TAXATION-INCOME OR CAPITAL GAIN-TIMBER LIMITS-PROFITON RESALE.-Between Anderson Logging Company v. M.N.R .in 1924 1 and Atlantic Sugar Refineries v. M.N.R . in 1949 ° theSupreme Court of Canada was not called upon to distinguish in-come from capital gain for the purposes of income tax. A quarterof a century is a considerable period of time and it is not surpris-ing that over the years the public had developed notions on thedistinction which were rather more favourable to taxpayers thanwas warranted. When, after the war, the federal government be-came more aggressive in the collection of taxes and less inclinedto settle when it met resistance, the resulting decisions came as ashock. The implications of the Anderson Logging case and of theMorrison decision' had come to be overlooked and capital gainstended to be taken for granted.

Since the judgment in the appeal of Atlantic Sugar RefineriesLimited, the Supreme Court has dealt with the question of incomeor capital gain on two further occasions : Campbell, profits on saleof real estate ;' and Sutton Lumber Company, sale of timberlimits' A third case, Gairdner Securities Limited, was argued be-fore the court in October, and judgment has not been delivered.Exchequer Court decisions which did not reach the SupremeCourt include McDonough, sale of mining company shares ; 6 MissN, real estate sales ;' Cragg, real estate sales;' Walker, gamblingwinnings ;' and Kennedy, expropriation of real estate." By the In-come Tax Appeal Board some twenty-five decisions have been

1 [1925] S.C.R . 45 ; [1917-271 C.T.C. 198 .2 [19491 S.C.R . 706 ; [19491 C.T.C . 196 .1 Allan Morrison v. M.N.R., [19281 Ex . C.R . 75 ; [1917-27] C.T.C. 343 .4 Thomas Campbell v. M.N.R., [1953] 1 S.C.R . 3, [1952] C.T.C. 334 .5 [1953] C.T.C. 237. Since this comment was written the case has ap-

peared in the Canada Law Reports, [195312 S.C.R . 77 .6 W. J. McDonmigh v. M.N.R ., [1949] Ex . C.R. 300 ; [1949] C.T.C. 213 .7 Miss N v . M.N.R., [1952] Ex . C.R . 20 ; [19511 C.T.C. 297.8 John Cragg v . M.N.R ., [1952] Ex . C.R . 40 ; [1951] C.T.C . 322.9 Wm. S. Walker v. M.N.R., [1928] Ex . C.R . 1 ; [1951] C.T.C . 334.10 Byron B. Kennedy v . M.N.R., [1952] Ex . C.R . 258 ; [1952] C.T.C. 59 .

1953]

Case and Comment

921

rendered on the same point. The overall success of the governmentin the courts has tended to produce a feeling that the day of capi-tal gains is over and the government has been pressed strongly onseveral occasions to devise a definition of capital gain, or converse-ly of taxable income, which will ,relieve taxpayers from the pros-pect of paying tax on everything.

The gloomy side of the picture is probably overdone . In thefirst place the government, naturally enough, has allowed itself tobe brought into court only where it counted on a better thanaverage chance of success, so that the law reports may indicateonly that the government has been a good deal more diligent inrecent years than it was before. Moreover, the decisions of theSupreme Court display a very definite concern to maintain the `distinction between taxable income and capital gains. To adoptthe language used by Mr. John G. McDonald in his article oncapital gains of two years ago in the Review,' it is the "policy"of the court to maintain this distinction and, notwithstanding Mr.McDonald's strictures, it would also seem to be the "law". Itmust be noted, however, that no case under the new Income TaxAct has yet come before the Supreme Court, or the ExchequerCourt for that matter . The results which will flow from the ap-plication of the new statute are .yet to be determined and it is pro-bably safe to say that they are awaited with some trepidation inthe taxpayer's corner of the ring.

The most recent decision under the Income War Tax Act isSutton Lumber & Trâding Company Limited v. M.N.R., in whichthe reasons for judgment were written by Locke J. and concurredin by Taschereau, Estey, Cartwright and Fauteux JJ ., the fullcourt which heard the argument. It represents the first occasionon which the claim for tax has been denied by the courts in thehistory of the Income War Tax Act (but not. by the Tax AppealBoard) and the judgment carries implications which may be ofconsiderable significance in the interpretation of the Income TaxAct. Having regard to the fact, however, that since this judgmentwas handed down the court has heard argument in the appeal ofGairdner Securities Limited, any opinions which may be expressedwith regard to the Sutton Lumberjudgment not closely and direct-ly related to the facts of that case must necessarily be tentativeand the temptation to discern a "trend" must be resisted.

One comment of a general nature is that the Supreme Court

lx McDonald, Capital Gains and Losses in Canada (1951), 29 Can.Bar Rev . 907. -

922

THE CANADIAN BAR REVIEW

[VOL. XXXI

has not yet dealt explicitly with the extent to which the interpreta-tion of the Canadian statutes is governed by decisions of Englishand Scottish courts . In judgments of the Exchequer Court and theTax Appeal Board there are not a few references to the differencesof language between the Canadian and the United Kingdomstatutes, in each case as preliminary to the opinion that the Cana-dian statute is to be interpreted "restrictively" . The SupremeCourt has not yet gone even so far as to remark upon the statutevariations, let alone to draw any conclusions from them . The im-plication from the Sutton Lumber decision seems to be that thepolicy of the court is to disregard variations in terminology infavour of identity of principle . Until there has been direct dis-cussion of the question the weight to be given to decisions inother jurisdictions will remain one of those uncertainties whichbedevil any one contemplating recourse to the courts .

