Maple Leaf Mills Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Thurlow J., MacKay and
Sweet D.JJ.—Toronto, April 18, 19 and May 17,
1973.
Income tax—Business income, ascertainment of—Year of
account—Losses from operation of ship guaranteed by ven-
dor—Payment in lump sum for several years—In what year
chargeable.
In connection with the sale of a ship to appellant in 1961
the vendor transferred some $1,900,000 in investments to B
Ltd., a subsidiary, which undertook that appellant's reve
nues from operating th e ship would meet certain levels. The
arrangement with B Ltd. was changed in 1963 and the
following arrangement substituted. Appellant purchased all
of the shares in B Ltd., to be paid for on the sale of the ship,
the price to be the fair market value of B Ltd.'s investments
at that time less operating deficiencies and any dividends
paid by B Ltd. to appellant. Appellant sold the ship during
its 1966 taxation year. During its ownership of the ship it
had incurred operating losses from ship operations of some
$1,201,079 and had received $216,435 in dividends from B
Ltd.
Held, appellant was chargeable to income tax in 1966 on
the difference between the net operating losses and the
dividends received, viz. $984,644. This sum was of an
income nature and was not to be taken into account before
sale of the ship, for while each year's deficiency was ascer
tainable at the end of each year and constituted a debt due
and owing, it was subject to revision until the ship was sold,
and thus did not acquire the character of a receivable until
then.
Held also, appellant should not be allowed to set up as a
new ground of appeal during argument that the final amount
was not ascertainable until 1967 when the auditor's certifi
cate was given. .
APPEAL.
COUNSEL:
Claude Thomson and D. J. Deacon for
appellant.
G. W. Ainslie, Q.C., and W. J. A. Hobson
for respondent.
SOLICITORS:
Campbell, Godfrey and Lewtas, Toronto,
for appellant.
Deputy Attorney General of Canada for
respondent.
THURLOW J.—This appeal arises from an
assessment of tax for the 1966 taxation year of
the appellant in respect of an amount of
$1,201,079 referred to in the notice of re
assessment as "deficient net revenue of vessel
FEDERAL MONARCH recovered from Bessbulk
Limited."
The facts and transactions which gave rise to
this amount are complicated and I propose to
state only so much of them as appears to me to
be necessary to point up and determine the
issues raised. The appellant, which had for
many years been engaged in the milling and
kindred businesses, on or about July 31, 1961,
bought a large' oil tanker which was then under a
long term charter to Imperial Oil Limited. From
that time onward the appellant, in addition to its
other activities, operated the vessel for its own
account, as had been contemplated by the
arrangements with the vendors. On November
19, 1965, the vessel was sold and the operation
of it by the appellant came to an end.
As part of the arrangements for the purchase
of the vessel the appellant entered into a con
tract with Bessbulk Limited, which had been
incorporated by the vendors in pursuance of the
arrangements, whereby Bessbulk underwrote
the amount by which the actual net revenues
from the operation of the vessel during the
charter period or until the vessel might be sold,
might fail to meet certain agreed projected
levels. The vendors had transferred to Bessbulk
a sum of some $1,900,000 for investment and
the agreement provided that in each year, to the
extent of the net revenues of Bessbulk from
such investments, any deficiency in the net
revenue from the operation of the vessel should
be paid to the appellant by Bessbulk and the
remainder of such deficiency should be a debt
due and owing to the appellant by Bessbulk to
be discharged by setting off revenues of later
years in excess of the agreed levels or failing
that by payment at the conclusion of the charter
or on the sale of the vessel. The agreement also
contained provisions for return to Bessbulk of
amounts it had paid under the agreement in the
event of the revenues of the vessel operation
exceeding the projected levels and ultimately
from the proceeds of sale of the vessel if such
proceeds exceeded her cost to the appellant and
any unpaid deficiencies of net revenue. Bess-
bulk was also entitled to 35% of any profits of
the operation over the projected levels.
