The taxpayer was incorporated under Part I of the Dominion Companies Act for the purpose of operating a flying school for the training of members of the RCAF and was restricted in its letters patent from distributing any dividends during the Second World War hostilities. It was intended by the incorporators (as stipulated in a declaration of trust for their shares) that any surplus from the taxpayer's operations would enure to the benefit of the St. Catharines Flying Club, a non-profit organization.
Profits earned by the taxpayer under a training contract with the Crown which did not place any restrictions on the use of profits therefrom were fully taxable. "The question of the liability of the respondent to taxation depends, not upon the intention of the promoters or shareholders as to the disposition to be made of the profits but rather upon consideration of the terms of the letters patent, the nature of the business authorized to be carried on and of the business which was carried on which resulted in the earning of the income."