Date: 20010823
Docket: 1999-1979-IT-G
BETWEEN:
TORONTO REFINERS & SMELTERS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
GENERAL:
[1]
All statutory references herein are to the Income Tax Act
("Act") unless otherwise stated.
ISSUE:
[2]
Whether any portion of the sum of $9,000,000 paid, in 1992 by the
Corporation of the City of Toronto ("Toronto") to the
Appellant in respect of damages occasioned as a result of the
Appellant's inability to relocate its business, Toronto
having acquired its business land and buildings in 1988, was an
"eligible capital expenditure" as defined in section
14.
FACTS:
[3]
The parties filed an Agreed Statement of Facts which constitutes
all facts placed before the Court.
[4]
The Appellant carried on the business of secondary lead refining
("Business") on its land and buildings ("Real
Property") located in the City of Toronto.
[5]
In the early 1980's Toronto expressed interest in purchasing
the Real Property from the Appellant. From that time until July
11, 1988 the Appellant and Toronto negotiated for the sale of the
Real Property conditional upon the Appellant finding a suitable
nearby location for the relocation of its Business. On July 11,
1988 the Appellant and Toronto entered into a written agreement
("1988 Agreement") to transfer the real property to
Toronto. That agreement was made pursuant to section 31 of the
Expropriations Act. Section 31 of that Act provided:
Where the owner of land consents to the acquisition of the
land by a statutory authority, the statutory authority or the
owner, with the consent of the other, may apply to the Board for
the determination of the compensation to which the owner would be
entitled by this Act if the land were expropriated, and the Board
may determine the compensation and the provisions of this Act and
the regulations respecting the determination of the compensation,
hearings and procedures, including costs and appeals, apply
thereto in the same manner as if the land had been expropriated
and for the purpose, subject to any agreement of the parties, the
compensation shall be assessed as of the date on which the assent
to the acquisition is given.
[6]
That agreement provided that the Appellant and Toronto each
consented to the other applying to the Ontario Municipal Board
("OMB") for determination of the compensation to which
the Appellant would have been entitled under the
Expropriations Act had the Real Property been
expropriated. In 1988 Toronto did not carry on the business of
secondary lead refining. The 1988 Agreement was not conditional
on the Appellant finding a suitable nearby site for the
relocation of its Business. However, it provided that in the
event that the Appellant did not relocate its business, Toronto
would acknowledge in all future proceedings that it was not
feasible for the Appellant to relocate the business.
[7]
The 1988 Agreement permitted the Appellant to recover its
inventory, equipment and chattels located on the Real Property
and to dispose of them for its own account. The Appellant agreed
that receipts from the disposition of those assets would be
disclosed to Toronto if it claimed compensation on the basis of
existing use or if it claimed disturbance damages. The Appellant
also agreed that the amount of such receipts could be taken into
account in calculating market value or disturbance damages if the
OMB deemed it relevant.
[8]
On July 15, 1988 the Appellant, pursuant to the 1988 Agreement,
transferred the Real Property to Toronto. Toronto paid the
Appellant $1,000,000 as an initial payment and $60,000 for legal,
appraisal and other costs incurred by the Appellant. The
$1,000,000 payment was received by the Appellant without
prejudice to its right to seek additional compensation based on a
July 15, 1988 valuation date.
[9]
The Appellant ceased carrying on its Business and disposed of
substantially all of its remaining business assets prior to 1989.
The Appellant gave Toronto vacant possession of the Real Property
on February 20, 1989. The Appellant never relocated the
business.
[10] On
October 13, 1989 the Appellant applied to the OMB for the
determination of the compensation to which it was entitled
pursuant to the 1988 Agreement and section 31 of the
Expropriations Act. Valuators, retained by the Appellant
and Toronto for the purposes of the hearing before the OMB,
valued the goodwill of the Business as being between $3,850,000
and $8,000,000. They valued the Real Property, based on existing
use, as being between $1,000,000 and $6,800,000. These valuations
were made as of July 15, 1988.
[11] The
hearing commenced before the OMB for compensation determination
in January, 1992. On January 27, 1992 the Appellant and Toronto
entered into a Minute of Settlement approved by an Order of the
OMB under which Toronto agreed to pay the Appellant as
compensation:
(a)
$2,900,000 in respect of the land,
(b)
$100,000 in respect of the buildings; and
(c)
$9,000,000 "in respect of damages occasioned as a result of
the inability of" the Appellant "to relocate its
Business".
[12] The
$12,000,000 was paid to the Appellant pursuant to sections 31, 13
and 18 and subsection 19(2) of the Expropriations Act. In
computing its income for the 1992 taxation year for financial
statement purposes, the Appellant included the receipt of
$9,000,000 as damages. In computing its income for income tax
purposes, it deducted $9,000,000 from income, claiming that that
sum was a non-taxable capital receipt.
