CAMERON,
J.:—This
is
an
appeal
from
assessments
to
income
tax
and
excess
profits
tax
for
the
taxation
year
1942.
The
appellant
had
claimed
a
normal
depletion
allowance
in
the
sum
of
$51,874.36,
and
also,
as
an
expense,
certain
interest
paid
on
its
note
for
$123,097.34
to
one
T.
EK.
McCool.
In
assessing
the
appellant
on
February
9,
1945,
the
respondent
had
allowed
normal
depletion
in
the
sum
of
$10,445.94
only
and
had
disallowed
entirely
all
interest
paid
on
the
said
note.
It
is
in
respect
of
these
two
items
that
the
appeal
is
now
taken.
In
order
to
appreciate
the
issues
in
the
case
it
is
necessary
to
set
out
the
facts
in
some
detail.
The
president
and
chief
shareholder
of
the
appellant
company
is
one
T.
E.
MeCool.
For
some
years
prior
to
1940
he
owned
and
operated
a
farm
near
Pembroke,
Ontario,
and
during
the
winter
months
operated
a
small
log
and
pulp-jobbing
business.
On
March
27,
1940,
he
secured
from
one
Gertrude
A.
Booth
an
option
to
purchase
for
$35,000.00
certain
timber
licences
held
by
her
from
the
Province
of
Ontario
on
lots
in
the
County
of
Renfrew.
This
option
to
purchase
(Exhibit
7)
was
open
for
acceptance
until
June
1,
1940,
and
could
be
taken
up
by
payment
of
$10,000.00
by
the
date
named,
a
further
payment
of
like
amount
being
due
on
January
2,
1941,
and
the
balance
on
May
1,
1941,
all
without
interest.
After
cruising
the
limits,
MeCool
estimated
that
he
would
be
able
to
cut
20,000,000
feet
B.M.
from
the
properties,
took
up
the
option
and
made
the
down
payment
of
$10,000.
Mr.
MeCool
considered
it
advisable
to
operate
the
said
Limits
(which
will
hereafter
be
referred
to
as
‘‘the
Booth
Limits’’
)
and
his
other
assets
through
the
medium
of
an
incorporated
com-
pany.
On
August
31,
1940,
he
entered
into
an
agreement
(contained
in
Exhibit
3)
with
one
Lawrence
S.
Ryan,
Chartered
Accountant,
as
trustee
on
behalf
of
the
Company
to
be
formed,
by
the
terms
of
which
he
agreed
to
sell
and
transfer
to
the
Company
to
be
formed
all
the
lands
and
assets
set
out
in
Schedule
"A’’
to
that
agreement,
which
schedule
included
the
Booth
Limits,
other
limits,
real
estate
and
buildings,
machinery,
equipment,
horses,
cattle,
camp
equipment,
trucks
and
cars,
accounts
receivable,
shares
in
a
certain
company
and
a
specified
amount
of
cash
on
hand
in
bank.
Except
in
regard
to
accounts
receivable
and
cash
on
hand
and
in
bank,
no
values
were
assigned
to
the
assets
to
be
transferred.
In
consideration
of
the
transfer
of
the
assets
to
the
Company
to
be
formed,
the
Company
was
to
(1)
assume
liabilities
of
the
vendor
in
the
sum
of
$37,684.20,
(2)
pay
the
vendor
$400.00
in
cash
to
be
used
in
payment
for
the
four
shares
of
the
incorporators
of
the
Company,
(3)
allot
to
the
vendor
596
fully
paid
up
and
non-assessable
shares
in
the
Company
of
a
par
value
of
$100.00
each,
and
(4)
to
make
and
give
to
the
vendor
a
demand
note
for
$123,097.34
bearing
interest
after
September
1,
1941,
at
5
per
cent
per
annum.
In
the
said
agreement
it
was
provided
that
the
transfer
of
the
assets
from
the
vendor
should
be
deemed
to
have
effect
from
August
31,
1940,
and
the
benefit
of
any
operations
carried
on
prior
to
such
transfer
was
to
enure
to
the
Company.
Any
subsequent
asset
acquired
by
the
vendor
in
connection
with
his
business
and
prior
to
the
transfer
was,
at
the
option
of
the
Company,
to
be
transferred
to
it.
The
appellant
Company
was
incorporated
on
October
20,
1941,
by
Dominion
charter.
By
an
agreement
dated
November
28,
1941
(contained
in
Exhibit
3),
between
the
said
T.
E.
McCool,
the
said
Lawrence
8.
Ryan
as
trustee,
and
the
Company,
the
said
MeCool,
with
the
consent
of
the
said
trustee,
agreed
to
sell
and
convey
to
the
Company,
and
the
Company
agreed
to
purchase
from
him,
all
the
assets
mentioned
in
Schedule
"‘A’’
to
the
agreement
of
August
31,
1940,
together
with
one
additional
property
in
the
town
of
Pembroke
on
the
terms
and
conditions
and
for
the
consideration
mentioned
in
the
agreement
of
August
31,
1940.
The
said
agreement
was
duly
carried
out,
the
assets
transferred
to
the
Company
and
the
vendor
receiveu
the
consideration
above
mentioned,
including
the
note
for
$123,097.34.
