300,000 mentioned in Mr. Everett's offer of May 16, 1986. Their price appears from the outset to have been $450,000 and the promissory note given by Mr. Everett was evidently the method of making up the difference. Mr. Everett does not appear to have had the resources to pay the indebtedness under the note and this obligation was therefore guaranteed by Polar Oils Ltd. The guarantee is a somewhat confusing document. It appears to have been signed originally on May 16, 1986, the date of Mr. Everett's promissory note. That date was, however, struck out and a new date of October 1, 1986 was written in. Moreover, the obligation under the note to pay instalments of $6,873 per month, or four cents per litre for all diesel fuel, was changed in the guarantee to $6,873 per month or two cents per litre for all gasoline pump sales. The note was to bear interest at seven per cent per annum. Neither of the witnesses called was able to explain the difference between the note and the guarantee.

By a document dated July , 1986 an agreement was entered into between Mel's Truck Stop Ltd., James and Unita Esau (who I assume were the owners of Mel's Truck Stop Ltd.), Joseph Everett and Everett's Truck Stop Ltd., "a body corporate having its head office at Beauval, in the Province of Saskatchewan". The agreement was signed on behalf of Everett's Truck Stop Ltd. by Mr. Everett, under its corporate seal. As stated above the appellant did not come into existence until September 17,1986. That agreement provided for the sale of the assets and business of Mel's Truck Stop Ltd. to "the purchaser" (i.e., Everett's Truck Stop Ltd. and Joseph Everett) and the transaction was to close on or before October 1, 1986. The price was $450,000, payable $1,000 down, $299,000 on closing and $150,000

. . . in accordance with the terms of a promissory note dated May 16, 1986, payment of which shall be guaranteed by Polar Oils Ltd.

Clause 16 of the agreement contains the following rather enigmatic provision:

This writing shall be further to and not in substitution for the offer to purchase and related documents between the parties dated May 16, 1986 and shall constitute a binding contract of purchase and sale and be binding upon the parties hereto, their heirs, executors, administrators, successors and assigns.

A further agreement dated July , 1986, was entered into between Joseph Everett, "operating under the name and style of 'Everett's Truck Stop’”, and referred to as the "purchaser" and Polar Oils Ltd., as "guarantor". In consideration of the latter's guaranteeing the payment to Mel's Truck Stop Ltd. of the sum of $150,000 on behalf of the purchaser, the parties agreed as follows:

(a) The guarantor agrees to provide all oil, gas and diesel products required by the purchaser for sale at the purchaser's gas and service station in Beauval, Saskatchewan for a period of five years, commencing on July 1, 1986. The guarantor agrees to provide gasoline products in an amount equal to the posted tank wagon price charged by the guarantor to all customers less $0.06 per unit, and the purchaser agrees to pay the said price during the term of the agreement or such other price that may be negotiated between the parties from time to time.

(b) The purchaser shall be bound to sell only the gasoline, diesel and oil and other fuel products supplied by the guarantor and shall not purchase any products from any other supplier for a period of five years from July 1, 1986.

(c) The purchaser acknowledges the guarantor’s expertise and experience in the sale of gasoline and fuel oil products and agrees to seek assistance from the guarantor in the management of the business and in consequence thereof, will provide the guarantor with monthly statements showing the level of sales and expenses associated with the operation of the service station.

(d) Where in the opinion of the guarantor, remedial action in respect of the management of the service station must be taken in order to protect the purchaser's ability to pay under the terms of the promissory note of May 16, 1986, the purchaser shall follow such recommendation to remedial action as given by the guarantor.

(e) In the event that the purchaser decides to sell the property and/or business at La Loche, Saskatchewan, the guarantor shall have a right of first refusal to match any other bona fide offer made to the purchaser on the same terms and conditions as the purchaser is prepared to accept from the third party, and the guarantor shall have a period of one month to examine an offer to purchase from a third party and accepted by the purchaser and on or before the conclusion of the period of one month shall advise the purchaser of the guarantor's intention to exercise its right of first refusal and purchase the property on those terms and conditions.

(f) In the event that the property is sold before payment in full of the promissory note of May 16, 1986 is accomplished, the purchaser shall use the proceeds of sale of the service station to settle the promissory note firstly.