[13] The
Minister of National Revenue ("Minister") reassessed
the Appellant for its 1992 taxation year on the basis that
three-quarters of the $9,000,000 payment was an "eligible
capital amount" within the meaning of subsection 14(1). This
appeal is in respect of that assessment.
APPELLANT'S SUBMISSIONS:
[14]
Appellant's counsel initially submitted that the $9,000,000
of damages was part of the cost of the Real Property purchased by
Toronto or was a current expense and was, therefore, not an
eligible capital amount under section 14. He later abandoned the
latter position respecting current expenses.
[15] He said
that in order to be an eligible capital amount within section 14,
the damages paid to the Appellant must be, pursuant to paragraph
14(5)(a)(iv)(A):
... an amount which, as a result of a disposition ... 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. ...
He then said that paragraph 14(5)(b) provides, inter
alia, that:
"eligible capital expenditure" of a taxpayer in
respect of a business means the portion of any outlay or expense
made or incurred by him, as a result of a transaction occurring
after 1971, on account of capital for the purpose of gaining or
producing income from the business, other than any such
outlay or expense ...
(i) in respect of which any amount is ... deductible in
computing income from the business ...
...
(iii) that is the cost of or any part of the cost of,
tangible property of the taxpayer ...
(emphasis added)
[16] Counsel,
in referring to subparagraph 14(5)(a)(iv)(A) submitted
that the actual circumstances of the payor, Toronto, must be
taken into account in determining whether the notional payor, the
Appellant, has incurred an eligible capital expenditure. He said
that, therefore, if the amount of damages paid to the Appellant
was not an eligible capital expenditure of Toronto because that
amount was part of the cost of the Real Property to Toronto or
was a currently deductible expense, the receipt of that amount
could not be an eligible capital amount of the Appellant.[1] He referred to Her
Majesty the Queen v. Goodwin Johnson, 86 DTC 6185 (F.C.A.).
In that case the Court had to determine whether damages for
breach of contract were eligible capital amounts under section
14. A company called Naden had purchased the beneficial ownership
of a timber license from a third party but title to the license
was held in Goodwin Johnson's ("Johnson") name,
apparently for regulatory reasons. Naden hired Johnson to manage
the timber cutting operations in return for fees partially
dependent on the amount of timber cut. The amount of timber that
could be cut depended on whether Naden would build a mill. Naden
sued Johnson for transfer of the license title. Johnson
counterclaimed for damages for breach of contract and breach of
fiduciary duty because Naden's refusal to build a mill
resulted in less timber being cut. The matter was settled by
Naden paying Johnson damages for breach of contract. The Court
held that the receipt of such damages was on capital account.
Appellant's counsel submitted that even though Naden and
Johnson were in the same business of timber cutting and were,
therefore, potential competitors, the Court found that Naden was
not attempting to acquire a portion of Johnson's business but
was only ridding itself of a breach of contract action. The Court
stated, at page 6189:
As I have earlier said, it is my opinion that the purpose of
the respondent in settling the damage action here was not to sell
a capital asset nor was it Naden's purpose to acquire one,
although that was a result which followed incidentally from the
acceptance of the settlement offer. Rather, its purpose truly was
to settle a breach of contract action.
[17] The Court
held that since an eligible capital expenditure as defined in
paragraph 14(5)(b) did not include a current deductible expense
and since Naden, the actual payor, had incurred a current
deductible expense by making the damages payment, Johnson, as
notional payor, should also be considered to have made a current
deductible expenditure. At page 6190 Urie, J. said:
I turn now to the effect, if any, of subsection 14(1) on the
finding that, in the hands of the Respondent, the payment of
$830,000 was capital. As earlier noted, that subsection employs
the curious technique of determining whether or not a payment is
an eligible capital expenditure by notionally considering the
recipient of the payment as the payor for the consideration which
was given in return for the payment. In my opinion, that notional
change of roles cannot be effected in a vacuum. By that I mean,
the circumstances in which the actual payment was made, for the
actual consideration given, do not change and cannot be ignored.
They are vital in making the determination required to ascertain
whether or not the payment is an eligible capital expenditure. As
I have concluded that the payment by Naden of $830,000 as the
actual payor, was in settlement of an action for damages for
breach of contract so too then is the payment of that sum by the
notional payor, the Respondent. The sole question then is, does
that payment fall within the terms of paragraph
14(5)(b)(i) or not? In general terms that question leads
to another - is the payment an expense deductible as being
one for the purpose of gaining or producing income and not within
the exceptions described in paragraphs (i) to (vi) inclusive of
subsection 14(1), more particularly, in this case, paragraph (i)?