On
November
28,
1941,
the
said
vendor
directed
the
secretary-treasurer
of
the
appellant
Company
to
issue
and
allot
the
596
shares
to
which
he
was
entitled,
in
a
certain
manner
between
his
eight
children
and
himself
;
and
following
that
date
and
taking
into
consideration
the
incorporator’s
shares,
the
said
T.
E.
McCool
held
360
shares,
each
of
his
eight
children
30
shares,
a
total
of
only
600
shares
being
issued.
At
the
Directors’
Meeting
held
on
November
28,
1941,
T.
E.
MeCool,
after
stating
that
he
had
entered
into
the
agreement
with
Ryan
dated
August
31,
1940,
and
that
he
had
an
interest
in
the
matters
which
would
come
before
the
meeting
regarding
the
purchase
of
his
assets,
withdrew
from
the
meeting.
Subsequently,
the
directors
considered
these
matters,
approved
of
the
acquisition
of
his
assets
on
the
basis
of
that
agreement
and
passed
a
by-law
authorizing
the
execution
of
the
agreement
above
referred
to
and
dated
November
28,
1941.
They
further
authorized
the
issue
of
the
shares
to
T.
E.
MeCool,
as
provided
in
the
said
agreement,
and
the
execution
of
its
note
to
him
for
$123,097.34.
As
stated
above,
the
agreement
of
August
31,
1940,
placed
no
individual
valuation
on
the
Booth
Limits
nor
did
the
said
agreement
state
the
total
value
placed
on
all
the
assets
to
be
conveyed
to
the
Company.
Under
date
of
November
10,
1941,
the
said
Lawrence
8.
Ryan—who
was
the
chartered
accountant
of
the
appellant
Company—addressed
a
letter
to
the
shareholders
of
the
Company,
attaching
a
balance
sheet
of
the
Company
outlining
its
opening
position
as
of
August
31,
1940.
The
letter
and
statement
comprise
Exhibit
5.
In
that
statement
the
assets
in
all
are
valued
at
a
total
of
$220,781.54,
the
Booth
Limits
being
valued
at
$150,000.00.
The
liabilities
also
total
$220,781,54,
being
made
up
of
current
liabilities
of
$37,684.20;
issued
capital
stock
(600
shares
of
a
par
value
of
$100.00
each)
at
$60,000.00,
and
the
demand
note
to
T.
E.
MeCool
for
$123,097.34.
I
shall
first
consider
the
appeal
in
regard
to
depletion
allowances.
During
its
fiscal
year
ending
August
31,
1942,
the
appellant
had
cut
6,916,581
feet
B.M.
from
the
Booth
Limits.
In
its
tax
return
it
had
claimed
an
allowance
for
depletion
at
the
rate
of
$7.50
per
1,000
feet
B.M.
so
cut.
Assuming
that
there
were
20,000,000
feet
in
all
in
the
Limits
(as
had
been
estimated
by
T.
E.
MeCool),
it
had
divided
the
sum
of
$150,000.00
(which
it
represented
was
the
cost
of
the
Limits
to
it)
by
20,000,000
feet
and
thereby
ascertained
the
figure
of
$7.50
per
1,000
feet
B.M.
as
a
proper
depletion
allowance.
The
respondent,
in
assessing
the
appellant,
rejected
the
appellant’s
computation.
In
a
letter
accompanying
its
Notice
of
Assessment,
and
dated
February
9,
1945,
the
following
paragraph
appeared:
{
Mt
has
been
ruled
by
the
Deputy
Minister
of
National
Revenue
(taxation)
that
the
Timber
Limits
will
be
valued
for
the
purpose
of
the
Income
War
Tax
Act
and
the
Excess
Profits
Tax
Act
at
the
cost
price
to
T.
E.
MeCool
of
$35,000.00,
that
the
depletion
allowable
will
be
the
result
of
dividing
$35,000.00
by
the
total
cruise
and
multiplying
by
the
cut
during
the
period,
and
that
interest
will
not
be
allowed
on
the
balance
of
the
T.
E.
MeCool
account
in
arriving
at
the
taxable
profit.
A
depletion
schedule
"‘C‘‘
is
attached.
Depletion
has
been
allowed
in
accordance
with
section
5(a)
of
the
Income
War
Tax
Act
and
the
interest
has
been
disallowed
under
section
6(a)
of
the
Income
War
Tax
Act.’’
The
respondent,
therefore,
in
fixing
the
depletion
allowance,
assumed
that
there
were
20,000,000
feet
B.M.
in
all
in
the
Booth
Limits
and
by
dividing
$35,000.00
by
20,000,000
feet,
allowed
depletion
at
the
rate
of
$1.75
per
M.B.M.,
thereby
reducing
the
normal
allowance
to
$12,104.02
for
the
6,916,581
feet
cut
in
the
fiscal
year
ending
August
31,
1942.
In
the
assessment,
however,
the
respondent
took
into
consideration
the
fact
that
the
Company
was
incorporated
only
on
October
20,
1941,
and
therefore
allowed
depletion
to
the
appellant
only
for
the
period
October
21,
1941,
to
August
31,
1942,
a
total
of
$10,445.94.
Notice
of
Appeal
was
given,
the
appellant
stating
inter
alia
that
the
Booth
Limits
were
transferred
to
the
Company
at
a
valuation
of
$150,000.00
and
giving
as
one
of
its
reasons
for
appeal
:
i(
(a)
It
should
be
allowed
depletion
on
the
basis
of
a
valuation
$150,000.00
and
not
$35,000.00,
the
sum
of
$150,000.00
being
the
price
paid
by
it
for
the
said
Limits
when
purchased
from
Mr.
