Lamarre T . C.J.:
These are appeals from tax assessments made by the Minister of National Revenue (the “Minister”) in respect of the 1988 taxation year. On December 1, 1988, the appellants Giovanni Fortino, Franco Carobelli, Oreste Presta, Mario Presta, Umberto Spagnuolo, Luciano Scornaienchi, Stanislao Filice and Antonio Scornaienchi (the “husbands”) sold all their common shares in Fortino’s Supermarket Ltd. (“Fortino’s”) to their wives, the appellants Pileria Fortino, Angela Carobelli, Vittoria Presta, Annina Presta, Gina Spagnuolo, Dora Scornaienchi, Maria Filice and Rosina Scornaienchi (the “wives”). The wives in turn sold the said shares to Food Market Holding Co. Ltd. (“Loblaws”) pursuant to Share Purchase Agreements that were completed on December 2, 1988 for proceeds totalling each $1,066,302. The same day, each appellant executed non-competition agreements (the “NCA”) with Loblaws whereby the latter paid to each husband an amount of $391,369.86 and to each wife, an amount of $195,684.94 (the “NCA payments”) for executing the NCA.
In filing their 1988 tax returns, the husbands elected not to have subsection 73(1) of the Income Tax Act (the “Act”) apply to the transfer of one- half of the shares (the “elected shares”) to their respective wives who paid in turn for the elected shares by way of a demand promissory note with interest at a given amount alleged to be the fair market value. Each husband reported the proceeds from the transfer of the elected shares to his spouse as a capital gain in his income tax return for the 1988 taxation year. The proceeds from the sale of the Fortino’s shares to Loblaws, which were attributable to these elected shares, were reported by the wives as a capital gain in the amount of $238,708 for each of them, in respect of which they claimed a capital gain deduction.
The other one-half of the shares (the “rollover shares”) transferred by the husbands to their wives were alleged to be conveyed pursuant to subsection 73(1) of the Act. The gain from the sale of the Fortino’s shares to Loblaws, which was attributable to these rollover shares, was attributed back to the husbands. The total capital gain, which each husband reported in his income tax return for the 1988 taxation year with respect to the proceeds from the transfer of the elected shares to his spouse and the gain which was attributed to him from the sale of the rollover shares to Loblaws, was $808,706 and each husband claimed the maximum capital gain deduction. No one included amounts received on the account of the NCA payments.
In assessing the appellants on December 13, 1991, the Minister ascribed the whole capital gain from the sale of the common shares of Fortino’s to the husbands, thereby deleting all capital gain from the wives’ income. In so assessing, the Minister therefore added an additional capital gain of $258,903 to each husband’s income. The Minister further added an amount of $293,527 to the husbands’ income and an amount of $146,763 to the wives’ income, being the taxable portion (75%) of the NCA payments, on the basis that such amounts were includable in income pursuant to subsection 14(1) of the Act. The Minister also applied penalties pursuant to subsection 163(2) of the Act with respect to the NCA payments for all the appellants.
By Notices of Reassessment dated March 19, 1993 issued to the husbands only, the Minister removed the amount of $293,527 from income for each of them which had been included pursuant to subsection 14(1) of the Act in the previous reassessments and recomputed the capital gain, realized by the husbands from the disposition of Fortino’s shares to Loblaws, by adding to the initial proceeds of disposition for each of them the amount of $587,055 representing the total NCA payments received by them and their respective wives. The Minister thereby applied penalties to the amount of tax arising from the additional capital gain of $587,055 and deleted the penalties in the previous assessments. Meanwhile, the wives’ assessments were not cancelled.
Issue (L10/R5230/T0/BT0) test_marked_paragraph_end (632) 1.011 0584_5261_5391
Appellants’ Preliminary Remarks
In his preliminary remarks at the hearing, counsel for the appellants narrowed down the issue to the sole questions of the taxability of the NCA payments and the penalties assessed with respect to these NCA payments. He therefore acknowledged that the total capital gain arising from the sale of the Fortino’s shares to Loblaws was rightly assessed in the husbands’ income. He contended that the NCA payments should not be included in the appellants’ income as there is no provision in the Act which renders the appellants liable for income tax with respect to these payments.
Respondent’s Preliminary Remarks
Counsel for the respondent now concedes that the NCA payments should not have been included in the proceeds of disposition of the For- tino’s shares to Loblaws. He also acknowledges that if the NCA payments are taxable, the husbands should not be assessed on the NCA payments paid to the wives. His main argument is now that the NCA payments are taxable amounts as they are income from a source under section 3 of the Act which do not fall in the category of “windfalls”. Alternatively, if this Court comes to the conclusion that the NCA payments do not constitute income from a source under section 3 of the Act, he argues that these payments should be taxable as eligible capital amounts under subsection 14(1) of the Act. He then submits that if this Court is not satisfied that these payments are taxable under subsection 14(1) of the Act, and that these payments do not characterize as windfalls, then the NCA payments must be treated as capital gains. Furthermore, the respondent still argues that the penalties should be maintained.
Facts (L8/R5196/T0/BT0) test_marked_paragraph_end (440) 1.016 0585_6526_6654
These appeals were all heard on common evidence. At the hearing, I heard the testimony of David Williams, Executive vice-president of Loblaws Co. Ltd., who negotiated the purchase of Fortino’s shares on behalf of Loblaws; Claude Génier, who is a consultant in the grocery industry and who negotiated the sale for the Fortino’s shareholders; John Fortino and his wife Pileria Fortino also testified on behalf of all the shareholders; Jean Dumont and Peter Colangelo, both Chartered Accountants, testified as the special tax adviser and tax accountant for Fortino’s shareholders; John Seigel, Chartered Accountant, testified as an expert witness on the valuation to be given to goodwill and personal goodwill; finally, David Turner, who is currently a Senior Appeals Officer in the Income Tax Appeals Division at Revenue Canada, testified as the one who reviewed the Notices of Appeal in the present appeals.
Summary of the Evidence
History of Fortino 's
Pileria Fortino and two of her sisters-in-law, Maria Filice and Gina Spagnuolo, founded Fortino’s in 1961. They apparently operated the business as a partnership. Only in 1966, however, did they sign a partnership declaration.
In 1972, another store was opened. That store was managed by five of the husbands in a partnership. The business operations of Pileria Fortino’s partnership would have been merged in this new partnership. The partnership became a corporation —-— Fortino’s ——- in 1973. They were eight shareholders and they all were related by blood or marriage. By June 1988, it appears that Fortino’s had eight stores and one franchise. These would not include the stores operated at the time of the partnership as they were closed by 1988.
