Gibson Bros. Industries Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Walsh J.—Vancouver, B.C.,
March 7 and 8; Ottawa, April 19, 1972.
Income tax—Capital cost allowances, recapture—Sale of
assets to subsidiary—Subsequent sale of subsidiary's shares
to third company—Subsidiary a simulacrum or cloak for
parent company.
Pursuant to an agreement with the R Co., appellant com
pany sold a timber tract with the buildings and logging
equipment connected therewith to a wholly-owned subsidi
ary for $116,212 (of which $58,000 was allocated to depre-
ciable assets), and the R Co. purchased from appellant all
the issued shares of the subsidiary for $272,000. In assess
ing appellant the Minister allocated $199,287 to the depre-
ciable assets with the resulting recapture of capital cost
allowances which he included in appellant's income under
section 20(1) of the Income Tax Act.
Held, affirming the assessment, the subsidiary was a mere
simulacrum, cloak, alias or alter ego of appellant or the
agent of either or both appellant and the R Co. in the above
transaction.
Sazio v. M.N.R. [1969] 1 Ex.C.R. 373, applied; Belle-
Isle v. M.N.R. [1966] C.T.C. 85, referred to.
INCOME tax appeal.
Heward Stikeman, Q.C., and D. G. H. Bow
man for appellant.
F. J. Dubrule, Q.C., for respondent.
WALSH J.—This is an appeal from income tax
assessments dated January 30, 1964 and March
21, 1967 for appellant's 1961 taxation year.
There are two distinct issues involved in the
appeal, the first arising out of the manner in
which appellant disposed of certain of its assets
in connection with its Jeune Landing lumbering
operations on Northern Vancouver Island, and
the second with the manner in which it appor
tioned the expenses arising out of the operation
of the vessel Norsal used by it partially for
business purposes and partially for personal use
by its shareholders. The facts relating to the
first of these issues are set out in paragraphs 1
to 10 of appellant's notice of appeal, which read
as follows:
1. The Appellant was incorporated under the laws of
British Columbia and carried on, at all material times, a
business of logging.
2. Since 1946, the Appellant and its predecessors
logged under agreements with Rayonier Canada Limited
certain areas near Jeune Landing on Northern Vancouver
Island in the Province of British Columbia.
3. In anticipation of the termination of the logging
agreements referred to in paragraph 2 hereof, and under
an agreement made as of the 15th day of December,
1959, the Appellant agreed with Rayonier Canada Limit
ed to cause a new company to be incorporated as a
wholly-owned subsidiary and to sell to the said new
company all land, timber, camp buildings, equipment,
machinery and other goods and property forming part of,
or used in connection with the carrying out of the said
logging agreements with Rayonier Canada Limited, the
latter agreeing that it or its nominee would purchase all of
the shares in the capital stock of the said new company
and any debt of the new company to the Appellant.
4. Pursuant to the agreement, to which reference is
made in paragraph 3 hereof, the Appellant caused a new
company called Quatsino Logging Ltd. to be incorporated
and on or about the 30th day of June, 1960, subscribed
for and paid for in cash at $1.00 per share ten fully paid
up shares in the capital stock of Quatsino Logging Ltd.
5. On or about the 30th day of June, 1960, the Appel
lant sold to Quatsino Logging Ltd. the property and
assets to which reference is made in paragraph 3 hereof
for the sum of $84,212.75, being $26,212.75 for the land
and $58,000.00 for the remaining assets, and caused
Consolidated Forest Products Limited to sell to Quatsino
Logging Ltd. a truck and trailer for the sum of
$32,000.00.
6. On or about the 1st day of August, 1960, Con
solidated Forest Products Limited assigned to the Appel
lant all of its right, title and interest in the sum of
$32,000.00 owed to it by Quatsino Logging Ltd.
7. On or about the 1st day of August, 1960, the Appel
lant sold at face value to Rayonier B.C. Limited, nominee
for Rayonier Canada Limited, the sum of $116,212.75
owed to it by Quatsino Logging Ltd. (being the aggregate
of the sums of $26,212.75, $58,000.00 and $32,000.00
referred to in paragraphs 5 and 6 hereof).
8. On or about the 1st day of August, 1960, the Appel
lant sold all of its shares in the capital stock of Quatsino
Logging Ltd. to Rayonier B.C. Limited, nominee for
Rayonier Canada Limited, for the sum of $141,579.99.
