Hall v. MNR, 70 DTC 6333, [1970] CTC 510 (Ex Ct), briefly aff'd 71 DTC 5217 (SCC)

SHEPPARD, D.J.:—This appeal is from a re-assessment of May 16, 1966 by the Minister of National Revenue for the taxation years 1965, 1966 and 1967 and alleged by the appellant to be in error in that:

1. In each of the years 1966 and 1967 the appellant sold overdue coupons of nominal amount $10,000 for the sum of $9,000 which two sums of $9,000 the re-assessment included as income and which the appellant contends were not income within Section 6(1) (b) of the Income Tax Act.

2. The re-assessment for the years 1965, 1966 and 1967 disallowed losses exceeding the gross rentals (Notice of Appeal, paragraph 5) in respect of Apartments 702 and 901, Honolulu, Hawaii, which the appellant alleges to be in error in that the apartments were purchased for the purpose of investment, that is for the purpose of earning income and all the expenses should be allowed.

The alleged errors are subject to two exceptions admitted by the appellant to be removed from the appeal, namely :

(1) the expenses of the appellant and his wife in going to Hawaii, and

(ii) a reasonable sum for the occupation of the apartments by the appellant and his wife.

By cross-appeal the respondent alleges that of the expenses alleged (paragraph 9(c), Reply), part only were disallowed (paragraph 14, Reply) and that all the expenses should have been disallowed under Section 12(1) (h) as personal or living expenses by reason that Apartments 702 and 901 were successively acquired as living quarters for the appellant and his wife and therefore the respondent asks that the assessment be referred back to the Minister to be re-assessed accordingly.

As to the income in each of the taxation years 1966 and 1967 the appellant held Canada bonds in the form Exhibit 1-R and in each of the years 1966 and 1967 the appellant removed overdue coupons from the bonds in the amount of $10,000 and sold the coupons to Eastern and Chartered Trust Company for the respective sums of $9,000. The trust company in acquiring the bonds was acting as trustee or agent for five registered retirement savings plans within Section 79B of the Income Tax Act and the beneficiaries of the plan were strangers to the appellant. The trust company cashed the coupons and credited the proceeds to the respective plans. In the result the appellant received in 1966 the amount of $9,000 and in 1967 the amount of $9,000, each for coupons of the nominal amount of $10,000, and the amounts received by the appellant were by the assessment added to the appellant’s income which the appellant contends was in error.

As to the sum of $9,000 received by the appellant in each of the years 1966 and 1967, the issue whether or not this sum constitutes income depends upon Section 6(1) (b) of the Income Tax Act which reads:

6. (1) Without restricting the generality of Section 3, there shall be included in computing the income of a taxpayer for a taxation year

(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest.

The words of Section 6(1) (b) appearing in brackets signify the method usually employed by the taxpayer: Industrial Mortgage and Trust Co. v. M.N.R., [1958] Ex. C.R. 205; [1958] C.T.C. 106. In this instance the appellant used cash basis not the accrual basis but nothing turns upon that as the sum of $9,000 here in question was actually received by the appellant in each of the two taxation years. The covenant in the bonds (Exhibit 1-R) was to pay to the bearer ‘‘interest on the said sum at the rate of four per cent on the first day of November and the first day of May until the date of maturity upon presentation and surrender of the annexed interest coupons as they mature’’. On the due date therefore the obligation to pay vested subject only to the ■presentation and surrender of the . . . interest coupons’’. Hence the presentation and surrender of the coupons was a condition precedent to the obligation to pay (Worsley v. Wood (1796), 6 Term Rep. 710) but the appellant having the coupons could. readily present and surrender them and thereby satisfy the condition precedent.

The appellant has received income within Section 6(1) (b).

(a) The moneys received from the trust company were (C received . . . as interest’’. Interest includes compensation for the use of money (Re Unconscionable Transactions Relief Act, Re Sampson & Barfield Enterprises Limited, [1962] O.R. 1103, per Schroeder, J.A. at 1106). The appellant’s right under the bonds was to receive interest as compensation for the use of his money and that right could be realized by surrendering the coupons to any agent of Canada 01 equally by selling to the trust company by delivering the matured coupons; in either event the proceeds in the appellant’s hands represent the sum received. by him as compensation for the use of his money which he had lent to Canada and which sums of $9,000: would be.:held. by :him. as compensation for the’ money: lent and therefore as interest” “received” within Section 6(1) (b).