MeCool
and
being
less
than
the
actual
market
value
of
the
said
Limits
at
the
date
of
acquisition
by
the
appellant.’’
Following
the
service
of
the
Notice
of
Appeal,
the
Minister
gave
his
decision
on
November
23,
1945,
and
so
far
as
this
item
of
the
Appeal
is
concerned,
stated
:
"‘The
Honourable
the
Minister
of
National
Revenue,
having
duly
considered
the
facts
as
set
forth
in
the
Notice
of
Appeal
and
matters
thereto
relating
.
.
.
hereby
affirms
the
said
Assessment
in
other
respects
on
the
ground
that
a
just
and
fair
allowance
has
been
made
under
the
provisions
of
paragraph
(a)
of
subsection
(1)
of
section
5
of
the
Income
War
Tax
Act
of
the
amount
of
$10,445.94
in
respect
of
depletion
of
a
timber
limit.’’
Notice
of
Dissatisfaction
was
given
by
the
appellant
on
December
18,
1945,
followed
by
the
reply
of
the
respondent
affirming
the
assessment
as
levied.
By
order
of
the
Court
pleadings
were
delivered.
In
1942,
see.
5
(1)
(a)
of
the
Income
War
Tax
Act
was
as
follows
:
""Sec.
5.
Exemptions
and
deductions—1.
‘Income’
as
hereinbefore
defined
shall
for
the
purposes
of
this
Act
be
subject
to
the
following
exemptions
and
deductions
:—
(a)
Depletion.—The
Minister
in
determining
the
income
derived
from
mining
and
from
oil
and
gas
wells
and
timber
limits
may
make
such
an
allowance
for
the
exhaustion
of
the
mines,
wells
and
timber
limits
as
he
may
deem
just
and
fair,
and
in
the
case
of
leases
of
mines,
oil
and
gas
wells
and
timber
limits
the
lessor
and
the
lessee
shall
each
be
entitled
to
deduct
a
part
of
the
allowance
for
exhaustion
as
they
agree
and
in
case
the
lessor
and
the
lessee
do
not
agree
the
Minister
shall
have
full
power
to
apportion
the
deduction
between
them
and
his
determination
shall
be
conclusive.’’
This
subsection
and
the
nature
of
the
discretion
to
be
exercised
by
the
respondent
were
recently
under
consideration
in
the
case
of
D).
À.
Fraser
and
Company
v.
Minister
of
National
Revenue
[1947]
S.C.R.
157.
The
judgment
in
that
case
establishes
that
the
taxpayer
has
now
no
statutory
right
to
a
depletion
allowance;
and
that
the
section
confers
on
the
Minister
a
discretion
not
merely
as
to
the
amount,
but
also
as
to
whether
any
allowance
for
depletion
should
be
made.
But
having
determined
that
an
allowance
should
be
made,
he
must
then
fix
an
amount
which
‘‘he
may
deem
just
and
fair.’’
In
the
Fraser
Case
Estey,
J.,
said
at
p.
169:
“The
nature
and
character
of
the
duties
imposed
upon
the
Minister
under
this
section
5(1)
(a)
would
appear
to
be
unchanged
by
the
amendment.
They
remain,
as
stated
by
Lord
Thankerton,
in
Pioneer
Laundry
d
Dry
Cleaners
Limited
v.
Minister
of
National
Revenue
:
cc
..
so
far
from
the
decision
of
the
Minister
being
purely
administrative
and
final,
a
right
of
appeal
is
conferred
on
a
dissatisfied
taxpayer;
but
it
is
equally
clear
that
the
Court
would
not
interfere
with
the
decision,
unless,
as
Davis,
J.,
states,
“It
was
manifestly
against
sound
and
fundamental
principles”.’
"
In
reaching
a
conclusion
as
to
whether
the
decision
of
the
respondent
was
against
sound
and
fundamental
principles
it
is
necessary
to
consider
what
material
he
had
before
him
at
the
time
he
exercised
his
discretion
and
made
the
assessment,
and
at
the
time
he
gave
his
decision
following
the
Notice
of
Appeal,
and
the
reasons
given
by
him.
Mr.
W.
F.
Williams,
Director-General
of
the
Corporation
Assessments
Branch
of
the
Taxation
Division,
Department
of
National
Revenue,
was
examined
for
discovery
and
all
of
that
examination
was
made
part
of
the
appellant’s
case.
From
that
examination
it
appears
that
the
Deputy
Minister
had
before
him
the
following
documents:
(a)
The
option
given
to
T.
E.
MeCool
by
Miss
Booth
to
purchase
the
Limits
for
$385,000.00.
(b)
The
trust
agreement
dated
August
31,
1940,
between
T.
E.
McCool
and
Lawrence
S.
Ryan,
referred
to
above.
((3)
The
balance
sheet
purporting
to
be
the
closing
balance
sheet
as
of
August
31,
1940,
for
T.
E.
McCool
personally,
and
in
which
the
Booth
Limits
were
valued
at
$35,000.00.
(d)
The
opening
balance
sheet
of
T.
EK.
MeCool
Limited
as
of
August
31,
1940,
in
which
the
Booth
Limits
were
valued
at
$150,000.00.
(e)
The
appellant’s
income
tax
return
for
its
fiscal
year
ending
August
31,
1942,
and
the
schedules
attached
thereto.