Fortino’s reputation in Hamilton
According to David Williams, Fortino’s was considered the best chain with the best price image in Hamilton. Loblaws, which had been unsuccessful in Hamilton after buying stores from another chain (in the name of “Super Carnevale” sic]) wanted to penetrate the market in Hamilton. They thought of exploiting the “Fortino’s magic”. That magic involved a special appeal to ethnic markets even while maintaining an appeal to non-ethnic markets, the use of service-counters instead of self-service and the freshness of “perishables”. According to Mr. Williams, the Fortino’s made the supermarket “come alive”.
Before the sale to Loblaws, about 90% of Fortino’s customers would shop only at Fortino’s. After the sale, Fortino’s customers continued to shop at Fortino’s. John Fortino thought his success stemmed from Fortino’s treating its customers with “esteem” or “appreciation”. Génier said Fortino’s differed from Loblaws in their fresh food sales, customer service and community involvement. In fact, John Fortino had established the Heart Foundation of Hamilton. His stores were known as the “supermarket with a heart”.
Negotiations began in the spring or summer of 1988. Mr. Génier negotiated on behalf of the appellants and Mr. Williams on behalf of Loblaws. On August 12, 1988, Loblaws sent a letter of intent, signed by Mr. Williams, to the appellants.’ In that letter, Loblaws offered to pay $15 million for the Fortino’s shares and offered $18 million to the appellants in consideration of a non-competition covenant that would be executed by the appellants whereby they would agree not to compete with Loblaws in the retail food business. There was neither a time nor a geographic limit on the non-competition agreement.
The appellants responded in a letter dated August 18, 1988. In that letter, signed only by Mr. Giovanni Fortino but apparently not drafted by him, it was said among other things the following:
With regard to your letter of intent dated August 12, 1988, (“Letter”), respecting the sale of all the issued or outstanding shares
(“Shares”) of Fortinos Supermarkets Ltd. (“Fortinos”), to Food Market Holding Co. Ltd. (“Food Market”), we are pleased to inform you that we are in agreement in principle with most of the terms and conditions contained therein, however, we request that the following changes and additions be made to the terms and conditions of the Letter:
1. that the structure of the payment of the Purchase Price and the amount payable under the Non-Competition Covenant (paragraph 4) be tax advantageous to the shareholders of Fortinos and that counsel to the shareholders provide a favourable opinion to that effect;
3. that paragraph 4 of the Letter be amended to reflect that the shareholders and their families agree not to compete directly or indirectly with Food Market or any of its affiliates with respect to the retail grocery business only. Further, the covenant shall be limited in effect to the province of Ontario for a period of five years from the closing date;
After that letter, it appears that two letters of intent, dated October 4, 1988, would have been prepared by Loblaws. One that was not signed and another signed by all the husbands, Mr. Génier and Mr. Williams. According to Mr. Génier who recognized the first letter (R-6), it might not have been signed because the duration on the non-competition agreement had been excessive. In the signed letter, the purchase price of the shares was $7 million. The price for the non-competition agreement was $1,350,000 and the covenant was limited to ten years for the appellants and to the Province of Ontario. It was limited to five years in the case of other immediate family members.
Mr. Génier explained the price differences between the first letter of intent of August 12, 1988 and the one of October 4, 1988. First, during the negotiations, Loblaws became aware of Fortino’s debt that was around $13 million at closing. Second, it also learned that the bakery operated by Fortino’s was losing money. Finally, the geographical scope and duration of the non-competition agreement had decreased. The final NCA between Loblaws and the appellants prevented them from competing with Loblaws in specific areas of Ontario for a period of five years. The husbands each received $391,369.86 and the wives each received $195,684.94. Moreover, Loblaws entered into consulting agreements with all the shareholders of Fortino’s. But Mr. Williams explained that these consulting agreements alone would not have assured Loblaws that the appellants would not compete with them.
According to Mr. Williams’ testimony, in the negotiations, he dealt with the global price paid for the shares and the NCA. He made sure that the non-competition was obtained. It is clear from his testimony that without the NCA, the deal would not have gone through as we can see from the excerpts from the transcripts:
Q. And what would have happened to these negotiations if one taxpayer refused to sign the non-compete?
A. It would have indicated to me that that taxpayer had good reason that they wanted to go back in the food business, and as such I would not have allowed the deal to go through.
Q. So to put it in other words, would that have been a deal breaker? A. Absolutely.
Similarly, in Mr. Génier’s view, Loblaws would not have made the deal without the NCA. His testimony is to that effect on that point:
Q. Which party to the negotiation of the sale of Fortino’s to Loblaws wanted those non-competes executed?
A. Dave Williams.
Q. And why did Loblaws want those executed?
A. Well, in this instance, in a lot of dealings in the supermarket business, you simply buy assets and you can re-work the stores effectively. But in this instance, it became clear during the onset of negotiations, that without a non-compete agreement, a non-competition agreement, there would be no deal. Loblaws recognized the personal skills of the partners and their wives as being important to the deal. The point that without that there would be no deal.
In fact, according to Mr. Williams, if the appellants had not signed the NCA and had opened a store in competition with Loblaws — this would have been possible as at the time of the sale of the shares, the appellants owned vacant land in Hamilton and John Fortino said that, before the sale, he had intended to open a new store on this property —-- such competition would have been more costly to Loblaws than the $5 million price for the NCA altogether.
(1) Income from a Source and Windfall (L20/R2416/T0/BT1) test_linespace (468>263.86) 1.034 0589_6482_6626
According to counsel, the Crown abandoned its primary position that the NCA payments were disguised share proceeds. It relied instead on its alternate pleas under sections 3 and 14 of the Act. Following the decision in Smythe v. Minister of National Revenue,^ the onus is therefore on the Crown to prove the allegations it made in the alternative. Counsel then advanced four main reasons why the NCA payments should not be caught by section 3 of the Act.
(a) Personal goodwill not source of income
The NCA payments represented consideration for the personal goodwill of the appellants. Personal goodwill is not a source of income. It cannot be disposed of, sold or transferred. That proposition is supported by the decision of Archambault J. of this Court in Placements A & N Robitaille Inc. v. Minister of National Revenue.^ Therefore, the NCA payments would not be taxable.
(b) Onus on the Crown
According to the Tax Review Board in R. v. Fries, (sub nom. Fries v. Minister of National Revenue), the Crown must prove that the NCA payments are taxable under a spcific provision of the Act. In sum, the appellants do not have to prove that the payments are not income from a source and are windfalls. Rather, the Crown has to prove that the payments are taxable under sections 3 or 14 of the Act. Then, relying on the decision of the Supreme Court of Canada in Fries, Counsel for the appellants argued that if there is a doubt that the NCA payments are taxable, the taxpayer should get the benefit of the doubt. The doubt exists here: the Crown took five different positions on how the payments were to be taxed.
