Ernest G Stickel v. Minister of National Revenue, [1972] CTC 210, 72 DTC 6178

Cattanach, J:—These are appeals from the assessment by the Minister of the appellant to income tax for his 1967 and 1968 taxation years whereby the Minister disallowed the appellant’s claims to exemption from payment of tax in those respective taxation years pursuant to Article VHIA of a Canada-US Tax Convention concluded between the two states indicated in the title on March 4, 1942 which article reads as follows:

Article VHIA: A professor or teacher who is a resident of one of the contracting States and who temporarily visits the other contracting State for the purpose of teaching, for a period not exceeding two years, at a university, college, school or other educational institution in such other State, shall be exempted by such other State from tax on his remuneration for such teaching for such period.

This convention was approved and declared to have the Force of law in Canada by the Canada-United States of America Tax Convention Act, 1943.

Subsequent amendments to the Convention were also approved and declared to have the force of law in Canada by statutes duly enacted by the Parliament of Canada.

Article VIIIA was added and approved by chapter 27, Statutes of Canada 1950.

The Convention has a preamble which declares that the objectives of the two contracting states are (1) the promotion of the flow of commerce between the two countries, (2) the avoidance of double taxation and (3) the prevention of fiscal evasion in the case of income taxes. Many years ago Lord Coke said that a preamble is a good means to find out the meaning of a statute, and as a key to open the understanding thereof.

The basic facts which give rise to these appeals are not in dispute but there is one area of dispute based upon the proper inference to be drawn from those facts and that is whether the appellant ceased to be a resident of the United States.

The appellant was born in Ohio, one of the States of the United States of America. There is no question whatsoever that he is a citizen of that country and resided there until July 18, 1967.

He completed his early education there and then attended Case Western Reserve University in Ohio. He was employed at that University from 1953 to 1957 and during that period he was simultaneously working towards his doctorate in philosophy which he achieved in 1956.

From 1957 to 1958 he worked as a consultant in a research institute in Cleveland, Ohio. From 1958 to 1961 he worked as a private consultant with the Case Institute which was a separate entity technically but closely affiliated with the University.

The appellant’s wife had been born in Newfoundland, Canada, but moved to the United States prior to their marriage. In 1967 there were four children to the union, two of whom were teenagers.

In 1961 the appellant and his family moved to Washington, DC.

From 1961 to 1962 he taught at William & Mary University in Norfolk, Virginia.

From there he returned to Washington where he was employed by the Montgomery Board of Health and the Montgomery Board of Education. While so employed he bought a house in Kensington, Maryland which he owned until 1964 when he moved to Wheaton, Maryland where the family lived in rented accommodation. All these places are in the area of Washington, DC.

Both of the appellant’s parents are deceased. If my recollection of the evidence is correct, his only living relative is a brother who lives in the United States. The appellant and his brother were joint owners of a house which was rented to a third person. The appellant sold his interest in this property in 1968.

The appellant also bought property in the States of Florida and New Mexico, neither of which properties he has ever seen. I suspect that these properties may have been bought as a speculation from land developers.

While the appellant was in Washington, DC an employment listing in the University of Alberta at Edmonton, Alberta came to his attention. He wrote to the chairman of the appropriate department of the University on December 5, 1966. He received a reply from the chairman in February 1967. This reply was to the effect that the chairman would be in New York and suggested an interview with the appellant. That interview took place and formed the basis for further discussion. That further discussion took place when the appellant flew to Edmonton for that purpose. As a result a verbal agreement for employment was reached. On March 27, 1967 a contract was received by the appellant from the University of Alberta while the appellant was living in Washington, DC. On March 31, 1967 he signed that contract and returned it to the University.