In the appellant's 1962 taxation year, which
ended in July 31, 1962, the net revenues of the
vessel operation fell below the agreed level by
$206,932 of which the appellant received
$36,058 from Bessbulk and the balance became
owing by Bessbulk under the agreed terms. In
each subsequent year of the vessel operation, as
well, the net revenues therefrom fell well below
the agreed levels until by the time the vessel
was sold in 1965 the total of such deficiencies
amounted to $1,201,079, that is to say, an
amount equal to that referred to in the assess
ment under appeal.
I pause to observe at this point that had the
arrangements referred to continued throughout
the period in question I should have had no
difficulty in concluding on the facts that this
amount arose from the operation of the vessel
and whenever realized would have been income
of the appellant's business.
The arrangements, however, did not continue.
By further agreements dated June 20, 1963, but
made effective from August 1, 1962, the
arrangements were, to use the expression of the
appellant's memorandum, "restructured". In
this transaction the appellant purchased from
the vendors all the shares of Bessbulk and the
underwriting by Bessbulk of the net revenue
deficiencies of the vessel operation was can
celled and terminated but without affecting
rights or liabilities accrued thereunder. While
the shares of Bessbulk were transferred to the
appellant immediately under these arrangements
the price therefor was not to be payable until
the termination of the charter or until the vessel
was sold, whichever might occur first, and what
was then to be paid was the amount by which
the fair market value of the investments of
Bessbulk at that time exceeded the net revenue
deficiencies of the operation of the vessel less
any amounts already paid by Bessbulk to the
appellant in respect of such deficiencies and any
income distributed by Bessbulk to the appellant.
In its 1963, 1964 and 1965 taxation years the
appellant received from Bessbulk dividend dis
tributions of $55,826, $60,834 and $63,717,
respectively, which together with the $36,058
received in 1962 totalled $216,435. In conse
quence, when the ship had been sold and the
calculations had been made, the appellant was
able to discharge its obligation to pay for the
shares of Bessbulk by paying an amount repre
senting the fair market value of that company's
investments less $984,644 (that is to say the
$1,201,079 total net operational deficiency
mentioned earlier less the $216,435 which the
appellant had received from Bessbulk).
In assessing the appellant for the taxation
year 1966 the Minister added the $1,201,079 to
the appellant's income and the assessment so
made was confirmed by the judgment of the
Trial Division. On the appeal to this Court,
however, the Minister, in his memorandum of
argument, acknowledged "that on a proper
interpretation of the contract of purchase, the
amount of the benefit enjoyed by the appellant
during its 1966 taxation year is not the sum of
$1,201,079, as assessed, but rather the sum of
$984,644" and took the position that the appeal
should be allowed and the judgment appealed
from varied so as to refer the assessment back
to him for re-assessment so as to include in the
appellant's income the sum of $984,644 instead
of the sum of $1,201,079 but that in other
respects the appeal should be dismissed.
The appellant raised two principal points in
objection to the assessment of the $984,644
amount, first, that the amount was not income
but a capital accretion, and second, that even if
the amount was income it was not assessable in
the 1966 taxation year.
On the first point the appellant's submission,
as I have understood it, was that on the face of
it the 1963 agreement was one for the purchase
by the appellant of shares and that even though
its provisions were intended to replace the 1961
income indemnity agreement its substance was
to provide a formula for the determination of
the purchase price of the shares; that while the
1961 agreement contemplated a supplement of
the earnings of a vessel being paid the 1963
agreement made no such provision but provided
merely for a reduction of the purchase price of
the shares by reference to the results of the
operation of the vessel.
It appears to me that whether that submission
accurately characterizes the 1963 agreement or
not,—and I am not inclined to regard it as an
inaccurate characterization—what must be
determined is not so much the substance or
character of the agreement itself, but the nature
of what has accrued to the appellant under it.