(c) NCA payments are not income
Counsel then submitted that if you follow the reasoning of Taylor J. in his then capacity of a member of the Tax Review Board in Fries, to determine whether the NCA payments are income from a source, you must ask:
(1) are the payments income? and (2) if they are, are they income from a source?
In Wood v. Minister of National Revenue,^ the Supreme Court of Canada said that income is to be given its plain ordinary sense and natural meaning. According to counsel, one-shot NCA payments do not fall within the plain and ordinary meaning of income.
Also, in the case of R. v. Cranswick, the Federal Court of Appeal said that before a payment can be considered “income”, there must be an organized effort to earn that payment. Counsel is of the view that the appellants made no effort to get the one-shot NCA payments. The meaning of the terms “income” and “source” should be limited to things like property, business and office or employment, which areas reveal some activity for organizing one’s affairs to earn income.
(d) NCA payments are windfalls
According to the case law, “source” means “what a practical man would regard as a real source of income”. One-time NCA payments would not be regarded by such a man as a source of income.
Counsel for the appellants considered the criteria for a windfall listed in Cranswick, supra. He admitted that the appellants could enforce payment for the NCA. However, no single criterion is conclusive. In addition, counsel argued that the appellants made no effort to obtain the payment; they did not expect the payment; the payment would not foreseeably recur; the payment was not consideration for anything; and payments from Loblaws were not a customary source of income for the appellants. The payments were therefore windfalls.
Counsel for the Respondent argued that a payment can be income even if it is not income from a source. Moreover, in our case, even if the payments were not income from a source, they could still be capital. If the payments were not windfalls, they had to be taxable. They fell into no other exception from taxability such as gift or exempt income.
According to counsel, the payments were not windfalls. To reach this conclusion, he relied on Cranswick, supra, and on the Federal Court of Ap- peal’s decision in Schwartz v. R., (sub nom. Schwartz v. Canada)  2 C.T.C. 99, (sub. nom. R. Schwartz),^ Only two of the criteria listed in Cranswick indicated that the NCA payments could be treated as windfalls: the payments occurred only once and Loblaws was not a customary source of income to the appellants. However,
(1) the appellants made an effort to get the NCA. They sought the payments. They engaged in five months of negotiations. The geographical scope and amount of the NCA were important to them;
(2) it was customary in buying shares to obtain NCA from share holders (e.g. when Loblaws purchased the shares of the other chain Super Carnevale sic]); and
(3) the payments were made for consideration: promises of the appellants not to compete.
As to the taxation of the NCA payments under section 3 of the Act as income from a source, counsel argued that the courts have recognized that income may be produced by an unemunerated source: e.g., Jorgenson v. Jack Crewe Ltd. 22
In rejecting the arguments of the appellants, counsel for the respondent noted that (1) in Wood, supra, the Supreme Court of Canada did not limit income from a source to things like property, employment and business income; and (2) in Fries, supra, the Supreme Court of Canada did not say strike pay was not income: all it said is that it was not income from a source.
According to counsel, the NCA were themselves the source of income to the appellants. He dealt with Canadian decisions on the meaning of “income” and “source”. Historically, the term “source” appears to have referred to capital; profits realized in disposing of a source would now be treated as a capital gain. According to Minister of National Revenue v. Hollinger North Shore Exploration Co. Ltd.,^ “source” is a term defined by its context. In this case, the contract between Loblaws and the appellants could be a source of income. In the decision of the Exchequer Court in Curran v. Minister of National Revenue, it was said that a man’s experience and capabilities could be capital assets. The Fortino’s magic is a capital asset. Use of this asset generates income from a source. Refraining from using this asset is the same as using it and also generates income.
Counsel for the respondent is also of the view that “income” is a broad concept. In the context of employment income, income need not even represent remuneration for services rendered. He also examined U.K. cases and stressed the fact that in the U.K., there are no unemunerated sources of income. For this reason, it seems, the Court should be wary of relying on these cases.
Counsel examined U.S. cases on NCA. In the U.S., unemunerated sources of income are included in “gross income” and are taxable. The U.S. case law supports the Minister’s position in this appeal. As to personal goodwill, counsel argued that assuming that such goodwill may not be transferred, this does not mean that payments to restrain the use of such goodwill will not be income.
Section 3 of the Act reads as follows:
The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;
(b) determine the amount, if any, by which
(i) the aggregate of
(A) the aggregate of his taxable capital gains for the year from dispositions of property other than listed personal property, and
(B) his taxable net gain for the year from dispositions of listed personal property,
11) the amount, if any, by which his allowable capital losses for the year from dispositions of property other than listed personal property exceed his allowable business investment losses for the year;
(c) determine the amount, if any, by which the aggregate determined under paragraph (a) plus the amount determined under paragraph (b) exceeds the aggregate of the deductions permitted by subdivision e in computing the taxpayer’s income for the year (except such of or such part of those deductions, if any, as have been taken into account in determining the aggregate referred to in paragraph (a)); and
(d) determine the amount, if any, by which the amount determined under paragraph (c) exceeds the aggregate of all amounts each of which is his loss for the year from an office, employment, business or property or his allowable business investment loss for the year;
and the amount, if any, determined under paragraph (d) is the taxpayer’s income for the year for the purposes of this Part.
The initial step in determining whether a receipt is taxable as income is to establish the nature and character of the receipt. If a receipt constitutes “income”, it is included in the taxable base unless, even though of an income nature, it is excluded by virtue of a specific statutory provision. Therefore, the characterization of a receipt as being on account of “income” or on account of something else is the first step in determining the taxable base and, hence, liability for tax.
The term “income” is not defined in the Act. From an economic point of view, “personal taxable income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption, and (2) the change in the value of the store of property rights between the beginning and the end of the period in question”. This definition of income does not distinguish between sources of income. It is oriented on uses of income: consumption and accretion to wealth, whether or not the increased value of wealth has been realized in a market transaction. Income would therefore include gains of all kinds, such as gifts, inheritances’ windfalls and capital gains. That approach was recommended by the Royal Commission on Taxation, headed by K.L. Carter in 1966 where the adoption of the “comprehensive tax base” was favoured although tax would be levied in proportion to the discretionary economic power of tax units. However, this perspective was not implemented as the concept of income remains undefined under the Act.
In contrast, segregation of income by source is the essence of the structure of the Canadian income tax system. Section 3 of the Act states the basic rules to be applied in determining a taxpayer’s income for a given year and identifies, in paragraph (a), the five principal sources from which income can be generated: office, employment, business, property and capital gains. Other sources of income are also identified in subdivision d of Division B of Part I, entitled “Other Sources of Income”. These “other sources” relate to certain types of income which cannot conveniently be identified as originating from the five sources enumerated in paragraph 3(a) of the Act.
