Teitelbaum, J.:—By means of a direct action in the Federal Court of Canada, Trial Division, the plaintiff is contesting the reassessment made by the Minister of National Revenue. The said reassessment, dated April 7, 1982, added the sum of $50,000 to plaintiff’s income for the 1977 financial year.
On May 26, 1982, the plaintiff objected to the notice of reassessment. Unfortunately for plaintiff, the Minister of National Revenue, by notice dated March 24, 1983, reconfirmed the said notice of reassessment.
Plaintiff corporation, to 1979, was an active shoe store retailer who, in 1977, had 22 shoe stores, selling both ladies’ and men’s shoes. The evidence was that its business consisted of selling 90 per cent ladies’ shoes and 10 per cent men's shoes.
In 1979, the plaintiff corporation sold all of its assets but still legally exists.
The 22 retail outlets plaintiff had in 1977 were, according to Mr. Gérard Gingras, plaintiff’s only witness, all leased stores and all, but one, were situated in shopping centres and supposedly in the Montreal area.
In 1977, the plaintiff had a retail store in Cowansville and it is as a result of this store that plaintiff's problem arose.
Sometime in 1976, a certain Mr. Bacariar approached plaintiff, Mr. Gérard Gingras, then secretary-treasurer of plaintiff, to see if plaintiff would be interested in leasing a store in a proposed shopping centre to be situated in the City of Cowansville. At this time, the shopping centre was under construction and only completed in 1977.
Mr. Gingras testified, and it was in no way contradicted, as Mr. Gingras was the only witness to be heard by me, that he immediately informed Mr. Bacariar that plaintiff was in no way interested in leasing a store in Cowans- ville as Cowansville was not the type of location where plaintiff would want to have a retail outlet for its merchandise.
Mr. Gingras explained that for the price range of its merchandise, Cowansville was not the place for one of their stores. The quality of shoe sold by plaintiff was too expensive for the average resident of the area. As Mr. Gingras stated, it was “pas notre marché”.
It seems that after Mr. Gingras' initial refusal, he was approached by Mr. Bacariar on several occasions whereby Mr. Bacariar offered various types of inducements to Mr. Gingras so that plaintiff would sign a lease and be a tenant, a desirable tenant, in the shopping centre of Cowansville.
Some of the inducements offered were:
(a) No base rent
(b) No maintenance charges
(c) No cost for advertising
(d) Lessor would build store
These types of offers were being made to plaintiff but without success. It seems that Mr. Bacariar could find no inducement sufficiently appealing to convince Mr. Gingras to agree to sign a lease and be a tenant in the shopping centre.
Probably, in frustration, I presume, and after a period of six months, Mr. Bacariar finally said to Mr. Gingras, “What is it that will convince you to have French Shoes Ltd. sign a lease?”’ To this question, and as Mr. Gingras stated, he replied in jest, “$50,000”.
To the surprise of plaintiff and Mr. Gingras, its representative, Mr. Bacariar came back soon after and agreed to pay plaintiff the $50,000 requested.
Plaintiff accepted because, as Mr. Gingras states, plaintiff had nothing to lose. The lessor was to do all, plaintiff only had to furnish the inventory and the equipment necessary to operate a retail shoe store, e.g. cash register, chairs, etc.
Plaintiff decided that this store would be a discount shoe store where shoes not selling in its regular stores would be shipped to Cowansville for sale.
A lease, Exhibit P-1, was produced as being the lease signed between Les Galeries de Cowansville Inc. as lessor and French Shoes Ltd. as lessee.
According to Mr. Gingras, the sum of $50,000 was paid by Les Galeries de Cowansville Inc. to plaintiff at the signing of the lease which was on June 22, 1977 even though the lessor only obligated himself to pay this sum “on or before July 1st, 1977” (last page of Exhibit P-1).
It is the receipt of this $50,000 that is the crux of the present problem.
The legal issue is to determine whether the sum received by plaintiff from the lessor, the sum of $50,000, is to be considered as revenue, as claimed by the Minister of National Revenue, or as “a windfall gain realized by the plaintiff which is not income within the meaning of the Income Tax Act” (Paragraph 10 of Plaintiff's declaration).