9. The sale price of the depreciable assets (the sum of
$58,000.00 referred to in paragraph 5 hereof) sold by the
Appellant to its wholly-owned subsidiary, Quatsino Log
ging Ltd., was approximately equal to their undepreciated
capital cost.
10. The Respondent considered that the sale of the
depreciable assets owned by the Appellant, to which
reference is made in paragraph 5 hereof, was not made
for the sum of $58,000.00 but for the sum of $199,-
787.25. In assessing the Appellant for the taxation year
1961, the Respondent included in the income of the
Appellant an amount of $109,557.54 as recapture of the
depreciation of property forming part of certain pre
scribed classes where a credit existed in the asset pool as
at the end of the Appellant's taxation year 1961, and also
reduced the undepreciated capital cost of other pre
scribed classes by an amount of $90,229.71.
Respondent admits paragraphs 1 to 6 inclu
sive and paragraph 10 but does not admit para
graphs 7, 8 and 9.
Respondent states that in assessing the appel
lant with respect to the sale of the assets he
assumed that:
(a) The Appellant or its agents agreed with Rayonier
Canada Limited or its agents' to sell to the latter all lands,
timber, camp buildings, equipment, machinery, and other
goods and property, including depreciable property, with
the exception of certain inventories, forming part of or
used in connection with the Jeune Landing Logging Camp
and operations of the Appellant or W. F. Gibson & Sons
Ltd., all as more particularly set out in the appraisal
thereof made in August 1959 by Universal Appraisal Co.
Ltd. (hereinafter referred to as "the Jeune Landing
assets"), for and in consideration of the sum of $272,-
000.00 which Rayonier Canada Limited undertook to
pay;
(b) It was agreed between the parties as evidenced by an
agreement between Gibson Bros. Industries Ltd., W. F.
Gibson & Sons Ltd., Albert Earson Gibson, James
Gordon Gibson, John Lambert Gibson and William Clarke
Gibson, and Rayonier Canada Limited dated the 15th day
of December 1959 and executed the 30th day of June,
1960, that the said sale of the Jeune Landing assets would
be completed in accordance with the terms of that agree
ment and more particularly but without restricting the
generality of the foregoing:
(i) by the Appellant causing a new company (ultimately
known as Quatsino Logging Limited and hereinafter
referred to as "Quatsino") to be incorporated as a
wholly-owned subsidiary of the Appellant;
(ii) by transferring the Jeune Landing assets to Quat-
sino for not less than $90,000.00;
(iii) by Rayonier then purchasing the shares of the
Appellant in Quatsino for the sum of $272,000.00;
(c) Pursuant to the said agreement:
(i) Quatsino was incorporated on the 30th day of June
1960 as a wholly-owned subsidiary of the Appellant;
(ii) On or about the 30th day of June 1960 the Jeune
Landing assets were transferred by the Appellant to
Quatsino for the sum of $116,430.00 being $90,000.00
for depreciable assets of certain prescribed classes of
the Income Tax Regulations, $217.25 for incorporation
costs, and $26,212.75 for land and timber. On transfer,
an account payable in the said sum of $116,430.00 was
entered on the books of account of Quatsino in favour
of the Appellant;
(iii) On the first of August 1960, the Appellant trans
ferred its shares in Quatsino to Rayonier Canada Limit
ed and received therefor the sum of $272,000.00 in
money or money's worth;
(iv) Thereafter the Jeune Landing assets were trans
ferred by Quatsino to Rayonier at the former's cost.
(d) Quatsino was, at all material times, a simulacrum,
cloak, alias or alter ego of the Appellant or in the alterna
tive, at all material times was the agent of either or both
of the Appellant or Rayonier Canada Limited.
Respondent states that of the purchase price of
$272,000 the sum of $199,787.25 was received
by the appellant for the sale of depreciable
property of certain classes, and after giving
details of the distribution of this among the
various classes and of the undepreciated capital
cost of appellant's assets in these classes prior
to the distribution, concludes that the proceeds
of distribution of the property of classes 6, 9
and 10, exceeded the undepreciated capital cost
to the appellant of the depreciable property of
those classes immediately before the disposition
in the amount of $109,557.54 which sum is
included in the appellant's income for the year
pursuant to section 20(1) of the Income Tax
Act.