The fundamental concept of the Act is that income from each source must be separately calculated according to the rules applicable to that particular source. The source concept would have been borrowed from the United Kingdom’s tax system under which income is taxable if it falls into one of the Schedules of the Income and Corporation Taxes Act, 1970 (Eng.), c.10. However, while under the English schedular system, a receipt is not taxable as income unless it comes within one of the named schedules, which are mutually exclusive, the named sources in section 3 of the Act are not exhaustive and literally income could arise from any other unnamed source. Indeed, paragraph 3(a) of the Act contains an “omnibus clause” couched in the following terms: “without restricting the generality of the foregoing, ...”.
However, as mentioned by Robertson J. of the Federal Court of Appeal in Bellingham'.^
There can be no doubt that the source doctrine serves to narrow the reach of the charging provisions of the Act so as to permit certain receipts to escape taxation, including gifts and inheritances.
And indeed, paragraph 3(a) of the Act continues to receive a narrow construction. Robertson J. goes on to say:
The rule of strict construction might explain the reluctance of courts to recognize new sources of income. Unfortunately, not even the application of the contextual and teleological approaches to statutory construction sheds light on the scope of the source doctrine. Turning to two related provisions of the Act we find that Parliament has chosen to include and exclude items from income without regard to whether their tax treatment offends the source doctrine. ... The result, however, is that it is futile to pursue the contextual or teleological approach to the interpretation of paragraph 3(a). The parameters of the source doctrine cannot be distilled from provisions intended to contradict the very precepts underlying the doctrine itself.
In Schwartz, supra, the Supreme Court of Canada however considered the whole scheme of the Act in order to properly analyze the concept of income. In so doing, the majority of the Court concluded that a general provision should not be given precedence over a detailed provision enacted by Parliament. In that case dealing with payments received pursuant to a settlement, the Court concluded that Parliament had chosen to deal with the taxability of such payments in the provisions of the Act relating to retiring allowances, and therefore it was decided that section 3 did not find application.
Ironically, the Supreme Court of Canada previously decided unanimously in Fries? that strike pay should be excluded from income and therefore fell outside the ambit of paragraph 3(a). That decision therefore restored the Tax Review Board’s decision whereby Taylor J. said that the strike pay was not taxable because the Act did not specifically provide for such taxation. The Supreme Court relied on the residual presumption and gave the benefit of the doubt to the taxpayer.
In Curran? the Supreme Court of Canada was concerned with the taxability of an amount paid to an executive of Imperial Oil in order to induce him to leave the company and join other companies in which the payor had a substantial interest. The payment was not considered as being income from employment under section 5 (now 5 and 6 of the Act) or section 24A (now subsection 6(3) of the Act). The Supreme Court found it was taxable, not under any specific provision of the Act but because, said the Chief Justice, the word “income” had to be given “its ordinary meaning bearing in mind the distinction between capital and income and the ordinary concepts and usages of mankind.” It therefore constituted “income from a source” under the general provision of section 3 of the Act.
This brings me to the distinction to be made between income and a capital receipt. In a general way, if a receipt relates to the loss of an incomeproducing asset, it will be considered to be a capital receipt. On the other hand, if it is compensation for loss of income, it will constitute income.
In Bellingham, supra, the Federal Court of Appeal examined a list of those items traditionally outside the ambit of paragraph 3(a) of the Act, namely gambling gains, gifts and inheritances, and windfall gains. The Court concluded that gambling gains are not taxable because such gains do not flow from a productive source, that is, a source capable of producing income. The gifts also do not flow from a productive source, as the source doctrine requires that income involves the creation of new wealth. As for windfall gains, the Court stated that such gains have proven problematic in the past. According to Robertson J., “at best, it can be said that a payment which is unexpected or unplanned and not of a recurrent nature, is more likely than not to be characterized as a windfall gain”. Reference was made to the decision in Cranswick, supra, where it was decided that an unsolicited payment to a minority shareholder by the majority shareholder of a Canadian company to thwart possible litigation arising from the sale of part of the Canadian company’s assets below book value, was not taxable because it was of an unusual and unexpected kind that one could not set out to earn as income from shares. In Cranswick, the Federal Court of Appeal referred to several indicia which could be applied when assessing whether a receipt constitutes income from a source. The Court carefully stipulated that while each of the indicia that follows may be relevant, none is conclusive in determining whether a payment represents a windfall gain. These criteria were the following:
(a) [The taxpayer] had no enforceable claim to the payment;
(b) There was no organized effort on the part of [the taxpayer] to receive payment;
(c) The payment was not sought after or solicited by [the taxpayer] in any manner;
(d) The payment was not expected by [the taxpayer], either specifically or customarily;
(e) The payment had no forseeable element of recurrence;
(f) The payor was not a customary source of income to [the taxpayer];
(g) The payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by [the taxpayer]; it was not earned by [the taxpayer], either as a result of any activity or pursuit of gain carried on by [the taxpayer] or otherwise.
In Bellingham, supra, the Federal Court of Appeal concluded that, as a general proposition, the monies received by a taxpayer from an expropriating authority constitute income from a productive source. However, “the critical factor is that the punitive damage award does not flow from either the performance or breach of a market transaction.” The payment of the “additional interest” did not flow from either an express or implied agreement between the parties. There was no element of bargain or exchange. There was no consideration. There was no quid pro quo on the part of the taxpayer. The payment was considered a windfall and therefore not income under paragraph 3(a) of the Act.
In Curran, supra, the taxpayer received an amount of money from the grantor who was desirous of persuading the taxpayer to resign from his previous position in order to be free to accept an offer of employment from a company in which the grantor had a substantial interest. The Supreme Court of Canada was of the opinion that this payment was made for services to be rendered by the taxpayer. It did not accept the taxpayer’s contention that the payment represented a capital receipt given in compensation for loss of a source of income with his previous employer. For the Court, the essence of the matter was the acquisition of services — and not to acquire any rights which the appellant had under his existing employment — and the consideration was paid so that those services would be more available. The Court made a distinction with English cases where payments to an employee have been held not to constitute taxable income because they were not made in respect of the performance of services by the employee, but in order to ac- quire from him rights which he had previously held against the employer. The Court however acknowledged that the taxpayer had to resign his former position, thereby giving up not only the annual salary but also his pension rights and further prospects. But the Court stated: “the payment of $250,000 was made for personal services only and that conclusion really dispose[d] of the matter as it [was] impossible to divide the consideration”.
