Saskatchewan Wheat Pool v. Her Majesty the Queen, [1983] CTC 248, 83 DTC 5268

Dubé, J:—The issue to be determined here is whether the plaintiff is entitled to deduct an inventory allowance of $1,931,180 in respect of grain of a value of $192,590,327, held by the plaintiff, for its 1977 taxation year.

The plaintiff (“the Pool”) is Canada’s largest agricultural cooperative. It owns and operates for receipt, storage, cleaning and shipment of grain, a number of country elevators situated in the Province of Saskatchewan and terminal elevators located at Thunder Bay and North Vancouver. It exploits an extensive network of facilities for getting wheat and other grains from field to market. It provides services to some 70,000 farmer owners annually. It employs some 4,000 people and its head office is in Regina, Saskatchewan.

In its statement of claim the Pool alleges that at the commencement of its 1977 taxation year it held grain inventories valued at $223,523,620 in its primary (country) elevators, or in transit to its terminal elevators. It claims that, of these inventories, grain valued at $192,590,327 (“Board grain”) was held by it subject to an agreement existing between it and the Canadian Wheat Board (“the Board”).

The Pool alleges that under its agreement with the Board it had purchased Board grain from farmers at its country elevators for storage, handling and ultimate delivery to the Board at its terminal elevators, or at other destinations designated by the Board. It recorded the Board grain as inventory in its audited financial statement.

On the other hand, the Minister, in assessing the plaintiff for its 1977 taxation year, assumed that the Board grain was not the property of the Pool, but the property of the Board, and therefore was not held by the Pool for sale, or to be otherwise used by it for sale within the meaning of subparagraph 20(1 )(gg)(ii) of the Income Tax Act, with the results that the Pool was not entitled to an inventory deduction in respect thereof. The subparagraph reads as follows:

20.( 1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto.

(gg) an amount in respect of any business carried on by the taxpayer in the year, equal to that portion of 3% of the cost amount to the taxpayer, at the commencement of the year, of the tangible property (other than real property or an interest therein) that was

(ii) held by him for sale or for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business

that the number of days in the year is of 365;

The heart of the matter, therefore, is whether or not the so-called Board grain was held by the Pool for sale to the Board, or was the property of the Board with the Pool acting as its agent. Inventory is defined in subsection 48(1) as follows:

INVENTORY

“inventory” means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year.

As appears from the oral evidence at the hearing, as well as from a publication filed by the plaintiff, “Field to Market”, the Pool in 1982 operated 965 licensed elevators with a total capacity of 2.3 million tonnes at nearly 600 stations throughout Saskatchewan. Farmers deliver their grain to the elevators under a quota system administered by the Board. This system enables the Board to obtain the types of grain it needs from areas in which it is available, while giving everyone a chance to deliver grain on as equal a basis as possible. The grain is graded by the elevator agent, who pays the farmers at the time of delivery by way of Cash Purchase Tickets. Grade is determined by quality, appearance and plumpness of the kernels, protein content and weight. “When a farmer sells his grain to the Canadian Wheat Board through his elevator, the payment he receives is known as an initial payment.”* [1] The Board, responsible for marketing, repays the elevator company for its outlay in making the initial payment. A portion of the proceeds is deducted to cover operating expenses and the remainder returned to the farmers as a ‘final payment”.

When wheat is delivered to an elevator, four basic operations take place prior to shipping: receiving, storage, handling (including blending, cleaning, turning and natural drying) and loading into railway cars. The grain is then moved by hopper cars along rail lines, either to the head of the Great Lakes or to the Pacific, for shipping from the terminals.

The giant concrete terminals are located at North Vancouver and Thunder Bay. The operations at the terminals are essentially similar to those at the originating elevators, except that it is on a larger scale. Hopper cars unload through openings below and from the holding bins the grain passes through cleaning equipment. When an outward shipment is made valves open at the bottom of the bins and the grain falls onto conveyor belts, is carried to shipping scales for weighing, then transferred to a ship.

Generally, the grain purchased from different farmers is not kept separate and identifiable, but is dumped into vast bins at the country elevators where it is mixed up, cleaned, or otherwise dealt with, along with other grains. Moreover, the Pool carries out several operations, such as mixing, drying, grading, pelletizing, which may increase or reduce the actual volume or quality of the grain.