Alternatively, respondent contends that if the
agreement between the parties was not for the
sale of assets but for the sale of shares, then
appellant was engaged in an adventure in the
nature of trade within the meaning of section
139(1)(e) of the Income Tax Act in that it pur
chased shares in Quatsino with the full and sole
intention of reselling the said shares to Rayoni-
er at a profit in accordance with the agreement
of December 15, 1959 and that in this event the
sum of $141,570 should be included in comput-
ing appellant's income for the year pursuant to
sections 3 and 4 of the Income Tax Act, this
being the portion of the sum of $272,000 which
can reasonably be attributed to the purchase of
the shares of Quatsino, the remainder of the
said sum being reasonably attributable to the
value of the assets transferred by the appellant
to Quatsino immediately beforehand.
Respondent also pleads as an alternative that
as a result of the said sales there was conferred
on the appellant a benefit in the amount of
$109,557.54 which sum should be included in
computing appellant's income for the year by
virtue of section 137(2) of the Act.
During the course of his evidence, the compa-
ny's auditor, Mr. Kelsey, said the exact total
paid was $258,000 and not $272,000 as
$14,000 of the original purchase price had been
attributed to a lot with timber on it but this was
fully logged by appellant during the first six
months of 1960 so the price was reduced
accordingly. Of the $258,000, $116,420.01 was
shown as the indebtedness of Quatsino to
appellant, which indebtedness was assigned by
appellant to Rayonier, and the balance of $141,-
579.99 represented payment for the shares. The
figure of $141,570 appears in the balance sheet
of appellant for the year 1961 under "Earned
Surplus" as "gain on sale of shares in Quatsino
Logging Limited". The difference between this
and the approximately $141,580 paid for the
shares represents the ten dollars subscription
price for same.
Mr. Gordon Gibson, one of the four Gibson
brothers who had been in the family logging
business together since 1916 and eventually
incorporated the appellant Gibson Brothers
Industries Limited, testified in a very frank and
lucid manner, and there is, in fact, little room
for dispute as to the facts. By virtue of an
agreement entered into on July 15, 1946 with
the British Columbia Pulp and Paper Company
Limited, he and his brothers at that time operat
ing under the name of W. F. Gibson and Sons,
undertook to log certain timber lands in the
Jeune Landing area of British Columbia, which
agreement was to expire on June 29, 1960.
British Columbia Pulp and Paper Company
Limited later became Alaska Pine and Cellulose
Limited and by an agreement dated January 1,
1958, this company in turn assigned to Alpine
Logging Limited all its rights in the 1946 agree
ment and supplemental agreement. Alpine Log
ging Limited is controlled by Rayonier Canada
Limited and although the initial discussions and
correspondence in 1959 dealing with what
would happen when the agreement expired on
June 29, 1960 were with representatives of
Alpine Logging Limited, it was apparent to all
parties that the decisions were being made by
Rayonier Canada Limited, and although both
companies are parties to the final agreement
made on January 1, 1960 and executed June 30,
1960 as are W. F. Gibson and Sons Limited and
the four Gibson brothers as well as the appel
lant Gibson Brothers Industries Limited, it is
not necessary for the purposes of these pro
ceedings to go into the intricate intercompany
relationships and the agreement can be consid
ered as having been one made between Gibson
Brothers Industries Limited and Rayonier
Canada Limited. While the appellant would
have liked to continue the logging agreement
after it expired, especially as it had all its equip
ment on the site, it soon became apparent that
Rayonier preferred to do this themselves and
that as they also had most of the equipment
they would require in the area they were not
anxious to purchase appellant's equipment
although at the same time they wished to treat
appellant fairly in view of their long and friend
ly association. It was agreed to have a joint
appraisal made of the value of the logging oper
ation by independent appraisers, Universal
Appraisal Company Limited, and their report
dated August 7, 1959 gave as the depreciated
value of all the buildings and equipment a figure
of $1,000,620.30. As appellant had no other
timber tracts on which they could use the equip
ment and there was very little market for the
equipment in any event since many independent
loggers were being forced out of business at the
time, and the cost of moving it would absorb
most of the value, appellant was not in a very
good bargaining position.