In the present case, I am of the opinion that the payment received by the appellants were not given for services to be rendered by the appellants to Loblaws. Consulting agreements were signed for that purpose. In fact, the appellants received an amount not to operate their business in certain areas for a certain period of time. By accepting such a covenant, the appellants surrendered a potential source of profit. Loblaws was in a sense, acquiring a right from the appellants that they had previously held against it. The appellants’ capital assets were in a sense sterilized. I find the situation here similar to the one that prevailed in Higgs (H.M. Inspector of Taxes) v. Olivier, supra. The restriction accepted by Sir Laurence Olivier on his freedom to exercise his vocation to carry on acting and producing and directing films inevitably involved him in loss of earnings. The Special Commissioners decided, and were upheld in appeal, that the sum received under the restriction agreement was a capital receipt.
The House of Lords also shared this view in respect of payments made in return for the imposition of substantial restrictions on the activities of traders, in Glenboig Union Fireclay Co., Ltd. v. Commissioners of Inland Revenue^ Glenboig carried on business as a manufacturer of fireclay goods and vendors of fireclay. It was a lessee of fireclay fields near a railway. The railway paid it compensation for not working the beds of clay because that might have caused the railway to subside. It was held that the compensation was a capital receipt. Lord Wrenbury said this, at page 465:
First, as to the £15,316, this was compensation for being precluded from working part of the demised area which otherwise the Appellants might have worked and thereby made profit. Was that compensation profit? The answer may be supplied, I think, by the answer to the following question: Is a sum profit which is paid to an owner of property on the terms that he shall not use his property so as to make a profit? The answer must be in the negative. The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit. The matter may be regarded from another point of view: the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area all subsequent profit by working would, of course, have been impossible, but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part.
It is true that in American cases referred to by counsel for the respondent, a payment for a covenant not to engage in a certain business is considered income of the recipient. This was decided among others in Cox v. Helvering, supra, where it was said that a contract to refrain from engaging in a particular business, where the restraint is limited as to time and space, is valid if ancillary to some lawful contract. And an amount paid as an incident of, and in support of, the contract of sale, whether paid as additional purchase price to the selling corporation or directly to its principal stockholder, will be included in gross income as defined in the U.S. Revenue Act.
However, we have to keep in mind first that the definition of gross income in the U.S. Revenue Act is exceedingly broad. This is not the case under the Act which is drafted in such a way as to include in the tax base only income from a source. The analysis made above of the interpretation to be given to the concept of income in Canadian law tends more towards a restrictive interpretation of what is to be included in taxable income. Our courts seem to act very carefully in including in taxable income amounts that are not specifically covered in the Act. Secondly, the tax treatment of a covenant ancillary to the sale of any property is treated in the Act in a section dealing with capital gains (section 42). For these reasons, I am very reluctant to follow U.S. case law. I will recall here what has been said by the Supreme Court of Canada in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours,^ with respect to the rules that should be applied in the interpretation of tax legislation. A legislative provision should be given a strict or liberal interpretation depending on the purpose underlying it, and that purpose must be identified in light of the context of the Statute, its objective and the legislative intent: this is the teleological approach. And where a reasonable doubt is not resolved by the ordinary rules of interpretation, it should be settled by recourse to the residual presumption in favor of the taxpayer.
These principles were also applied in Symes v. Æ., and in Schwartz, supra. In these two cases, it was decided that a general provision in the Act should not prevail over a detailed provision enacted by Parliament. Now, some covenants signed with respect to the sale of property are specifically treated in section 42 of the Act. Consideration given for such covenants is deemed to be proceeds of disposition of such property. If the consideration given for a certain type of covenant in respect of the disposition of property is not caught by this section of the Act, it should not, in my view, be taxable as income under section 3.
I therefore conclude that the NCA payments received by the appellants from Loblaws were more in the nature of a capital receipt and were not income from a productive source under section 3.
There remains the question as to whether the NCA payments should be regarded as non-taxable capital receipts, or whether they should be considered “eligible capital amounts” taxable in accordance with section 14, or as proceeds of disposition of property and thus potentially subject to treatment as capital gains.
(2) Eligible Capital Amount Under Section 14 (L18/R1930/T0/BT1) test_linespace (456>258.94) 1.039 0603_1007_1161
Counsel for the appellants argued that the NCA payments are not eligible capital amounts within the meaning of section 14 of the Act. For the appellants to have received eligible capital amounts, they must have had grocery businesses of their own in 1988. The Crown wrongly wants to lift the corporate veil from Fortino’s. It is true that the appellants had a grocery business, which they operated as a partnership, until 1972, when the business was incorporated. Loblaws paid no amount in respect of this former business. It paid for the business — eight stores — operated by Fortino’s.
In order for the payments to be eligible capital amounts, the payments must pass the mirror-image test. This requires, under subparagraph 14(5)(a)(iv), that you must ask whether the payment would have been an eligible capital expenditure if each of the appellants had made the payment to themselves. However, according to the Federal Court of Appeal in Goodwin Johnson (1960) Ltd. v. R. you cannot apply this test in a vacuum. In our case, we would have to ask what is the nature of a payment John Fortino made to himself to stop himself from competing with Loblaws. Counsel argued that, in this context, the mirror-image test was “absurd”; it could not work properly.
Moreover, the mirror-image test applies to “dispositions” only. The term “disposition” in the context of eligible capital property does not have the extended meaning given to it in the context of capital gains. It has its ordinary meaning. The appellants made no disposition in the present case. They did not give up their Fortino’s magic.
Finally, the payments cannot be eligible capital amounts if the payments were deductible from income by the real payor, in this case, Loblaws. It appears that this provision is also part of the mirrorimage test. No evidence was adduced on how Loblaws did or should have treated the payment it had made.
Counsel listed some cases on which the courts commented about the difficulty in interpreting section 14. He suggested that the Supreme Court of Canada’s decision in Fries, be applied here; that the benefit of the doubt on the interpretation of section 14 goes to the taxpayer.
For the NCA payments to be eligible capital amounts, certain conditions must be met. First, there must have been a disposition. According to counsel, there was: the appellants disposed of their rights to carry on business directly or indirectly in the retail and wholesale grocery business in the designated area for five years. It does not matter whether Loblaws acquired anything. However, Loblaws did acquire the enforceable right to prevent the taxpayers from competing with it.
Second, the mirror-image test must be met. Under this test, one must ask whether the payment may be seen as an eligible capital expenditure
(“ECE”) from the point of view of the real, or perhaps a notional, payor. Whether a payment is an ECE depends on the tests set out in Goodwin Johnson.^ Counsel for the respondent submits there are two versions of the mirror-image test. One adopted in Goodwin Johnson, supra, where you must ask what did the real payor pay for, in the present case Loblaws. And the other version, adopted in Samoth Financial Corp. Ltd. v. J?., where you must ask what the taxpayer would have paid for if he had been the buyer. The question is therefore: “If the Fortino’s had paid $5 million to acquire the right to carry on business in a designated area ... for five years, what would that have been?” According to counsel, whatever version you take, the NCA payments are ECE in view of the tests elaborated in Goodwin Johnson, supra.