(f)
A
report
of
his
assessor
showing
that
the
appellant
Company
had
issued
600
of
its
1,000
authorized
shares,
of
which
360
were
issued
to
T.
E.
MeCool
personally
and
the
remaining
240
by
the
direction
of
T.
E.
McCool
were
issued
in
equal
proportions
of
30
shares
to
each
of
his
eight
children.
This
report
also
indicated
that
the
240
shares
were
given
by
T.
E.
MeCool
to
his
children
and
that
on
a
valuation
of
$24,000.00
he
had
paid
a
gift
tax
of
$1,000.00
in
regard
thereto.
The
minute
book
of
the
Company
was
not
before
the
Minister
but
no
doubt
was
examined
by
the
assessor
who
made
the
report.
Mr.
Williams
was
not
in
the
Department
at
the
time
the
assessment
was
made,
but
stated
that
in
his
opinion
the
division
of
the
shares
by
Mr.
MeCool
between
himself
and
the
members
of
his
family
would
have
influenced
the
decision
of
the
Deputy
Minister.
He
stated,
"‘I
would’consider
that
the
Company
was
Mr.
MeCool’s
company,
that
he
would
have
control
as
to
the
price
to
be
fixed
on
any
assets
that
were
purchased
from
himself,
and
consequently
that
that
was
not
a
transaction
as
between
strangers.
’
’
He
added
that
he
thought
that
the
fact
that
Mr.
MeCool
controlled
the
Company
might
have
had
some
bearing
on
the
decision
of
the
Deputy
Minister.
In
answer
to
a
question
as
to
whether
any
effort
was
made
by
the
Deputy
Minister
to
ascertain
the
market
value
of
the
Booth
Limits
in
1942,
he
said,
"‘Yes,
as
far
as
market
value
is
concerned
they
had
a
transaction.
The
Department
usually
looks
at
a
transaction
in
regard
to
market
value,
if
there
is
not
a
ready
market
.
.
.
Such
as
there
is
on
the
stock
exchange,
for
example,
or
over
the
counter
trading
.
.
.
as
the
last
transaction
that
took
place
for
cash,
at
arms’
length
or
as
between
strangers.
Now
here
was
a
transaction,
the
last
transaction
for
cash
between
strangers,
that
only
took
place
a
month
or
two
months
before
and
was
turned
over
immediately,
approximately
on
the
same
day,
from
$35,000.00
to
$150,000.00.’’
It
is
also
in
evidence
that
the
Department
of
National
Revenue
(taxation)
on
February
19,
1942,
adopted
recommendations
of
the
Timber
Depletion
Committee
of
the
Income
Tax
Division
and
such
recommendations
were
made
public
to
the
various
timber
associations.
Included
therein
was
the
following:
"
"
That
the
depletion
allowance
be
such
as
to
permit
the
owner
of
timber
or
the
holder
of
a
right
to
cut
timber
from
Crown
or
private
lands
to
recover
successively
and
ratably
out
of
income
before
tax
such
capital
sums
as
he
may
have
invested
in
acquiring
such
ownership
or
rights,
and
no
more.’’
It
is
quite
clear,
therefore,
that
in
making
the
assessment
and
affirming
it
in
his
Decision,
the
respondent,
by
his
Deputy
Minister,
rejected
the
statements
of
the
appellant
that
the
Limits
had
eost
the
appellant
$150,000.00
and
that
that
sum
was
less
than
the
actual
value
of
the
Limits
at
the
time
the
appellant
acquired
them.
Quite
obviously
the
respondent
did
not
consider
that
the
sale
to
the
appellant
established
a
market
value
of
$150.000.00.
The
respondent,
in
the
letter
to
the
appellant,
stated
very
clearly
that
he
would
value
the
Limits
at
the
cost
price
thereof
to
T.
E.
MeCool—namely,
$35,000.00.
In
so
doing,
did
he
violate
sound
and
fundamental
principles?
In
general
terms
I
think
it
may
be
said
that
the
principle
of
taxation
under
the
Income
War
Tax
Act
is
the
taxation
of
the
net
gains
of
the
taxpayer.
That
principle
as
to
depletion
was
put
into
practice
by
the
Department
of
National
Revenue
(Taxation)
when
it
accepted
the
recommendation
of
the
Timber
Depletion
Committee.
That
recommendation
declared
that
the
allowance
should
be
such
as
to
permit
a
taxpayer
to
recover
out
of
income
before
tax
such
capital
sums
as
he
had
invested
in
acquiring
his
timber.
I
do
not
suggest
that
such
a
general
declaration
of
policy
is
in
all
cases
binding
on
the
respondent,
for,
as
stated
in
the
Pioneer
Laundry
and
Dry
Cleaners
Case
[1940]
A.C.
127
at
134:
‘These
Departmental
circulars
are
for
the
general
guidance
of
the
officers
and
cannot
be
regarded
as
the
exercise
of
his
statutory
discretion
by
the
respondent
in
any
particular
case.”
In
the
Fraser
Case
(supra),
Rand,
J.,
stated
at
p.
164:
"
"
It
is,
therefore,
sufficient
to
say
that
whatever
the
effect
of
depletion
allowance
may,
in
particular
cases,
be,
it
nevertheless
is
designed
only
to
enable
the
Minister
broadly
in
time,
factors
and
basis,
to
afford
assurance
of
the
recovery
of
investment
committed
to
the
risk
undertaken.