(b) The appellant’ s coupons sold to. the trust company were due and as due had become ‘‘receivable . . . as interest” and therefore taxable as income under Section 6(1) (b) , at least to the extent of the moneys received by the appellant.

The appellant had held the bonds with coupons attached until maturity of the coupons and then the appellant cut the coupons from the bonds and sold them to the trust company.

At maturity of the coupons the appellant was the bearer of the coupons and in a position to present and surrender them to an agent of Canada, hence the coupons represented sums ‘ ‘ receivable ... as interest’’ in the hands of the appellant and are to be included in income under Section 6(1) (b).; [M.N.R. v. John Coif ord Contracting Co. Ltd., [1960] Ex. C.R. 458 Kearney, J. at 440; [1960] C.T.C. 178.]

(€) The sums received from the trust company are included in the words ‘‘in lieu of payment of*; . . interest” within Section 6.(1) (b): The words: “in lieu of” mean “instead of”’ (Black’s Law Dictionary, 4th ed., p. 1073 and Shorter Oxford English Dictionary, p. 1138) and therefore the sums of $9,000 have: been received by the. appellant “instead of” the sums to be received from an agent of Canada on presenting the coupons to such agent of Canada and therefore are declared income within Section 6(1) (b).

The appellant cited the following cases which are distinguishable :

1. In Paget v. Ç.I.R. (1937)^ 21 T. C. 677, the facts are that on July 24, 1933 the Yugoslav Government gave notice of its inability to pay the interest in full (payable in American dollars in New York) and offered to meet the coupons maturing from November 1, 1932 to May 1, 1935 by payment in “blocked” dinars in Belgrade or by paying 10% in dollars and funding bonds for the balance. Paget, the taxpayer, did not accept the scheme but in September 1933 she sold the income coupons due on November 1, 1932 and May 1, 1933 and it was held that the sale of coupons did not constitute income within the Income Tax Acts. (Great Britain). The question was, whether Paget had received income from foreign securities out of the United Kingdom (Schedule D, Case IV). Sir Wilfrid Greene, M.R. stated at page 692:

The purchase price received by Miss Paget was not income arising from the bonds at all. It arose from contracts of sale and purchase whereby Miss Paget sold whatever right she had to receive such income in the future, as well as her right to take what was offered by the defaulting debtors. It is, in my opinion, quite impossible to treat this as equivalent in any sense to “income arising from” the bonds. A further aspect of this argument can be more conveniently dealt with later. With regard to the former contention, it would be sufficient to say that, in my opinion, neither the Municipality of Budapest nor the Kingdom of Jugoslavia is a foreign . . . company, society, adventure or concern within the meaning of Miscellaneous Rule 7. But even if they, or either of them, could be thought to fall within those words, Rule 7 does not, in my opinion, produce the result claimed.

and at page 693:

But it is said on behalf of the Appellants that this view would lead to the result that, in the case of a sale to a coupon dealer, the interest would not, as such, be assessable to Sur-tax, since it would merely form one item in the aggregate receipts of his business. This argument does not impress me. It is not difficult to think of cases in which income, which, if received by A, would attract Sur-tax, escapes tax if transferred to B—the sale by A, a Sur-tax payer, of an annuity belonging to him to B, who is not a Sur-tax payer is an obvious example. A similar argument was advanced in support of the proposition already discussed, that, quite apart from Miscellaneous Rule 7, the purchase price was income of Miss Paget taxable under Case IV of Schedule D. It was said that this proposition must be correct since otherwise, if a coupon were sold to a person other than a coupon dealer and the interest were collected by him, that interest would escape Income Tax altogether. Even if this consequence were to follow on such a sale, I should not accept the conclusion based upon it. But, in my opinion, it would not follow, for I am unable to see how the purchaser of the coupon could successfully contend that the interest received upon it was not income in his hands. It was not seriously disputed by the Attorney-General that, if a number of coupons were cut off and sold together to a purchaser, the interest on each coupon as received would be income in the purchaser’s hands. I am quite unable to see how the position can be different if one coupon only is sold, and no satisfactory reason for the distinction was suggested.

and Lord Romer, at page 699, stated:

In these circumstances, the only question to be decided is whether the proceeds of sale of a right to receive income in the future can be treated as income for the purpose of Income Tax Acts. The question thus broadly stated plainly admits of but one answer, and that answer must be in the negative. The proceeds of the sale for a lump sum of an annuity, for instance, are capital in the hands of the vendor and not income. And this is true even when the subject of the sale is not the annuity for its whole duration, but the right to be paid the annuity for a number of years or even for one year. Nor is it any the less true because the purchaser will pay less for an annuity that will be subject to deduction of Income Tax in his hands than he would pay for a tax free annuity. Nor is it any the less true because in many cases the net income when paid to the purchaser is not income in his hands. In the case, for instance, of a man carrying on the business of dealing in coupons, the sum collected by him on cashing a coupon will be merely a trade receipt and not income. Tax may have been deducted on payment of the coupon, but for Sur-tax purposes the interest represented by the coupon cannot be regarded as forming part of the total income of anybody. This is a position that frequently occurs. The net income received by a trustee under a trust for accumulation of income is a case in point.