Third, the amount must be received in respect of a business carried on, or formerly carried on, by the appellants. Counsel cites Oryx Realty Corporation v. Minister of National Revenue,^ as a way of interpreting this requirement. If I understand correctly, counsel made the point that a particular disposition of the Act should be interpreted so that it applies consistently to all taxpayers. Counsel also said that the decision in Corp. Notre-Dame de Bon-Secours, supra, has rendered the residual presumption in favour of the taxpayer a last recourse in interpreting a section.
Counsel for the respondent is of the view that Fortino’s carried on business through the agency of the appellants. It makes no sense to distinguish between people who carry on business through a corporation and people who carry on business through an unincorporated entity. Section 14 should apply consistently to shareholders and sole proprietors or partners who run businesses.
The applicable portion of section 14 of the Act reads as follows for the taxation year in issue:
14(1) Where, at the end of a taxation year, the aggregate of all amounts each of which is an amount determined in respect of a business of a taxpayer under subparagraph (5) (a) (iv) (in this Act referred to as an “eligible capital amount”) or (v) exceeds the aggregate of all amounts determined under subparagraphs (5) (a) (i) to 11.1) in respect of the business (which excess is in this subsection referred to as “the excess’’),
(a) in the case of a taxpayer (other than
(i) a corporation,
(ii) a partnership all the members of which were
(B) partnerships all the members of which were corporations, or
(C) partnerships described in this subparagraph, or
(iii) a partnership that was not a Canadian partnership throughout the year) who was resident in Canada through the year,
(iv) the amount, if any, that is the lesser of
(A) the excess, and
(B) the amount determined under subparagraph (5) (a) (v) at the end of the year in respect of the business
shall be included in computing the taxpayer’s income from that business for the year, and
14(5)(a) “cumulative eligible capital” of a taxpayer at any time in respect of a business of the taxpayer means the amount, if any, by which the aggregate of
(i) 3/4 of the aggregate of all eligible capital expenditures in respect of the business made or incurred by the taxpayer before that time and after his adjustment time,
exceeds the total of
(iv) the aggregate of all amounts each of which is 3/4 of the amount, if any, by which
(A) an amount which, as a result of a disposition occurring after the taxpayer’s adjustment time and before that time, he has or may become entitled to receive, in respect of the business carried on or formerly carried on by him where the consideration given by him therefor was such that, if any payment had been made by him after 1971 for that consideration, the payment would have been an eligible capital expenditure of the taxpayer in respect of the business
Then the Act defines, at paragraph 14(5)(b), what is an eligible capital expenditure. It defines it generally as being an expense made or incurred by a taxpayer, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from a business.
As to the interpretation of section 14, before going through the “metaphysical exercise” required by section 14 of the Act, as described by Strayer J. in Pe Ben Industries v. Æ., it is at least clear from the words used in the Act that we must ask first - who was carrying on the business? If the tax- payer does not carry on the business that was the object of the transaction, then subsection 14(1) does not come into play.
In the present case, the NCA payments were made to the appellants who were the shareholders of Fortino’s which was carrying on the business. Respondent does not challenge the fact that Fortino’s was carrying on the food business. Her counsel instead argues that it would make no sense to distinguish between people who carry on business through a corporation and people who carry on business through an unincorporated entity. According to counsel, section 14 should apply consistently to shareholders and sole proprietors or partners who run the business. To say so he relied on a decision of the Federal Court of Appeal in Oryx Realty Corporation, supra, where the Court had to interpret the old subsection 12(3) of the Act repealed in 1964, which provided that an otherwise deductible outlay or expense was not deductible if not paid within one year after the end of the taxation year and if it was payable to a person with whom the taxpayer was not dealing at arm’s length. In determining if the price for which the appellant corporation in that case bought the land was not “an otherwise deductible outlay or expense” within the meaning of those words in subsection 12(3), the Court came to the conclusion that the computation of profit should not include the computation of gross profit in that particular case contrary to general statements in the leading cases concerning business profits. The Court concluded that way as a “necessity of giving such meaning to that subsection [12(3)] as will operate with consistency in the different circumstances to be encountered in the normal course of events.”
The situation is quite different in the present case where what the respondent really wants is to lift the corporate veil as if Fortino’s was in fact only acting as an agent for the appellants. In other words, the respondent is asking that the corporate veil be lifted in order to give application to a section of the Act which at first sight is not applicable to shareholders of a company which itself operates the business.
As mentioned by Wetston J. in Colbert v. R.,^ referred to by counsel for the appellants:
Since Salomon v. Salomon & Co. Ltd.,  A.C. 22 it has been a well settled principle of company law that the mere holding of all the shares of a corporation does not lead to the conclusion that the business carried on by the company is the business of the shareholder. Therefore, one must start from the presumption that generally when a company is incorporated to carry on a business, the business becomes that of the company and the shareholder cannot claim that business as his or her own. However, it has also been recognized that the relationship between a company and a shareholder can be such to constitute the company as an agent of the shareholder; Constitution Insurance Co. v. Kosmopoulos, supra, at page 213, Dension [Denison] Mines Ltd. v. Minister of National Revenue, 71 D.T.C. 5375] at 5388 (F.C.T.D.), Gramophone & Typewriter Ltd. v. Stanley,  2 K.B. 89. When such circumstances exist, the business carried on by the company can in reality be said to be that of the shareholder. Whether an express or implied agency relationship has been established is a question of fact to be determined on the specific circumstances of each case, Clarkson v. Zhelka,  2 O.R. 565 at 578 (H.C.).
In the present case, the evidence did not reveal that along the years the business was in reality carried on by the shareholders of Fortino’s. Nothing put forward in evidence pointed to the fact that Fortino’s acted as an agent for the appellants. Therefore, I cannot conclude that Fortino’s was a mere conduit and for this reason I do not see how section 14, as it is actually drafted, could apply to shareholders who are not operating any business themselves. In Contonis, supra, Bowman J. of this Court referred to a decision of the Privy Council in Victoria (City) v. Bishop of Vancouver Island?* where it was said by Lord Atkinson, speaking for the Judicial Committee:
There is another principle in the construction of statutes specially applicable to this section. It is thus stated by Lord Esher in Reg. v. Judge of the City of London Court (3): “If the words of an Act are clear, you must follow them, even though they lead to a manifest absurdity. The Court has nothing to do with the question whether the legislature has committed an absurdity. In my opinion, the rule has always been this: ——- if the words of an Act admit of two interpretations, then they are not clear; and if one interpretation leads to an absurdity, and the other does not, the Court will conclude that the legislature did not intent to lead to an absurdity, and will adopt the other interpretation.”