In his letter of December 5, 1966 to the University the appellant indicated his interest in “re-locating to Canada’’, that he had been watching movements and trends in Canada for some time and that he had noticed differences that attracted him “personally and professionally”. In reciting his personal attributes he made reference to the fact that his wife was a Canadian and that most of his living relatives were in Canada. He mentioned that the family had bought a school bus which was converted into a “prairie schooner” in which the family had toured extensively in Eastern Canada. He also mentioned that all members of the family were camping, fishing and outdoor enthusiasts. He concluded this letter by stating that the family felt that “Canada is the new land of promise”. Bearing in mind that this was a letter seeking employment and that the appellant, as a prospective employee, would set out facts and circumstances which he considered might influence the employer in his favour, the letter may not be of great significance being in the nature of puffing. However, it is an indication of the appellant’s thoughts and the nomadic way of his life, no doubt dictated by the appellant’s occupation.

On the other hand, Mrs Stickel gave evidence that the move to Edmonton was discussed at a family conference. She, herself, was less than enthusiastic. She had no desire to return to Eastern Canada and she was unfamiliar with Western Canada. It was the consensus of the family, including the appellant, that they should give it a try for two years and remain open minded about the project.

The contract between the appellant and the University was for his employment as an associate professor in the Department of Educational Psychology in the Faculty of Education, the effective date of appointment being July 1, 1967 for a probationary period ending June 30, 1969, which I would point out is for a period of two years exactly.

The appellant moved to Edmonton, Alberta with his family on July 18, 1967 to take up his duties under this appointment.

Prior to moving to Canada the appellant terminated the lease on the premises occupied in the United States. Certain personal effects, which could not be conveniently moved to Canada, were left with his brother. The evidence is not conclusive if this was an outright gift or whether the effects were to be kept for the appellant.

The appellant had a loan account which he closed out but continued payments for about eighteen months to discharge the outstanding balance. His checking and saving account was moved to Edmonton.

When the appellant first came to Edmonton he had difficulty in finding suitable accommodation for rent. He eventually found accommodation but after occupying it for a period the property was offered for sale. The appellant was left with the alternative of buying the property or moving. The appellant moved. On March 27, 1968 he entered into a lease for another property for a period of five years supplemented by an option agreement, for a consideration of $2,000, to purchase and with an agreement for sale annexed, which might be exercised after February 15, 1973. The lease expired on March 31, 1973. The appellant’s explanation was that he entered into these arrangements, ie a lease, an option and an agreement for sale, because his obligations thereunder could be transferred readily and the option sold.

At the expiration of his teaching contract with the University on June 30, 1969, the appellant did not renew it. He was dissatisfied with the changes wrought over the two-year period. In his view the enrolment had become too great for satisfactory teaching. He had become disillusioned and no longer wished to teach under those conditions.

The appellant decided to continue in two part-time posts in Edmonton. He was employed as a consulting psychologist in a private clinic, The Cold Mountain Institute, and conducted seminars in human relations.

From July 18, 1967 until he left Canada on March 9, 1970 he did not return to the United States except to attend professional conventions and in the fall of 1969 for an interview about prospective employment in the State of Alaska. He received an offer of employment in January 1970 as a result of that interview which he accepted and left Canada in March 1970.

To recapitulate the salient facts in summary form, the appellant was a professor, he was a resident of the United States on July 18, 1967 on which date he came to Canada to teach at the University of Alberta. He taught at that University for a period of two years ending June 30, 1969. From June 30, 1969 to March 9, 1970, a period of slightly more than eight months, he remained in Canada and engaged in employment, other than teaching, for which he received remuneration.

While the appellant was engaged in teaching at the University of Alberta in the years 1967 and 1968 the administrative officer in charge of payroll operations deducted income tax and payments to the Canada Pension Plan, remitted the amounts so deducted to the Minister of National Revenue and issued T4 slips therefor.

During the months of July to December 1967 a total of $1,804.33 was deducted from the salary of the appellant for income tax together with a total of $79.20 as Canada Pension Plan payments, making a total deduction of $1,884.03 for the 1967 year.

During the year 1968 income tax deductions from the appellant’s salary totalled $3,819.54 and Canada Pension Plan deductions totalled $81, making a total of $3,900.54.

I might also add that deductions were also made from the appellant’s salary in these two years for contributions to a University Pension Plan.

