A-19-72
Oryx Realty Corporation (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Thurlow and
Pratte JJ.—Montreal, June 4, 5, 1974.
Income tax—Profit on resale of land—Change in position
under Income Tax Act, s. 139(5) and (5a)—Application of s.
12(3).
The taxpayer purchased land for $174,000 (payable in
instalments) from a corporation with which it was deemed to
be "not dealing at arm's length" within section 139(5) and
(5a) of the Income Tax Act. In 1960, the taxpayer ceased to
be a corporation "deemed" not to deal at arm's length with
the corporation from which it bought the land. Later on the
same date, the taxpayer sold the land for $373,000 and
computed its income from this transaction for the taxation
year 1960 at the sum of $373,000 less $174,000. The
Minister took the position that the taxpayer's profit, com
puted in accordance with section 12(3) of the Act, was
$373,000 minus $18,500, the amount that, by the end of
1961, the appellant had paid on account of the price for
which it had bought the land. The Minister's assessment was
affirmed by the Tax Appeal Board (now the Tax Review
Board) and by the Trial Division. The taxpayer appealed.
Held, the appeal should be allowed and the assessment of
the appellant under Part I of the Income Tax Act for the
1960 taxation year should be referred back to the respond
ent Minister for re-assessment, on the basis that section
12(3) of the Act had no application.
Per Jackett C.J. (Thurlow J. concurring): The provision in
section 12(3) for assessment of the taxpayer's "income for a
taxation year" in respect to "an otherwise deductible outlay
or expense" should be interpreted, in the case of business
income, as referring to the computation of "income" or
"profit" for a year from the gross profit for the year and
was therefore inapplicable to the circumstances of this case.
Per curiam: The other factor in the subsection, that the
price payable by the appellant for the land was "payable to a
person with whom [it] was not dealing at arm's length" was
also inapplicable. It was only from the moment of the sale
that the cost of the land could be described as "an otherwise
deductible outlay or expense", but from that time on, it
could not be described as "payable by the taxpayer to a
person with whom [it] was not dealing at arm's length"
because, before the moment of the sale, the taxpayer,
having ceased to be related to the payee, was no longer
"deemed" not to deal at arm's length with that company.
M.N.R. v. Irwin [1964] S.C.R. 662, applied; M.N.R. v.
Anaconda American Brass Ltd. [1956] A.C. 85,
considered.
INCOME tax appeal.
COUNSEL:
P. Vineberg, Q.C., for appellant.
A. Garon, Q.C., and J. Halpin for
respondent.
SOLICITORS:
Phillips & Vineberg, Montreal, for
appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered orally in English by
JACKETT C.J.: This is an appeal from a judg
ment of the Trial Division [[1972] F.C. 33]
dismissing, with costs, an appeal from a deci
sion of the Tax Appeal Board dismissing an
appeal from the appellant's assessment under
Part I of the Income Tax Act for the 1960
taxation year.
The sole question involved in the appeal is
whether the respondent erred in applying sec
tion 12(3) of the Income Tax Act (as applicable
to the 1960 taxation year) in computing the
appellant's profit from a sale of land made in
1960, which profit was, admittedly, properly
included in computing the appellant's income
for the 1960 taxation year.
The appellant purchased the land in question
from a corporation with which it was deemed to
be "not dealing at arm's length"' for $174,000,
of which it paid $1,000 cash and agreed to pay
the balance, without interest, in nine annual
instalments of $17,500 and one further instal
ment of $15,500.
On July 21, 1960, as the result of a sale of
some of the appellant's shares, the appellant
ceased to be a corporation "deemed" not to deal
at arm's length with the corporation from whom
it bought the land.
Later on July 21, 1960, the appellant sold the
land for $373,000.