In the Paget case the payment of coupons had been repudiated by a sovereign body and the rights of Paget were thereby reduced to a right to be paid in future. Hence there remained in the taxpayer only a right to be paid interest in future as it matured which right she assigned at a time when the interest had not become due. Simon’s Income Tax, vol. 1, paragraph 1015 states: “But the principle underlying the decision in Paget v. J.R. Comrs. was and still is good law, namely that apart from some special legislation the proceeds of the sale of a right to receive income in future are not income.’’

2. In Wigmore (H.M. Inspector of Taxes) v. Thomas Summer- son and Sons Limited (1926), 9 T.C. 577, the taxpayer sold bonds with the coupons attached but not accrued due and the question was whether he had received interest of money within the Income Tax Acts (Great Britain) (Schedule D, Case III, Rule 1).

Rowlatt, J. at page 581 stated :

The truth of the matter is that the seller does not receive “interest”, and “interest” is the subject matter of the taxation. He receives the price of the expectancy of interest, and that is not the subject of taxation, and the whole thing, I think, really depends upon that fallacy.

3. In Ted Davy Finance Co. Limited v. M.N.R., [1964] C.T.C. 194, that appellant being in the business of purchasing conditional sales contracts sold the business and it was held that the amounts received by the appellant as purchase price of the business did not include interest within Section 85F (4). Thurlow, J. at page 197 stated:

Firstly, in my opinion, this was a sale of a “right” to receivables and not a sale of receivables, and is therefore a capital receipt. The principle of law enunciated in C.I.R. v. Paget (1937), 21 T.C. 67 7, per Lord Romer at p. 699 is, in my opinion, applicable.

This case properly distinguishes between. a sale of a business and a sale in the ordinary course:of business, and holds that this sale of a business did not come within. Section 85F (4). That is not the section in the case at Bar and affords no assistance in construing the phrases “as interest”? or ‘‘in lieu of payment of

^interest” appearing in Section b).

Also the Paget case (supra) and the Summerson case (supra) are under a different statute and therefore are not authority for the construction of Section 6(1) (b) of the Income Tax Act (Canada). In the Paget case the question was whether the taxpayer had received income from foreign securities’’ within the Income Tax Acts (Great Britain). In the Summerson case the question. was whether the taxpayer had received -interest of money within the Income Tax Acts (Great Britain). Here, Section 6(1) (b) of the Income Tax Act (Canada) is wider and includes as income not only the amounts received r, receivable as interest”? but also a payment in lieu of payment Of . . . interest’’ and in lieu of” must be read as meaning instead of’’ (Black’s Law Dictionary, 4th ed., p. 1073, Shorter Oxford English Dictionary, p. 1138). On each of the foregoing grounds (a), (b) and (c), the sum of $9,000 received by the appellant in the year 1966, and the similar sum of $9, 000 received in the year 1967, were properly assessed as income” within Section 6(1)(b).

