Dubé,
J:—Defendant,
a
corporation
formed
on
January
21,
1970
for
the
purpose
of
transporting
mail,
is
appealing
an
assessment
by
the
Minister
of
National
Revenue
for
the
taxation
year
1970,
which
included
in
the
computation
of
plaintiff’s
income
the
sums
of
$184,755
and
$108,360
received
as
compensation
following
the
cancellation
of
two
contracts
by
the
Postmaster
General.
It
must
be
determined
whether
the
said
sums
were
received
as
income
under
sections
3,
4
and
139
of
the
Income
Tax
Act,
RSC
1952,
c
148,
as
amended,
as
the
Minister
assumed,
or
as
capital,
as
claimed
by
plaintiff.
The
relevant
facts
may
be
summarized
as
follows:
In
1969
Claude
Marcoux,
a
businessman
from
Boucherville
Involved
in
the
transport
business,
jointly
sought
with
Jean-Baptiste
Handfield
and
François
Handfield
to
obtain
contracts
for
the
transportation
of
mail.
The
two
Handfield
brothers
already
had
some
experience
in
this
field.
Following
public
tenders,
two
contracts
were
awarded
to
them
by
the
Post
Office
Department.
On
January
21,
1970
they
incorporated
themselves
as
Courrier
M
H
Inc,
and
on
January
28
the
contracts
for
the
transportation
of
Her
Majesty’s
mails
were
signed
by
the
Postmaster
General
and
plaintiff.
For
the
purposes
of
fulfilling
these
contracts
plaintiff
placed
an
order
for
81
trucks
and
purchased
a
property
on
Hochelaga
Street
in
Montreal.
Two
days
before
they
were
due
to
come
into
force,
that
is
on
March
30,
1970,
plaintiff
was
informed
by
the
Postmaster
General
that
the
contracts
were
cancelled.
The
Postmaster
General
undertook
to
purchase
the
trucks,
the
property
on
Hochelaga
Street
was
rented
to
the
Department
of
Public
Works,
the
two
aforementioned
sums
were
paid
to
plaintiff,
and,
at
the
end
of
1971,
plaintiff
submitted
an
application
to
surrender
its
charter.
One
of
the
two
contracts
covered
a
period
from
April
1,
1970
to
October
31,
1974,
and
the
other
from
April
1,
1970
to
June
30,
1974.
The
first
contract
provided
for
the
sum
of
21.8
cents
per
item
delivered
in
the
central
sector
of
Montreal
and
the
other
provided
for
the
sum
of
22.4
cents
per
item
in
the
northern
sector
of
the
city.
The
other
conditions
were
identical
in
both
contracts.
Paragraph
11
of
the
contracts
deals
with
cancellation
of
the
contracts
and
subparagraphs
(1)
and
(3)
read
as
follows:
Termination:
Notwithstanding
anything
contained
in
the
contract:
(1)
The
Postmaster
General
may,
subject
to
subsection
(3)
of
this
section
terminate
this
contract
three
months
after
the
delivery
of
a
notice
in
writing
to
that
effect
to
the
Contractor.
(3)
Where
a
Notice
to
Terminate
has
been
served
pursuant
to
subsection
(1)
of
this
section
and
the
Postmaster
General
is
of
the
opinion
that
the
Contractor
should
no
longer
perform
the
work
required
of
him
pursuant
to
this
contract,
the
Postmaster
General
may
give
notice
to
the
Contractor
of
his
decisioin
in
this
respect
and
the
Contractor
shall
be
compensated
at
the
rate
of
50%
of
the
amount
that
he
would
normally
have
been
paid
pursuant
to
this
contract
for
the
unexpired
portion
of
the
said
three
month
period.
It
appears
that
the
then
Postmaster
General
cancelled
the
contracts
as
a
result
of
the
Lapalme
affair
and
union
problems,
with
the
view
of
integrating
postal
workers
into
the
Public
Service.