The negotiations culminated in a letter of
agreement dated December 15, 1959 whereby it
was agreed to extend the logging agreement for
six months to December 31, 1960 under terms
and conditions which do not concern us here,
the important clauses being clauses 2 and 3(a)
which read as follows:
2. The Gibson Company will, at its own expense, cause
a new company to be incorporated as a wholly owned
subsidiary of the Gibson Company (hereinafter called
"the new Company") and not less than thirty (30) days
before the closing date shall have caused to be sold and
transferred to the new Company, at an undepreciated
capital cost for income tax purposes on the books of the
new Company of not less than $90,000, all land, timber,
camp buildings, equipment, machinery and other goods
and property (exclusive of the inventories referred to in
paragraph 3(h) hereof) forming part of or used in connec
tion with the logging camp and operation at Jeune Land
ing of the Logger and/or of the Gibson Company (herein
collectively called "the said assets") all as are more
particularly set out in the appraisal thereof made in
August, 1959, by Universal Appraisal Co. Ltd. The new
Company shall have such name, form and characteristics
as shall have been first approved by Rayonier.
3. The parties hereto will enter into an agreement for
the sale and purchase of the shares of the new Company
and the said inventories substantially as follows:
(a) On some date after the termination of the 1946
Agreement to be agreed upon between the parties hereto
but not later than February 15th, 1961 (herein called "the
closing date"), Rayonier or its nominee will purchase all
the issued shares in the capital of the new Company for a
total consideration of $272,000, payable to the Gibson
company in cash on the closing date subject to reduction
as hereinafter provided.
The final agreement executed on June 30, 1960,
contains substantially similar clauses (this date
would seem to be incorrectly stated in the
agreement since there is in the file a copy of a
letter dated July 14, 1960 from Rayonier
Canada Limited to appellant's attorneys which
commences "We enclose the Logging Agree
ment and the Sale Agreement, both in quadru-
plicate, for execution by your clients".) This
letter reads, in part,
I. The assets, other than inventories, will be sold and
transferred to Quatsino as at June 30th, 1960 for a total
consideration of $116,212.75, comprising $90,000 for
boats, fixtures, logging equipment, etc. and $26,212.75
for land and timber. Quatsino will issue ten shares at
$1.00 each to Gibson Bros. Industries Ltd., or its
nominees, and the balance will be set up as an open
account owing to Gibson Bros. Industries Ltd. This sale
and transfer will be fully reflected in the minutes of
Quatsino .. .
5. Closing date will be August 1st, 1960.
6. On the closing date, you will deliver to us all docu
ments necessary to complete the sale, including the
executed Indemnity Agreement; the certificates, duly
endorsed, representing all issued shares in Quatsino; the
resignations of all the directors (being Gibson nominees);
minutes accepting the resignations and approving the
change in shareholders and directors; executed Assign
ment, to be drawn by you from Gibson Bros. Industries
Ltd. to Rayonier B.C. Limited covering the debt arising
on the sale of the assets to Quatsino; all documents
executed in connection with the sale of the assets to
Quatsino; and incorporation documents, company seal,
Minute book, share register, share certificate book and all
other pertinent contracts, books, records and material
relating to Quatsino and its assets. If you wish us to draw
the minutes referred to above, will you please give us
particulars of the original shareholders and directors.
7. On the closing date, the agreed purchase price will
be paid in full to Gibson Bros. Industries Ltd. Unless you
have some objection, we might prefer to complete our
purchase by two distinct transactions, namely—pay
$116,212.75 for the debt and pay the balance of the
purchase price for the shares. Prior to closing, we must of
course agree upon any reduction in the purchase price by
reason of any of the equipment, machinery, etc. being no
longer in existence or in unsatisfactory repair or
condition.
Our nominees to be directors of Quatsino and owners of
one share each in its capital stock are William E. Breiten-
back, Ross R. Douglas, Gordon L. Draeseke, Peter Sloan
and R. W. Blatchley. The other five shares will be acquired
in the name of Rayonier B.C. Limited.
With respect to the incorporation of Quat-
sino, there is a letter dated May 10, 1960 from
Rayonier Canada Limited to appellant's attor
neys which refers to the enclosure of "Memo-
randum and Articles of association, both in
duplicate, of Quatsino Logging Ltd." and goes
on to say: "We have reserved the name Quat-
sino Logging Ltd., for twenty-one days from
April 29th last." and a letter the next day dated
May 11, 1960 from appellant's attorneys to
appellant stating that they have now received
and enclose the proposed Memorandum and
Articles of Association of the company which is
to be named "Quatsino Logging Ltd.", that they
have looked through them and they appear to
be in order and that the company has the ability
to acquire the assets proposed to be transferred
to it. The letter goes on to say: "Unless you
find something objectionable, we propose to
advise Rayonier that the documents are in order
and to proceed with incorporation of the
company".