The second issue relates to Apartments 702 and 901, Coral Strands Apartments, Honolulu, Hawaii, and the taxation years 1965, 1966 and 1967. The appellant throughout has lived in Vancouver, British Columbia, where he has the controlling interest in the company owning the Devonshire Hotel, but he and his wife visit Hawaii frequently, including each of the years 1964 to 1969, both inclusive. In 1964 the appellant and his wife occupied Apartment 503, Coral Strands Apartments, under a lease. The appellant testified that he felt it would be a good investment to own an apartment in or near Honolulu and he had been told by Jenkins, who controlled C. S. Land Company Ltd., the company owning and leasing the land on which the Coral Strands Apartments were situated, that over the years. the rentals from an apartment would pay for the investment. In 1964 the appellant bought Apartment 702 by Assignment of Lease bearing the date January 17, 1964 between C.S. Land Company Ltd. and the appellant, and by. transfer of 10: shares in Coral Strand Apartments Ltd. .' (Exhibit A-3). Apartment 7-02 was then unfurnished and the appellant’s wife bought. furnishings ‘for --$3,500. to $4,000. Jenkins also was. to ‘charge: 10% of the rents: to be received from others. In 1966: Apartment 702, which was bought for $36,000 U.S. funds, was sold for $40,000 U.S. funds, and the appellant bought Apartment 901, a larger apartment in Coral Strands Apartments: for. ,$55,000. U.S. funds. Those transactions were carried out by Assignment of Lease of February: 18;:1966 from United States National Bank to the appellant covering Apartment 901 and transfer of 15 shares in Coral Strands Apartments Ltd., which document was executed on February 24, 1966 by the appellant (Exhibit A-3) and by assignment of February 25, 1966 by the appellant as assignor to Edward E. Linde and Mary. Olive Linde covering Apartment 702 and transfer of 10 shares in Coral Strands: ‘Apartments Ltd. which document was executed ‘on February 25, 1966 (Exhibit A-3). The appellant also bought an apartment at 317 Makaha Shores, Hawaii for the sum of $37, 500 U.S. funds under Assignment bearing date. of April 7, 1969 from Harold Richardson and Doris Hughes: Hakman to Coleman Ernest Hall as trustee for Granville Ventures Ltd: (Exhibit: A-3), but this appeal does not include any alleged error in respect of this apartment. Granville Ventures Ltd. is a personal corporation of the appellant. A letter ‘of April 12, 1967 (Exhibit 2-A) from the appellant: to Garvey relating to an automobile to be hired by the appellant with lease of Apartment 901 contains the following paragraph:

The only people ‘that ‘would ‘be using the car outside of myself, would be respectable friends that I might rent the apartment to, and this would not happen for more than two 'or three months of the; year. For your information, the only people that will be using the apartment at the present time are Mr. and Mrs. McClure, friends from Palm Springs, and they will be there for the month of July. During the last year, outside the three months that we occupied the apartment, it was only rented for friends for two months,

The purchase of the apartments in. Coral Strands was not profitable in that, ‘apar from ‘being occupied ‘by the appellant and his wife, Apartment 702 was not rented to third persons until August 31, 1965 and Apartment 901 was rented to third persons in 1966 only for two months and'in in 1967 for July, but was oceupied by the appellant and his wife for three months in 1966 and two months to two and a ‘half months: in 1967. The appellant and hW wife occupied Apartment 702 ;or 901 during a part of each year 1965, 1966 and 1967. The issue in respect of Apartments 702 and: 901 is whether’ these apartments were acquired by the appellant as an investment; that is for the purpose of producing income, or whether;.as alleged by the respondent, the apartments were not acquired to produce income but were acquired for the benefit of the appellant and his wife within Section 12(1) (h) and without a ‘‘reasonable expectation of profit” within Section 139(1) (ae). Section 12(1) (a) and (h) of the Income Tax Act reads as follows:

12. (1) In computing income, no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,

(h) personal or living expenses of the taxpayer except travelling expenses (including the entire amount expended for meals and lodging) incurred by the taxpayer while away from home in the course of carrying on his business,

and Section 139(1) (ae) (i) reads:

(ae) “personal or living expenses” include

(i) the expenses of properties maintained by any person for the use or benefit of ‘the taxpayer or any person connected with the taxpayer by blood relationship, marriage or adoption, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit,