(g) The purchaser agrees to execute a security agreement in favour of the guarantor in accordance with the form as attached to this agreement granting to the guarantor the specific rights and remedies as contained in the said security agreement. The guarantor shall have the right to enforce any of the provisions of the security agreement upon the purchaser breaching any covenant, condition or term of this contract and without the requirement of the guarantor to give notification to the purchaser of such breach.

(h) This agreement shall be binding upon the heirs, executors and assigns of the parties.

Presumably on the same day, July , 1986, a security agreement was signed by Joseph Everett and the as yet non-existent Everett's Truck Stop Ltd. whereby security was given to Polar Oils Ltd. over all the undertaking and assets of "the company" (defined as Joseph Everett and Everett's Truck Stop Ltd.) in respect of a debt of $150,000.

After the purchase of Mel's Truck Stop Ltd., Polar Oils Ltd. paid the appellant $6,873 per month for five months. These amounts were then paid by the appellant to Mel's Truck Stop Ltd. These amounts received from Polar Oils Ltd. were treated by the appellant’s accountants as income for accounting and tax purposes.

The result of this, therefore is, a purchase for $450,000, of which a portion was financed by a grant from ARDA, who based their grant upon the under- standing that the cost was to be about $300,000. Mr. Everett realized that if he asked ARDA for $150,000 more to complete the transaction the grant might be cancelled. Indeed, if ARDA were to find out that the purchase had cost $450,000 it might have meant that it would demand a repayment of the money or at least refuse to make any further payments of the balance of the grant. As it turned out, ARDA did become aware of the monthly payments of $6,873 and of the obligation to pay Mel's Truck Stop Ltd. an additional $150,000 and started to ask questions.

Accordingly it was essential that the obligation to pay Mel's Truck Stop Ltd. $6,873 per month disappear from the appellant's financial statements. This was accomplished by means of an agreement with Polar Oils Ltd. whereby Polar Oils Ltd. ceased to be liable as guarantor and became the principal obligor of the indebtedness to Mel's Truck Stop Ltd. and the appellant ceased to have any direct obligation to Mel's Truck Stop Ltd.

The agreement was made as of March 31, 1987, between Everett's Truck Stop Ltd. and/or Joe Everett, Mel's Truck Stop Ltd. and Polar Oils Ltd. I set it out in full since it is the central document upon which the assessment rests:

WHEREAS Everett's Truck Stop Ltd. and/or Joe Everett and Mel’s Truck Stop Ltd. have entered into a certain agreement (herein the said“ agreement”) for the sale of a restaurant and gas/truck stop business at or near Beauval, Saskatchewan (herein the "service station").

AND WHEREAS under the terms of the said agreement Mel's Truck Stop Ltd. agreed to carry Everett's Truck Stop Ltd. and/or Joe Everett for $150,000 on terms and conditions more specifically set out in a promissory note dated May 16, 1986 to be guaranteed by Polar Oils Ltd.

AND WHEREAS Polar Oils Ltd. has agreed with Everett's Truck Stop Ltd. and/or Joe Everett to assume responsibility for the said debt of $150,000 as principal debtor (subject to Mel's Truck Stop Ltd. agreeing to accommodate such a substitution by releasing Everett's Truck Stop Ltd. and/or Joe Everett) in order to accommodate Mel's Truck Stop Ltd. and/or Joe Everett in completing their financing of the purchase of the said business and in order to secure the trading account of the said service station.

NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS:

1. For a period of five years from the date hereof Everett's Truck Stop Ltd. agrees to utilize and sell only gasoline, diesel and oil and other fuel products supplied by Polar Oils Ltd. and shall not purchase any products from any other suppliers.

2. For a period of five years from the date hereof Everett's Truck Stop Ltd. agrees to seek assistance from Polar Oils Ltd. in the management of the business and in consequence thereof, will provide Polar Oils Ltd. with monthly statements showing the level of sales and expenses associated with the operation of the service Station.

3. For a period of five years from the date hereof in the event Everett's Truck Stop Ltd. decides to sell the property and/or business at [illegible — probably Beauval], Saskatchewan, Polar Oils Ltd. shall have a right of first refusal to match any bona fide offer made to Everett's Truck Stop Ltd. on the same terms and conditions as Everett's Truck Stop Ltd. is prepared to accept from the third party, and Polar Oils Ltd. shall have a period of one month to examine an offer to purchase from a third party and accepted by Everett's Truck Stop and on or before the conclusion of the period of one month shall advise Everett's Truck Stop Ltd. of Polar Oils Ltd.'s intention to exercise its right of first refusal and purchase the property on those terms and conditions.