The
two
paragraphs
of
the
letter
from
the
Minister
dated
March
30,
1970
read
as
follows:
(TRANSLATION)
As
the
Postmaster
General
for
Canada,
I
wish
to
inform
you
of
my
decision
to
cancel
the
contracts
dated
January
28,
1970
between
yourselves
and
Her
Majesty
the
Queen
in
right
of
Canada,
concerning
the
transportation
of
Her
Majesty’s
mails,
in
accordance
with
the
provisions
of
subparagraph
(1)
of
paragraph
11
of
the
General
Conditions
of
the
said
contract.
Although
normally
you
would
be
required
to
provide
the
services
involved
in
the
said
contract
during
the
three
(3)
months
following
receipt
of
this
notice,
the
Crown
is
willing
in
the
circumstances
of
which
you
are
aware
to
release
you
from
your
commitments
in
this
respect,
and
to
pay
you
the
compensation
to
which
you
would
have
been
entitled
if
the
service
involved
had
in
fact
been
rendered.
According
to
Claude
Marcoux,
the
only
witness
at
the
hearing,
the
amount
of
compensation
paid
for
the
two
contracts
represents
50%
of
the
gross
income
which
plaintiff
would
have
earned
in
the
first
three
months
of
the
contracts,
as
estimated
by
the
Post
Office.
This
testimony
was
not
contradicted.
Claude
Marcoux
also
testified
that
at
the
time
he
bid
for
the
contracts
he
did
not
anticipate
the
course
of
events.
He
further
stated
that
at
a
meeting
between
the
Postmaster
General
and
the
contractors
he
had
personally
objected
to
the
solution
put
forward
by
the
Postmaster
General,
because
he
preferred
to
continue
carrying
out
the
contracts.
Apart
from
the
81
trucks
and
the
building,
it
appears
that
the
other
expenses
relating
to
the
contracts
were
rather
minimal.
There
were
some
salaries
to
be
paid,
caps
purchased
for
the
couriers
and
other
preliminary
expenses.
In
MNR
v
Import
Motors
Limited,
[1973]
CTC
719;
73
DTC
5530,
the
taxpayer,
having
enjoyed
a
Volkswagen
distributorship
franchise
for
the
Province
of
Newfoundland
for
several
years,
was
informed
that
the
arrangement
was
to
be
terminated
and
that
his
business
would
be
converted
by
Volkswagen
Canada
Limited
into
a
retail
outlet.
Volkswagen
agreed
to
pay
the
taxpayer
$100,800
in
12
monthly
instalments,
described
as
an
“additional
distributor
discount”,
and
purportedly
calculated
on
past
sales
at
so
much
a
unit.
The
issue
in
the
case
before
the
Federal
Court
was
whether
the
real
nature
of
the
payments
was
trade
discounts
(income)
or
a
camouflaged
capital
sum
paid
for
the
sterilization
of
a
capital
asset
(the
distributorship
agreement).
My
brother
Urie
held
that,
notwithstanding
the
form
of
the
transaction,
the
business
substance
was
the
cancellation
of
the
distributorship
agreement,
a
capital
asset
which
could
never
be
recovered.
At
page
726
[5534]
he
quoted
Lord
Russell
in
Commissioners
of
Inland
Revenue
v
Fleming
&
Co
(Machinery),
Ltd,
33
TC
57,
wherein
he
said
at
page
63:
The
sum
received
by
a
commercial
firm
as
compensation
for
the
loss
sustained
by
the
cancellation
of
a
trading
contract
or
the
premature
termination
of
an
agency
agreement
may
in
the
recipient’s
hands
be
regarded
either
as
a
capital
receipt
or
as
a
trading
receipt
forming
part
of
the
trading
profit.
It
may
be
difficult
to
formulate
a
general
principle
by
reference
to
which
in
all
cases
the
correct
decision
will
be
arrived
at
since
In
each
case
the
question
comes
to
be
one
of
circumstance
and
degree.