The letter of April 12, 1967 from the appellant to Garvey (Exhibit 2-A) is of exceptional evidentiary value as written at the time when the purpose of the purchaser in making the purchases would be readily remembered. The appellant and his wife went to Hawaii each year and there occupied Apartment 702 or 901 for some period in each year 1965 to 1967 inclusive. The appellant bought in Hawaii a new automobile which he and his wife used and which he then resold; but as he believed an apartment would be more readily rentable if accompanied4)y an automobile, he purchased a second-hand automobile, referred to in the letter (Exhibit 2-A). Under this letter (Exhibit 2-A), the appellant has stated that the apartment, then 901, would be rented to “respectable friends’’ and ‘‘this would not happen for more than two or three months of the year’’, that in 1966 the apartment was used by the appellant and his wife for three months and rented to third persons only for two months, and in 1967 the apartment ‘was occupied by the appellant and his wife for two to two and a half months and was rented to the McClures for July and so would be occupied for a total of three to three and a half months. Henee that purchase could not be for the purpose of investment but rather as a ‘primary purpose for a residence for ‘the appellant and his wife in Hawaii. That is further verified by the fact that Apartment 702 was unfurnished when purchased and the furnishings were bought by. the wife of the appellant, that is selected by the wife, not by the appellant though paid by the appellant and that apartment was later occupied by the appellant and his wife. In the result there could have been no reasonable expectation of profit within Section 139(1) (ae) in that possible tenants were limited to friends of the appellant to whom he might rent the apartment and then only for two or three months according to the letter. The conveyance by purchase of Apartment 901 was executed by the appellant on February 24, 1966 and the conveyance for the sale of Apartment 702 was executed the following day, February 25, 1966. That is, the appellant did not commit himself to the sale of Apartment 702 until after he had obtained and executed conveyance to Apartment 901 and therefore the purpose of purchasing Apartment 901 was to replace Apartment 702 as a residence for the appellant and his wife. Further, Apartments 702 and 901 were assigned to the appellant personally and were not taken in trust for Granville Ventures Ltd. (Exhibit A-3) as was the assignment of the apartment at Makaha shores. When the appellant bought Apartment 901 in 1966 he had held 702 during 1964 and 1965 and therefore did know that the rentals to be obtained from that apartment would not be sufficient to make a reasonable return on the purchase price and certainly not to repay the purchase price, the cost of furnishing and the outlays for an automobile. However that knowledge did not deter the appellant from purchasing Apartment 901, although according to the letter of April 12, 1967 (Exhibit 2-A) he expected to rent the apartment only for two or three months of the year and in fact in 1966 that turned out to be only two months and in 1967 only for the month of July. The purchase of Apartment 702 and later of Apartment 901 was to provide a residence for the appellant and his wife and family in Hawaii and therefore the expenses alleged were personal or living expenses of the taxpayer within Section 12(1) (h) and not for the purpose of gaining or producing income within Section 12(1) (a).

In M.N.R. v. Alfred Gordon, [1966] C.T.C. 722, and in Dr. John R. Harms v. M.N.R., [1968] Tax A.B.C. 1238, a similar result has been reached.

In conclusion, the appellant has established no error as alleged in the re-assessment and the appeal is dismissed; on the crossappeal the re-assessment will be referred back to the Minister to be re-assessed in accordance with these reasons. The assignments of lease of Apartments 702 and 901 to the appellant personally and not in trust for Granville Ventures Ltd. as. was the apartment. at Makaha Shores, hence there appears no need of any direction. under Section 67:. There. will be leave to apply. [sic]. The costs wall be payable by the appellant to the respondent. .

.* * *, * *

The reasons. of September. 23. 1970 are amended as follows :

1. Exhibit 6-A is admitted in evidence.

“2. The reference back to the Minister of National Revenue

under the cross-appeal has been abandoned.

There remains only the appeal of Coleman E. Hall. That appeal is dismissed with costs for the reasons. previously given. MINISTER OF NATIONAL REVENUE, Appellant,

and

DAME RENE FORTIN, TESTAMENTARY EXECUTRIX OF THE Estate oF RENE FORTIN, Respondent.

Exchequer Court of Canada (Walsh, J.), October 20, 1970, on appeal from a decision of the Tax Appeal Board, reported [1969] T ax A.B.C. 408.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections 6(1)(c), 15(1)—Partnership—Withdrawal indemnity payable to withdrawing partner—Amount taxable in hands of withdrawing partner.

The deceased withdrew from a partnership of professional engineers in 1963 and in settlement of his interest agreed to a withdrawal indemnity of $35,900, the income content of which was in issue. Remaining in dispute after the decision of the Tax Appeal Board was an item of $16,000, payment of which, by agreement, was not to be made to the deceased until received in cash by the partnership. It now transpired that the money in question would never be received by the firm and it was accordingly not paid over to the deceased. In the Minister’s view, however, the amount represented part of the deceased’s share of the partnership profits and was therefore taxable in his hands under Section 6(1) (c) whether received or not. The Board had viewed the item as a "litigious right” which, pending the outcome of a civil action to recover the amount from the remaining partners, had not acquired the character of a "receivable" and was therefore not yet "income" to the deceased.

HELD:

The settlement agreed upon was based entirely on amounts already earned or to be earned by the firm and included nothing in respect of the disputed sum. The only way in which the other partners took the amount into account was that they were counting on the proceeds to pay the deceased the $16,000 which they owed him on other contracts. The entire amount of $35,900, less the portion already imputed to capital in the assessment, represented the deceased’s share of the partnership earnings and was taxable as assessed. The Minister’s appeal was allowed.

Jean Claude Sarrazin for the Appellant.

Albert Bissonnette for the Respondent.