If it is not within these exceptions and is properly a deductible
expense, it is a revenue expenditure. Since it is not within the
ambit of subsection 14(1), it will not be an eligible capital
expenditure.
Note: The pertinent portions of subsection 14(1) referred to
in Johnson are virtually identical to the pertinent
portions of subparagraph 14(5)(a)(iv) under examination in
the instant case.
[18] Mr.
Justice Urie also, at 6190 said:
What, then, on the facts of this case, was the purpose of the
payment? In my opinion, it is clear that the expenditure was made
"for the purpose of gaining or producing income" by
getting rid of an operational contractual expense by paying
damages for breach of that contract. The purpose could not
remotely be described as being for the acquisition of a capital
asset. That being so, subsection 14(1) does not come into play
because if the Respondent had been the payor, the payment made by
it would not have been an eligible capital expenditure since it
failed to meet one of its tests imposed by subparagraph
14(5)(b)(i) of the Act, viz, that the payment not
be what, in general terms, is described as, a deductible business
expense. The trial judge, therefore, correct found the $830,000
payment to have been received on capital account.
[19] Counsel
then referred to Pe Ben Industries Company Limited v. Her
Majesty the Queen, 88 DTC 6347, in which Strayer, J. (as he
then was) approved and applied the Goodwin Johnson
decision, at page 6351, in respect of a payment that:
... was getting rid of its contractual arrangement with the
plaintiff and avoiding all future litigation. It was getting rid
of any further obligations to pay what would normally be
operating expenses under the contract. In other words the payment
made by NAR to the plaintiff was for it in the nature of an
operating expense which would be deductible as a business
expense. By virtue of subparagraph 14(5)(b)(i) of the
Income Tax Act it could therefore not be "eligible
capital expenditure" if it had been made by the plaintiff
and therefore it cannot when received by the plaintiff be an
"eligible capital amount". This was the rationale of
the Goodwin Johnson decision and it is directly applicable
here.
[20] With
respect to subsection 14(1) counsel quoted the learned Justice
further:
In applying it, one must then notionally put the plaintiff in
the position of the payor who actually was paid this amount as an
income matter, i.e. a deductible expense incurred in the process
of earning income. That being the case the plaintiff notionally
put in that position cannot claim the amount received by it as an
"eligible capital amount" because of the provisions of
paragraph 14(5)(b).
[21]
Appellant's counsel submitted further that an "eligible
capital expenditure" must be an outlay or expense "in
respect of a business" that is made or incurred for the
purpose of gaining or producing income from the business. He said
that there was no evidence before the Court that Toronto carried
on any business. He then said that the payment by Toronto would
not be an eligible capital expenditure.
[22] In
addition, counsel submitted that Toronto's purpose in paying
damages arose out of its desire to acquire the Real property and
subsequently being obliged to pay the Appellant for its inability
to relocate its Business. He enforced this argument by saying
that the payment was not made to terminate the business. He
referred to the 1988 Agreement between the Appellant and Toronto
and stated that the Appellant did not, under that agreement,
agree to terminate the Business.
[23] Counsel
submitted further that the payment was not for the acquisition of
goodwill since Toronto did not acquire the Business. He stated
that the payment was not made to acquire goodwill by eliminating
the Appellant's Business, Toronto not being a competitor of
the Appellant and there being no evidence that it wished to
acquire any customers of the Appellant becoming available upon
its inability to relocate the Business.
[24] He argued
that the entire $12,000,000 was Toronto's cost of the Real
Property. He sought to support this statement by reference to
The Queen v. Metropolitan Properties Co. Limited, 85 DTC
5128. In that case the taxpayer, being in the land development
business, agreed with a municipality to install services and
improvements such as sewers, water mains, paving, tree planting,
streetlights and telephone and electrical services on land that
it owned but that it would donate to the city. The agreements
provided that the cost of these services would be considered as
pre-payments of realty taxes that would otherwise be levied by
the city. The taxpayer deducted such costs as current expenses.
The court held, in denying the claimed deduction, that such costs
must be added to the cost of the taxpayer's land inventory
since that would present a truer picture of the taxpayer's
real income in any given year. He submitted that there was no
suggestion that the expenditure should be an eligible capital
expenditure.