But
what
is
to
be
the
basis
of
returnable
value?
For
instance,
cost
may
be
inapplicable
to
property
demised
:
special
considerations
might
affect
it
in
mining
ventures,
and,
as
in
the
United
States,
place
it
either
at
the
fair
market
value
at
the
time
of
discovery,
or
a
value
ultimately
ascertained
by
a
percentage
of
gross
return.
But,
apart
from
the
latter,
where
there
has
in
fact
been
a
return
of
basic
value
or
investment,
the
warrant
for
allowance
has
been
removed.
If
here
the
measure,
under
the
statute,
is
to
be
taken
to
be
cost,
then
without
more
the
case
for
the
appellant
disappears.
"‘Even
conceding
an
absolute
right
to
an
allowanee,
it
is
necessarily
bound
by
the
limitation
of
value
spread
evenly
over
the
asset
as
a
whole;
and
since
the
statute
does
not
preseribe
the
basis,
the
Minister
must
be
free
in
any
case
to
adopt
one
reasonably
designed
to
carry
out
the
purpose
intended.
On
this
assumption,
I
take
the
word
"‘may’’
to
include
a
discretion
in
that
choice
;
and
that
the
basis
of
actual
capital
investment
may
be
used
by
him
in
any
ease
is,
I
think,
beyond
doubt.
Ordinarily
the
increments
of
return
would
attach
to
every
unit
of
asset
and
value,
but
here
the
whole
has
been
recovered
by
relation
to
part
only
of
the
asset.”
In
my
view,
the
instant
case
is
similar
in
many
ways
to
Pioneer
Laundry
and
Dry
Cleaners
Limited
v.
Minister
of
National
Revenue
[1939]
S.C.R.
1.
It
is
to
be
kept
in
mind
that
that
appeal
had
to
do
with
a
depreciation
allowance
under
the
then
section
5(1)
(a)
which
then
read
as
follows:
""
"Income’
as
hereinbefore
defined
shall
for
the
purpose
of
this
Act
be
subject
to
the
following
exemptions
and
deductions:
(a)
such
reasonable
amount
as
the
Minister,
in
his
discretion,
may
allow
for
depreciation,
and
the
Minister
in
determining
the
income
derived
from
mining
and
from
oil
and
gas
wells
and
timber
limits
shall
make
such
allowance
for
the
exhaustion
of
the
mines,
wells
and
timber
limits
as
he
may
deem
just
and
fair.
And
in
the
case
of
leases
of
mines,
oil
and
gas
wells,
and
timber
limits,
the
lessor
and
lessee
shall
each
be
entitled
to
deduct
a
part
of
the
allowance
for
exhaustion
as
they
agree
and
in
case
the
lessor
and
lessee
do
not
agree,
the
Minister
shall
have
full
power
to
apportion
the
deduction
between
them
and
his
determination
shall
be
conclusive.’’
That
case
is
very
well
known
and
I
do
not
consider
it
necessary
to
do
more
than
quote
a
few
passages
from
the
dissenting
judgments
of
the
Chief
Justice
and
Davis,
J.,
later
approved
in
the
Judicial
Committee
of
the
Privy
Council.
At
p.
5
Davis,
J.,
said:
"‘The
Commissioner.
of
Income
Tax
put
his
denial
of
any
amount
for
depreciation
on
the
said
machinery
and
equipment
upon
the
ground
that
‘there
was
no
actual
change
of
ownership
of
the
assets’
and
they
were
‘set
up
in
the
books
of
the
taxpayer
at
appreciated
values.’
In
my
view
that
was
not
a
proper
ground
upon
which
to
exercise
the
discretion
that
had
been
vested
in
the
Minister.
The
Commissioner
was
not
entitled
in
the
absence
of
any
fraud
or
improper
conduct,
to
disregard
the
separate
legal
existence
of
the
Company
and
to
inquire
as
to
who
its
shareholders
were
and
at
what
figures
these
assets
had
been
carried
on
the
books
of
some
other
financial
partnership
or
corporation.”
And,
at
p.
6:
‘The
appellant
was
a
new
owner
for
all
legal
purposes
and
its
predecessor’s
depreciation
allowance
is
immaterial
when
considering
what
is
a
reasonable
amount
to
be
allowed
for
its
depreciation.
What
is
virtually
said
here
against
the
appellant
is—You
are
entitled
to
nothing
because
the
beneficial
ownership
of
your
company
is
the
same
as
the
beneficial
ownership
of
another
company
from
which,
indirectly,
you
purchased
your
machinery
and
equipment
and
we
are
entitled
to
look
right
through
your
legal
existence
and
say
that
you
are
entitled
to
nothing
at
all
for
depreciation
on
your
machinery
and
equipment.
"In
my
view
that
is
not
a
legitimate
exercise
of
the
discretion
which
Parliament
vested
in
the
Minister.
I
have
not
the
slightest
doubt
that
the
Commissioner
was
as
anxious
to
do
justice
as
I
am,
but
the
public
have
been
given
the
right
to
appeal
to
the
Court
from
the
decision
of
the
Minister
and
if
the
Court
is
of
the
opinion
that
in
a
given
case
the
Minister
or
his
Commissioner
has,
however
unintentionally,
failed
to
apply
what
the
Court
regards
as
fundamental
principles,
the
Court
ought
not
to
hesitate
to
interfere.