It is abundantly clear that although Quatsino
Logging Ltd. may have actually been incor
porated by appellant's attorneys, the ground
work was laid by Rayonier Canada Limited and
the form and characteristics of the company
were approved by it. The balance sheet as of
July 15, 1960 of Quatsino Logging Ltd. shows
an amount of $116,420.01 as owing to Gibson
Brothers Industries Limited and this includes
payment of the expenses of incorporation in the
amount of $217.26 so appellant was reimbursed
for this by Rayonier Canada Limited.
The extension of the logging agreement fol
lowing June 30 proved to be unnecessary as the
47 million square feet called for under it had
already been delivered by appellant prior to that
date. Mr. Gibson testified that all assets and
inventories were turned over as of June 30,
1960 and appellant's insurance coverage on
them cancelled as of that date. Although the
shares in Quatsino were not transferred until
August 3, he never at any time gave any
instructions to the shareholders or directors of
Quatsino, nor did Quatsino do any business of
any nature whatsoever while a wholly-owned
subsidiary.
It is necessary to explain the figure of
$58,000 referred to in paragraph 19 of appel
lant's reasons for appeal as the sale price of its
depreciable assets which differs from the figure
of $90,000 used in the agreement. One large
piece of equipment consisting of a lumber truck
and trailer valued at $32,000 was actually
owned by Consolidated Forest Products Limit
ed, a subsidiary of appellant and since this was
included in the assets sold to Quatsino Logging
Ltd., Consolidated Forest Products Limited, on
August 1, 1960, assigned its rights to payment
of this amount to appellant.
Respondent's original re-assessment in 1964
added the sum of $141,570 as profit on sale of
shares of Quatsino Logging Ltd. Subsequently,
by the 1967 reassessment, this sum was delet
ed but the appellant's capital cost allowance
schedules were adjusted so as to include recap
ture of capital cost allowance totalling $109,-
557.54 arising out of the alleged proceeds of
disposition of depreciable property used in the
Jeune Landing operation being $199,787.25.
Respondent in its reply to the notice of appeal,
however, does not altogether abandon the con
tention that the sum of $141,570 resulted from
an adventure in the nature of trade under sec
tion 139(1)(e) arising out of, the purchase of the
shares in Quatsino with the full and sole inten
tion of selling them to Rayonier at a profit in
accordance with the agreement of December
15, 1959, but retains this as an alternative
argument.
Respondent's principal argument is based on
paragraph 4(d) of its reply to notice of appeal in
which it is stated:
(d) Quatsino was, at all material times, a simulacrum,
cloak, alias or alter ego of the Appellant or in the alterna
tive, at all material times was the agent of either or both
of the Appellant or Rayonier Canada Limited.
On the facts of this case I agree with this
conclusion.
Appellant relies on the case of Sazio v.
M.N.R. [1969] 1 Ex.C.R. 373, which held at p.
383:
Ever since the Salomon case, [1897] A.C. 22, it has been
a well settled principle, which has been jealously main
tained, that a company is an entirely different entity from
its shareholders. Its assets are not their assets, and its debts
are not their debts. It is only upon evidence forbidding any
other conclusion can it be held that acts done in the name of
the company are not its acts or that profits shown in its
accounts do not belong to it. The fact that a company may
have been formed to serve the interests of a particular
person is not sufficient to establish the relationship of
principal and agent between that person and the company.
In order to hold otherwise it must be found that the compa
ny is a "mere sham, simulacrum or cloak".
It is significant to note the part of this quotation
stating:
It is only upon evidence forbidding any other conclusion
can it be held that acts done in the name of the company are
not its acts or that profits shown in its accounts do not
belong to it.
Certainly it is clear in the present case that
Quatsino Logging Ltd. was never formed with
the intention of carrying on any business but
that it merely acquired certain assets from
appellant for which it eventually paid with
funds furnished by Rayonier Canada Limited
including even the costs of its incorporation,
and that the second stage whereby Rayonier
Canada Limited then bought the shares of Quat-
sino from appellant for the balance of the pur
chase price as previously agreed was part and
parcel of one transaction whereby the assets in
question were acquired for the price of $272,-
000 (less $14,000 deducted for lumber removed
prior to the agreement as see supra).