The question is whether the profit from that
sale that is to be included in the computation of
the appellant's income for the 1960 taxation
year for the purposes of Part I of the Income
Tax Act is, as the appellant contends, the sale
price of $373,000 less $174,000 (the price at
which the appellant bought the land), being
$199,000 which is the profit from the sale deter
mined in accordance with ordinary business or
commercial principles, or whether that profit is,
as the respondent contends, the sale price of
$373,000 less $18,500 (the amount that, by the
end of 1961, the appellant had paid on account
of the price for which it had bought the land),
being $353,500, which is the profit as computed
in accordance with the respondent's view as to
the effect, in the circumstances, of section 12(3)
of the Income Tax Act as applicable to the 1960
taxation year.
Section 12(3) reads as follows:
12. (3) In computing a taxpayer's income for a taxation
year, no deduction shall be made in respect of an otherwise
deductible outlay or expense payable by the taxpayer to a
person with whom he was not dealing at arm's length if the
amount thereof has not been paid before the day one year
after the end of the taxation year; but, if an amount that was
' See section 139(5) and (Sa), which read in part:
(5) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each
other at arm's length; and
(Sa) For the purpose of subsection (5), (Sc) and this
subsection, "related persons", or persons related to each
other, are
•
(c) any two corporations
(i) if they are controlled by the same person or group of
persons,
not deductible in computing the income of one taxation year
by virtue of this subsection was subsequently paid, it may
be deducted in computing the taxpayer's income for the
taxation year in which it was paid.
The appellant contends that section 12(3)
does not apply in the circumstances for two
different reasons, viz:
(a) it says that the price for which it bought
the land was not "an otherwise deductible
outlay or expense" within the meaning of
those words in section 12(3), and
(b) it says that the price for which it bought
the land was not, in any event, "payable .. .
to a person with whom [it] was not dealing at
arm's length" within the meaning of those
words in section 12(3).
The question whether the price for which a
trader bought property for re-sale in his busi
ness is a "deductible outlay or expense" for the
purposes of section 12(3) is one that, in my
view, is of considerable difficulty.
For the purposes of the Income Tax Act,
"income" for a taxation year from a business is
the "profit" therefrom for the year. Profit must
be determined in accordance with ordinary busi
ness and commercial principles (subject to any
special direction in the tax statute). In the case
of a trader, leaving aside special revenue items
and disbursements, the profit from the business
is the gross profit from the trading operations
less the normal operating expenses, such as
salaries, rents, repairs, advertising, etc., and less
special statutory allowances such as bad debts,
interest, capital cost allowances, etc.
What we are concerned with here is "gross
profit". "The law is clear ... that for income
tax purposes gross profit, in the case of a busi
ness which consists of acquiring property and
re-selling it, is the excess of price over cost ..."
(see M.N.R. v. Irwin' per Abbott J., delivering
the judgment of the Court, at pages 664-65).
Gross trading profit for a taxation year may be
obtained by adding together the profits of the
various transactions completed in the year or by
adding together the prices at which sales were
effected in the year and deducting the aggregate
of the costs of the various things sold. Either of
such methods would be suitable for a business
consisting of relatively few transactions. In the
ordinary trading business, however, the prac
tice, which has hardened into a rule of law, is
that profit for a year must be computed by
deducting from the aggregate "proceeds" of all
sales the "cost of sales" computed by adding a
value 3 placed on inventory at the beginning of
the year to the cost of acquisitions in the year
and deducting a value 3 placed on inventory at
the end of the year.
In considering what application section 12(3)
has, there can be no doubt that "gross profit"
must be computed before income can be deter
mined and that, at least in the second method of
computing "gross profit" indicated above, the
price for which the property was bought is
"deductible" in its computation. If, on the other
hand, the computation of "income" for a taxa
tion year is thought of as commencing with
"gross profit" then the "cost" of the property
bought is not an amount that is "deductible" in
its computation. When, moreover, one thinks of
applying section 12(3) to a trader whose trans
actions are so numerous or of such a character
as to dictate the use of the proceeds of sales
less cost of sales formula, then, in the "compu-
tation" of the "taxpayer's income for a taxation
2 [1964] S.C.R. 662.