The plaintiff’s main contention is that the grain, once purchased from the farmers at the elevators, becomes the property of the Pool until it is delivered to the Board at the shipping terminals: the farmers are paid with the Pool’s money, actually Pool tickets cashable at all banks; the grain is purchased by the Pool’s agents; the grain is handled by the Pool’s personnel; it is not kept separate, but dumped into bins with other grains; the grain while in transit is kept insured by the Pool, not the Board; the Pool keeps control over it until final delivery to the Board at the terminal. The Board’s accountants have therefore been entering the Board grain as part of the Pool’s inventory.

The plaintiff relies inter alia on MNR v Wardean Drilling Limited [1969] CTC 265; 69 DTC 5194, a decision of Cattanach, J. of this Court wherein the learned judge held that assets were “acquired” within the meaning of paragraph 20(5)(e) of the Income Tax Act at the time title passed, or when the purchaser had acquired ail the attributes of title, such as possession, use and risk. Counsel argues that the Board only acquires the three essential attributes of ownership at the time of delivery at the terminals. Before that, it is the Pool which has possession, use and risk of the grain.

Counsel argues that there exists a form of agency which does not preclude ownership.* [2] He lists an impressive number of factors which tend to show that the property of the grain remains with the Pool until delivery at the terminals. For instance, the farmers may not sue the Board, but the Pool for reimburse- ment; the Board does not reimburse the Pool for its expenses; the Pool does not have to account to the Board for all its expenditures; the Pool may pelletize chaffed grain and turn it into chicken feed without rendering account to the Board; all the employees of the elevators are employees of the Pool, not the Board; money paid to the farmers is Pool’s money not Board’s money; it is the Pool which holds the licence to operate the elevators, not the Board; it is the Pool which insures the grain, not the Board; the Board does not send auditors around the elevators, the Pool does that; the documents issued until delivery are the Pool’s documents, not the Board’s documents; clause 16 of the agreement between the Pool and the Board allows the Pool to pledge the grain as security for borrowing from the bank; it is the Pool, not the Board that sets the price it will pay the farmers, and the farmers are free to sell elsewhere; the Pool does not have to deliver exactly the same grain to the Board, as long as it delivers the same quantity and the same quality; the Pool must absorb the risk for any damage sustained during the voyage to the terminals. Therefore, according to counsel for the Pool, all those ingredients lead to the conclusion that property over the grain remains with the Pool until delivery at the terminals where the grain is graded, weighed and sold to the Board.

All those elements would indeed point to ownership of the grain by the Pool at the time of purchase from the farmers, were it not for the Canadian Wheat Board Act, which governs all those activities, and the agreement made under that Act by the Board and the Pool.

The scheme of the Act indicates that the Board, not the Pool, buys the grain from the farmers. Section 4 provides that the Board has capacity to contract, to be sued and is an agent of Her Majesty in right of Canada. Its object is to market in an orderly manner, in interprovincial and export trade, grain grown in Canada. It has power to buy, take delivery of, store, ship or otherwise dispose of grain. It has the power to operate elevators directly or by means of agents, and subject to the Canada Grain Act to pay such agents, commissions, storage and other charges as may be agreed upon, with the approval of the Canadian Grain Commission.

It is provided under section 17 that, except with the permission of the Board, no person shall deliver grain to an elevator, unless the person delivering the grain is the actual producer. Under section 21, the Board may prescribe the forms and manner of completing applications for permit books allowing for the delivery of grain and the Board may require any person engaged in a business of delivering, receiving, storing, transporting and handling grain to make returns to the Board of information relating thereto or of any facilities therefor, owned, possessed or controlled by him.

Section 25 prescribes that the Board shall undertake the marketing of wheat produced for interprovincial or export trade, and for such purpose the Board shall “buy all wheat produced", pay to producers “a sum certain per tonne basis in storage Thunder Bay or Vancouver”. The Board shall issue to a producer a certificate indicating the number of tonnes purchased, which certificate entitles the producer to share in the equitable distribution of the surplus, if any.

Section 26 authorizes the Board to deduct from the total amount received all moneys disbursed by the Board or on behalf of the Board and to distribute the balance remaining among holders of certificates. Section 12 of the Canadian Wheat Board Regulations describes the form of certificates to be issued to producers delivering and selling wheat.