4. For a period of five years from the date hereof Polar Oils Ltd. agrees to provide gasoline in an amount equal to the posted tank wagon price charged by Polar Oils Ltd. to all customers less $0.06 per unit until another or other price is mutually negotiated.

5. Polar Oils Ltd. hereby agrees to grant its promissory note to Mel's Truck Stop Ltd. in the amount of $150,000 on the same terms and conditions as to repayment and interest as identified in the photocopy of a promissory note which is attached to this agreement as Schedule "A", subject to adjustment for the reduction of principal effected by payments made by or on behalf of Everett's Truck Stop Ltd. and/or Joe Everett to the date hereof.

6. Mel’s Truck Stop Ltd. agrees to accept in substitution for the Corporation and personal covenants of Everett's Truck Stop Ltd. and/or Joe Everett, to pay the sum of $150,000 under the said agreement and promissory note (Schedule "A"), the promissory note of Polar Oils Ltd. in the principal balance owing under the said promissory note as of the March 31, 1987 in a form and on the terms set out in Schedule'^" hereto.

7. This agreement and all its provisions shall enure to the benefits of the parties their successors and assigns.

At the time of the agreement of March 31,1987 the amount outstanding under the promissory note was $119,658, the amount assessed to tax by the Minister. The full amount of the obligation was not paid off by Polar Oils Ltd. in the appellant's 1987 taxation year, which ended on September 30, 1987. It continued to make the monthly payments of $6,873 until some time after September 30, 1987, at which time the balance outstanding was paid off.

On December 9, 1988 Polar Oils Ltd. requested an assignment by Mel's Truck Stop Ltd. of Mr. Everett's promissory note.

The accountants for the appellant, in preparing the appellant's 1987 income tax return, reduced the balance in the appellant's cumulative eligible capital account by the amount of $119,658 to reflect the assumption of the liability by Polar Oils Ltd. The Minister, on assessing, brought the $119,658 into the appellant's income for 1987 and increased the appellant’s cumulative eligible capital account by the same amount. The appellant's accountants in 1991 endeavoured to have the reduction of the eligible capital amount by $119,658 treated as an election under subsection 13(7.4) which would have had the effect of reducing the undepreciated capital cost of the appellant's depreciable property, and not the appellant's cumulative eligible capital. This request was denied by the officials of the Department of National Revenue on the basis that the election should have been filed with the return of income and there was no basis upon which the time for making the election could be extended. Moreover, the departmental officials refused to treat the credit to the appellant's cumulative eligible capital as tantamount to a valid election.

The Court must, therefore, determine what factual inferences can be drawn from the oral testimony and from this somewhat confusing and in some cases contradictory series of documents,and the appropriate legal result under the Income Tax Act that flows from those inferences. No question of credibility arises. I found Mr. Everett and Mr. Dalgleish, the president of Polar Oils Ltd., perfectly credible and straightforward witnesses.

The overall factual picture which emerges, as I view the evidence as a whole, is this: Mr. Everett wanted to buy Mel's Truck Stop Ltd. He did not have the money to do so himself, but he had various sources of funds of which he could avail himself, including ARDA. Moreover, the Meadow Lake's tribal council, which had a substantial interest in Polar Oils Ltd., was prepared to support him, both for commercial and policy reasons. He was able to obtain some funding from ARDA on the basis that the price of Mel's Truck Stop Ltd. was $300,000. The Esaus were not willing to sell for that figure and the price of $450,000 was struck. The additional $150,000 was to be supplied through Mr. Everett's promissory note. Since he did not have the resources to pay the instalments, Polar Oils Ltd. did so from the outset by paying the appellant who in turn paid Mel's Truck Stop Ltd. When it turned out that this arrangement was not going to work, because the payments still appeared in the appellant's records, the agreement of March 31, 1987 was entered into. Polar Oils Ltd., however, had its price, not being motivated entirely by pure social or altruistic concerns. Mr. Everett or his company were expected to pay an enhanced price for the diesel fuel that was purchased from Polar Oils Ltd., specifically, four cents per litre. This was accomplished by giving the appellant a discount of six cents per litre rather than the ten cents per litre given to other retailers. This was not explicitly stated in any of the agreements that were put in evidence but it was clear from the oral testimony. It was not clear from the evidence whether the four cents per litre was in respect of diesel fuel, gasoline, or both. This arrangement was continued until enough gasoline or diesel fuel had been sold to make up the entire $150,000 (more or less) at four cents per litre, at which time Polar Oils Ltd. allowed the appellant to revert to the usual ten cents discount. Although the promissory note referred to interest at seven per cent, the agreements of July , 1986 and March 31, 1987 do not. In computing its income in 1987 and subsequent years the appellant treated the increased price as part of the cost of the product that it sold and deducted it in computing its income.