CASES REFERRED TO:

M.N.R. v. Benaby Realties Lid., [1968] S.C.R. 12; [1967]

C.T.C. 418;

William G. Briggs v. M.N.R., [1958] C.T.C. 11;

Commissioner of Income Tax, Madras v. P.R.A.L.M. Muthu-

karuppan Chettiar, Gordon’s Digest of Income Tax Cases 757;

M.N.R. v. Joseph Sedgwick, [1963] C.T.C. 571.

WALSH, J.:—This is an appeal from a judgment of the Tax Appeal Board, dated April 1, 1969, maintaining in part the appeal of respondent from a notice of re-assessment dated March 28, 1968 of the income of the late Rene Fortin for the 1963 taxation year. Respondent brought the proceedings before the Tax Appeal Board in her quality as testamentary executrix of the estate of her husband, the late Rene Fortin (hereinafter referred to as "‘the deceased’’). The facts of the case are as follows. The deceased entered into partnership with four other professional engineers namely, Jean Amyot, Marcel Bhal, Gilbert Coupienne and Louis P. Derome, to carry on their profession in partnership. and share the resulting expenses and income. equally. The partnership was for a period of two years: commencing on January 1, 1962 and renewable by express or tacit agreement. Provision was made for the withdrawal of a partner, in which event the partnership would continue to exist with the remaining partners having a delay of six months o. pay to the partner who had withdrawn his share in the operating capital, but the withdrawing partner would not have the ? Fight to share in the profits for the current year.

One of the partners, Gilbert Coupienne, withdrew as of December 19, 1963 and the deceased as of December 20, 1963, the withdrawal: agreement in his case being signed on March 23, 1964. By virtue of this agreement, he accepted, as a withdrawal indemnity in settlement of all the rights which he had or might have in the partnership, the sum of $35,900, payable in the amount of $19,900 by certain ms I whieh he received from the following contracts :

and a balance of $16,000, which was specified to be payable when the City of Montreal paid for the Métro plans, out of the share of the fees due to the three other partners on this project in accordance with the terms of a later clause in the agreement. The later clause provided that he should make the plans for and exercise supervision of the Papineau Station of the. Montreal Métro, and the division of the fees was to be in the amount of 50% for him and 50% for the other three partners. The agreement continued (translated) :

It is clearly understood that, should Rene Fortin give up his contract for this Métro station or withdraw in favour of someone else, he shall not receive from his other three partners the $16,000 which remains owing to him, and furthermore he shall be liable towards the other three partners for half of the fees paid by the City for this Métro station, less the amount of ‘$16, 000 which As owing to him.

The withdrawal agreement further provided (translated) :

This agreement is retroactive to December 30, 1963, to take effect as if it had been signed on that date and shall remain unalterable with respect to the amounts mentioned as having been collected or to be collected.

(It will be noted that the preamble of the agreement refers to the dissolution taking place as of December 20, 1963, but I do not believe this affects the issue before me.)

The amount of $35,900 payable to the deceased under this agreement appears to have been established in accordance with the handwritten schedule to the agreement appearing on page 8 of the documentary proof, filed as Exhibit C-2. This schedule, which seems to have been based on estimates in round figures at the time, indicates amounts due to him of $29,400 as his share of the partnership assets at the time, and an additional $6,500 for contracts to be completed, making a total of $35,900 and provides for the manner of payment of $19,900 of this, which amount it is admitted that he received, leaving a balance of $16,000 due to be paid to him when payment was made to the partnership by the City of Montreal for his engineering work and supervision in connection with the construction of the Papineau Station of the Montreal Métro. The deceased did not give up this contract nor did he withdraw in favour of someone else. This work was taken out of his hands by the City of Montreal which decided to do the work through its own engineers and it is alleged by the other partners, though this does not concern us here, that the deceased was aware of this at the time the withdrawal agreement was signed in March, as the result of a letter received from the Montreal Transportation Commission dated January 9, 1964. Consequently, the partnership never received payment for this work and the remaining partners refused to pay any part of this $16,000 to Fortin or to his estate. Before his death he instituted proceedings against them in the Superior Court in Montreal to claim this amount which proceedings were contested and have been carried on by his executrix, the present respondent, but have not yet come to trial.