In order to carry out the provisions of the Act, the Board and the Pool entered into an agreement on August 8, 1977 covering the period from Au- gust 1, 1977 to July 31, 1978. The agreement declares that the Board is incorporated under the Canadian Wheat Board Act with the object of marketing grain in an orderly manner in interprovincial and export trade and, pursuant to the said object, to receive grain from producers and to market the same. It provides that the Board, “to accomplish the said object”, may employ the services of persons and corporations owning and operating primary elevators. The agreement is said to be made with the object of facilitating delivery to the Board of the grains of producers. It is clearly stated that the Pool “has agreed with the Board that it will act as an agent of the Board to accept deliveries and to carry out the purchase of wheat, oats and barley”.

Clause 3 provides that the Pool will “as agent of the Board” during the term of this agreement at its primary elevators “accept delivery of wheat. .. on behalf of the Board from any producer”, store such grain and deliver it as instructed by the Board.

Clause 4(a) provides that the Pool will purchase grain which has a level of excellence higher than that of feed grain “exclusively for the Board”. Under Clause 8(a) the Pool will deliver the grain to the Board at terminal points and “assume the risk of grade” of such grain. Clause 9 recites that the Pool will provide the Board with a daily report of grain received at its elevators and a list showing the railway cars loaded with grain and their destinations. Clause 10 provides that the Pool will insure against fire and report promptly to the Board any loss or damage. Under Clause 12, the Board will pay the Pool on date of invoice the fixed price at Thunder Bay or Vancouver in respect of grain delivered at terminal points. During the crop year the Board will pay the Pool storage and interest as well as carrying charges. Under Clause 14 the Board will reimburse the Pool for any difference in freight rates.

Clause 16, as previously mentioned, authorizes the Pool to borrow from the bank on the security of all grain on hand and may give security on such grain. “For all such purposes” the Pool shall be deemed to be the owner. Finally, the termination Clause 24 recites that if the parties fail to agree before October 1st, 1977 upon the terms of the agreement, then ‘the agency shall terminate and come to an end”.

It seems therefore clear to me in light of the provisions of the Act and the clauses of the agreement that the Pool acts as an agent of the Board, purchases the Board grain on behalf of the Board, and that the Board becomes the owner of the grain from the day of the purchase from the producers.

Now returning to subparagraph 20(1 )(gg)(ii) of the Income Tax Act, it cannot be said that the Board grain held in the plaintiff’s elevators, or in transit to the terminals, was “held by him [the Pool] for sale”, for it was not his to sell; it was held by him for delivery to the owner, the Board.

In a recent decision of the Federal Court of Appeal, Saskatchewan Wheat Pool v The Queen [1981] 2 FC 212, Heald, J on behalf of the Court analyzed the scheme of the Canadian Wheat Board Act and described the Board as an agent of the federal Crown which purchases the farmers’ grain from them through the Board’s agents “the primary country elevator companies”. He said as follows at 218;

_.. The Canadian Wheat Board, under the Canadian Wheat Board Act, RSC 1970, c C-12, is an agent of the federal Crown for all purposes (see Canadian Wheat Board Act, subsection 4(2)). Under the scheme of the Canadian Wheat Board Act, The Canadian Wheat Board administers the system of orderly marketing of grain grown by western grain producers. Every grain elevator is required to be operated for and on behalf of The Canadian Wheat Board (Canadian Wheat Board Act, subsection 13(1)). Thus, while The Canadian Wheat Board is an agent of the federal Crown, and while the primary country elevator operators are agents of The Canadian Wheat Board, it cannot be said that The Canadian Wheat Board is an agent of the grain producers. On the contrary, it is The Canadian Wheat Board which purchases the farmers’ grain from them, in most cases through their agents, the primary country elevator companies.

[Italics mine.]

In the second full paragraph of his judgment Heald, J has also described the so-called Board grain, that is grain shipped from country elevators to terminals, as “at all relevant times, grain owned by The Canadian Wheat Board”.*

It is trite law that in order to benefit from a tax exemption the taxpayer must place himself squarely within the four corners of the exempting provision. Unfortunately for the plaintiff, it cannot do so in this instance. This appeal, therefore, must be dismissed with costs.