For these reasons, I find that section 14 of the Act is not applicable and therefore the NCA payments cannot be taxable as eligible capital amounts.
(3) Capital Gain (L26/R4290/T0/BT1) test_marked_paragraph_end (4280) 1.008 0609_2261_2393
General Provisions: Sections 38 and 39
Counsel for the respondent argued that if I were of the opinion that the NCA payments were neither income from a source under section 3, nor a windfall, nor an eligible capital amount, then I would have to conclude that the assessments should simply stand as such, the NCA payments having been assessed as capital gains. According to counsel, it is immaterial that the reasons the Minister considered it a capital gain are not being asserted, as the Minister may be right for the wrong reasons.
It is true as it was said in Pollock, supra, that where the Minister pleads no assumptions or where his assumptions are rebutted, the Crown may still try to prove the Minister’s position. What the respondent tries to establish now is that the NCA payments should be treated as capital gains, but not for the reasons pleaded in the Amended Reply to the Notice of Appeal. The tax treatment of capital gains is found in Subdivision c, Division B, Part I of the Act. It starts with paragraph 38(a) where it is said (as applicable for the 1988 taxation year):
38: For the purposes of this Act,
(a) a taxpayer’s taxable capital gain for a taxation year from the disposition of any property is 2/3 of the taxpayer’s capital gain for the year from the disposition of that property;
It is abundantly clear that for this paragraph to apply, a disposition of something must have occurred in a certain taxation year. The word “disposition” is defined in section 54 of the Act in part as follows:
“disposition” of any property, except as expressly otherwise provided, includes
(i) any transaction or event entitling a taxpayer to proceeds of disposition of property,
And “proceeds of disposition” is also defined in section 54. It might have been argued that a non-competition agreement should be treated as a transaction or event entitling a taxpayer to proceeds of disposition of property and that the consideration given by the appellants was the disposition of a right giving rise to a capital gain. However, I am of the view that the evidence is not sufficient to reach such a conclusion.
It is true that in considering an appeal from an income tax assessment the Court is concerned with the validity of the assessment, not the correctness of the reasons assigned by the Minister for making it. However, this principle does not relieve the respondent from pleading adequately the basis upon which the appellants were reassessed so that they know clearly and beyond any possibility of doubt the basis of such assessments.
In the present case, the respondent took many different positions in her pleadings to establish a basis for the assessments under issue. One adopted by the respondent, and it was the position taken by the Minister in reassessing the husbands in 1993, was that the NCA payments constituted disguised proceeds of disposition of the shares. The respondent however dropped that argument before the trial. She intended rather to take the alternative position that the NCA payments should be treated in itself as a capital gain received by the appellants in the 1988 taxation year. Not said but implied was the submission that to be treated as a capital gain there needed to be a disposition of property and that property was a “right of any kind whatever”. That amendment was sought at the eve of the trial by counsel for the respondent. This was met by vigorous opposition by counsel for the appellants who insisted on an adjournment if the motion were to be granted. Considering the fact that to allow such an amendment, I was of the view that I would have in all fairness to the appellants, to adjourn the hearing of the trial, counsel for the respondent decided to withdraw his request to file an Amended Reply to the Notice of Appeal with the proposed amendment. Consequently, the application of sections 38 and 39 and the submission that the appellants disposed of a right were not specifically raised in the pleadings when the trial started. Having done that, I am of the view that the Crown could no longer rely on income in the nature of capital gains in contesting the appeals.
Under section 49 of the Tax Court of Canada Rules (General Procedure), every Reply “shall state” certain things including the findings or assumptions of fact made by the Minister when making the assessment; any other material facts; the issues to be decided; the statutory provisions relied on; the reasons the respondent intends to rely on. Moreover, “it is trite to say that one of the purposes of a statement of defense is to raise all grounds of defence which, if not raised, would be likely to take the opposite party by surprise. A fortiori where, as here, a particular statutory provision is to be relied upon it must be pleaded together with the facts disclosing why the provision is applicable”. As was said by Jackett J. in R. v. Littler?
In my view, when a cause of action is to be supported on the basis of a statutory provision, it is elementary that the facts necessary to make the provision applicable be pleaded (preferably with a direct reference to the provision) so that the opposing party may decide what position to take with regard thereto, have discovery with regard thereto and prepare for trial with regard thereto. ... Had that [section of the Act] been pleaded, other facts might well have been the subject of evidence in addition to those that were brought out at trial. In my view, it is no mere “technicality”, but a matter of elementary justice to abstain, in the absence of very special circumstances, from drawing inferences from evidence adduced in respect of certain issues in order to make findings of fact that were not in issue during the course of the trial.
I therefore conclude that the NCA payments should not be included in the appellants’ income as capital gains pursuant to sections 38 and 39 of the Act.
As to the application of section 42 of the Act, I invited the parties after the trial was closed to submit their comments on this point. More precisely, I asked the parties if I could consider that the NCA payments received by the Fortino’s shareholders were received in respect of the disposition of the shares, pursuant to section 42 of the Act, so that these payments should be included in the proceeds of disposition of the shares.
Both parties submitted written and oral submissions on this question. The appellants are of the view first that it is not open to me to decide, at this stage of the appeal and in light of the history of the pleadings, whether section 42 of the Act (which was never raised in the pleadings) applies to the NCA payments. They are also of the view that in any case this section is not applicable to the present situation. According to counsel for the appellants, only conditional or contingent covenants are to be included in the proceeds of disposition under section 42. He submits that the terms “warranties” and “covenants” are coloured by the words “or other conditional or contingent obligations” found in this section. The use of the word “other” would suggest that any warranties and covenants caught by section 42 must be conditional or contingent obligations. Counsel also suggested that section 42 is symmetrical, that is, since the latter half of the section provides for the treatment of losses incurred by the taxpayer in meeting any contingent liabilities, this presupposes that the first half of the section may only refer to contingent or conditional covenants, and not just a covenant that is only “in respect of” a disposition of property. Finally, counsel argued that should there be any doubt on the issue, the benefit of that doubt should be given to the taxpayer.
Counsel for the respondent is of the view that I could apply section 42 of the Act, irrespective of the position pleaded by the parties. According to counsel, section 42 is a deeming provision whereby, notwithstanding the real nature of an amount received by a taxpayer as consideration for warranties, covenants or other conditional or contingent obligations given or incurred by the taxpayer in respect of the disposition of a property, such amount shall be included in the proceeds of disposition of such property. Counsel is of the view that the non-competition covenant was given by each husband in respect of the disposition of the shares as the share acquisition by Loblaws would simply not have taken place without the NCA. In that sense, the NCA were contingent. Counsel is also of the view that section 42 is not applicable to the wives as they were not legally the owners of the shares that were sold to Loblaws.