The bursar’s office, particularly the administrative officer in charge of payroll operations, was not aware of the Canada-US Reciprocal Tax Convention and did not become aware of it until the matter was brought to the attention of the office in June 1968. In that month the Department of National Revenue, Taxation Division supplied copies of Information Bulletin No 41, dated May 21, 1968 and published in the Canada Gazette of June 1, 1968, the subject of which bulletin is the exemption from income tax in Canada of professors and teachers from other countries.

it is now the practice of that office to obtain from a visiting professor a statement of exemption stating (1) the name of his home country,

(2) the date he entered Canada, (3) that he came to Canada for the express purpose of teaching in this country, (4) that his intention is to leave Canada within 24 consecutive months from the date of his entry and (5) that he has not been allowed a tax exemption in respect of teaching income earned in Canada for any period prior to the date of entry indicated. This statement of exemption was drafted and designed in accordance with the instructions in Bulletin No 41.

The appellant did not complete such a statement at any time for the very obvious reason that neither the bursar’s office, nor the appellant were aware of the tax treaty or Bulletin No 41 until June 1968 and the spring of 1969 or possibly the summer of 1968 respectively.

The appellant did file tax returns with the appropriate authority of the United States in which he claimed “non-resident” status. He has paid no income tax to the United States on the income earned in Canada.

The appellant did not file income tax returns in Canada for the 1967 and 1968 taxation years until March 1970. Apparently the appellant filed two tax returns for each taxation year. The returns which bear the latter date do not claim tax exemption under the tax treaty but the returns which bear the earlier date do.

I do not attach significance to this added confusion because by Notices of Assessment dated April 14, 1970 and April 16, 1970, the Minister advised the appellant that he did not qualify for tax exemption “under Article 8A of the Income Tax Act [sic]” and that he was being assessed accordingly.

I might also add that while the appellant claimed tax exemption for all teaching income earned in Canada in 1967 he only claimed exemption on the teaching income earned by him to June 30 in the year 1968.

The appellant forthwith filed Notices of Objection. The Minister notified the appellant that he had been properly assessed under subsection 5(1) of the Act and that the provisions of Article VIIIA of the tax convention are not applicable.

Hence the present appeals.

Counsel for the appellant submitted that a treaty must be interpreted so as to give effect to the rule of effectiveness and the rule of liberal interpretation. I fail to follow how the rule of effectiveness can mean any more than the obvious duty of the Court to give effect to the treaty. That duty is, as I conceive it, to ascertain and give effect to the intention of the contracting states as expressed in the words used by them.

Similarly I find little help in the statement that a treaty shall receive a liberal or extensive construction rather than a strict one. The consensus of all writers is that treaties are to be construed in the most liberal spirit provided however that the sense is not wrested from its plain and obvious meaning.

In my view the duty of the Court is to construe a treaty as it would construe any other instrument public or private, that is to ascertain the true intent and meaning of the contracting states collected from the nature of the subject matter and from the words employed by them in their context. In this I am assisted by the preamble of this particular treaty which states that two of the overall aims are the avoidance of double taxation and the prevention of fiscal evasion in the case of income tax.

The clear and unambiguous language of subsections (1) and (2) of section 2 of the Income Tax Act imposes a tax on the appellant, were it not for Article VIIIA. Subsection (1) imposes a tax on every person resident in Canada at any time in the taxation year and subsection (2) imposes a tax on a person not resident in Canada on income earned in Canada. Accordingly for the appellant to be exempt he must bring himself precisely within the four corners of Article VIIIA.

The avowed purpose of Article VIIIA in so far as it concerns the present appellant is to ensure relief from double taxation.

The appellant has not been subjected to tax in the United States on the remuneration earned by him for teaching in Canada. The appellant has filed returns in the United States on the basis that he was a non-resident of the United States. The revenue authorities of that state have categorized the appellant as a non-resident and he was accordingly informed that no tax was due to that jurisdiction on the money earned by him in Canada. This being so I fail to appreciate how the appellant falls within the general objective of the treaty which is to avoid double taxation. The appellant has not, as yet, been subjected to double taxation but there remains the possibility that he might be subjected to tax in that jurisdiction as well.