3 As noted by Abbot J. in the Irwin case, that "value" is
normally "cost or market, whichever is lower", which has
the result of allowing the trader to deduct unrealized inven
tory losses.
year" there is no deduction, at least as such, of
the cost of the goods that were sold in the year.'
Presumably, however, section 12(3) is to have
the same effect in relation to the computation of
a taxpayer's income for a year regardless of the
method that has to be used to compute "gross
profit". With considerable hesitation, I have
come to the conclusion that section 12(3) should
be interpreted, in the case of business income,
as referring to the computation of "income" or
"profit" for a year from the "gross profit" for
the year; and was not, therefore, applicable in
the circumstances of this case. In reaching that
conclusion, I am conscious that, in other con
texts, for more than a century the general state
ments in the leading cases concerning business
profits have treated the computation of profit as
including the computation of gross profit. What
has brought me to the opposite conclusion in the
interpretation of section 12(3) is the necessity
of giving such meaning to that subsection as will
operate with consistency in the different cir
cumstances to be encountered in the normal
course of events.
I turn to the question whether, for the pur
poses of applying section 12(3) in the circum
stances of this case, it can be said that the price
payable by the appellant for the land was "pay-
able ... to a person with whom [it] was not
dealing at arm's length".
In that connection it is to be noted that sec
tion 12(3) lays down a rule which, if it applies at
all, applies "In computing" the appellant's
income for its 1960 taxation year and, in par
ticular, it applies in the computation of the gross
profit accruing to the appellant from a sale of
land in that year. In my view, the question
whether the "otherwise deductible outlay or
expense" was payable by the appellant to "a
person with whom he was not dealing at arm's
length" must be determined as of the time of, or
after, that transaction. Prior to the sale, the cost
^ Frequently, the nature of the business is such that it is
impossible, or impractical, to determine which goods were
sold in the year and it is impossible or impractical to
determine their cost. Compare M.N.R. v. Anaconda Ameri-
can Brass Ltd. [1956] A.C. 85. In such a case, if one
supplier of a number were a related company, it would be
impossible to apply section 12(3).
of the land was not deductible because there
was no sale price to deduct it from. It is only
from the moment of the sale on, therefore, that
the cost of the land could conceivably be
described as "an otherwise deductible outlay or
expense" but, from that moment on it could not
be described as "payable by the taxpayer to a
person with whom he was not dealing at arm's
length" because, before that time, the appellant
had ceased to be related to the payee and was,
therefore, no longer "deemed" not to deal at
arm's length with that company.
It follows, in my view, that section 12(3) does
not apply in respect of the cost of the land that
was the subject of the sale that gave rise to the
profit in question.
Either of the aforesaid grounds would be suf
ficient for my conclusion that section 12(3) was
not applicable in the circumstances of this case.
I am, therefore, of opinion that the appeal
should be allowed with costs in the Trial Divi
sion as well as in this Court, the judgment of the
Trial Division should be set aside, and the
assessment of the appellant under Part I of the
Income Tax Act for the 1960 taxation year
should be referred back to the respondent for
re-assessment on the basis that section 12(3) of
the Income Tax Act has no application in
respect of the cost of the land that was the
subject of the sale that gave rise to the profit
that is the subject of the assessment.
* * *
THURLOW J. concurred.
* * *
The following are the reasons for judgment
delivered orally in English by
PRATTE J.: I do not wish to express any
opinion on the question of whether the price for
which a trader bought property for re-sale in his
business is a deductible expense or outlay
within the meaning of section 12(3) of the
Income Tax Act.
However, I share the view expressed by the
Chief Justice that, on the facts of this case,
section 12(3) did not preclude the appellant, in
computing its profit from the sale of the land
here in question, from deducting the purchase
price of that land. That purchase price, assum
ing it to be an "outlay or expense", clearly did
not become "otherwise deductible" until the
land was sold by the appellant and, at that time,
it was no longer payable to a person with whom
the appellant was not dealing at arm's length.
For these reasons, I would dispose of this
appeal as proposed by the Chief Justice.
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.