In calculating the amount of $35,900 owing to him, no allowance was included for the amount. to be earned in connection with the Papineau Métro Station, the amount of $3,000 appearing for Métro in the said ‘schedule being for services in connection with the tube under the station for which the work was completed. and payment made (evidence of Jean Amyot before Tax Appeal Board, Exhibit C-l, p. 26). In so far as the with- drawal agreement itself is concerned, therefore, it merely provided a suspensive condition for payment of the balance of $16,000 due to the deceased in connection with contracts other than the Papineau Métro Station. While the evidence of Mr. Amyot before the Tax Appeal Board was rather vague on the point, apparently the contention of the other partners is that had they known at the time, as they claim the deceased already did, that he would not be receiving the Métro contract involving some $35,000, of which they would receive 50%, they would not have agreed to pay him $35,900 on his withdrawal from the partnership, even though. his share of this potential $35,000 had not been taken into consideration in arriving at the amount he was to be paid, because Amyot and Derome, who are also surveyors, put into the partnership earnings which they had received in this capacity, which Mr. Amyot claims they were not obliged to do and would not have done had they not counted on paying the balance of $16,000 due to Fortin out of payments to be eventually received as the result of the Métro contract (pages 29-31, evidence of Jean Amyot before Tax Appeal Board). As previously indicated, this is being litigated in the Superior Court in Montreal and cannot be dealt with here.

Two amounts were in issue in the appeal before the Tax Appeal Board. The first of these was the sum of $11,110 which the deceased received in 1964 as his share of profits for work done in connection with the Sogefors contract which was completed in 1963. He filed his personal returns on a cash basis but the partnership accounting was done on an accrual basis. The financial statements of the partnership for its year ending December 31, 1963 were not filed in evidence and, in fact, production of them was quite properly objected to before the Tax Appeal Board on the grounds that the deceased was no longer a partner at that date, and that the income of the remaining three partners was not an issue in his appeal before the Board. The only accounting of the income of the partnership at the date of the deceased’s withdrawal is the rough handwritten calculation already referred to dated November 30, 1963, which established the amount due to him as $35,900. This did show amounts totalling $13,900 to be collected by him in connection with the Sogefors contract which sums it is admitted he collected. The judgment of the Tax Appeal Board found that this was for work completed while he was a member of the partnership in 1963 and consequently, pursuant to Section 6(l)(c) of the Income Tax Act, he must be assessed for the year in which it was earned whether or not he received it in that year. The assessor had transferred the sum of $11,110 from his 1964 tax return to his 1963 return and this was held to be correct, and as there has been no counter appeal on this issue it can be considered as settled.

The other question in issue, and that which is before the Court, is whether the estate of the deceased should be taxed in 1963 on the amount of $16,000 which he never received and which, in fact, may never be received, this being a litigious right.

The Minister, in assessing the deceased for this sum of $16,000 in the 1963 taxation year, relies on Sections 3, 4, 6(1) (c), 15(1) and 139(1) (e) of the Income Tax Act which read as follows:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(c) the taxpayer’s income from a partnership or syndicate for the year whether or not he has withdrawn it during the year;

15. (1) Where a person is a partner or an individual is a proprietor of a business, his income from the partnership or business for a taxation year shall be deemed to be his income from the partnership or business for the fiscal period or periods that ended in the year.

139. (1) In this Act,

(e) "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

Although no proper financial. statement of the partnership was drawn up for the period ending December 20 (or December 30, 1963, as the case may be) the rough calculation prepared and on which the amount of the payment due to the deceased was established is in effect a statement prepared on an accrual basis showing the earnings of the partnership and his share in them calculated on an accrual basis as of November 30, 1963 and, in so far as he is concerned, this would represent his earnings from the partnership for the fiscal period ending in the 1963 taxation year whether or not he received payment of the amount of $35,900 so established during that year.

The judgment of the Tax Appeal Board holding that the sum of $16,000 should not be included in his income for the year because it is a litigious right, relies on the Supreme Court case of M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12; [1967] C.T.C. 418. In that case it was held that, although expropriation of property gives the owner the right to receive compensation from the moment of expropriation, even though the amount is not fixed until a subsequent date, and the taxpayer in that case was on an accrual basis, nevertheless it should be taxed only when the amount to be paid had been agreed to by the parties or established by judgment since, although the taxpayer had a right to compensation, there was nothing which could be taken into account as an amount receivable until such an amount was determined. I do not believe that the same situation exists in the present case. The sum of $35,000, of which the partners hoped eventually to receive a 50% share as a result of the Métro contract for the Papineau Station, was not taken into account in the settlement with the deceased, which settlement for $35,900 was based entirely on the amounts already earned or to be earned from contracts which were taken into account on an accrual basis. The only way in which the other three partners took into account the Métro Papineau Station contract was that they were counting on the proceeds of it to make it convenient for them to pay the deceased the $16,000, which the statement prepared on his withdrawal from partnership showed they owed him on other contracts. Whether he misled them is not an issue before me, and clearly this Métro contract did not enter into the accounting at the dissolution of the partnership in 1963, nor become a bad debt of the partnership, nor was there any reserve set aside for this.