Article XVI of the Convention provides that where a taxpayer shows proof that the action of the revenue authorities of one of the contracting States has resulted in double taxation, then the taxpayer is entitled to lodge a claim with the State of which he is a citizen or resident. The competent authority of that State will then consult with the corresponding authority of the other State to determine if the double taxation may be avoided.

In the present instance the appellant cannot resort to this procedure because he has paid no taxes in the United States on his teaching remuneration earned in Canada, nor has the United States sought to impose a tax on that amount as yet.

Therefore the condition precedent to the appellant invoking a determination of the avoidance of double taxation does not exist because as yet there is no double taxation.

It therefore follows that I am obliged to determine if the appellant is exigible to tax in Canada and to do so I must determine if the appellant falls within the exemption contemplated by the language employed by the contracting parties in Article VIIIA.

It was the further submission on behalf of the appellant that the Minister is estopped from taxing the appellant.

This contention is based upon Information Bulletin No 41 issued by the Minister, particularly the text appearing under the heading “Transitional Rules”. This is to the effect that where a teacher remains in Canada after the expiration of a 24-month period from the date of his arrival in Canada he will be subject to tax and to making Canada Pension Plan payments “only to the extent that such income was earned after the end of the month in which the 24-month period expired”.

The effect of this language in Information Bulletin No 41 is that a teacher could come to Canada and teach for two years during which his remuneration would be tax exempt under Article VIIIA, but if that teacher should remain in Canada to teach for a period in excess of two years then the remuneration earned during the first two years would continue to remain tax exempt but the remuneration earned by him in the third and subsequent years will be subject to tax.

It is the contention on behalf of the Minister that, in order for the appellant to qualify for exemption under Article VIIIA, the term of his visit to Canada must not endure beyond two years and the visit must be exclusively for the purpose of teaching.

The position taken by counsel for the appellant is that the Minister is precluded from taking such stand in the face of the express statements made in the Information Bulletin.

In support of his position counsel relies on the decision of the Tax Appeal Board in D G W Smith v MNR, [1970] Tax ABC 938: 70 DTC 1594, and the decision of the Tax Review Board in G L Bowen v MNR, [1972] CTC 2174; 72 DTC 1161, dated February 3, 1972.

In Smith v MNR the appellant who was a professor came to Canada on September 9, 1966 with his family for the purpose of teaching at the University of Alberta. His teaching contract was for a period of four years but evidence was adduced and accepted by the Board that this was in error and the contract was in fact for two years only. Before the end of the two year period (ie September 1968) the appellant’s family returned to England in May 1968. On June 18, 1968 an offer of renewal of his teaching contract for a further two years was made to the appellant under more advantageous conditions. In July 1968 the appellant went to England to persuade his wife to return to Alberta for a further two years. The appellant, accompanied by his family, returned to Canada in September 1968 to continue teaching for a further two years (a total of four years). The Board allowed the appeal on acceptance of the fact that it was the appellant’s intention to teach in Canada for no more than two years. Obviously the Board based its decision on the appellant’s intention.

If the ratio of this decision is, as it appears to be, that the professor’s intention to teach in Canada for not more than two years is the determining factor, then I am forced to the conclusion that the Smith case (supra) was wrongly decided. In my view, the intention of a professor or teacher when he enters Canada has no relevance in the interpretation and application of the pertinent articles of the Treaty.

In Bowen v MNR (supra) the appellant was an exchange teacher from New Zealand who taught in Canada for two years. At the end of that period the appellant had made all necessary arrangements to return to New Zealand. However, prior to that time the appellant learned of an excursion flight to Europe where the appellant had relatives, but to take advantage of that flight, the appellant would be obliged to teach for a further 10 months beyond the two-year period. He therefore enquired of the district tax office and was informed, in accordance with the terms of Information Bulletin No 41, that the policy of the Department was that where a teacher remained in Canada subsequent to the expiration of the 24-month period the teacher would not be subject to income tax and Canada Pension Plans on the income which had been exempt in the original two years. On the strength of this representation the appellant stayed on in his teaching post beyond the two-year period. He was assessed to income tax for the prior two-year period on the ground that Article X of the Canada-New Zealand Tax Agreement did not apply. The effect of Article X is similar to that of Article VIIIA of the Canada-US Treaty, although the language differs substantially.