I believe plaintiff's witness when he stated he never had any intention to lease the store in Cowansville until he received the consent of Les Galeries de Cowansville Inc. that it would pay plaintiff the $50,000 requested as well as the other benefits promised, such as, no base rent, no maintenance charges, etc.
In examining the lease, Exhibit P-1, one can see, from the last page of the lease, that the sum of $50,000 received by plaintiff was given with what seems to me to be a condition or obligation. It states:
“Lessee shall receive the sum of $50,000 to be applied against its inventory”
[Emphasis is mine.]
In cross-examination the witness Gingras stated that it was himself and an associate who negotiated all the leases for plaintiff and from the date he joined the company to the time the company’s assets were sold in 1979, he, on behalf of plaintiff, leased 22 stores and renegotiated 12 leases for a total of 34 negotiations.
This indicates to me that a very important part of the company’s business is in the negotiation of leases. The better the conditions, that is, rent, extra charges, etc., the more the profit will be from any individual store. There is no doubt that the main business of the plaintiff is the selling, at retail, of shoes.
Although the witness stated in his examination in chief that the plaintiff's stores were all in the Montreal area, in cross-examination he admitted that plaintiff had one store in Joliette, from 1967, one in Chicoutimi, from 1975 and three stores in Ottawa in 1979.
Furthermore, the witness stated he was really not interested in having a store in Cowansville as he was convinced it would not be profitable, “pas rentable".
He admitted his definition of “pas rentable” meant the store would only “break even". The $50,000 that the company received did not change the question that the store would still be “pas rentable" but with $50,000, he was quite prepared to go into the store in Cowansville.
The witness also admitted that the sum of $50.000 received by plaintiff was included as “revenue" in plaintiff's Statement of Earnings and Retained Earnings for the year ended July 31, 1977 (Exhibit D-1, page 10) but later, at the suggestion of his accountant, deducted the said sum (Exhibit D-1, page 4) and therefore no tax of any kind was paid on the receipt of the said sum of $50,000.
Mr. Gingras informed me that he was often solicited to be a tenant in shopping centres as plaintiff is considered a very desirable tenant. It was, the witness presumes, this reason why he was approached by Mr. Bacariar and why he was offered the $50,000 plus the other benefits previously mentioned.
In all the years that he was negotiating leases for plaintiff and to his knowledge, this was the only time that the company received a cash inducement of $50,000.
The attorney for plaintiff informed me that it was not his intention to claim that the receipt of the sum of $50,000 represents a payment in respect of business carried on by plaintiff within the meaning of clause
14(5)(a)(IV)(A)
of the Income Tax Act and as a result I have ignored the testimony of Ronald Singer, C.A. whose testimony would only have referred to this problem.
No witnesses were offered by defendant.
In argument, the attorney for plaintiff submitted that the receipt of the $50,000 was not taxable as it was not revenue, the revenue of plaintiff only coming from the retail sale of shoes. He claimed that the receipt of the money was a unique event, it never having occurred before. It was plaintiffs contention that revenue can be derived from three main sources:
(a) Employment
(b) Property
(c) Business
as well as from capital gains, alimentary pension, etc. The attorney argued that plaintiff never solicited Les Galeries de Cowansville Inc. but that it was the representative of the lessor who took over six months to convince plaintiff to sign a lease.
The plaintiff submits five cases as its authorities for claiming that the sum of $50,000 received by plaintiff is not taxable.
Plaintiff cites the case of Walker (Inspector of Taxes) v. Carnaby, Narrower, Barham & Pykett, [1970] 1 All E.R. 502; [1970] 1 W.L.R. 276 as a case that parallels the one before me. In this case, a firm of accountants were auditors to a company and five other associated companies. In the case of the company, they had acted for 27 years and in the case of one of the other companies, for 59 years. After 1962, the auditors were told their services would no longer be required and they received a cheque for 12,567.5 (English pounds) (being the equivalent of one year’s fees as auditors) as “solatium” for the loss of the office of auditors (see Head Note).
The Court determined that this payment was not taxable as it was not part of the firm's business.