The agreement was said to be a restructuring
of the 1961 arrangements and that it was intend
ed to produce in another way the same econom
ic results. It may, therefore, be taken, that its
provisions were in substitution for the earlier
1961 provisions, and constituted a method of
filling the hole in revenues, or of supplementing
revenues, which was different from that pro
vided by the 1961 arrangement but which
served the same purpose, viz., to satisfy the
appellant's initial stipulation for an assurance
that the revenues from the operation of the
vessel would not be less than projected. That
suggests in my opinion that what accrued to the
appellant under this agreement was also of a
revenue nature.
In addition to this the facts appear to me to
show that it was by reason of the subsequent
operation of the vessel that the appellant earned
the right to have the amount in question taken
into account in calculating the price it was to
pay for the shares. This right thus accrued from
the operation of the vessel and forms part of
what the appellant gained by the operation.
I am accordingly of the opinion that the right
of the appellant to have the $984,644 in ques
tion taken into account was of an income nature
and was assessable as income.
On the other point the submission was that in
any event the amount was not properly included
in the appellant's 1966 income since it accrued
year by year and the appellant's entitlement
with respect to the net revenue deficiency of
each year should have been assessed in the year
in which such deficiency arose. With respect to
the taxation years 1963, 1964 and 1965, to
which the 1963 agreement applied, I am at a
loss to understand what could have been regard
ed at the end of any year as having accrued to
the appellant as a right since the charter still had
many years to run during which the deficiency
might be obliterated and since the ship had not
yet been sold. For this reason, I think the appel
lant's submission is even weaker with respect to
these years than it is with respect to the 1962
taxation year, to which the 1961 agreement
applied. In that case as well, however, though
the amount of the deficiency for the year was
capable of ascertainment at the end of the year
and constituted a debt due and owing within the
meaning of the agreement, it too remained sub
ject, until the end of the charter period or until
the vessel should be sold, to revision or oblitera
tion as a result of the operation of the vessel in
subsequent years, or as a result of the vessel
being sold for enough to bring into play the
provisions of the agreement for reimbursement
of Bessbulk. As I see it, the earliest time when
any of these amounts had the character and
qualities of a receivable was when the ship had
been sold and their net amount, which because
there were no annual revenue increases was
also their gross amount, had been determined in
accordance with the provisions of the arrange
ments. I do not think, therefore, that there was
anything to be taken into account as income by
the appellant in respect of such amounts in any
taxation year earlier than 1966.
The foregoing conclusions are sufficient to
dispose of the appeal on the points raised in the
appellant's notice of appeal to the Trial Division
and in the memorandum of argument and the
argument presented by counsel for the appellant
on the hearing of the appeal. In the course of his
reply, however, counsel sought to raise a further
point which had first appeared during the pre
sentation of argument by counsel for the Minis
ter. The point was that if the amount in question
was assessable as income and was not assess-
able in the years earlier than 1966 it was never
theless not assessable in the appellant's 1966
taxation year since the certificate of the audi
tors certifying pursuant to the agreement the
amount of the net revenue deficiencies and the
price to be paid for the shares, (which appears
at page 379 of the appeal case) purports to be
dated December 1, 1966, which fell in the
appellant's 1967 taxation year, and that accord
ingly the amount in question in the appeal was
not determined in the appellant's 1966 taxation
year and was not income of that year.
This was a new issue not raised at any stage
in the Trial Division nor up to that time on the
appeal and to my mind it amounted to putting
forward an entirely new alternative case which
had not been pleaded and the possible existence
of which had not theretofore been apparent to
counsel on either side.
Paragraphs 8 and 16 of the appellant's notice
of appeal to the Trial Division filed on October
6, 1969, include the following assertions:
8. On November 19, 1965 the vessel was sold by Maple
Leaf to Oswego Unity Corporation ("Oswego"). The pur
chase price payable under the purchase agreement for the
shares and other securities of Bessbulk was paid by Maple
Leaf in its 1966 fiscal year.