The learned member of the Tax Review Board stated at page 2182 [1165 I:

. . . I have come firmly to the conclusion that it is not now open to the Minister to plead Article X of the Schedule to the Canada-New Zealand Income Tax Agreement to the exclusion of and without having due regard to Information Bulletin No 41 which undoubtedly supports the appellant’s position herein. . . .

There is no question that the appellant acted upon the representation contained in Information Bulletin No 41 and more particularly on the letter from the District Taxation office, by altering his plans and thereby his position leaving himself vulnerable to the assessments to income tax imposed by the Minister.

With due respect to the learned member of the Tax Review Board I cannot accept his statement because, in my view, it is contrary to well established principles.

First Information Bulletin No 41 is precisely what it is stated to be, and that is an information bulletin issued by the Deputy Minister of the Department of National Revenue. The Deputy Minister does not have the power to legislate on this subject matter delegated to him. In reality, this information bulletin is nothing more than the Department’s interpretation of Article VIIIA of the Treaty for departmental purposes. It is also, in effect, a direction to employers of professors and teachers from other countries who are expected to work in Canada at the employer’s institution for a period of two years or less to refrain from making deductions from the employee’s remuneration for teaching for income tax and pension plan and remitting these deductions to the Department. Information Bulletin No 41 is not a statute.

On the other hand, the Canada-US Reciprocal Tax Convention was by statute approved and declared to have the force of law in Canada. It is therefore the domestic law of the land.

The position taken by counsel for the appellant to the effect that the Minister is precluded from relying on the language of Article VIIIA of the convention to the exclusion of and without having regard to the interpretation implicit in Information Bulletin No 41 is an invocation of the doctrine of estoppel.

In Woon v MNR, [1951] Ex CR 18; [1950] CTC 263; 4 DTC 871, one of the grounds of appeal was that the Commissioner had given a “ruling” that if the appellant followed a certain procedure tax would be imposed under a particular section of the Income War Tax Act. That procedure was followed but the Minister assessed the appellant to a much greater tax under another section of the Act which was applicable. It was argued that the Minister was precluded from alleging that the particular section under which the assessment was made was applicable because of the prior ruling of the Commissioner.

Mr Justice Cameron, after a detailed and analytical review of the leading authorities, held that the Commissioner had no power to bind the Minister by a ruling limiting tax action other than in accordance with the statute; that the assessment must be made pursuant to the terms of the statute and it is not open to the appellant to set up an estoppel to prevent the operation of the statute.

In MNR v Inland Industries Limited, [1972] CTC 27; 72 DTC 6013, the respondent sought to deduct contributions made to pension plans in computing its income. The plans had been submitted to the department, and were approved and registered by it. Further, the respondent was advised by the Minister that contributions made to the plans with respect to past services of the employees would be deductible. Mr Justice Pigeon, in delivering the unanimous judgment of the Supreme Court of Canada, held that it was an express requirement of the pertinent section of the Income Tax Act that there must be an obligation of the plan to its employees. To preclude the Minister from contending and establishing that such an obligation of the plan to its employees did not exist would nullify the provisions of the Act. He added that the approval of the Minister was not decisive of the existence of the statutory condition precedent to approval of the plan.

He effectively disposed of any question of an estoppel arising by stating at p 31 [6017]:

However it seems clear to me that the Minister cannot be bound by any approval given when the conditions prescribed by law were not met.

It therefore follows that if approval and registration given by the Minister to a pension plan does not give rise to estoppel then a fortiori an information bulletin cannot either.

In short, estoppel is subject to the one general rule that it cannot override the law of the land.

Therefore, the Minister is not precluded from relying on Article VIHA to the exclusion of the information bulletin.

Accordingly, I reiterate that the question to be determined is whether the appellant herein falls within the exemption contemplated by the language of Article VIIIA.

