A J Frost:—This is an income tax appeal in respect of the appellant’s 1962 taxation year wherein an additional tax to the extent of $17,146.75 was levied in connection with the profit realized from the sale of the appellant’s partnership interest in O H Ranch. Upon Notice of Ob- jection duly signed, the Minister of National Revenue confirmed the assessment on February 7, 1968. This appeal and the appeals of Clinton W Roenisch, Jr, Harold W Roenisch and Mrs Dorothy E Bacon were heard together on common evidence on September 29, 1971 at Calgary, Alberta by the Tax Appeal Board as it was then constituted.
The O H Ranch was owned and operated by a partnership comprising members of the family of the appellant and the family of William Ardern. Each family owned 50% of the partnership assets with Clinton W Roenisch, Jr acting as trustee for the appellant’s family and A D Kingsford for the Ardern family. On January 4, 1962 the Roenisch family sold its interests to O H Ranch (1961) Limited for $297,500. The agreement of sale, made retroactive to November 30, 1961, did not allocate the purchase price between livestock and other partnership assets.
The Minister assessed the transaction on the basis that there must be some allocation of the proceeds of sale of the partnership interest between assets of a capital nature and the livestock inventory. The appellant disputed this, contending that the entire proceeds of sale were of a capital nature, and submitted that the tax levied in respect of the sale of the livestock inventory had no basis in law. Two questions arose in argument which, in my opinion, bring out the essentials in this appeal. They are: (1) Was the total sale price paid for the interest in the partnership a capital receipt? (2) Was the inventory of cattle excessive?
Counsel for the appellant, in his argument, regarding the first question, contended that Rutherford v The Commissioners of Inland Revenue, 10 TC 683, and Van Den Berghs, Limited v Clark, [1935] AC 431; 19 TC 390, had established that the sale price of an interest in a partnership is a capital receipt. It was further contended that the agreement by its terms constituted a sale of an interest in a partnership rather than in a business or part of a business.
While it is true that at one time no part of the proceeds of the sale of the interest in a partnership was taxable on the ground that a taxpayer was not in business for the purpose of going out of business, this is no longer law. Subsection 85E(1) of the Income Tax Act reads as follows:
85E. (1) Where, upon or after disposing of or ceasing to carry on a business or a part of a business, a taxpayer has sold all or any part of the property that was included in the inventory of the business, the property so sold shall, for the purposes of this Part, be deemed to have been sold by him
(a) during the last taxation year in which he carried on the business or the part of the business, and
(b) in the course of carrying on the business.
Accordingly, I find that the Minister is right in distinguishing livestock inventory from the capital assets of the partnership and in taxing the profits realized from the sale of livestock inventory under the above-cited section of the Act.
Concerning the second question, counsel contended that the re- assessment was inaccurate in that it treats a cow and a calf as a unit and one-half, whereas on the effective date of the agreement (November 30, 1961) a cow and a Calf constituted one unit.
Section 1802 of the Income Tax Regulations governing the valuation of animals was enacted March 13, 1963, applicable to the 1962 taxation year and subsequent years. It is not applicable to the year 1961.
This is an unusual situation in that the Minister causes a regulation to be enacted retroactively at a time when the appellant has already entered into a retroactive agreement and thereby unknowingly succeeded in avoiding retroactive regulation. Parliament can constitutionally enact legislation on a retroactive basis within its class of subject and an individual can also enter into an agreement which is to take effect as from a date prior to that on which the contract was signed. The retroactive agreement was in force prior to the enactment of the retroactive regulation. In my view the appellant was within his rights in insisting that the valuation of his cattle be based on departmental practice as of November 30, 1961, the effective date of the sale. I further find that the inventory of cattle was overstated by 24 head, being the number of cattle “sold” as a bonus to the appellant’s foreman prior to November 30, 1961.
Appeal allowed in part.