Saskatchewan Wheat Pool v. The Queen, 85 DTC 5034, [1985] 1 CTC 31 (FCA)

Hugessen, J:—The Saskatchewan Wheat Pool is a grain dealer. As such it operates about 950 primary elevators in Saskatchewan. It also operates terminal elevators in Thunder Bay and Vancouver. This appeal concerns the Pool’s right to claim inventory allowance in connection with its dealings for the Canadian Wheat Board in high quality grains (of a quality graded higher than feed grain

— often referred to as “Board grains’’).

The Canadian Wheat Board is a statutory body charged with the orderly marketing of Board grains destined for inter-provincial and export markets. To this end it has a monopoly of such grains. In order to acquire property in Board grains from the producers thereof, the Board enters into contractual arrangements with grain dealers like the Pool. Those arrangements are at the heart of the present litigation.

The issue briefly put is to know whether Board grains acquired by the Pool on behalf of the Board become part of the Pool’s inventory which is then sold to the Board. If so, the Pool and others in like case may claim the inventory allowance permitted by paragraph 20(1 )(gg) of the Income Tax Act.* [1]

If not, the claim fails, as does the present appeal from a judgment of the Trial Division confirming the Minister’s reassessment.

By the terms of the agreement between the Board and the Pool, the latter is appointed to act as the agent of the Board for the purchase of Board grains from the producers. If the matter ended there, there would, of course, be no issue; in a pure agency arrangement that agent does not become the owner of goods which he acquires for his principal and does not sell them to him. The relations between the parties, however, are far more complex than can be explained by a simple contract of agency. I shall attempt in as few words as possible to trace the salient features of the Pool’s dealings in Board grains, and then try to fit those dealings into the conceptual framework of paragraph 20(l)(gg).

Grain is sold by the producing farmer to the Pool and other similar dealers at primary elevators. As anyone who has travelled in the prairies can attest, such elevators are widely spread throughout the countryside. The price of Board grains is fixed by the Board and this price forms the basis of the price paid by the dealer to the producer. A tariff established by the Canadian Grain Commission sets the maximum limits that a dealer may charge by way of deduction from the Board price to cover its own costs and profit; within the limits set by that tariff there is considerable room for competition amongst dealers.

Grain delivered to one of the Pool’s primary elevators is graded and weighed and, if it is Board grain and the producer wishes to sell it, will be paid for by a Cash Purchase Ticket. This is, in effect, a cheque payable to the producer drawn on the Pool’s own funds. Any errors or shortfalls in the weighing and grading process are for the Pool’s account; the Board will only pay on the basis of the official weighing and grading which takes place under the supervision of the Canadian Grain Commission at the time the grain reaches a terminal elevator. By the same token, of course, if grain should be of higher quality or in greater quantity than was originally determined at the primary elevator, the windfall will accrue to the Pool’s benefit. What is more, changes in the quality of grain may occur in storage. Inferior, damp grains may be upgraded by drying and mixing; high quality grains may be downgraded by infestation or otherwise. Such changes are for the account of neither the primary producer nor the Board but of the Pool. Also, not all Board grain delivered to the Pool is sold at once by the producer, who may, for a variety of reasons, choose to simply store it with the Pool against delivery of a Graded Storage Receipt; this is like a warehouse receipt and obliges the Pool, upon surrender, to deliver to the holder a like quantity of grain of the same grade. Since all grains of a like grade are commingled in the elevator bins, it is not possible to distinguish grain which has been purchased for the Board from that which has simply been accepted for storage, although, of course, the proportions of each category making up the whole of the bin should always be known.

The Pool is required to report to the Board on a daily basis for its purchases of Board grains. Such grains are stored by the Pool until called for by the Board, when they will be shipped by rail to terminal elevators at Vancouver or Thunder Bay.

While grain is in storage in a primary elevator or in transit to terminal elevators, storage and interest charges are paid thereon by the Board to the Pool. During this whole period of time, the agreement between the Pool and the Board makes it clear that the grain is at the Pool’s risk except for loss or damage caused solely by force majeure.

Upon arrival at the terminal, the grains are officially weighed and graded and a Terminal Elevator Receipt issued. The Terminal Elevator Receipt is treated as a document of title and upon endorsement and delivery of it to the Board, the Pool receives payment of the purchase price together with carrying charges; these include the storage charges and interest on the amount paid by the Pool to the producers from the time the grain was delivered to the primary elevator.

If the Board’s operations in any year result in a surplus, the producers will receive a further payment directly from the Board on account of any Board grains sold by them through the Pool. With this sole exception, however, all payments to producers for Board grains are made by the Pool from its own funds. The agreement provides that the Pool may effect bank borrowings on the security of Board grains and specifies that the Pool “shall be and is deemed and declared to be the owner . . . for all such purposes and to such extent”.