Respondent contends that a payment on withdrawal from a partnership should not be assimilated in its consequences to a distribution to the partners of income and capital of the partnership on its dissolution, which did not take place in this case as the remaining partners continued in partnership. I believe, however, that a clear distinction must be made between withdrawal of capital and withdrawal of a partner’s share of the income of the partnership for the period in question. A withdrawal payment can include both elements, but in the present case most of the sum of $35,900 due to the deceased seems to have consisted of his share of the income of the partnership for the year 1963 to the date of his withdrawal. The notice of re-assessment (Book of Documents, p. 11) makes an allowance of $2,264.03 for deceased’s share of the capital of the partnership as of January 1, 1963, and this is not in dispute.

Earned income cannot be converted into capital by the process of making an agreement whereby such income is withdrawn by a partner leaving the partnership, whether such withdrawal is in the form of a lump payment or by instalments. This question was dealt with by Dumoulin, J. in the case of William G. Briggs v. M.N.R., [1958] C.T.C. 11, in which the payment received by the appellant on withdrawal from a partnership included the sum of $3,255 which, according to the partnership’s balance sheet, represented his proportion of the firm’s accounts receivable. His income was reported on a cash basis and appellant contended that this was a capital receipt resulting from the sale of his interest in the partnership to the remaining partners. It was held that the amount at issue was not paid to the appellant as the purchase price of his interest in the firm but as his share of earnings already realized by the partnership that would be collected periodically by the continuing partners. This judgment referred with approval to the case of Commissioner of Income Tax, Madras v. P.R.A.L.M. Muthukaruppan Chettiar, Gordon’s Digest of Income Tax Cases, p. 757, where, upon the dissolution of a partnership, the Commissioner of Income Tax purported to assess interest received by the respondent on capital employed in business. On the appeal, Lord Atkin held that:

. . . Being profits of the respondent up to May 31, 1930, how did they alter their character by dissolution? The account taken on dissolution ascertains what is due to the partners for profits, and what is due for capital. It can hardly be suggested that the partners share according to their capital proportions in the whole assets of the partnership. The sum due for undrawn profits was and remains a sum due by the partners to each partner, and necessarily ranks first before the sums due for capital can be distributed. In other words, on dissolution of a partnership an outgoing partner has the right to receive not as in the case of a shareholder in winding-up a company only a share of the assets, but to receive payment of his profits, profits which were his before dissolution and do not cease to be his on dissolution.

In the Supreme Court case of M.N.R. v. Joseph Sedgwick, [1963] C.T.C. 571, the respondent lawyer and four associates financed the formation of a Toronto Stock Exchange member firm to be carried on by a stockbroker who agreed to pay the five associates 90% of the firm’s profits of which the respondents share was 10% of the amount allotted to the group. In due course the five associates sold their interests for a total of $550,000 payable in instalments of which $300,000 was the amount fixed as their share of the net profits of the business for the fiscal year ending March 31, 1956. Respondent therefore became entitled to receive $55,000 of which $30,000 was related to 1956 profits and during the year 1956 he was paid $15,000 on account of this. The Minister treated him as a partner and added $30,000 to his declared income, whereas respondent contended that this was a capital reecipt. It was held, with one dissent, that the agreement could not be construed as being one for the sale of interest in a partnership but that it was rather an agreement for the winding-up of the partnership and that under the Act respondent was liable to pay tax for the year 1956 in respect of his share of the partnership income (even though not withdrawn by him) for the fiscal period ending in 1956, which period ended when the partnership was wound up on February 1, 1956, even though the partnership profits were determined by the agreement itself up to the end of its normal fiscal period ending on March 31, 1956.

In the present case, as already stated, the assessment makes allowance for the portion of the withdrawal payment made to the deceased which could be considered as capital. The question of goodwill does not enter into this case and the entire amount of $35,900, less the amount of capital already allowed for in the assessment, therefore, represents deceased’s share of the accrued earnings of the partnership on contracts completed or in course of completion at the date of his withdrawal and, hence, is taxable in that year whether or not full payment is ever made to him.

The appeal is therefore allowed with costs with respect to the assessment. for the 1963 taxation year.