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
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
ter
alternatively
argued
that
under
subsection
74.2(1)
of
the
Act,
any
capital
gain
realized
by
the
wives
as
a
result
of
the
sale
of
the
shares
to
Loblaws
is
deemed
a
capital
gain
in
the
hands
of
the
husbands.
The
Minister
further
argued
that
the
provisions
of
subsection
74.5(1)
of
the
Act
should
not
be
applied
to
the
sale
of
the
Fortino’s
shares
by
the
wives
to
Loblaws
pursuant
to
subsection
245(2)
of
the
Act.
The
Minister
also
submitted
an
argument
on
the
fair
market
value
of
Fortino’s
shares
sold
by
the
husbands
to
the
wives.
Furthermore,
by
Notices
of
reassessment
dated
July
10,
1992,
(in
the
case
of
Pileria
For-
tino
—
again,
the
wives
were
not
all
assessed
on
the
same
day
but
were
all
assessed
on
the
same
purpose
—
)
the
Minister
reassessed
the
wives
by
adding
to
their
income
the
capital
gain
and
allowing
the
capital
gain
deduction
as
the
wives
initially
declared.
My
understanding
is
that
this
assessment
was
done
as
a
precautionary
measure
pending
the
outcome
of
the
case
before
this
Court.
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
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”.
Non-Competition
Clause
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
Appellants’
Submissions
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.
Respondent’s
Submissions
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)
[1994]
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.
Analysis
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,
exceeds
(ii)
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;
pears
that
the
compensation
received
is
no
more
than
a
surrogatum
for
the
future
profits
surrendered,
the
compensation
received
is
in
use
to
be
treated
as
a
revenue
receipt
and
not
a
capital
receipt.
When
the
rights
and
advantages
surrendered
on
cancellation
are
such
as
to
destroy
or
materially
to
cripple
the
whole
structure
of
the
recipient’s
profit-making
apparatus,
involving
the
serious
dislocation
of
the
normal
commercial
organization
and
resulting
perhaps
in
the
cutting
down
of
the
staff
previously
required,
the
recipient
of
the
compensation
may
properly
affirm
that
the
compensation
represents
the
price
paid
for
the
loss
or
sterilization
of
a
capital
asset
and
is
therefore
a
capital
and
not
a
revenue
receipt.
See
the
comment
of
Lord
Russel
in
Commissioners
of
Inland
Revenue
Commissioners
v.
Fleming
&
Co.,
33
Tax
Cas
57
(Cour
of
Session
(1st
Division)
as
the
Court
of
Exchequer
in
Scotland)
at
page
63.
(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
Appellants
Argument
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.
Respondent’s
Arguments
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.
Analysis
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
(A)
corporations,
(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.,
[1897]
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,
[1908]
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,
[1967]
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
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.
Section
42
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.
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
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
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
unless
it
is
satisfied
beyond
all
reasonable
doubt
that
all
requisite
evidence
had
been
adduced
to
enable
the
Defendant
to
rebut
the
Plaintiff’s
new
position.”
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.
Appeals
allowed.
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