When
the
rights
and
advantages
surrendered
on
cancellation
are
such
as
to
destroy
or
materially
to
cripple
the
whole
structure
of
the
recipient’s
profit-making
apparatus,
involving
the
serious
dislocation
of
the
normal
commercial
organisation
and
resulting
perhaps
in
the
cutting
down
of
the
staff
previously
required,
the
recipient
of
the
compensation
may
properly
affirm
that
the
compensation
represents
the
price
paid
for
the
loss
or
sterilisation
of
a
capital
asset
and
is
therefore
a
capital
and
not
a
revenue
receipt.
Illustrations
of
such
cases
are
to
be
found
in
Van
den
Berghs,
Ltd,
(19
TC
390)
[1935]
AC
431,
and
Barr,
Crombie
&
Co,
Ltd
(26
TC
406)
[1945]
SC
271.
On
the
other
hand
when
the
benefit
surrendered
on
cancellation
does
not
represent
the
loss
of
an
enduring
asset
in
circumstances
such
as
those
above-mentioned—where
for
example
the
structure
of
the
recipient’s
business
is
so
fashioned
as
to
absorb
the
shock
as
one
of
the
normal
Incidents
to
be
looked
for
and
where
it
appears
that
the
compensation
received
is
no
more
than
a
surrogatum
for
the
future
profits
surrendered—
the
compensation
received
is
in
use
to
be
treated
as
a
revenue
receipt
and
not
a
capital
receipt.
See
eg
Short
Brothers,
Ltd,
12
TC
955:
Kelsall
Parsons
&
Co
(21
TC
608)
[1938]
SC
238.
Farther
down
the
page,
Urie,
J
said
that
in
his
opinion
the
“business
substance”
of
the
Volkswagen
transaction
was
that
the
payment
was
compensation
for
“the
loss
or
sterilization
of
a
capital
asset
by
the
early
termination
of
the
distributor
franchise”.
He
added
that
“Whether
or
not
Volkswagen
treats
the
distributor
agreement
as
a
capital
aseet
in
my
view
is
immaterial.
It
is
the
true
nature
of
the
loss,
not
the
subjective
views
of
the
parties
as
to
the
nature
which
is
important”.
In
Parsons-Steiner
Ltd
v
MNR,
[1962]
CTC
231;
62
DTC
1148,
the
issue
was
whether
a
sum
of
$100,000,
received
by
the
appellant
following
the
termination
of
an
agency
relationship
pursuant
to
an
agreement
between
the
parties
rather
than
pursuant
to
the
3
months’
notice
provided
in
the
agency
agreement,
was
income.
After
reviewing
the
authorities
Thurlow,
J,
as
he
then
was,
said
at
page
244
[1154]:
On
the
whole
therefore
having
regard
to
the
importance
of
the
Doulton
agency
in
the
appellant’s
business
the
length
of
time
the
relationship
had
subsisted,
the
extent
to
which
the
appellant’s
business
was
affected
by
its
loss
both
in
decreased
sales
and
by
reason
of
its
inability
to
replace
it
with
anything
equivalent,
to
the
fact
that
two
of
the
appellant’s
employees
became
employees
of
the
Doulton
subsidiary
on
the
termination
of
the
relationship
and
the
fact
that
from
that
time
the
appellant
was
in
fact
out
of
that
part
of
its
business,
both
as
an
agent
and
as
a
wholesale
dealer,
and
particularly
to
the
nature
of
the
claim
asserted
in
respect
of
which
the
payment
was
made,
I
am
of
the
opinion
that
.
.
.
the
payment
in
question
was
not
income
from
the
appellant’s
business,
but
was
referable
to
the
appellant’s
claim
for
loss
of
what
it
and
Doulton
Co
Limited
as
well
considered
to
be
the
appellant’s
interest
in
the
goodwill
and
business
in
Doulton
products
in
Canada.