Appellant's attempt to distinguish the case of
Claude Belle-Isle v. M.N.R. [1964] C.T.C. 40,
approved in the Supreme Court [1966] C.T.C.
85, in which appellant sold a hotel to a corpora
tion formed for the purpose receiving payment
partly in shares of the corporation and partly in
the form of a mortgage, the value placed on the
shares being the difference between the mort
gage and the selling price. On the same date he
sold the shares to a third party for a sum
substantially in excess of the value attributed to
them when he acquired them as part of the
consideration for the sale of the hotel. The
Minister at first sought to tax the whole profit
as income from an adventure in the nature of
trade as he did in the present case but later
agreed to limit the taxable portion to an amount
representing the recapture of capital cost allow
ance on the presumption that the second trans
action established the true value of the shares
and that this supported the recapture of the
capital cost allowance. This was upheld. While
in the present case the assets were not sold to
Quatsino for a consideration expressed partially
in cash and partially in shares of that company,
they were in effect sold to Rayonier for a
consideration to be paid in part in cash by
Quatsino with funds provided by Rayonier and
in part by Rayonier undertaking to buy shares
which appellant would subscribe in Quatsino, at
a pre-arranged price, greatly in excess of what
appellant had paid for them. The intervention of
a third company created apparently for this
express purpose is not in my view sufficient to
distinguish the situation here from that in the
Belle-Isle case. The situation might have been
different had appellant, knowing its logging
agreement was about to expire, and without any
prior discussions or agreement with Rayonier
decided to incorporate a company and transfer
to it the machinery and equipment of its Jeune
Landing operations for $90,000 plus $26,-
212.75 for land and timber. At a later date, if it
had then received an offer from Rayonier
Canada Limited to buy the shares of this com
pany which it had formed, it is likely that the
question of recapture of capital cost allowance
on the depreciable assets so disposed of would
never have arisen and appellant might have
been able to argue that the profit realized on the
sale of the shares of the company so formed
was capital gain. I am expressing no opinion on
this since this is not what happened, but I wish
to emphasize the distinction between such a
situation and the present one where the incor
poration of Quatsino Logging Ltd. was clearly
part and parcel of the agreement from its incep
tion and formed part of the method adopted for
the eventual disposition of these assets to
Rayonier Canada Limited.
Appellant relies strongly on section 20(4) of
the Income Tax Act which, in the case of prop
erty which has been transferred by one or more
transactions between persons not dealing at
arm's length, limits the taxpayer who has even
tually acquired it to capital cost allowance only
on the amount that was the capital cost to the
original owner. On this basis, although appellant
and Rayonier Canada Limited were dealing at
arm's length the sale by appellant to Quatsino
and the subsequent acquisition by Rayonier
Canada Limited of these assets from Quatsino
when its assets were distributed to its share
holders were both non-arm's length transactions
and hence Rayonier Canada Limited was limit
ed to claiming capital cost allowance on
$90,000. It so happened in the present case that
a fire took place in the cookhouse, one of the
major depreciable assets shortly after it was
acquired by Rayonier Canada Limited and
when the insurance claim was settled in 1961
the Minister, in crediting this to recaptured
capital cost allowance, limited Rayonier Canada
Limited to the figure of $90,000 by implication
accepting the purchases by Quatsino from
appellant and Rayonier from Quatsino at their
face value as non-arm's length transactions.