In the Sutton Lumber case the question was whether or not thecompany had realized a taxable gain on the sale in 1946 of cer-tain timber limits it had purchased around the turn of the century.It was held that the profit was a capital gain, and not taxable, onthe basis of principles enunciated by the Lord Justice-Clerk in theScottish case of Californian Copper S},ndicate Limited v. Harris"decided under the legislation of the United Kingdom and quotedwith approval by the Privy Council in the Australian case ofCommissioner of Taxes v. The Melbourne Trust, Limited." Theonly other reference to a decided case on the point at issue was tothe judgment of Mr. Justice Duff in the Anderson Logging Com-pany decision, which was decided under the British Columbia In-come Tax Act.

It was argued by the Minister that the issue before the courtin the Sutton Lumber case was determined by the fact that in thememorandum of association by which the company had been incorporated under British Columbia legislation the power "Topurchase, take on lease, or otherwise acquire and hold any lands,timber lands or leases, timber claims, . . . and to sell, lease, subletor otherwise dispose of the same" had been taken. The Minister'ssubmission was derived from a principle believed to have beenlaid down in the Anderson Logging decision, that if a corporationderives gain in the course of exercising any power conferred uponit by its charter or memorandum of association, the gain is tax-able for the reason that the corporation has been carrying on somefeature of the business it was incorporated to carry on . Because

12 (1904), 5 T.C . 159.

13 [19141 A.C. 1001 .

1953]

Case and Comment

923

a taxable profit is any gain acquired in consequence of carryingon a trade or business, the conclusion of taxability in the SuttonLumber case, was regarded as a necessary consequence.

This is substantially the argument which appealed to the lateMr. Justice Archibald of the Exchequer Court when the issuecame before him. He said that the Anderson Logging case laiddown a principle which he then stated in the language of the headnote to the decision as reported in the Supreme Court Reports :"Where the powers of a company, incorporated to take over as agoing concern. a logging business, included the power to acquiretimber lands with a view to dealing in them and turning them toaccount for the profit of the company, and it bought a tract oftimber land and sold it at a profit the same is not a capital pro=fit but one derived from the business of the company and as suchassessable to income tax . . . ". The actual words used by Duff J.,which might be regarded as underlying the head note, were as fol-lows: "The sole raison d'être of a public company is to have abusiness and to carry it on . If the transaction in question belongsto a class of profit-making operations contemplated by the memo-randum of association, prima .facie, at all events, the profit derivedfrom it is a profit derived from the business of the company." 14

Mr. Justice Locke explained and distinguished Duff J.'s re-marks without weakening their application to the Anderson Log-ging Company's activities . In the first place, he . pointed out thatthe Anderson Logging Company, in addition to having the powerto purchase and sell timber limits, had a power, unlike the SuttonLumber Company, to deal in them . The second ground for dis-tinguishing the case, and it is submitted the substantial ground, isthat Duff J. was dealing with a case where very little evidence waspresented on which he could determine the nature of the businessof the company and it was therefore natural'and proper for himto turn to its memorandum of association . Mr. Justice Lockesaid: "In the absence of the evidence of any one having any knowledge of what was referred to as the design of the directors of thecompany [the Anderson Logging Company] in purchasing thelimits and as one of the substantive objects of the company, asdeclared by the memorandum, was to acquire timber land andtimber rights with a view to dealing in them and turning them toaccount for the profit of the company, it was held [by Duff J.]that the appellant had failed to show that the assessment was onewhich ought not to have been made". Counsel for the Sutton

1 [19251 S.C.R. 45, at p. 56 .

924

THE CANADIAN BAR REVIEW

[VOL. XXXI

Lumber Company did not fail to note the course of events whichhad led Duff J . to hold that the Anderson Logging Company pro-fit must be taxed . With a view to avoiding a similar fate, a massof evidence was presented to indicate from the beginning the pur-pose and intention of those who guided the activities of the SuttonLumber Company .

It is significant that the problem for the court in both caseswas presented in almost identical language. Duff J . referred direct-ly to the language of the United Kingdom decisions and quotedSankey J . in Beynon v. Ogg," who asked whether the profit inquestion was a profit made in the operation of the appellant com-pany's business . Mr . Justice Locke said, "The question to be de-cided is not as to what business or trade the company might havecarried on under its memorandum, but rather what was in truththe business it did engage in"." It can be said with some assurancethat the extreme view expressed by the editor of the SupremeCourt Reports in the head note to the Anderson Logging decisionwas not in fact the substance of Duff J .'s decision and it has notbeen supported by Mr. Justice Locke . Although there were in-dications in the decision of the Tax Appeal Board in Cabus CreekLogging Company Limited v . M.N.R . 17 that the board was pre-pared to accept the head note as laying down a valid principle oftaxation, there are no other conspicuous examples of a similartendency, and that point at least can be regarded as settled .

But if it is possible to say that the Sutton Lumber case has putan end to the doctrine that corporate powers are the. determiningfactor in distinguishing capital gains from the income of a corporation, its effect on the doctrine of intention is uncertain . The sub-stance of the opening remarks in a recent essay by Dean G. F .Curtis entitled "Isolation, Intention and Income", which is oneof the Moxon Essays, reads as follows, "Intention, on the acquisi-tion of property, to profit from it by reselling it has emerged inrecent Canadian tax law as the prime test of the taxability of gainsarising from isolated transactions" . 18 The essay develops thisargument with an extended discussion of decisions in the Com-monwealth courts and concludes with the following :

From this it is clear that the courts look as much to a taxpayer'sactions as to his own statements to determine his intention and holdthemselves free to draw conclusions of fact contrary to express declara-tions of intention, particularly those made ex postfacto . . .'1 (1918), 7 T.C . 125.

1~ [1953] C.T.C. 237, at p. 244.17 (1951), 3 T.A.B.C. 305.Is Corry, Cronkite and Whitmore (eds .), Legal Essays in Honour of

Arthur Moxon (1953) p. 239.

1953]

Case and Comment

925

In summary, it seems clear that, in Canada, casual gains are broughtwithin charge if they spring from activities entered upon with profitin view. The business purpose will be spelt out from all the surround-ing circumstances and facts, and does not depend on subjective state-ments o£ intention ; it can indeed exist . though the taxpayer disclaims it .