The argument advanced on behalf of the Minister was that in order for the appellant to be eligible for exemption by virtue of Article VIIIA of the tax convention he must comply with the conditions set out immediately below:

(1) He must have been a resident of the United States at the time of entering Canada. In this respect Article VIIIA is abundantly clear. The language is “A professor who is a resident of one of the Contracting States”. The evidence established beyond doubt that the appellant was a professor and on the date he entered Canada he was a resident of the United States.

(2) He must retain his status as a resident of the United States throughout the period of his temporary visit to Canada. That is if the appellant meets the first qualification above enumerated that he continues to be a resident of the United States upon his entry to Canada but subsequently during the prescribed period of two years, ceases to be a resident of the United States then the appellant loses any right or privilege that he may otherwise have had to exemption from taxation in Canada by virtue of the tax convention. !t was the further submission on behalf of the Minister that on the basis of the objective criteria discussed in P W Thomson v MNR, [1946] SCR 209; [1946] CTC 51; 2 DTC 812 and in Beament v MNR, [1952] SCR 486; [1952] CTC 327; 52 DTC 1183 to determine if the respective appellants in those cases fell within the meaning of the words, “residing”, “resident” and “ordinarily resident” as used in the pertinent sections of the Income Tax Act there under review, it should be found as a fact that the appellant herein had ceased to be a resident of the United States. As Mr Justice Cartwright (as he then was) pointed out in the Beament case (supra), the decision as to the place or places in which a person is resident must turn on the facts of the particular case.

(3) The period of the appellant’s “temporary visit” must not exceed two years and the temporary visit must be exclusively for teaching, in the appellant’s case, at a University.

I propose to consider the submissions on behalf of the Minister in the reverse order to which they were presented and accordingly I turn to the third submission.

The key words, which I have emphasized, of Article VIIIA are a professor who is resident of one of the contracting states “and who temporarily visits the other contracting State for the purpose of teaching, for a period not exceeding two years,” at a university shall be exempted by the State which he visits from tax on the remuneration for teaching for such period.

The introduction of commas before and after the phrase “for a period not exceeding two years” is a circumstance of importance. The phrase modifies the language which precedes it and is not limited to a modification of the words “for the purpose of teaching”. The phrase also modifies the words “temporarily visits”. This being so, it follows that the temporary visit is limited to a “period not exceeding two years”. If the phrase “for a period of two years” were restricted to a modification of the phrase “for the purpose of teaching”, which might be the case but for the insertion of the commas, then the word “temporarily” would be redundant and should be given no meaning. However, it is a cardinal rule of interpretation that every word used must be given a meaning where possible. Had the language been “visits for the purpose of temporarily teaching”, then the duration of the visit would not be specifically limited. But such is not the case. The word “temporarily” is introduced before the word “visits” and modifies that word. The words “temporarily visits” are modified by the words “for a period not exceeding two years”.

Therefore, the temporary visit cannot endure beyond two years in order for the exemption to apply.

Then there is the further qualification that the nature or character of the visit must be “for the purpose of teaching”.

It follows that in order to qualify for exemption by virtue of Article VIIIA a professor or teacher who is resident of one of the contracting states to the convention must meet a two-fold test: (1) the duration of the temporary visit must not be in excess of two years; and (2) the visit must be for the purpose of teaching.

If a professor or teacher fails in either aspect, then he is not within the exemption contemplated by Article VIIIA.

The undisputed facts in the present appeals are that the appellant came to Canada for the purpose of teaching and accordingly meets one of the two tests. He taught for a period of two years but he extended his visit beyond that period, and earned income from employment other than teaching, so that he failed in the second aspect of the two-fold test above propounded in that his visit was in excess of two years.

In view of this conclusion, it is unnecessary for me to consider the other argument advanced on behalf of the Minister that the appellant must retain his status as a resident of the United States throughout the period of his temporary visit to Canada and that, on the Minister’s submission, the appellant had not done so.