Appellant argues that if the Minister now
adopts the position that the sale by appellant to
Quatsino and acquisition of the depreciable
assets by Rayonier Canada Limited from Quat-
sino are to be looked on as a mere sham,
simulacrum or cloak to cover a direct sale of
these assets from appellant to Rayonier Canada
Limited then this company would be entitled to
take these assets on its books at the price paid
and claim capital cost on them accordingly as
section 20(4) would have no application, the
transaction being an arm's length one. Accord
ing to appellant's counsel, the Minister is now
adopting a contradictory position in applying
section 20(6)(g) in apportioning the price paid
between depreciable and non-depreciable prop
erty, reaching a conclusion that in so far as
present appellant is concerned, the sum of
$199,787.25 was received for the sale of depre-
ciable property. Section 20(6)(g) reads as
follows:
20. (6) For the purpose of this section and regulations
made under paragraph (a) of subsection (1) of section 11,
the following rules apply:
(g) where an amount can reasonably be regarded as being
in part the consideration for disposition of depreciable
property of a taxpayer of a prescribed class and as being
in part consideration for something else, the part of the
amount that can reasonably be regarded as being the
consideration for such disposition shall be deemed to be
the proceeds of disposition of depreciable property of
that class irrespective of the form or legal effect of the
contract or agreement; and the person to whom the
depreciable property was disposed of shall be deemed to
have acquired the property at a capital cost to him equal
to the same part of that amount;
He points out further that all parties entered
into this transaction with the benefit of good
legal and accounting advice and in full aware
ness of the tax situation and that the price paid
was affected by these considerations so that in
the event that Rayonier Canada Limited had
been able to claim capital cost allowance on the
full price paid for the depreciable property
rather than on the $90,000 attributed to this in
the agreement, and on the other hand had appel
lant believed that it would be called upon to pay
recaptured capital cost allowance on the portion
of the total price attributed by the Minister to
depreciable assets by the application of section
20(6)(g), then on the one hand the purchasers
might have been willing to pay more and on the
other hand appellant would have insisted on a
higher price because of this. These arguments
are hypothetical, however, and, while it is desir
able that the Minister should be consistent in
his application of the Income Tax Act to the
purchaser and to the vendor, he is under no
obligation to be so. The decision in the present
case concerns only the appellant and whether or
not Rayonier Canada Limited was properly re
assessed on December 17, 1964 with respect to
the treatment of the insurance proceeds in its
1962 taxation year is not an issue before me.
No notice of objection was taken to it. As
counsel for respondent points out, section 20(4)
is a section applying to the purchaser and not to
the vendor. By applying section 20(6)(g) to
appellant, in order to attribute the sum of $199,-
787.25 as the value of the depreciable property
sold, it would appear that the same figure
should also have been applied in the case of
Rayonier Canada Limited, but the fact that a
different position was taken in the 1964 re
assessment of its 1962 taxation year does not,
in my view, estop respondent from applying this
section in appellant's case. Neither can appel
lant successfully argue that since the purchaser
is limited to capital cost allowance on $90,000
under section 20(4) if the two transactions are
taken at their face value and hence, the Minister
in due course, benefits by the limitation of the
capital cost allowance to the lower amounts
which the purchaser can claim on this figure, it
is not necessary for him to attempt to recover
recaptured cost allowance from the vendor, and
that this is the purpose of section 20(4), in view
of the Minister's right to treat the interposition
of Quatsino Logging Ltd. as a sham and consid
er the sale of the assets and the sale of the
shares as one single arm's length transaction
and apply section 20(6)(g) thereto.
Having reached a conclusion that appellant's
appeal must fail on this ground it is unnecessary
for me to deal with the argument as to whether,
in any event, a benefit was conferred on appel
lant in the amount of $109,557.54 within the
meaning of section 137(2) of the Act or the
alternative argument that the sale of the shares
for a profit of $141,570 was an adventure in the
nature of trade within the meaning of section
139(1)(e) of the Act.
I now turn to the second issue raised in the
appeal. Appellant states in its notice of appeal
that it owned the vessel Norsal which was used
by it in connection with its logging business but
there was no need for this when this business
ceased and it then endeavoured, unsuccessfully,
to dispose of it by sale. Being unable to arrange
a sale it entered into the business of chartering
the vessel to earn income and minimize the loss
on the investment. The income from such chart
ering for the years 1959 to 1963 inclusive was
as follows:
1959 nil
1960 $650
1961 $3,650
1962 $7,550
1963 $17,192
In addition to this the vessel was from time to
time used personally by the shareholders of
appellant's parent company and appellant, in
filing its 1961 and 1962 tax returns calculated
the net loss from the operation of the vessel,
and, to determine the amount of non-allowable
expenses arising by reason of personal use,
apportioned such net losses in the ratio that
such personal use bore to the total use of the
vessel in each such year. Upon receipt of
respondent's objection to this method, appellant
then proposed that the calculation be made by
first deducting the fixed expenses of the vessel
and then applying to the variable expenses only,
such as crew wages, fuel and galley the ratio
that personal use bore to the total use of the
vessel. By this method of computation the non-
allowable expenses would have been $4,327 in
the taxation year 1961 and $4,318 in the taxa
tion year 1962. Respondent, in his reply to the
notice of appeal, admits this.