For the purpose of this comment, Dean Curtis's argument is ac-cepted as adequately establishing'~the pre-eminent position of inten-tion as a factor in determining whether income or capital gain isderived from an isolated transaction.

What weight has the test of intention, however, in those caseswhere the gain 4s derived in the course of carrying on an establish-ed business such. as that of the Sutton Lumber Company? As al-ready noted; Mr. Justice Locke set himself to determine the businesscarried on by the taxpayer . The intention which preceded the ac-quisition of the Nootka limits is not dealt with . It was found thatthe business of the company was to operate a cedar lumber millin the vicinity of the Clayoquot reserves and it seems to have beenassumed that the Nootka reserves were acquired for the purposesof and in the course of conducting that business, this notwith-standing that on the evidence it appeared that the Nootka limitswere deficient in cedar and were not accessible to the mill. More-over, it does not appear that the character of the forest growthwas ascertained in any real way until several years after the pro-perty was purchased and, when the facts were discovered, theprompt decision was made to sell .

Be that as .i t may, the specific findings of fact were that theselimits "were assets in which the company had invested with aview to cutting the merchantable timber into lumber" and that"the 'sale .[was] merely a realization upon one of its capital assetswhich was not required and did not fit into the company's plansfor the operation of its main property" . It seems to be implicit inthe first of these findings ,that intention at the time of acquisitionis a factor to be considered in determining the nature of the gain,but the evidence which justified describing the purchase as an in-vestment is not brought out. As Dean Curtis points out in dis-cussing the Anderson Logging decision

Timber limits, unlike paintings, household goods, machinery', andequipment, do not admit of use or enjoyment ; nor can they be oc-cupied like houses and other buildings . They do not normally con-stitute a source, like stocks and bonds, _ from which income flowsleaving the source, the capital investment, unimpaired. They are, inother words, not objects of use or investment but of exploitation .Their value lies entirely in exchange not retention ; accordingly, itmatters not at all whether they are disposed of bit by bit by being

926)

THE CANADIAN BAR REVIEW

[VOL. XXXI

logged or are sold outright . This reasoning equates the timber stand-ing on the limits to the raw materials of a manufacturer. The limitsare articles `traded in,' rather than `traded with' and thus are notcapital assets, the disposal of which at a profit is alone free from tax.

A possible answer to this is that under modern techniques a tim-ber limit is farmed not mined and the annual production of woodremains constant indefinitely . Nothing in the evidence in eitherthe Anderson Logging or the Sutton Lumber case indicates thatthose companies employed these techniques and it appears notunreasonable to assume that in the latter case quite as much asin the former the limits were purchased because they had potentialvalue in exchange either as standing timber or cut lumber .

If Mr, Justice Locke had embarked on a close investigation ofthe intention surrounding the purchase of the Nootka limits, it ispossible he could have found a taxable gain as was done in theAnderson Logging case . The notable feature of his holding is that,notwithstanding the finding of fact that the company had acquiredan investment when it bought the limits, no consideration is givento its intentions when it made the purchase . This leads me to thesuggestion that the Sutton Lumber decision marks a definite with-drawal from the unlimited application of the doctrine of intentionin favour of the objective test of whether or not the gain is derivedfrom carrying on a trade or business . To generalize, even to thisextent, is apt to be misleading and for the, present it would seemadvisable to say that the case is authority for nothing more thanthe particular point it decided . The point might be said to be thatwhere an asset is acquired, which has value only if it is disposedof or exchanged in some manner, the profit on a sale is neverthe-less not taxable where the property has been acquired for the pur-pose of carrying on a business and is disposed of outside thecourse of carrying on that business . Expressed in the terms of in-tention, it might be said that where the acquisition is for the pur-poses and in the course of carrying on a business the "intention"is presumed to be that the disposition will also be in the courseof carrying on the business . If there is a bona fide frustration ofthis intention, any profit arising on the disposition is, therefore,not from the carrying on of the trade or business and hence is nottaxable.

The simple approach to the Sutton Lumber decision is to re-gard it as no more than an instance of a non-taxable gain on therealization of a capital asset in which a trading company had invested its funds . Complications develop when it is attempted torelate the evidence, which is exclusively concerned with the nature

1953]

Case and Comment

'

927'

of the business carried on by the company, to the conclusions offact that the Nooika limits were investments or capital assets, asto which there is no evidence. Rather the evidence is related toyet another finding that the sale of the asset was not made in thecourse of carrying on the business of the company. I have sug-gested that the decision is authority for no more than that the saleof a capital asset produces a capital gain. If, however, a non-tax-able gain can be said to arise in all cases of sales of assets similarin character to the Nootka limits, where they take place other-wise than in the ordinary course of the company's business, theimplications will be very far reaching indeed."

STUART THOM'r

EVIDENCE-FEDERAL INCOME TAX STATEMENTS-PRODUCTION INCOURT OVER MINISTER'S OBJECTION-PUBLIC POLICY.-Illinois'Governor Adlai Stevenson, writing in the Altantic Monthly on theprevalence of slot machine crime in the state of Illinois, comment-ed on the moral confusion arising in the public mind from an ap-parent contradiction between the policies of the Illinois state gov-ernment and the United States federal government on slot ma-chines . The former had outlawed the use of slot machines on painof penalty and .forfeiture; the latter had imposed a tax on them,thereby imPliedly giving its stamp of approval to their ownershipand use. Similar confusion might easily arise in Canada from themanner in which Canadian legislation treats profitable crime.