I
confess
that
I
am
influenced
in
this
case
by
the
insistence
of
many
great
judges
upon
the
full
recognition
of
the
separate
legal
entity
of
a
Joint
stock
company
and
the
impropriety
in
dealing
with
its
affairs
of
ignoring
its
legal
status
as
if
it
had
never
been
incorporated
and
organized.”
And,
at
p.
8:
^The
Income
War
Tax
Act
gives
a
right
of
appeal
from
the
Minister’s
decisions
and
while
there
is
no
statutory
limitation
upon
the
appellate
jurisdiction,
normally
the
Court
would
not
interfere
with
the
exercise
of
a
discretion
by
the
Minister
except
on
grounds
of
law.
But
here
the
Commissioner,
acting
for
the
Minister,
did
exercise
a
discretion
upon
what
I
consider
to
be
wrong
principles
of
law
and
it
is
the
duty
of
the
Court
in
such
circumstances
to
remit
the
case,
as
provided
by
section
(65(2)
of
the
Act,
for
a
reconsideration
of
the
subject-matter,
stripped
of
the
application
of
these
wrong
principles.”
The
judgment
of
the
Judicial
Committee
of
the
Privy
Council
is
reported
in
[1940]
A.C.
127.
At
p.
137
Lord
Thankerton,
in
delivering
the
judgment
of
the
Board,
stated
:.
"
"
Their
Lordships
agree
with
the
Chief
Justice
and
Davis,
J.,
that
the
reason
given
for
the
decision
was
not
a
proper
ground
for
the
exercise
of
the
Minister’s
discretion,
and
that
he
was
not
entitled,
in
the
absence
of
fraud
or
improper
conduct,
to
disregard
the
separate
legal
existence
of
the
appellant
company,
and
to
inquire
as
to
who
its
shareholders
were
and
its
relation
to
its
predecessors.
The
taxpayer
is
the
company,
and
not
its
shareholders.
Their
Lordships
agree
with
the
reasons
given
by
these
learned
judges,
and
their
application
of
the
authorities
cited
by
them,
and
it
unnecessary
to
repeat
them.’’
In
this
ease,
as
in
the
Pioneer
Laundry
Case,
the
Deputy
Minister
has
based
his
decision
on
two
grounds:
(a)
that
there
was
no
actual
change
of
ownership
of
the
assets,
and
(b)
the
assets
(the
Booth
Limits)
were
"‘set
up
in
the
books
of
the
appellant
Company
at
appreciated
values.’’
As
held
in
the
Pioneer
Laundry
Case,
these
were
not
proper
grounds
upon
which
to
exercise
the:
discretion
vested
in
the
Minister.
As
Davis,
J.,
said
at
p.
5
:
‘The
Commissioner
was
not
entitled,
in
the
absence
of
any
fraud
or
improper
conduct,
to
disregard
the
separate
legal
existence
of
the
company
and
to
inquire
as
to
who
its
share-
holders
were
and
at
what
figures
these
assets
had
been
carried
on
the
books
of
some
other
individual,
partnership
or
cor-
poration.’’
What
is
virtually
said
against
the
appellant
here
is—You
are
entitled
to
some
depletion
allowance
but
only
on
the
basis
of
the
cost
of
the
timber
to
your
predecessor
in
title
and
not
on
the
basis
of
the
cost
to
you
or
its
actual
value.
But
the
appellant
was
a
new
owner
for
all
legal
purposes,
and,
in
my
view,
is
entitled
to
have
the
Minister
determine
what
is
a
just
and
fair
.
allowance
to
it
and
not
to
a
predecessor
in
title.
In
effect,
the
allowance
for
depletion
given
to
the
appellant
is
precisely
the
same
as
would
have
been
allowed
to
T.
E.
MeCool
had
he
continued
as
owner
of
and
had
he
operated
the
Limits.
In
considering
what
depletion
allowance
should
be
made,
I
think
that
the
first
duty
of
the
Minister
is
to
ascertain
the
cost
of
the
timber
to
the
taxpayer.
In
the
instant
case
there
is
now
no
doubt
that
the
cost
to
the
appellant
was
$150,000.00.
It
may
be
argued
that
on
the
material
before
the
Minister
there
was
no
clear
proof
that
such
was
the
case;
but
I
think
that
the
evidence
before
him
did
fairly
indicate
that
that
was
the
cost
and
there
was
no
evidence
to
establish
that
such
was
not
the
case.
In
any
event,
it
has
been
established
in
evidence
before
me
by
both
McCool
and
Ryan
that
the
price
put
on
the
Limits
at
the
time
of
the
agreement
of
August
31,
1940,
was
$150,000.00.
I
think
it
may
be
fairly
assumed
that
page
8
in
Exhibit
5
(the
opening
balance
sheet
of
the
appellant
Company
as
submitted
by
its
auditor
on
November
10,
1941,
and
before
the
Directors’
Meeting
at
which
the
purchase
was
authorized)
contained
the
same
values
as
T.
E.
MeCool
and
Ryan
had
in
mind
when
they
signed
the
agreement
on
August
31,
1940.
I
do
not
see
how
otherwise
the
amount
of
the
note
at
$123,097.34
could
reasonably
have
been
arrived
at—the
other
unvalued
assets
being
relatively
of
a
minor
nature.