Appellant states that in assessing for its 1961
and 1962 taxation years, respondent has com
puted the non-allowable expenses applicable to
the personal use by taking the portion of total
expenses (including capital cost allowance)
which such use bore to the total use of the
vessel and thus increased the income of the
appellant for the taxation year 1961 by an
amount of $7,027.75 and revised the business
loss sustained in the taxation year 1962 by
reducing the said loss by an amount of $10,-
868.25, in each case the figures representing the
difference between the computation proposed
by the appellant as set forth above and that
employed by the respondent. Respondent does
not admit this and in reply states as follows:
6. With respect to the vessel Norsal, he assumed that:
(a) The Appellant in the years 1961 and 1962 incurred
expenses of $22,507.58 and $28,853.92 respectively
and sustained a net loss in the amount of $18,917.58
and $21,303.92 of which sums respectively the sums of
$11,354.75 and $15,186.25 were not related to the
gaining or producing of income by the Appellant;
(b) In computing the amount of the said loss not
incurred in the gaining or producing of income, the
Appellant considered that only the portion of the net
loss on operation of the boat that personal use had to
total use was to be deducted from the said loss and that
the excess of the net loss over such sum was a proper
deduction from income;
(c) The Respondent considered that only the proportion
of the total expenses of operation of the boat that
personal use had to total use was to be deducted from
the said loss and that the excess of the net loss over
such sum was a proper deduction from income.
7. The Appellant in its Notice of Appeal has now
alleged that the portion of the loss attributable to the
gaining or producing of income should be computed by
first deducting the fixed expenses of the vessel and then
applying to the variable expenses only (e.g. crew wages,
fuel & galley) the ratio that personal use bore to total use
of the vessel. By this method of computation, the non-
allowable expenses would be $4,327.00 in the taxation
year 1961 and $4,318.00 in the taxation year 1962.
8. The Respondent submits that the method of compu
tation employed by the Respondent in assessing the
Appellant as detailed in subparagraph (c) of paragraph 6
herein is the proper method of calculation.
Neither party was able to refer to any juris
prudence on this question so it is necessary to
examine it on basic principles. There is no dis
pute about the portion of the total use which
was attributed to personal use by the officers of
the company. It appears to me that the proper
approach is to divide all expenses, including
capital cost allowance, on this basis, attributing
to appellant company its portion of such total
expenses and, after deducting the total income
received by the company from the chartering of
the boat from its share of the total expenses,
the balance would represent the allowable loss
to be claimed by appellant. The only case which
I have been able to find which recognizes a
distinction between capital cost allowance and
actual operating expenses is that of Cumming v.
M.N.R. [1967] C.T.C. 462 in which the operat
ing expenses of an automobile were imputed
25% to business use on the basis of mileage but
the capital cost allowance was imputed 50% on
the basis of time involved. Since, in the present
case, there is no dispute as to the apportion
ment and no figures before the Court as to the
relative distance covered by the vessel while in
personal use as distinguished from business use
or the proportion of the vessel's time which was
devoted to personal use as distinguished from
business use, this case is not applicable. In the
case of automobile expenses, these are normal
ly dealt with in accordance with Information
Bulletin No. 28 of the Taxation Division of
January 6, 1965 (see Canada Tax Service, Vol.
A, p. 12-278 BB). This takes capital cost allow
ance into consideration in the apportionment of
the total expenses in the use of a car between
personal and business use. I see no reason not
to apply this principle here.
If appellant's officers were chartering a boat
from someone with whom they were dealing at
arm's length, the charges would certainly be
sufficiently high as to include an element of
capital cost allowance. It is only by apportion
ing the gross expenses, including capital cost
allowance, that the true expense picture
appears, and by then applying the revenue from
chartering the boat, which revenue accrues
entirely to the company as owners, against the
company's portion of these expenses, it can be
determined whether the company has suffered a
gain or a loss which will be taxed accordingly.
This is, in effect, what the Minister has done in
his re-assessment.
Since I therefore find that respondent's
method of assessing the loss on the operation of
the vessel Norsal is correct, the appeal must
also fail on this issue.
Appellant's appeal is therefore dismissed with
costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.