1s Instances of similar transactions have already come before the In-come Tax Appeal Board . In Lapp v. M.N.R. (1951), 3 T.A.B.C. 301, theappellant purchased farm property on the outskirts of Toronto with theintention of operating a chicken farm . He was unable to carry out hisplans for the reason that the property was brought within the urban de-velopment area and could only be used for building purposes . The appel-lant accordingly subdivided the property and sold it at a profit. This washeld to be a non-taxable gain . In the second case of Williscroft v. M.N.R .(1952), 7 T.A.B:C . 118, building lots were purchased by a contractor withthe intention of erecting houses on them for sale. He became short ofmoney and under pressure from his bank sold some of the lots, but at aprofit . This gain was also held to be non-taxable. In the third case of No .123 v. M.N.R. (not yet reported) a company purchased a large quantityof a chemical compound, to be used in its business of manufacturingplastic goods . The material, upon being so used, turned out to be unsatis-factory and the appellant was required to dispose of it, but did so at aprofit . In this case the gain was held to be taxable . These three cases in-dicate the possibilities of the Sutton Lumber decision in a striking manner.Were the Nootka limits capital assets, in the sense that Mr . Lapp's farmwas a capital asset, quasi-capital, resembling Mr. Williscroft's buildinglots, or really nothing more than inventory, analogous to the asset pur-chased by No. 123? -

` *Of Smith, Rae, Greer, Toronto . Mr . Thom is chairman of the Taxa-tion Section of the Canadian Bar Association .

928

THE CANADIAN BAR REVIEW

[VOL. XXXI

The Canadian Criminal Code defines criminal activity and pro-vides penalties for convicted criminals . Yet, pursuant to the pro-visions of the Canadian Income Tax Act, criminals are requiredto pay income tax on their profits from criminal activities . Mem-bers of the Canadian public may liken this attitude of the Cana-dian government to that of a person who condemns prostitutionwhile at the same time living off its avails . Members of the legalprofession, who are used to thinking in terms of the common law,which regards criminal transactions as null and void, may alsohave been somewhat startled by the judgment of Lord Haldanein 1927, on behalf of the Judicial Committee of the Privy Council,in Smith v. Minister of Finance,' which held (reversing the un-animous decision of the Supreme Court of Canada and restoringthe decision of Audette J. in the Exchequer Court) that the profitfrom illicit traffic in liquor within Ontario, contrary to the OntarioTemperance Act, was "income" within the meaning of the Cana-dian Income War Tax Act. Although that case did not concernthe effect of either Dominion legislation on crime or the commonlaw of crime on the meaning of "income", it denied the effect ofprovincial legislation and of moral and ethical standards on theliteral meaning of the definition of "income" that was to be foundin the Dominion Income War Tax Act. This judgment is now ac-cepted as justifying the imposition of income tax on all illegalgains that come within the concept of business profits in the In-come Tax Act.

Those persons who on moral grounds would condemn theestablished practice of taxing the profit from crime should notethat the present high rate of income taxation in Canada rendersthe alternative course of not taxing illegal profits even less attrac-tive, since it would substantially subsidize criminal activity . Further-reflection leads one to the conclusion that any real inconsistencyin our approach to crime lies in the administrative practices en-visaged by the Criminal Code and under the Income Tax Act. Con-stant vigilance in the pursuit and apprehension of Code offendersis practised both by provincial and Dominion police forces . Theduty of prosecuting Code offenders to secure their conviction be-fore judges (who are, for the most part, federally appointed) isdiligently carried out by provincial authorities. But the Depart-ment of National Revenue, in administering the Income Tax Act,has pursued a policy that has not always been consistent with theoutlawery of crime. That fact was noted by Mignault J. (Anglin

1 [19271 A.C. 193 ; [1917-271 C.T.C. 251 .

1953]

Case and Comment

929

C.J.C., Duff, Newcombe and Rinfret JJ. concurring) in the Smithcase, where he said :

Moreover what may be called the machinery clauses of the Act(sections 7 et seq.) clearly shew that it never was contemplated that anincome tax would be levied on the gains derived from illicit businessesor from . the commission of crime . Thus every person liable to taxationmust make to the Minister, on-or before April 30, in each year, a re-turn of his total income during the last preceding year . If the Minister,in order to be able to make an assessment or for any other purpose,desires any information or additional information, he may demandit by registered letter and the taxpayer is obliged to furnish this in-formation within thirty days . The Minister may also require the pro-duction of any letters, accounts, invoices, statements, books or otherdocuments, or he may have an inquiry made by an officer thereuntoauthorized by him, and if the taxpayer fails or refuses to keep ade-quate books or accounts for -income tax, purposes, the Minister mayrequire him to keep such records and accounts as he may prescribe .Any information thus obtained is treated as confidential and its di-vulgement is prohibited.

I think the inference irresistible that the taxpayer's return of in-come, the additional information which may be demanded by theMinister, the books and accounts which may be inspected, and theaccounts and records which the Minister may require the taxpayer tokeep are all in respect of businesses which may be legally carried on.It is difficult to conceive of the Minister requiring criminals to furnishinformation as to profits derived from the commission -of crime, ordemanding from them the keeping of books or records of their illicitand criminal operations . Furthermore if the gains derived from crimeare within the contemplation of the statute, then the expenses incurredin making these gains, e.g. in the employment of criminal agents,would be chargeable as deductions against these gains, and, as to allinformation furnished by the wrongdoer, there would be a promiseof secrecy for his protection . It is impossible to believe that anythinglike this was contemplated by Parliament. 2

The extent, if any, to which officials of the Department ofNational Revenue' practise the disclosure to Dominion or pro-vincial police of criminal activity revealed by its investigations isnot known to me. However, the fact that the Department of Na-tional Revenue is not always inclined to render assistance in theprosecution of apprehended criminals is clearly revealed by therecent reference to the British Columbia Court of Appeal in ReRegina v. Snider.'

That reference resulted from the prosecution of a number ofaccused persons on an indictment charging them with conspiringtogether and with others to keep common betting houses contrary

2 [1925] S.C.R . 405, at pp . 408-409 ; [1917-27] C.T.C. 244, at pp . 246-247 .311953] 2 D.L.R. 9.