16. The transaction constituted by the purchase agree
ment involved the sale by Federal Bulk and Bessemer and
purchase by Maple Leaf of the outstanding shares and other
securities of Bessbulk for a purchase price to be determined
at a later date in light of the circumstances referred to in the
purchase agreement and there was to be only one payment
between them payable when the purchase price was so
determined. The purchase price having been determined in
Maple Leaf's 1966 fiscal year, it was paid in that year.
By an amendment filed on September 28, 1970,
the following paragraph 17A was added:
17A. In the alternative if the Minister was entitled to
assess as taxable income any amount in respect of the
operation of the vessel, the only taxable income assessable
is the amount earned in the fiscal year 1966. The Minister
has included in his re-assessment amounts which on his
theory would have to have been earned in earlier years.
In the Minister's reply paragraph 8 was admit
ted and no reference was made to paragraphs 16
or 17A both of which had appeared in part B of
the notice of appeal entitled "Statutory Provi
sions Upon Which The Appellant Relies And
Reasons Which It Intends To Submit."
The matter is complicated further to some
extent by the fact that the certificate referred to
was put in evidence by counsel for the Minister.
Even after that had been done, however, the
trial proceeded to its conclusion and the appeal
was presented without the point having been
raised. In these circumstances I do not think it
is open to the appellant as of right or that the
appellant should be permitted at this stage to
put forward what amounts to a new case based
on the document without an appropriate amend
ment to his pleadings and an opportunity to the
respondent to answer such amendment. (See
Rules 420(2) and 1104.)
At the conclusion of the hearing the Court
reserved judgment and indicated to counsel that
judgment would not be pronounced until the
appellant had had an opportunity to consider
whether to apply for leave to make such an
amendment and counsel has since indicated by a
letter to the Registry that the appellant does not
propose to ask leave to amend.
In my view therefore the matter must be
treated as not before the Court and not open to
the appellant.
I would allow the appeal and refer the assess
ment back to the Minister for re-assessment on
the basis that the sum of $984,644 should be
included in the appellant's income for the year
1966 instead of the sum of $1,201,079 referred
to in the assessment under appeal. In other
respects I would dismiss the appeal.
As the appellant has had a substantial success
I am of the opinion that it is entitled to its costs
in the Trial Division and its costs of this appeal
up to the time of the delivery of the respond
ent's memorandum of argument, together with
costs incidental to the entry of judgment herein.
The respondent is entitled to his costs on the
hearing of the appeal.
* *
MACKAY D.J.—I concur in the reasons for
judgment of my brother Thurlow.
* * *
SWEET D.J.—In his reasons Mr. Justice Thur-
low has set out all the relevant facts necessary
for the understanding of and the disposition of
the matters at issue. Included in those reasons is
a reference to a contract made "as of the 31st
day of July, 1961" between Bessbulk Limited
and the appellant. By it Bessbulk Limited
underwrote an amount by which the appellant's
actual net revenues from the operation of a
vessel purchased by the appellant in 1961 might
fail to meet certain agreed projected levels
during the time mentioned therein. Reference
was also made in the reasons of Thurlow J. to
another agreement dated "as of the 20th day of
June, 1963" providing for the appellant pur
chasing all the outstanding shares and income
debentures of Bessbulk Limited. As a part of
the 1963 transaction the 1961 indemnity agree
ment was "cancelled and terminated, without
affecting any rights or liabilities" theretofore
accrued thereunder. The terms of the agree
ments, which have significance in connection
with the issues in this case, are mentioned in
those reasons and need no repetition here. As it
turned out the appellant was able to discharge
its obligations to pay for those shares and
debentures of Bessbulk Limited by paying an
amount representing the fair market value of
that company's investments less $984,644. As a
result the appellant was able to purchase the
Bessbulk shares and debentures at $984,644
less than their fair market value.