For the foregoing reasons, the appeals are dismissed with costs. GIBSON BROS INDUSTRIES LIMITED, Appellant,

and

MINISTER OF NATIONAL REVENUE, Respondent.

Federal Court—Trial Division (Walsh, J), April 19, 1972, on appeal from assessments of the Minister of National Revenue.

Income tax—Federal—Income Tax Act, RSC 1952, c 148—12(1)(h), 20(6)(g),

Two issues were before the Court: (1) the effect of transactions whereby the appellant transferred its assets to a new company formed to receive them, followed by the sale of the new company’s shares, and (2) the computation of personal expenses to be disallowed in connection with the use of a vessel owned by the appellant.

The appellant was a logging company whose contract to supply logs in a certain area expired in 1960. Prior to this date negotiations between the appellant and its principal led to an agreement whereby the appellant caused a new company to be formed to receive its assets at book values and then sold the shares in the new company to its principal. In the Minister’s view the new company was at all material times a simulacrum, cloak, alias or alter ego of the appellant or, in the alternative, an agent of either or both the appellant and its principal. On this footing the Minister imputed part of the appellant’s profit on the sale of the shares to proceeds of disposition of the depreciable property, so as to effect a recapture of capital cost allowance of $109,557. In the alternative, the Minister contended that the overall profit on the sale of the shares, amounting to $141,570, arose from an adventure in the nature of trade within paragraph 139(1)(e) or that a taxable benefit of $109,557 was conferred on the appellant within subsection 137(2).

On the second issue, the appellant owned a vessel that was used in part to earn income (by charter) and in part for the personal use of its shareholders. It was conceded that some disallowance should be made of expenses imputable to the personal use of the vessel and the appellant sought to compute such part as a portion of only the variable expenses whereas the Minister sought to apportion the total expenses, including capital cost allowance.

HELD:

The Minister’s view of the appellant’s subsidiary as being a simulacrum, cloak, alter ego or agent, etc was correct and the appellant’s appeal in this respect therefore failed (making it unnecessary to consider the Minister’s alternative arguments).

On the second point it seemed proper to apportion the total expenses relevant to the vessel, including capital cost allowance, and the Minister’s computation of the disallowance was therefore correct. Appeal dismissed.

Heward Stikeman, QC and D G H Bowman for the Appellant.

F J Dubrule, QC for the Respondent.

CASES REFERRED TO:

Sazio v MNR, [1968] CTC 579; 69 DTC 5001 ;

Claude Belle-Isle v MNR, [1964] CTC 40; 64 DTC 5041; [1966] CTC

85; 66 DTC 5100 (Can SC);

Cumming v MNR, [1967] CTC 462; 67 DTC 5312.

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 apportioned 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 Limited 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 al! 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 Appellant 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 Ltd 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, Consolidated Forest Products Limited assigned to the Appellant 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 Appellant sold at face value to Rayonier BC 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 Appellant sold all of its shares in the capital stock of Quatsino Logging Ltd to Rayonier BC 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 Logging 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 prescribed 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 prescribed classes by an amount of $90,229.71.

Respondent admits paragraphs 1 to 6 inclusive and paragraph 10 but does not admit paragraphs 7, 8 and 9.

Respondent states that in assessing the appellant 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 agreement and more particularly but without restricting the generality of the foregoing:

(i) by the Appellant causing a new company (ultimately known as Quat- sino 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 Quatsino 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 transferred its shares in Quatsino to Rayonier Canada Limited and received therefor the sum of $272,000.00 in money or money’s worth;

(iv) Thereafter the Jeune Landing assets were transferred 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 alternative, 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 subsection 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 paragraph 139(1)(e) of the Income Tax Act in that it purchased shares in Quatsino with the full and sole intention of reselling the said shares to Rayonier 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 computing 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 subsection 137(2) of the Act.