930

THE CANADIAN BAR REVIEW

[VOL. XXXI

to the Criminal Code . A director of taxation was summoned atthe instance of counsel for the Attorney-General of British Colum-bia to appear and give evidence on behalf of the Crown and alsoto produce at the trial the income tax returns filed by the accused.The Minister of National Revenue objected . The ground of ob-jection appears to have been that, in the opinion of the minister,it would have been prejudicial to the public interest if the directorof taxation produced the returns and gave oral evidence relatingto those returns or disclosed information obtained by him in thecourse of his employment with the Department of National Rev-enue . These objections were overruled by the presiding judge. Thewhole matter was then referred to the Court of Appeal under theConstitutional Questions Determination Act, in the form of threequestions :

1 . On the trial of a person charged with an indictable offence,where a subpoena duces tecum has been served on the appropriateIncome Tax official to produce before the Court on such trial returns,reports, papers and documents filed pursuant to the provisions of theIncome Tax Act, the Income War Tax Act or the Excess Profits TaxAct 1940, and to give evidence relating thereto, and where the Ministerof National Revenue has stated on oath that in his opinion such evi-dence and the production of such returns, reports, papers and docu-ments would be prejudicial to the public interest ; ought such Courtto order the production of such returns, reports, papers and docu-ments and the giving of oral evidence relating thereto:

(a) when such subpoena is served at the instance or on behalf ofthe Attorney-General of the Province ;

(b) when such subpoena is served at the instance or on behalf ofthe accused?

2. Are the documents hereinbefore mentioned in Question 1, for thepurposes of a subpoena duces tecum directed to an Income Tax officialof the Income Tax Department, in the possession of the said officialto the extent that the Court may order them produced in Court pur-suant to the said subpoena, or are the said documents in the posses-sion of the Crown?

3. Do Sections 81 and 121 of the Income War Tax Act and theIncome Tax Act 1948 respectively affect the right of the Minister ofNational Revenue to object on the ground of prejudice to the publicinterest to the production of the documents hereinbefore mentionedin Question 1 and to the giving of oral evidence by an Income Taxofficial relating to returns made under the said Acts?

When viewed in their context, these questions did not raiseany problem regarding admissibility of evidence other than theMinister's right to withhold disclosure ; and it is important to notethat considerations of the value of such evidence in a criminalprosecution and the fairness to an accused of admitting evidence

1953]

Case and Comment

931

obtained in pursuing government tax policies were not consideredin this case . It was argued for the Minister that his refusal to allowdisclosure on the stated ground of public policy was final and con-clusive and not subject to review by the court. At . the same timeit was revealed to the court that his main ground for objection wasthat the revenue of the Crown would stiffer because those personsengaged in crime would not make a true return of the proceedsof their criminal activities if in so doing there was the possibilitythat their crimes could be proved against them by the productionof the returns. The Minister also argued that the relevant docu-ments were in the possession of the Crown, against whom an order.could not be issued, and, finally, that section 121 of the IncomeTax Act, 1948, prevented disclosure. - That section (now section133 of the Income Tax Act), read :

Every person who, while employed in the service of His -Majestyhas communicated or allowed to be communicated to a person notlegally entitled thereto any information obtained under this Act orhas allowed any such person to inspect or have access to any writtenstatement furnished under this Act is guilty of an offence and liableon summary conviction to a fine not exceeding $200 .The British Columbia Court of Appeal held, Sydney Smith

J.A . dissenting, that the relevant documents were not in the posses-sion of the Crown but of authorized Crown officials empoweredby Parliament to receive and retain income tax returns. A majorityof the court also held that section 121 of the Act did not affectthe Minister's right to object to the production of evidence. Thatsection left open the question who were persons "legally entitled"to information and, in the opinion of the majority, any absolutejurisdiction of the Minister to deny a court any access to theevidence would have to be conferred in clearer language. At thesame time the majority considered that there was nothing in thelegislation to limit the Minister's right to object to the productionof documents and the examination of officials on the ground ofpublic policy. Mr . Justice O'Halloran dissented from the majorityand held that section 121 must be read to exclude the existence ofany ministerial or governmental power not expressed in the statuteand that courts of law, which come within the phrase "personslegally entitled"; were thereby given the right to the production ofincome tax information both in criminal and civil cases.

On the first question submitted, involving the finality and con--elusiveness of the Minister's objection on the ground of publicpolicy, counsel for the Minister relied on the well-known decisionof the House of Lords in Duncan v. Cammell, Laird and Company,

932

THE CANADIAN BAR REVIEW

[VOL. XXXI

Limited.' That case concerned instructions issued during time ofwar by the First Lord of the Admiralty prohibiting the disclosure,by one of the parties to a civil action of documents relating to theloss of a British submarine during a trial run just before the out-break of war . The reason given was that disclosure would be in-jurious to the public interest . The House of Lords unanimouslyupheld the Minister and refused to order production of the docu-ments to allow the court to ascertain if the objection was proper .In delivering judgment for the house, Viscount Simon L.C. em-phasized that a Minister's determination on the question of injuryto the public interest should be treated by a court as conclusive .At the same time he made clear that the decision to exclude adocument is the judge's decision and thereupon proceeded to dis-cuss what would constitute adequate justification for objecting toproduction. He says :

It is not a sufficient ground that the documents are `State documents'or `official' or are marked 'confidential' . It would not be a good groundthat, if they were produced, the consequences might involve the de-partment or the government in parliamentary discussion or in publiccriticism, or might necessitate the attendance as witnesses or otherwiseof officials who have pressing duties elsewhere . Neither would it be agood ground that production might tend to expose a want of efficiencyin the administration or tend to lay the department open to claimsfor compensation. In a word, it is not enough that the minister or thedepartment does not want to have the documents produced . The min-ister, in deciding whether it is his duty to object, should bear theseconsiderations in mind, for he ought not to take the responsibility ofwithholding production except in cases where the public interest wouldotherwise be damnified . for example, where disclosure would be in-jurious to national defence, or to good diplomatic relations, or wherethe practice of keeping a class of documents secret is necessary for theproper functioning of the public service.fi