It is that amount, $984,644, which the
respondent submits is now assessable on the
ground that it was a benefit realized in the
course of the carrying on or carrying out of the
appellant's business.
The appellant in its memorandum of fact and
law submits inter alia:
The learned trial Judge erred in failing to hold that on its
face the 1963 Purchase Agreement provided a formula for
the purchase of shares ... .
and
As the appellant was not in the business of dealing in
securities, the purchase of the securities was a capital trans
action ... .
In that memorandum, referring to the 1963
purchase agreement, it was also stated:
Undoubtedly the parties intended that that document should
serve the same purpose as was served by the 1961 Indemni
ty Agreement.
Mr. J. L. Lewtas, a director of the appellant
and a member of the law firm who were general
solicitors of the appellant, giving evidence and
answering a question relative to the agreement
of June 20th, 1963 and the earlier agreement
said:
I think you will find that it is not word for word but just so
that I may answer that with all candor, my instructions were
to achieve the identical economic result while at the same
time solving this U.S. tax problem.
The 1963 purchase agreement does deal with
the purchase of capital assets, namely securities
of Bessbulk Limited. It does set out a formula
or method for determining the ostensible price
of those securities.
However the amount by which the appellant
might purchase those securities at less than their
fair market value and the right of the appellant
to do so, as it did, was related to and arose out
of the carrying on of a business in which the
appellant was engaged,—the operation of the
ship.
The intention motivating and the purpose of
both the indemnity agreement of 1961 and the
purchase agreement of 1963 was to assure the
appellant of a projected level of actual net reve
nue from the operation of the vessel. Pursuant
to the 1961 agreement if that level was not
reached the deficiency was to be made up by
payment by Bessbulk Limited. Pursuant to the
1963 purchase agreement the deficiency was to
be made up by the adjustment downward of the
purchase price so that the appellant would pur
chase the Bessbulk Limited securities at an
amount less than their fair market value. The
amount less than the fair market value would
equal that deficiency.
Whether the assured projected net revenues
came from the use by others of the vessel, or
from the underwriting by Bessbulk Limited
under the indemnity agreement of 1961 or from
the right to purchase the Bessbulk Limited
securities under the purchase agreement of
1963 or partly from one or partly from the
others, made no essential difference. In all cases
the revenues would flow from the carrying on
of and would be income from that portion of the
appellant's business which involved the opera
tion of the vessel. The characteristics would be
the same in each case. Only the sources would
be different. Regardless of those sources all
would actually be revenue in nature. All would
be profit from the business. In my opinion, all
being income would be assessable as income.
An alternative position taken by the appellant
was that in any event as stated in the
memorandum:
The learned trial judge erred in concluding that any receipt
or benefit obtained by the taxpayer from the 1961 Indemni
ty Agreement or 1963 Purchase Agreement was determined,
payable and taxable in the 1966 taxation year.
In connection with that alternative position I
concur in the view of Thurlow J. to the effect
that there was nothing to be taken into account
as income by the appellant in respect of such
amounts in any taxation year earlier than 1966
and I concur in his reasons for that conclusion.
I also concur in his views regarding the fur
ther point counsel sought to raise, namely that if
the amount in question was assessable as
income and was not assessable in the years
earlier than 1966 it was nevertheless not assess-
able in the appellant's 1966 taxation year since
the certificate of the auditors as to the amount
of the net revenue deficiencies and the price to
be paid for the shares purports to be dated
December 1, 1966 which fell in the appellant's
1967 taxation year. In his view, for the reasons
stated by him, that matter must be treated as not
before the Court and not open to the appellant. I
agree.
I also would allow the appeal and refer the
assessment back to the Minister for re-assess
ment on the basis that $984,644 should be
included in the appellant's income for the year
1966 instead of the sum of $1,201,079 referred
to in the assessment under appeal. In other
respects I would also dismiss the appeal.
I would dispose of the matter of costs in the
same manner as does Thurlow J.
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.