But,
as
stated
by
Rand,
J.,
in
the
Fraser
Lumber
Case
(supra),
the
allowance
is
necessarily
bound
by
the
limitation
of
value
spread
evenly
over
the
asset
as
a
whole.
If
cost
to
the
taxpayer
were
the
only
matter
to
be
considered,
the
statutory
discretion
of
the
Minister
would
be
seriously
interfered
with
and
grave
abuses
could
quite
easily
result.
It
is
the
duty,
therefore,
of
the
Minister
to
ensure
that
the
cost
on
which
depletion
is
to
be
based
does
not
exceed
the
value
of
the
wasting
asset.
It
was
asserted
by
the
appellant
in
its
Notice
of
Appeal
that
the
cost
of
$150,000.00
was
not
in
excess
of
the
actual
value
of
the
timber.
Again,
it
may
be
argued
that
this
was
not
proven
and
that
the
only
clear
proof
of
value
then
before
the
Minister
was
the
sale
by
Miss
Booth
to
T.
E.
McCool
of
$35,000.00
some
few
months
earlier.
Be
that
as
it
may,
it
is
now
well
established
by
the
evidence
given
at
the
hearing
that
the
value
of
the
timber
Limits
when
acquired
by
the
Company
was
not
less
than
$150,000.00
Objection
was
taken
by
counsel
for
the
respondent
to
the
admissibility
of
evidence
as
to
the
then
market
value.
I
reserved
my
finding
in
regard
thereto
but
have
reached
the
conclusion
that
it
should
be
admitted.
The
question
of
value
is
clearly
relevant
to
the
issue
and
it
is
not
barred
by
the
provisions
of
section
65(1)
of
the
Income
War
Tax
Act
as
the
appellant
clearly
raised
that
issue
in
its
Notice
of
Appeal.
The
evidence
of
experienced,
disinterested
and
competent
valuators
of
timber
with
a
full
knowledge
of
the
then
values
in
that
area
indicates
that
the
Limits
were
then
worth
from
$150,000.00
to
$250,000.00.
That
evidence
is
not
contradicted
in
any
way.
The
evidence
also
indicates
that
Miss
Booth
had
no
knowledge
of
the
real
value
of
her
timber
licences,
that
she
had
inherited
them
from
her
father,
had
held
them
for
about
twenty-five
years,
and
in
1940
was
anxious
to
get
rid
of
them.
I
find,
therefore,
that
in
fixing
depletion
allowance
to
the
appellant
on
the
basis
of
the
cost
to
a
predecessor
in
title,
the
Minister
proceeded
on
a
wrong
principle
and
the
assessment
should
be
set
aside.
In
the
case
of
Minister
of
National
Revenue
v.
Wright’s
Canadian
Ropes
Limited
[1947]
A.C.
109,
the
Judicial
Committee
of
the
Privy
Council
(p.
125)
stated
that
the
power
conferred
on
the
Court
under
section
65(2)
of
the
Income
War
Tax
Act
to
refer
the
matter
back
to
the
Minister
for
further
consideration
was
limited
to
cases
of
the
kind
referred
to
in
subsection
(1)
of
section
65,
namely,
where
matters
not
referred
to
in
the
Notice
of
Appeal
or
Notice
of
Dissatisfaction
were
admitted
by
the
Court.
Inasmuch
as
this
was
not
the
case
here,
I
am
unable
to
refer
the
matter
back
to
the
Minister
for
further
consideration
as
I
had
as
first
thought
it
my
duty
to
do.
The
issues
have
been
fought
out
by
action
in
this
Court
and
inasmuch
as
I
have
found
that
the
cost
to
the
appellant
of
the
Limits
in
question
was
$150,000.00,
an
amount
which
did
not
exceed
the
actual
value
of
the
timber,
I
think
it
is
now
my
duty
to
allow
the
appeal
on
this
point,
and,
as
was
done
in
the
Wright’s
Canadian
Ropes
Case,
direct,
that,
under
the
inherent
jurisdiction
of
the
Court,
the
assessment
be
referred
back
to
the
Minister
for
an
adjustment
of
the
figures
consequential
on
the
allowance
of
the
appeal.
I
find,
therefore,
that
the
appellant
is
entitled
to
depletion
allowance
at
the
rate
of
$7.50
per
M.B.M.
for
all
timber
cut
on
the
Booth
Limits
by
it
in
its
fiscal
year
ending
August
31,
1942.
It
is
now
admitted
that
6,916,581
feet
B.M.
were
so
cut
by
the
appellant
after
its
incorporation
on
October
20,
1941,
and
before
March
1,
1942.
I
therefore
refer
the
matter
back
to
the
respondent
for
a
proper
adjustment
of
the
assessments,
both
under
the
Income
War
Tax
Act
and
Excess
Profits
Tax
Act
consequential
on
the
allowance
of
the
appeal
on
this
point.
In
making
a
new.
assessment
under
the
Excess
Profits
Tax
Act
the
appellant
is
entitled
also
to
the
additional
allowance
for
depletion
provided
for
in
the
memorandum
of
February
19,
1942,
in
the
manner
therein
set
out
and
on
the
basis
of
$7.50
per
M.B.M.
In
view
of
the
provisions
of
clause
2
of
such
recommendation
in
respect
to
additional
allowance
for
depletion,
the
proper
amount
of
such
additional
allowance
would
appear
to
be
$20,582.41,
as
stated
in
a
memorandum
signed
by
counsel
for
both
parties.