There can be no doubt that their Lordships realized that the exe-cutive's power of refusal might be abused. Yet they were preparedto give the executive the absolute right to refuse production inrecognition of the fact that executive discretion may at times benecessary in the interests of sound administration . A similar viewwas recently adopted by a majority of the Supreme Court of theUnited States in U.S . v . Reynolds, where it is observed : s

Judicial control over the evidence in a case cannot be abdicated to thecaprice of executive officers . Yet we will not go so far as to say thatthe court may automatically require a complete disclosure to the judge1 (19421 A.C . 624 ; [19421 1 All E.R . 587 .[l942] A.C. 624, at p . 642 ; [1942] 1 All E.R. 587, at p . 595 .fi -U.S .-, 97 L . ed . (Advance p . 519 . at p. 525) .

1953]

Case and Comment

933

before the claim of privilege will be accepted in any case . It may bepossible to satisfy the court, from all the circumstances of the case,that there is a reasonable danger that compulsion of the ,evidence willexpose military matters which, in the interest of national security,should not be divulged . When this is the case, the occasion for theprivilege is appropriate, and the court should not jeopardize thesecurity which the privilege is meant to protect by insisting upon anexamination of the evidence, even by the judge alone, in chambers.

On the Snider reference, Mr. Justice Sydney Smith thoughtthat the balance of authority required that the Minister's rulingbe taken as conclusive not only in the case of "true state docu-ments" but of documents like tax returns, "in which the statemerely has an interest". Moreover, he adds :

I see no escape from holding that to treat a Minister's claim of publicinterest as conclusive is the only practical course with regard to docu-ments held by the Crown whether the case be civil or criminal.

The majority of the court rejected this view, basing their reason-ing on various grounds of public policy. Sloan C.J.B.C. (Bird J.A .concurring) distinguished earlier cases on the ground that none ofthem involved the direct conflict or disagreement between two de-partments of state that, as I have said, is evident in this type ofcase . In the face of such conflict he regarded the court as free todecide which public interest contended for was paramount andshould prevail. He identifies "the due administration of publicjustice" as the interest that ought to be regarded as paramount.Hence the Minister's objection would not be final in the conversecase where either an accused person or the Crown desires the pro-duction. of income tax returns. "In my opinion", he says, "it is inthe public interest that the life and liberty of an innocent personshould not be unjustly imperilled ." It is also apparent that hisLordship regarded earlier cases, including Dùncan v. Cammell,Laird, and Company, Limited, as having no application to criminaltrials where life and liberty are at stake and, it may be added, hisjudgment is expressly limited to the question of income tax re-turns in criminal cases.

Mr. Justice Robertson also decided that the Minister's deci-sion should not be treated as final, but he proceeded on a some-what narrower basis. Although he also thought that the paramountof two conflicting public policies should prevail, he described thisparamount policy as being that "an innocent person should notbe convicted" and "a guilty person charged with a crime shouldnot escape". He confined the Cammell, Laird case to civil actionsand (without reaffirming) referred to his views expressed in an

934

THE CANADIAN BAR REVIEW

[VOL. XXXI

earlier case that the Minister's objection should be treated as con-clusive in a civil case .

Mr . Justice O'Halloran's reasons were more far-reaching . Heconfined the Cammell, Laird case to situations involving the"safety of the state" and refused to observe any distinction betweencriminal and civil cases . Moreover, he regarded that case as limit-ed to laying down a rule of practice for English courts in dealingwith a minister's determination on public welfare or public policy .On this point he considered the decision contrary to that of thePrivy Council in Robinson v. South Australia,' for which he ex-pressed a preference . On the question of policy, he regarded theissue raised as of "high constitutional law" involving "a directclash without middle ground, between the power of the Courts onthe one hand, and the power of a member of the Executive on theother hand". "It is", he says, "therefore not a case for an arbitrator(as distinct from a Court) to invoke expedients to reconcile theclaims of two Departments of state, but it is a case for a Court assuch to define and uphold the constitutional power of the Courtwhen and where it is invaded by a member of the Executive." Ac-cordingly he held that the power to determine whether the evidencewas producible in court should be exercised by the court alike incivil and criminal cases .

Aside from the technical reasoning in the judgments in thiscase, the majority of the court appears to have felt that the Ministerhad abused his power to rule on admissibility of departmentaldocuments. All the judges, except Mr. Justice Sydney Smith, enter-ed into the question whether the Minister's objections had beenvalidly raised . The majority of the court felt it to be a "violent as-sumption" that criminals do make a true disclosure of their in-come earned from crime . Moreover, it was obvious that the courtconsidered the importance of extracting revenue from criminalsas of less importance than the suppression of crime . Mr . JusticeO'Halloran concluded that :

In the last analysis the only ground left is that some people whomake profits illegally or illicitly and who now think it is wiser to de-clare them in some form or other, will find means of evading disclosure .As I understand the argument this ground was relied upon . But is itto be assumed that men who now declare returns relating to 'boot-legging' of various kinds, to swindling, to forms of illegal drug trans-actions, etc . etc., will not do so if they think their returns may be pro-duceable in Court? But it may work out the other way, and there maybe more danger to such people if they do not disclose their profits7 [1953] 2 D.L.R . 9, at p . 48 .1 [19311 A.C . 704 .

1953]

Case and Comment

935

truthfully . Their failure to do so may become more appareht if theirreturns, are produced in Court . In any event, the percentage of tax-payers of this type cannot be substantial .