In
my
view
this
was,
to
use
Lord
Evershed’s
expression,
“a
capital
asset
of
an
enduring
nature”.
In
H
A
Roberts
Ltd
v
MNR,
[1969]
CTC
369;
69
DTC
5249,
the
Supreme
Court
of
Canada
held
that
the
appellant’s
mortgage
department
constituted
a
separate
business
and
the
compensation
received
upon
its
termination
was
a
capital
sum.
The
agency
contracts
were
said
to
be
capital
assets
of
an
enduring
nature.
Spence,
J
said
at
page
379
[5255]:
The
learned
trial
judge
also
pointed
out
that
in
the
Parsons-Steiner
case
the
compensation
was
negotiated
while
here
the
exact
compensation
paid
was
prescribed
for
in
the
agreement.
Again,
I
cannot
find
such
a
circumstance
decisive.
In
this
case
in
1960
the
taxpayer,
realizing
that
it
was
building
up
a
Capital
asset,
desired
to
assure
that
it
would
endure
or
that
proper
compensation
would
be
paid
for
its
loss
and
negotiated
an
exact
provision
for
that
compensation,
agreeing
to
a
reduction
of
its
income
for
the
purpose
of
securing
such
compensation
for
loss
of
the
capital
asset.
The
payment
of
such
prefixed
compensation
is
no
less
a
payment
for
a
capital
loss
than
a
payment
for
such
loss
after
negotiation
at
the
time
when
it
occurs.
Finally,
counsel
for
the
Minister,
if
we
were
of
the
opinion
that
the
Parsons-
Steiner
case
was
un-distinguishable,
invited
us
to
hold
it
was
badly
decided
and
refuse
to
accept
it.
I
am
not
willing
to
do
so.
With
respect,
I
am
of
the
opinion
that
Thurlow,
J
in
Parsons-Steiner
came
to
the
correct
conclusion
after
a
careful
and
accurate
analysis
of
the
case
law
and
the
principles
involved.
I
am
of
the
view
that
when
the
Postmaster
General
cancelled
plaintiff’s
contracts
he
materially
crippled
the
whole
structure
of
its
profitmaking
apparatus.
These
two
contracts
were
the
very
foundation
of
the
business
venture
and
the
sole
raison
d’être
for
plaintiff’s
incorporation,
the
purchase
of
the
trucks
and
the
building,
and
the
hiring
of
couriers.
With
the
contracts,
the
trucks
and
the
couriers
gone,
and
the
building
rented,
virtually
nothing
remained
of
plaintiff
but
its
charter
in
the
process
of
being
abandoned.
The
compensation
therefore
represents
the
price
paid
for
the
sterilization
of
its
capital
asset.
And
obviously,
the
shock
of
cancellation
cannot
be
absorbed,
or
cushioned,
by
the
expectation
of
future
contracts
for
the
conveyance
of
Her
Majesty’s
mails
in
Montreal,
since
all
such
contracts
were
cancelled
for
the
purpose
of
integrating
mail
delivery
service
within
the
departmental
structure.
We
do
not
know
if
the
Postmaster
General’s
view
was
to
compensate
for
revenues
or
for
capital,
since
there
is
no
evidence
from
that
source
apart
from
his
letter
which
refers
to
“remuneration
for
services”,
but
it
matters
not,
as
the
true
nature
of
the
loss
must
be
assessed,
not
the
subjective
view
of
the
parties.
Whether
or
not
the
two
amounts
paid
by
the
Postmaster
General
were
exactly
as
prescribed
in
paragraph
11(3)
of
the
contracts
is
not
decisive.
Under
the
circumstances
I
am
of
the
view
that
the
two
amounts
paid
by
the
Postmaster
General
to
the
plaintiff
are
not
taxable
under
the
Act.
The
appeal
therefore
is
allowed
with
costs
to
the
plaintiff.
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