The Pool is forbidden by its agreement with the Board from dealing in Board grains otherwise than through the Board; so strict is this prohibition that if the Pool needs Board grain for its own purposes (eg for milling), it cannot use the grain in its own possession but must first notionally deliver the required quantity to the Board and then buy it back.

The inventory allowance permitted by paragraph 20(1 )(gg) was introduced into the Income Tax Act in 1977. Its obvious purpose was to allow some relief to businesses from the increased tax liability due to “false” profits created by the effect of high inflation on year-end inventories. It may be doubted if it was ever intended that a taxpayer in the Pool’s position should benefit from this provision since Pool inventories carry Board grains at the price fixed by the Board which, of course, does not vary with regard to any given quantity of grain between the time when the Pool accepts delivery from the producer and takes it into inventory and the end of that crop year (August 1 to July 31, which is also the Pool’s fiscal year), hence, it is impossible for inventories of Board grains ever to be subject to any inflationary distortions in the course of the year. Be that as it may, if the taxpayer can bring itself within the text of the legislation, it is entitled to benefit from the deduction.

The Pool’s claim for inventory allowance must, by the text of paragraph 20(l)(gg), rest on the twin propositions that Board grains form part of the Pool’s inventory and that such grains are held by the Pool for sale.

The first of these propositions is certainly arguable. Inventory is defined, in subsection 248(1), as being

a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business.

This is a very broad definition and it seems to me to be difficult to urge that Board grains, the risk of whose quantity and quality and any variations therein are for the account of the Pool, are not property whose cost or value are relevant in computing the Pool’s income.

What is far more difficult to accept is the Pool’s second proposition to the effect that it holds Board grains for sale to the Board and, in fact, sells them at the time of the endorsement and delivery of the Terminal Elevator Receipt. Certainly there is nothing in the agreement between the Pool and the Board to indicate that this is the case; that agreement speaks exclusively and repeatedly in the language of agency. The Pool, however, argues that when it accepts delivery of Board grains at a primary elevator, it acquires the possession, use and risk thereof and hence becomes in law their owner; such ownership is subsequently transferred to the Board by the endorsement and delivery of a document of title in exchange for a money consideration called the price in a transaction which displays all the elements of the classic definition of the contract of sale.

It may well be that the Pool becomes the owner of all the grains delivered to it. This does not advance the matter very far, however, for the same might be said of anyone accepting fungibles from a variety of sources and commingling them in a common storage facility. It could not seriously be suggested that grains delivered to the Pool for storage under a Graded Storage Receipt are sold to the holder of such receipt at the time they are taken out of storage. The relationship is not one of vendor and purchaser but of warehouseman and holder of a warehouse receipt.

Even the Pool’s ownership of Board grains may be subject to some doubt, however. Certainly the Pool has possession, use and some risk, but there is a very important part of the risk which lies elsewhere. Clause 11 of the agreement provides that the Pool

shall not be liable for . . . loss or damage . . . caused solely by cyclone, tornado, flood, riot, civil commotion, acts of God or the Queen’s enemies.

Risk of loss by force majeure is surely one of the identifying characteristics of ownership and appears to rest not with the Pool but with the Board.

As to what takes place when the Pool delivers grains to the Board, I have great difficulty in qualifying this as a contract of sale. In the first place, it is not even clear to me, assuming that the Pool has at some point been an owner of the grains, that the transfer of such ownership only takes place upon the endorsement and delivery of the Terminal Elevator Receipt. Given the clear agency terms of the agreement between the Pool and the Board, it is at least arguable that such transfer takes place at an earlier stage, either when the grains are separated from the common mass in the primary elevator and placed aboard cars for shipment to the Board or, at the latest, when such grains arrive at the terminal elevator and are weighed and graded. In either case what happens appears to me to be more compatible with an appropriation of a part of the commingled property to the fulfilment of the Pool’s obligations under its agency agreement with the Board than with any contract for the sale of goods.

There is more, however. The “price” paid by the Board to the Pool is determined not as at the time that the Terminal Elevator Receipt is endorsed but rather when the producer originally makes delivery to the primary elevator. That price, as we have seen, forms the basis of the price paid by the Pool to the producer and the Pool at no time bears any risk with regard to it. It is a fortunate, and most unusual, purchaser who never buys except for a guaranteed resale at a guaranteed price. Furthermore, that price includes an interest component which is calculated not from the time of the endorsement of the Terminal Elevator Receipt but from the time of the original delivery to the primary elevator.