Moreover, one would think that if criminal activities are disclos-ed in income tax returns, it would be the duty of the Minister to makethis known to the Attorney-General . One cannot imagine a Ministerof the Crown keeping secret the deceitful or criminal activities of ataxpayer so that the Crown may obtain a share of the criminal profits.Without pursuing the subject further it ought to be evident that dis-closure of income tax returns in Court can have no rational relationto public policy in any true sense ; nor can it have any understandableinterference with the proper functioning of the Income Tax Depart-ment . In any event, the whole field of income tax is covered by statute,and the measure of any secrecy Parliament intended to be attachedto it is to be found in those statutes .

It may be that the court has erred. The administrative neces-sity for strict secrecy and confidence within the Department ofNational Revenue may far outweigh the possible evidentiary valuethat departmental records may have in a criminal prosecution. Ifthis is so, we can expect that the Minister will introduce appro-priate amendments to the Income Tax Act, which Parliament willenact (see the United States Internal Revenue Code, section 55,and the' regtdations' passed under it). In that event the presentpractice of the department will stand confirmed, but Canadianswill have had the satisfaction of seeing the entire question of, ad-ministrative inconsistencies in the attitude toward crime broughtat last under review .

F. E . LABRIE*

GIFTS -DONATIO MORTIS CAUSA-DEATH-BED GIFT - OF JEWEL-LERY EFFECTED BY DELIVERY OF KEY TO TRUNK CONTAINING KEYTO A SAFETY DEPOSIT BOX CONTAINING KEY TO A SECOND DE-POSIT BOX-WHETHER SUFFICIENT DELIVERY OF JEWELLERY-WHETHER DONATIO MORTIS CAUSA OR GIFT INTER VIVOS.-=Everylawyers knows, in a general way, the legal requirements for avalid doriatio mortis causa . Assuming that the subject of the giftis a proper one, the legal requisites for a valid gift mortis causa, asstated by Lord Russell of Killowen C. J., are :

°For an effectual donatio mortis causa, three things must combine ; first,the "gift or donation must have been made in contemplation, thoughnot necessarily in expectation, of death ; secondly, there must have beendelivery to the donee of the subject-matter of the gift ; and, thirdly ;

*Associate Professor of Law, School of Law, University of Toronto.

936

THE CANADIAN BAR REVIEW

[VOL. XXXI

the gift must be made under such circumstances as to show that thething is to revert to the donor in case he should recover.'

In the recent English case of Re Lillingston 2 Wynn-Parry J. foundthat the three things did combine and upheld a strongly contesteddonatio mortis causa. The case is of particular interest, however,because of its unusual facts and because, in the light of the facts,counsel for the residuary legatee (opposing the gift) argued thatthere was no room for a finding that the gift was conditional.'

The facts of Re Lillingston, shortly, were these. The donor wasa Mrs. Elizabeth Lillingston, who was seventy-eight years old andin failing health . At her death, and for some months before, shewas living at a hotel managed by the donee, a Mrs. Pembery. Thedonor was confined to her bed and was nursed by Mrs. Pemberywith the assistance of a trained nurse. On February 6th, 1950,Mrs. Lillingston suffered a heart attack, following which she saidto Mrs. Pembery that she felt she was "done for", that she was verynear her end, and would die without leaving her room again.She added : "I want to be cremated, I do not want to go into thecold earth and I do not want any flowers" . She then said : "I amgoing to give you all my jewellery . I am giving you my key to thesafe deposit at Harrods and when I am gone you can go and getthe jewellery." She then handed the donee the keys of her trunkwith the words : "Here is the key to the trunk over there. You willfind the key to the Harrods safe deposit on the right hand side inthe finger of a glove. I have shown you where it is before. The keyto my city safe is at Harrods. I want you to have all my jewelleryexcept the diamond necklace which is for my god-daughter . Thatis in my city safe." The donor then took a packet from under herpillow and said : "This is also for you". The donee opened it andsaw that it contained jewellery . It was agreed that the packetshould be kept in the trunk (in the donor's room) and the doneeopened the trunk with the key she had just received and placedthe packet inside it . The donor then said : "Keep the key; it is nowyours" . Six days later, on February 12th, 1950, Mrs. Lillingstondied . The safety deposit boxes referred to by the donor containedjewellery, and the safety deposit box at Harrods, Ltd. also con-tained the key to the second safety deposit box. The donee, Mrs.Pembery, claimed to be entitled to the jewellery in the packet andin the safety deposit boxes.

' Cain v. Moon, [1896] 2 Q.B . 283, at p. 286.2 Re Lillingston (deceased) . Pembery v. Pembery and Another, [1952] 2

All E.R. 184.1 See Lord Russell's third requisite, supra.

1953]

Case and Comment

937

On the question whether or not there had been a valid deliveryof the jewellery to Mrs. Pembery, it will be seen that as to partof the jewellery access by the donee could be obtained only aftermaking use of a series of keys-after using, in other words, a keyto a key to a key. And an even more challenging legal obstacle tothe sufficiency of delivery were the terms of the contract betweenthe donor and Harrods, Ltd. This contract required that a personother than Mrs. Lillingston could only be given the contents ofthe safety deposit box on producing, in addition to the key, anauthority signed by her and giving a password.

Neither the fact that a series of keys had to be used by thedonee nor the terms of the contract between the donor and' Har-rods, Ltd. troubled the court unduly. As to the keys,- the courtnoted that the scope of the gift was made clear, therefore "it doesnot matter in how many boxes the subject of a gift may be con-tained or that each, except the last, contains a key which opensthe next'1.4 As to the contract, the court simply cited Re Wasser-berg' and Delgoffe v . Faders as authorities for the propositionthat in gifts mortis causa the law does not in all cases requirecomplete delivery but, where a partial vesting has been effected,for example, by delivery of a key of the receptacle containing thearticles intended to be given, a trust has been raised under whichthe donee can call on the legal personal representative of thedonor to complete the gift . Thus the court disposed of any argu-ment based on the circumstance that most of the jewellery was notin fact handed to the donee but only made available to her underwell established equitable principles .