Pennycuick, J. states at 511 (W.L.R. 287):
When one looks at the particular facts of this case one finds that the taxpayers were carrying on the business of chartered accountants, which consists in rendering services of a certain professional character in return for reward. They rendered those services to these five companies over a number of years and duly received their reward for so doing. At the end of their final term of office they had no legal claim of any description to receive any further payment from the companies. The companies then proceeded to make a wholly voluntary payment to the taxpayers. It is, I think, irrelevant that the companies elected to make that payment in an amount identical to a penny with the fees paid to the firm during their last year of office.
It seems to me that a gift of that kind made by a former client cannot reasonably be treated as a receipt of a business which consists in rendering professional services. The subject-matter of the assessments under Cases I and II is the full amount of the profits or gains of the trade or profession. Those profits have to be computed, it is well established, on ordinary commercial principles. It does not seem to me that ordinary commercial principles require the bringing into account of this sort of voluntary payment, not made as the consideration for any services rendered by the firm, but by way of recognition of past service or by way of consolation for the termination of a contract. It is difficult to amplify the point any further. I fully appreciate that the taxpayer would not have received this payment if they had not previously rendered professional services to the companies. Again, I fully appreciate that the payment was made to them as a firm and not because the companies had a particular affection for any member of the firm personally.
[Emphasis is mine]
The case before me is very different. In the Walker case (supra) the payment is made “by way of recognition of past services". The payment in the Walker case is a gift. The client wanted to give a gift to its past auditors for many years of loyal service.
In the case before me one cannot state that Les Galeries de Cowansville Inc. wanted to give a gift to plaintiff for past services rendered. What Les Galeries de Cowansville Inc. wanted to do was induce the plaintiff to rent premises in its shopping centre to give the shopping centre some sort of credibility in order to convince other prospective tenants to lease space.
At the same time, the plaintiff, by accepting the sum of $50,000 received a substantial benefit in terms of the conditions of rental. It received $50,000 and should have, if it did not, apply the said sum to its inventory as required by Exhibit P-1, the lease.
A second case submitted by plaintiff is Murray (Inspector of Taxes) v. Goodhews, [1978] 2 All E.R. 40; [1978] 1 W.L.R. 499, which plaintiff believes is similar to the case before me.
Unfortunately, I do not agree with this contention. The Murray case is very different. In the Murray case one of the main considerations for making the payment was, at page 40, “(c) that Watney had made the payments to acknowledge a long and friendly association with Goodhews and to maintain its name, goodwill and image in the brewing industry". It was as a result of terminating a long standing contract that the sum was paid. It was, once again, paid as a gift and not, as was said, for “lost profits".
In the case before me, the money was paid to induce plaintiff to lease a store, which it did, and to cover the cost of part of its inventory. It was paid as part of the terms and conditions of a commercial lease.
I am satisfied the money received by plaintiff is a benefit of leasing as the benefits plaintiff received when it was agreed that plaintiff woud not have to pay any cost of advertising or costs of maintenance or costs to prepare the premises, as is normally done in shopping centre leases.
The payment of $50,000 is simply an additional benefit to the other benefits granted plaintiff as a condition to plaintiff leasing space in the shopping centre.
I was also referred to the case of J.E. Cranswick v. The Queen, [1980] C.T.C. 93; 80 D.T.C. 6057; and Federal Farms Ltd. v. M.N.R., [1959] C.T.C. 98; 59 D.T.C. 1050 (Ex. Ct.) by the attorney for Plaintiff because of the six criteria listed by Cameron J. in the Federal Farms case and followed by Grant, D.J. in the Cranswick case.
The six criteria listed by Cameron, J. and quoted by Grant, D.J. are, at 96 (D.T.C. 6059):
(a) the payment was entirely voluntary;
(b) it was given by persons who had no business relations with the taxpayer; (c) it was unrelated to the taxpayer’s business activities;
(d) the taxpayer had no legal right to demand any portion of the fund;
(e) at the time of the loss he had no expectation of being so compensated; (f) it was unlikely ever to happen again.
I was told by the attorney for plaintiff that plaintiff’s case “fits in".
Once again I cannot agree.