Counsel for the appellant invited me to find that the $119,658 was a loan by Polar Oils Ltd. to the appellant. I do not think that it can be so characterized. I accept that Mr. Everett recognized that his company had to pay Polar Oils Ltd. for its assumption of the obligation, but it did so in a manner that was consistent not with a loan but with an ordinary commercial transaction in which, in return for relieving the appellant of its obligation to pay the balance of the note to Mel's Truck Stop Ltd., and, in effect, removing the obligation from its financial statements, the appellant agreed to pay a higher price for the product, and to commit itself for five years to being supplied exclusively by Polar Oils Ltd. and to give Polar Oils Ltd. the right to involve itself in management.

Counsel for the appellant contended that Polar Oils Ltd. really obtained nothing under the agreement of March 31, 1987 that it had not obtained under the agreement of July 1986, which was entered into before the appellant was incorporated. There is some merit in this argument, but it fails to take into account that the appellant was in the March 31, 1987 agreement in existence and a party to the agreement. Moreover, whatever little difference the change in legal relationship might have made as a practical matter, Polar Oils Lt .’s obligation became that of principal obligor under the novation of March 31, 1987, not of guarantor and the appellant and Mr. Everett were entirely released from their obligation to Mel's Truck Stop Ltd. I think it clear that the appellant, by its conduct, adopted the pre-incorporation contracts entered into on its behalf by Mr. Everett, including the agreements of July , 1986 and that on its incorporation and adoption of those contracts it became jointly liable for the $150,000 referred to in the promissory note.

The conclusion which I think must be drawn from the evidence is that on March 31, 1987 Polar Oils Ltd., in assuming the appellant's obligations to Mel's Truck Stop Ltd. of $119,658, made a payment to it of that amount and the quid pro quo was that the appellant commit itself for five years to Polar Oils Ltd., and that it pay an enhanced price for Polar Oils Ltd.'s products. I use the word "payment" in the sense of a conferral and receipt of a commercial benefit the amount or value of which must be taken into account. [1]

The matter might have been structured as a loan but it was not. Indeed, the whole object of the exercise was to ensure that it not be treated or perceived as a loan. It was treated as a purely commercial transaction all of the incidents of which are on revenue account, including the deduction in computing income of the increased payments made by the appellant to Polar Oils Ltd. as the price of the petroleum products sold to it.

I have reached the conclusion that the sum of $119,658 is fully taxable in the appellant's hands in 1987. It was an inducement received by the appellant and paid by Polar in the ordinary course of their respective businesses within the meaning of paragraph 12(1)(x) in 1987, the year in which it was recognized in the appellant's books as a credit to the cumulative eligible capital and the year in which the appellant's obligation to Mel's Truck Stop Ltd. was terminated.

The only one of the exceptions in subparagraphs 12(1)(x)(v) to (viii) into which the payment might fall is subparagraph (v) as an amount that was otherwise included in computing the appellant's income. I read the word “included” to mean "properly includible". [2]

So far as subparagraph 12(1)(x)(viii) is concerned there is no basis upon which I could determine that any portion of the payment was attributable to an acquisition by Polar Oils Ltd. of an interest in the appellant. I should have thought that if anything was paid for the right of first refusal it would be nominal. The predominant objective was to bind the appellant's petroleum supply to Polar Oils Ltd. and to obtain the enhanced price for the product.

I cannot conclude that the crediting of the payment to the appellant's cumulative eligible capital constitutes an election under subsection 13(7.4) or that the appellant is entitled to treat the accountant's letter of August 3, 1991 as such an election (see Miller v. Canada, [1993] 1 C.T.C. 269, 93 D.T.C. 5035 (F.C.A.)). Indeed, if the amount is required to be included in the appellant's income independently of paragraph 12(1)(x) the relief provided under subsection 13(7.4) would not be available in any event.

The appeal is dismissed with costs.

Appeal dismissed.