It is important to notice, however, that the doctrine that in-complete or inchoate delivery may sometimes be sufficient to ef-fectuate a gift mortis causa is a rule only applicable to gifts, of thiskind. For an effectual gift inter vivos, -an inchoate delivery will .not do.' Accordingly, counsel opposing the validity of the gift inRe Lillingston endeavoured to persuade the court that what, infact and in law, the donor attempted to make was not a- gift mortiscausa but inter vivos . In the circumstances, this was a difficultargument to sustain. It was clear that Mrs. Lillingston was dying

4 At p. 191 .5 [19151 1 Ch . 195 ; 84 L.J. Ch . 214 .6 [19391 3 All E.R . '682 ; [1939] Ch. 922 .If any authority is needed for this statement, Re Wasserberg, supra,

footnote 5, could be cited, where Sargant J. states : " . . . donationes mortiscausa fall into two classes . There is first the class of cases in which a complete delivery or transfer takes place such as would be sufficient in. thecase of an ordinary gift . . . ."

938

THE CANADIAN BAR REVIEW

[VOL. XXXI

when she handed over the important keys to her trunk and "If agift is made in expectation of death, there is an implied conditionthat it is to be held only in the event of death" .' Counsel for thoseopposing the gift were, shortly, up against this : the law says thata dying donor need not expressly say that his gift is conditionalto make it a good gift mortis causa and in the absence of evidenceto the contrary the law will imply this condition for him. In Kend-rick v. Dominion Bank and Bownas, Meredith C.J.O . put it thisway

I do not understand that the implication spoken of is a presump-tion of law, but that it is the proper inference from the circumstancethat the gift was made in the extremity of sickness, which may be re-butted by proof of other circumstances pointing to a different intentionon the part of the donor. 9

Confronted by this not inconsiderable hurdle, counsel pre-sented an ingenious argument which may, on another occasion,be employed with more success. Simply put, the argument againstthe conditional character of the gift in Re Lillingston was that thedonor was so sick that she could not possibly recover and thatshe was, in fact, aware of this when she purported to make thegift . That being so, there was no occasion for implying a condi-tion that the jewellery was to be returned on recovery .

As authority for their argument, counsel referred to a casedecided by the Court of Session of Scotland, Lord Advocate v .M'Court .1° There, because at the time of the gift the donor, "dyingof mortification in his leg", "was a doomed man who recognizedthe very short span of life he had alone to count on", the courtfound that " . . . there was no occasion for any implied conditionabout recovery, and I am not going to read such a condition wherethe circumstances were not such as would give rise to it . . . . . . 11

But Wynn-Parry J. did not accede to the argument. He heldthat Lord Advocate v . M'Court turned on its peculiar facts. "Theimminence of death was certain and knowledge thereof was im-puted to the deceased . . . . In the present case the evidence doesnot lead me to the conclusion that on Feb. 6, 1950, it was certainthat death would overtake Mrs. Lillingston within a matter ofdays . No doubt, she felt that she was almost certain to die soon,but that does not appear to me to be sufficient." 12 Furthermore,

~ Gardner v. Parker (1818), 3 Madd . 184: 56 E.R. 478.9 (1920), 48 O.L.R . 539, at p. 543 .10 (1893), 20 R. (Ct. of Sess .) 488.11 Per Lord M'Laren at p. 500.12 At p. 189.

1953)

, Case and Comment

939

the court felt it was bound by the decisions of Gardner v. Parker"and Re Mustapha,l4 where the significant facts closely approxi-mated 'those in Re Lillingston and where, nevertheless, a gooddonatio mortis causa was found to have been made .

Despite their failure to convince the court in Re Lillingstonthat a donatio mortis causa had not been effected, counsel for thelosing party succeeded in inducing Wynn-Parry J. to incorporatein his decision long extracts from the decisions rendered in LordAdvocate v. M'Court and from these it appears that it may be -quite feasible for lawyers to try this argument- again. The argu-ment that at the time of the donative transaction the donor maybe so near death and so certain himself that death is near that itis nonsense to imply the condition necessary for a valid donatiomortis causa is not without merit.

R. GRAHAM MuRRAY *`,

Recent Judicial Appointments

Honourable Alphonse Fournier, Q.C., of the city of Hull, in the pro-vince of Quebec, to be a puisne judge of the Exchequer Court of Canada .

William Richard Kent, Q.C., of the town of Corner Brook, in theprovince of Newfoundland, to be a judge of the District Court of theJudicial District of Humber-St . George's .W. Loyola Whelan, Q.C ., of the town of Corner Brook, in the pro-

vince of Newfoundland, to be a judge of the District Court of the Judi-cial District of St . John's East.W. P . Potter, Q.C ., of the town of Lunenburg, in the province of

Nova Scotia, to be,a puisne judge of the Exchequer Court of Canada .A . H . Young, Q.C ., of the city of Toronto, in the province of Ontario,

to be a junior judge of the County Court for the county of York and alsoa local judge of the High Court of Justice for Ontario during his tenureof office as junior judge.H. E . Hazlewood, Esquire, barrister-af-law, of the town of Port

Colborne, in the province of Ontario to be a junior judge of the CountyCourt for the county of Welland and also a local judge of the High Courtof Justice for Ontario during his tenure of office as junior judge .

His Honour Nelles Victor Buchanan, a judge of the District Court ofthe district of Northern Alberta, to be chiefjudge of the court .

P . Greschuk, Esquire, barrister-at-law, of the city of,Edmonton, inthe province of Alberta, to be a judge of the District Court of the districtof Northern Alberta and also a local judge of the Supreme Court ofAlberta during his tenure of office as a judge of the District Court .

13 Supra, footnote 8 .

-14 (1891), 8 T.L.R . 160.*R . Graham Murray, B.A ., LL.B . (Dal .), LL.M . (Harvard), Professor

of Law, Dalhousie University . Professor Murray is Provincial Editor inNova Scotia of the Canadian Bar Review.