The proof indicates that the $50,000 was paid after a request for same. It was offered as an incentive by Les Galeries de Cowansville Inc. but only after Mr. Gingras was asked what would it take to convince plaintiff to sign a lease. The reply by Mr. Gingras was $50,000. Therefore, payment of the sum of $50,000 was requested by plaintiff as a condition to plaintiff signing a ease.
In so far as the question of business relations are concerned, there is no doubt that there were business relations between the parties. Les Galeries de Cowansville Inc. wanted to lease premises to plaintiff and plaintiff was prepared to accept to lease if it received the sum of $50,000 plus other benefits.
There was, according to plaintiffs witness, at least one-sided negotiations going on for six months.
Was the payment unrelated to the taxpayer’s business activities? At first glance one would have to answer in the affirmative, it was not related to the taxpayer’s business activity of selling shoes. This would be true if I would only be restricted to looking at the business activity of plaintiff as only selling shoes to the public.
It is important, as part of plaintiff's business activity, to sign leases for stores under the best possible conditions, that is, the cheapest rent, the least amount of expenditures for start-up costs, etc. In the present case, there was an additional benefit, a single payment of $50,000 in addition to the other benefits already described.
I also believe that the plaintiff, after signing the lease, had a right to legally claim the $50,000 promised and moreover had, according to the lease, an obligation to apply the sum to its inventory.
I am not so convinced as to believe that such a payment could not have happened again. It is my belief that there was a good possibility of its happening again for plaintiff because of plaintiff's outstanding reputation. Plaintiff was a very desirable tenant and, as such, could arrange for such an inducement if an owner of a shopping centre really wanted plaintiff as a tenant.
Plaintiff’s case does not fit into the criteria cited in the Federal Farm case.
Article 9(1) of the Income Tax Act states very clearly what is income from business or property:
9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.
I am satisfied that the $50,000 received by plaintiff is part of its revenue. When a taxpayer receives an inducement to sign a lease, then those moneys received must form part of the taxpayer's revenue for the year in which the inducement was received. An inducement is not a “windfall", it is an incentive, a reason for doing something. Taxpayers and lessors use inducements as a form of doing business. For the lessor, it rents out space and for the taxpayer it is a benefit received. In the end, the receipt of the benefit helps to make a profit. It is part of the taxpayer's revenue that is derived because of, and is part of, its business activity.
In the present case, the money, $50,000, received by plaintiff is part of its business revenue.
Although each case must be judged on the facts of that particular case, I am of the opinion that incentive payments, inducements, generally form part of the revenue of the taxpayer. The payment is received as a result of the business activity carried on by the taxpayer and would not have otherwise been received.
Plaintiff contends that the defendant, in 1985, amended the Income Tax Act by adding paragraph 12(1)(x) which states:
12.(1)(x) payments as inducement or as reimbursement etc. — any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from
(i) a person who pays the amount (in this paragraph referred to as “the payor”) in the course of earning income from a business or property or in order to achieve a benefit or advantage for himself or for persons with whom he does not deal at arm's length, or
(ii) a government, municipality or other public authority where the amount can reasonably be considered to have been received
(iii) as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or
(iv) as a reimbursement, contribution, allowance or as assistance whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an expense to the extent that the amount
(v) was not otherwise included in computing the taxpayer’s income for the year or a preceding taxation year.
(vi) except as provided by subsection 127(11.1), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the expense, as the case may be,
(vii) does not reduce, pursuant to subsection 13(7.4) or paragraph 53(2)(s), the cost or capital cost of the property, as the case may be, or
(viii) may not reasonably be considered to be a payment made in respect of the acquisition by the payor or the public authority of an interest in the taxpayer, his business or his property.
thus admitting that before the amendment, inducement payments such as received by plaintiff were not revenue.
I do not agree. Subsection 37(2) of the Interpretation Act 1970 R.S.C. c. I-23 states:
37. (2) The amendment of an enactment shall not be deemed to be or to involve a declaration that the law under such enactment was or was considered by Parliament or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.
Therefore, the amendment of the Income Tax Act does not imply a change in the law, it, in this case, clarifies the law with regard to inducement payments.
For the reasons herein above given, plaintiff’s action is dismissed with costs.
Action dismissed.