Taken all together, these factors seem to me to be wholly incompatible with any notion of a contract of sale between the Pool and the Board.

Paragraph 20(1 )(gg) provides for an exception from the general rule for computing income for the purposes of taxation. A taxpayer seeking to benefit from such exception must bring himself clearly within the language of the legislation. For the reasons stated, I am of the view that Board grains held by the Pool for delivery to the Board are not property described in the Pool’s inventory held by it for sale within the meaning of paragraph 20(l)(gg).

I would dismiss the appeal.

Marceau, J.—I have had the advantage of reading the reasons for judgment, in draft, prepared by Mr Justice Hugessen and I find myself in complete agreement with his conclusion that this appeal cannot succeed.

As explained by Mr Justice Hugessen, this whole controversy turns on the proper characterization to be given to the contractual arrangements that were entered into by the Board with the Pool, an elevators owner and grain dealer in Saskatchewan. Those contractual arrangements were set out and described in great detail in the memorandum of agreement signed by the parties, an agreement meant and designed to carry out faithfully the provisions of the Canadian Wheat Board Act. Now, if are considered the terms used in the Act, those in the agreement, and together with those used afterwards in all communications between the parties with respect to the agreement, there is no doubt that no one ever contemplated that the contractual relationship between the Board and Pool could be that of buyer and seller. It is clear that in the minds of all concerned, the Board was purchasing the grain directly from the producers and was using the services of the Pool in a dual capacity: first, as legal agent, to complete and execute, on its behalf, the purchasing contracts with the farmers and second, as grain handlers, to store the grain so acquired, dry it, clean it of all by-products not needed, prepare it for shipping, and finally deliver it when called for. But, the appellant contends — and its whole case rests on that contention — that in spite of the terms the parties used in their contract, and whatever intention or comprehension they may have had at all times, what they actually did was to create between them the relations of vendor and seller. It had to be so, argues the appellant since, according to the scheme of their arrangements, from the moment it purchases the grain and pays the farmers until the moment it delivers same to the Board and receives the predetermined price therefor, it keeps the grain in its own bins, commingled with other grain, and its right thereon has all the essential elements of ownership, namely: possession, use, and risk.

It is to be noted first, that this is not a case where a party wishes to rely on some extrinsic evidence either to prove the true nature of an agreement or to show that the writing prepared was not intended to express the whole of the agreement or to explain some unclear or incomplete provisions of the instrument. It is a case where a party contends afterwards that what he intended to do, and indeed said he was in fact doing when he entered into the agreement, is not to be accepted as such, because the legal effects of the agreement did not and could not correspond to what both he and his co-contractor thought they were then doing. It seems to me that such an unusual contention in a proceeding not seeking the nullity of a contract could only be accepted if indeed it is totally impossible to understand and adapt the rights and obligations actually flowing from the contract with what the parties intended them to be. Well, I must say after reflection that, not only did the appellant fail to convince me that the contract between it and the Board cannot be very easily and very properly understood as a contract of agency and services, it now appears to me that this can be the only way to construe it legally, the construction suggested by the appellant being totally indefensible.

As mentioned above, the “double-sale” thesis of the appellant is based on a two-fold premise, namely: that the Pool becomes the owner of the grain it purchases from the producers, so that a transfer of ownership from it to the Board will be required to complete the scheme, and such transfer can only be realized through a second contract of sale. To me, that premise is wrong in both its facets. In my view, the Pool does not become the owner of the grain. The Pool’s title may have some of the attributes of ownership, namely possession, use and risk, but, regardless of their striking limitations here, these are attributes attached to many other legal titles (namely that of a bailee), and much more significantly, the Pool never acquires those attributes which are exclusively attached to ownership, ie the right to use as one pleases and for one’s own personal advantage, the right to consume, to destroy or to dispose of, and conversely the “obligation” to assume the risk of loss due to any cause including, of course, force majeure. Besides, the identification of the Board grain, required to leave intact the Board’s title, is not diminished by the fact that, in the appellant’s bins, a relatively small quantity of other grain was added thereto. It seems to me that ninety per cent of the grains present in the appellant’s bins are clearly enough ascertained goods to be and remain the property of the Board. It may be sustained that the Board’s interest in the inter-mixture has become one in common with others, but, nevertheless it remains that of an owner (see Halsbury’s Laws of England, (4th ed) Vol 2 p 709, para 1537). On the other hand, it is clear that the contract of sale is not the only legal means of realizing the transfer of ownership of a moveable from one person to another. The appellant’s thesis is to me clearly ill-founded and cannot be sustained.

I have no doubt now that this appeal ought to be dismissed.