There exists also an Interpretation Bulletin, IT-330R, whereby it is said the following in paragraphs 5 and 6:
5. ... Where capital properties of a business are sold, a non-competition covenant, given by the vendor not to carry on a competitive business, is considered to be in respect of the disposition of the goodwill of the business and is therefore not subject to section 42. Such a disposition is a disposition of eligible capital property and is subject to the provisions of section 14.
6. A warranty given on the sale of the shares of a corporation generally relates specifically to the underlying business properties and not to the shares themselves. For example, the warranty will usually relate to the title to these properties or the correctness of the financial statements. However, the wording of section 42 is sufficiently comprehensive to include such warranties as being given “in respect of” the disposition of the shares, and therefore section 42 applies to increase the proceeds of disposition of the shares by the amount received for any such warranty. In this regard, any amount received for a non-competition covenant referred to in paragraph 5 that is in respect of the disposition of shares comes within the provisions of section 42 as part of proceeds of disposition of the shares.
Section 42 reads as follows:
Section 42: Dispositions subject to warranty. (L509/R2203/T2/BT2) test_linespace (280>217.60) 0.874 0614_1325_1477
In computing a taxpayer’s proceeds of disposition of any property for the purposes of this subdivision, there shall be included all amounts received or receivable by the taxpayer as consideration for warranties, covenants or other conditional or contingent obligations given or incurred by the taxpayer in respect of the disposition, and in computing the taxpayer’s income for the taxation year in which the property was disposed of and for each subsequent taxation year, any outlay or expense made or incurred by the taxpayer in any such year pursuant to or by reason of any such obligation shall be deemed to be a loss of the taxpayer for such year from a disposition of a capital property and for the purposes of section 110.6, that capital property shall be deemed to have been disposed of by him in such year.
I agree with counsel for the appellants that the warranties or covenants contemplated by that section must have, as an essential ingredient, an element of conditional or contingent obligation. The nature of a contingent liability has been discussed by Christie J. of this Court in a case referred to by counsel for the appellants in Samuel F. Investments Ltd. v. Minister of National Revenue:^
My understanding is that a liability to make a payment is contingent if the terms of its creation include uncertainty in respect of any of these three things: (1) whether the payment will be made; (2) the amount payable; or (3) the time by which payment shall be made. If there is certainty regarding the three matters just enumerated and time of payment is deferred it will still be a real liability, but in the nature of a future obligation.
After having cited a passage from the House of Lords in Winter v. Inland Revenue Commissioners^ on the nature of conditional obligations, /? Christie J. cited the following statement of Lord Reid:
So far as I am aware that statement [quoted above] has never been questioned during the two centuries since it was written, and later authorities make it clear that conditional obligation and contingent liability have no different significance. ...
Thus, there are two conclusions which we can draw from the Samuel F. Investments Limited case: (i) a conditional obligation has the same effect as a contingent liability, and (ii) a contingent liability must have uncertainty with respect to one of three elements. Combining the two conclusions, an obligation can be said to be a conditional obligation if there is uncertainty in its terms in respect of three things: (1) whether the payment will be made;
(2) the amount payable; or (3) the time at which the payment shall be made.
I am of the view that the warranties and covenants aimed at in section 42 must in themselves be contingent or conditional in nature. Given the meaning ascribed to a conditional obligation by the jurisprudence, I am of the view that the NCA were not contingent obligations given with respect to the sale of the shares. There was no uncertainty as to when the NCA payments were to be made, as to the amount payable and as to the time at which the payment was to be made. My understanding is that the NCA were collateral contracts to the sale of the shares, and not a warranty or contingent obligation. If the appellants broke the NCA and decided to compete with Loblaws, they would be in breach of the NCA, not, I suppose, in breach of the Share Purchase Agreements. They could be liable for damages but most probably the Share Purchase Agreements in themselves would not be void. I would therefore conclude that section 42 is not applicable for the reason that the NCA were not contingent or conditional.
Moreover, even if I am wrong in accepting the appellants’ position on this interpretation of section 42, I do not share the view of counsel for the respondent that the facts revealed in evidence necessarily support his position with respect to the application of section 42. The simple fact that the Share Purchase Agreements were not filed, which certainly could have thrown light on this case, raises serious doubts that I have before me all the facts bearing upon the new contention that I brought and which would find its basis in section 42. For these reasons, I am of the opinion that the appellants should not be held taxable under section 42.
(4) Penalties (L8/R4652/T0/BT1) test_marked_paragraph_end (3208) 1.023 0616_969_1101
In view of the above conclusions, the assessments will be varied to take into account that the NCA payments received by the appellants in 1988 are not to be included in their income. The penalties will automatically be deleted. However, even if I had come to the conclusion that the NCA payments should have been held taxable under the Act, I am of the opinion that the respondent has not discharged the burden of proving gross negligence.
The issue under subsection 163(2) of the Act, is whether the omission to include income was made knowingly or under circumstances amounting to gross negligence. According to Venne v. T?., penalties should only be authorized where there is a high degree of blameworthiness, and in light of the decision in Farm Business Consultants Inc. v. Æ., the benefit of the doubt should be given to the taxpayer where his conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not.
In the present case, considering all the different positions taken by the Minister to try to justify his own assessments, I do not see how we can attribute to the appellants a degree of negligence to sustain a penalty under subsection 163(2) when especially they have obtained professional advice that the NCA payments were not taxable. The transaction was a public one which was not made behind the Minister’s back. The respondent tried to establish at trial that the appellants had hidden some legal advice that would have been given to them and presumably would have been unfavourable to the appellants. First, the evidence did not reveal such facts. Second, even if such legal advice had been obtained, on one hand, such legal advice is privileged and on the other hand, the appellants surely had opposite opinions from third parties (the accountants). This would certainly be a case where the appellants should be given the benefit of the doubt.
Conclusion (L8/R4752/T0/BT0) test_marked_paragraph_end (3312) 1.034 0616_7285_7419
For these reasons, the appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the NCA payments are not to be included in the appellants’ income for the 1988 taxation year, and the penalties applied pursuant to subsection 163(2) of the Act shall be deleted. The capital gain realized by the husbands on the disposition of all the shares of Fortino’s shall therefore be recalculated consequently. The capital gain from the sale of Fortino’s shares shall be deleted from the wives income for the some year.
As to the request of the appellants for costs on a solicitor-client basis, I will not allow such a request, as it is an exceptional remedy that is opened only if it is justified by any misconduct arising in the course of the litigation. I do not find this is the case here.