If,
however,
there
is
any
disagreement
on
this
point,
the
matter
may
be
spoken
to.
The
remaining
point
for
consideration
is
the
interest
paid
on
the
note
to
T.
EK.
McCool
under
the
circumstances
above
mentioned.
The
appellant
claims
that
this
should
be
allowed
as
an
operating
expense
on
the
ground
that
the
note
represents
borrowed
capital
used
in
the
earning
of
its
income
and
should
be
allowed
under
section
5(1)
(b)
of
the
Act,
which
is
as
follows:
il
"Income’
as
hereinbefore
defined
shall
for
the
purposes
of
this
Act
be
subject
to
the
following
exemptions
and
deduction
:
"‘(b)
Interest
on
borrowed
capital.—Such
reasonable
rate
of
interest
on
borrowed
capital
used
in
the
business
to
earn
the
income
as
the
Minister
in
his
discretion
may
allow
notwithstanding
the
rate
of
interest
payable
by
the
taxpayer,
but
to
the
extent
that
the
interest
payable
by
the
taxpayer
is
in
excess
of
the
amount
allowed
by
the
Minister
hereunder,
it
shall
not
be
allowed
as
a
deduction
and
the
rate
of
interest
allowed
shall
not
in
any
case
exceed
the
rate
stipulated
for
in
the
bond,
debenture,
mortgage,
note,
agreement
or
other
similar
document,
whether
with
or
without
security,
by
virtue
of
which
the
interest
is
payable.’’
For
the
respondent
it
is
argued
that
the
payment
of
interest
here
is
not
interest
on
borrowed
capital
used
in
the
business
of
the
appellant
to
earn
its
income.
In
the
letter
of
February
9,
1945,
referred
to
above,
it
was
stated
that
the
interest
was
disallowed
under
section
6(a)
of
the
Act,
but
Mr.
Williams
in
his
Examination
for
Discovery
stated
that
the
disallowance
was
made
under
section
5(1)
(b).
From
that
subsection
it
is
apparent
that
interest
may
be
allowed
on
borrowed
capital
secured
to
the
lender
by
a
note.
But
it
is
allowed
only
on
borrowed
capital.
In
my
opinion,
if
there
is
to
be
borrowed
capital,
the
taxpayer
would
have
to
be
in
the
position
of
a
borrower
and
some
other
party
would
have
to
be
a
lender.
In
this
case
the
taxpayer
was
never
a
borrower
from
T.
E.
MeCool
and
the
latter
did
not
at
any
time
lend
anything
to
the
appellant.
As
between
the
appellant
and
the
payee
of
the
note,
the
relationship
of
borrower
and
lender
did
not
exist
at
any
time.
The
relationship
between
them
at
the
time
of
the
sale
was
that
of
vendor
and
purchaser
and
following
the
giving
of
the
note
the
relationship
was
that
of
a
creditor
and
debtor.
The
note
was
given
in
respect
of
the
unpaid
part
of
the
purchase
money.
Reference
may
be
made
to
the
recent
case
of
Inland
Revenue
Commissioners
v.
Rowntree
c
Co.
Ltd.
[1948]
1
AILE.R.
482,
in
which
is
was
held:
""The
words
‘borrowed
money’
in
paragraph
2(1)
in
law
required
the
relationship
of
a
borrower
and
a
lender,
a
relationship
which
did
not
exist
in
this
case,
but,
even
if
the
words
were
to
be
given
some
wider
interpretation,
the
finding
of
the
Commissioners
that
in
ordinary
commercial
usage
the
relationship
between
the
parties
was
not
that
of
borrower
and
lender
ought
not
to
be
disturbed.”
In
that
case
Tucker,
L.J.,
in
the
Court
of
Appeal,
said
at
p.
486:
“I
find
it
difficult,
if
not
impossible,
to
appreciate
how
there
can
be
borrowed
money
unless
the
legal
relationship
of
lender
and
borrower
exists
between
A
and
B.
After
all,
the
words
‘borrow’
and
‘lend’
are
not
words
of
narrow
legal
meaning.
They
represent
a
transaction
well
known
to
business
people
which
has
taken
its
place
in
the
law
as
a
result
of
commercial
transactions
among
the
merchants
of
this
country,
and
when
the
law,
under
the
Bills
of
Exchange
Act,
or
elsewhere,
has
to
deal
with
matters
of
this
kind,
it
is
dealing
with
commercial
transactions.
’
’
In
the
case
of
Dupuis
Freres
Ltd.
v.
Minister
of
National
Revenue
[1927]
Ex.C.R.
207,
Audette,
J.,
in
dealing
with
the
same
section
as
I
am
now
considering,
stated
at
p.
209
:
‘“Therefore
these
shares
used
to
pay
for
the
purchase,
and
which
go
to
make
the
capital
authorized
by
the
company,
cannot
be
classed
as
borrowed
capital.”
The
interest
paid
by
the
appellant
to
T.
E.
McCool
on
his
note
was
not
in
my
view
interest
paid
on
borrowed
capital
used
in
the
business
to
earn
the
income
and
was
properly
disallowed.
The
appeal
on
this
point
will
be
dismissed.
The
appellant,
having
succeeded
on
the
main
point
raised
in
the
appeal,
is
entitled
to
its
costs
after
taxation.
Judgment
accordingly.
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