During the course of his evidence, the company’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 operating 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 agreement and supplemental agreement. Alpine Logging 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 ap- parent 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 appellant Gibson Brothers Industries Limited, it is not necessary for the purposes of these proceedings to go into the intricate intercompany relationships and the agreement can be considered 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 equipment 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 friendly association. It was agreed to have a joint appraisal made of the value of the logging operation 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 equipment 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 connection with the logging camp and operation at Jeune Landing 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 Agreement and the Sale Agreement, both in quadruplicate, for execution by your clients”). This letter reads, in part,

1. 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 documents 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 Assignment to be drawn by you from Gibson: Bros Industries Ltd to Rayonier BC 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 Breitenback, Ross R Douglas, Gordon L Draeseke, Peter Sloan and R W Blatchley. The other five shares will be acquired in the name of Rayonier BC Limited.

With respect to the incorporation of Quatsino, there is a letter dated May 10, 1960 from Rayonier Canada Limited to appellant’s attorneys which refers to the enclosure of "Memorandum and Articles of association, both in duplicate, of Quatsino Logging Ltd” and goes on to say: “We have reserved the name Quatsino 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 incorporated 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 following 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 appellant’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 Limited, 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 reassessment 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 deleted but the appellant’s capital cost allowance schedules were adjusted so as to include recapture 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 contention that the sum of $141,570 resulted from an adventure in the nature of trade under paragraph 139(1)(e) arising out of the purchase of the shares in Quatsino with the full and sole intention 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 alternative, 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 MNR, [1968] CTC 579; 69 DTC 5001, which held at page 588 [5007]:

Ever since the Salomon case, [1897] AC 22, it has been a well settled principle, which has been jealously maintained, 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 company 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 Quatsino from appellant for the balance of the purchase 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 MNR, [1964] CTC 40; 64 DTC 5041, approved in the Supreme Court, [1966] CTC 85; 66 DTC 5100, in which appellant sold a hotel to a corporation formed for the purpose of 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 mortgage 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 allowance on the presumption that the second transaction 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 company 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 thai 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 incorporation of Quatsino Logging Ltd was clearly part and parcel of the agreement from its inception and formed part of the method adopted for the eventual disposition of these assets to Rayonier Canada Limited.

Appellant relies strongly on subsection 20(4) of the Income Tax Act which, in the case of property which has been transferred by one or more transactions between persons not dealing at arm’s length, limits the taxpayer who has eventually 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 subse- queht acquisition by Rayonier Canada Limited of these assets from Quatsino when its assets were distributed to its shareholders were both non-arm’s length transactions and hence Rayonier Canada Limited was limited to claiming capital cost allowance on $90,000. It so happened in the present case that a fire took place in the cook-house, 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 Quatsino 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 subsection 20(4) would have no application, the transaction being an arm’s length one. According to appellant’s counsel, the Minister is now adopting a contradictory position in applying paragraph 20(6)(g) in apportioning the price paid between depreciable and non-depreciable property, reaching a conclusion that in so far as present appellant is concerned, the sum of $199,787.25 was received for the sale of depreciable property. Paragraph 20(6)(g) reads as follows:

(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 awareness 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 appellant 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 paragraph 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 desirable 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 reassessed 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, subsection 20(4) is a section applying to the purchaser and not to the vendor. By applying paragraph 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 reassessment of its 1962 taxation year does not, in my view, estop respondent from applying this section in appellant’s case. Neither can appellant successfully argue that since the purchaser is limited to capital cost allowance on $90,000 under subsection 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 subsection 20(4), in view of the Minister’s right to treat the interposition of Quatsino Logging Ltd as a sham and consider the sale of the assets and the sale of the shares as one single arm’s length transaction and apply paragraph 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 appellant in the amount of $109,557.54 within the meaning of subsection 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 paragraph 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 chartering for the years 1959 to 1963 inclusive was as follows:

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 taxation 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 computed 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 (eg 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 computation 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 jurisprudence on this question so it is necessary to examine it on basic principles. There is no dispute 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 MNR, [1967] CTC 462; 67 DTC 5312, in which the operating 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 apportionment and no figures before the Court as to the relative distance covered by the vesse! 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 normally dealt with in accordance with Information Bulletin No 28 of the Taxation Division of January 6, 1965.* [1] This takes capital cost allowance 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 apportioning 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 reassessment.

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.