[25] Counsel
said further that the allocation of the entire $12,000,000 to
Toronto's cost of the Real Property is also supported by the
decision of the Federal Court of Appeal in Gladstone
Investment Corporation et al v. The Queen, 99 DTC 5207. In
that case the taxpayers owned a shopping plaza and wanted to
expand its parking facilities. However, the land required for
that expansion was being used by the city for a street. The city
eventually agreed to relocate the street northward and transfer
the land to the taxpayers provided that they transferred a more
northerly parcel of land to the city. They paid the city $480,900
to reimburse it for the cost of relocating the street to the more
northerly land. The taxpayers argued that the payment was
currently deductible since the real purpose of that payment was
not to acquire an asset of an enduring nature but to induce the
city to make changes on city property that were beneficial to day
to day business. The court held that the $480,900 should be added
to the cost of the land acquired from the city. The Federal Court
of Appeal upheld the Tax Court decision that the land, used in
the expansion of a parking lot, was an asset of an enduring
nature. It said, at page 5209:
Here, the exchange of land and the payment for the relocation
of Pierre Corneille Street are not severable. The evidence is
clear that both were viewed by the Appellants as part and parcel
of a single arrangement the purpose of which was to allow for the
expansion of the parking facility.
[26] Counsel
submitted that the payment in Gladstone was similar to
Toronto's payment to the Appellant in that the payment was
made as part of a land purchase agreement under which Toronto
agreed to compensate the Appellant for the market value of the
Real Property and for any costs of relocating its Business or of
not being able to relocate its Business. Accordingly, he
concluded, in this respect, that Toronto's payment to the
Appellant must be added to the cost of the Real Property acquired
by it, that not being an eligible capital expenditure in
accordance with the decisions in Goodwin Johnson and Pe
Ben.
[27]
Counsel's next argument was that the amount of damage paid to
it could not fall within the provisions of section 14 because
such payment was not received in respect of a
"disposition" of its Business within the meaning of
clause 14(5)(a)(iv)(A) since the word
"disposition", when read together with the other words
in that clause, means a transfer to another person. Further he
said that it was not received "in respect of a
business" within the meaning of that clause but rather as
damages in respect of the loss of a business. Counsel
argued that the word "disposition", read in context,
contemplated that only a transfer of property for consideration
could give rise to an eligible capital amount. He referred to the
Supreme Court of Canada decision in The Queen v. Compagnie
Immobilière BCN Limitée, 79 DTC 5068. In that
case the court relied, inter alia, on the broad
definitions of "proceeds of disposition" and
"disposition" in the Act applying for capital
cost allowance purposes. He submitted that those definitions were
not of assistance in analyzing the word "disposition"
since they only applied for capital cost allowance and capital
gains purposes. He referred to Contonis v. The Queen, 95
DTC 511 (T.C.C.) in which this Court, in deciding when an amount
was "payable" under section 14 said, at page 515:
"Proceeds of disposition" is defined in at least two
provisions, paragraphs 13(21)(d) and 54(h) and it
includes "the sale price of property that has been
sold".
It will be noted however that paragraphs 13(21)(d) and
54(h) do not deal with dispositions of eligible capital
property. Paragraph 13(21)(d) is part of a subsection that
defines words used in sections 13, 20 and regulations made under
paragraph 20(1)(a). Paragraph 54(h) is found in
subdivision c of Division B which deals with capital gains and
losses.
[28] Further,
in this regard, Appellant's counsel submitted that clause
14(5)(a)(iv)(A) only applies where a taxpayer agrees to
transfer property rights to another person for consideration and
that it does not contemplate damages for the extinguishment of
property such as a business. He said that the provision refers to
both a "disposition" and a "payment made for ...
consideration". He submitted that the logical interpretation
of that convoluted provision was that it applies when the
recipient of the payment (Appellant) has disposed of
consideration to the payor (Toronto) and has received payment
therefor. Counsel then submitted that damages received for its
inability to relocate its Business do not fall within that
provision since no part of its Business was transferred to
Toronto. He argued further that the test described in
Johnson requires the recipient of a payment to assume that
he made the payment to obtain the consideration given up. He then
said that both the receipt of the actual payment and the notional
payment must "be in respect of a business" and that the
language of clause 14(5)(a)(iv)(A) therefore contemplates
that property has been transferred from one business to another
in the course of both businesses.
[29] Counsel
then submitted that clause 14(5)(a)(iv)(A) required the
payment to the Appellant to be "in respect of the business
carried on or formerly carried on by" the Appellant. He said
that the requirement that the amount be "in respect of the
Business of the Appellant was reiterated in subsection 14(1) and
submitted that a payment of damages in respect of a loss
of a business was not a payment "in respect of the
business" within the meaning of section 14. He referred to
The Queen v. Atkins, 76 DTC 6258 in which an employee who
was dismissed without notice threatened to commence an action
against his former employer. A settlement was negotiated and the
employee received an amount as a "severance allowance"
in exchange for releasing the employer from all claims against
it. The Crown contended that the amount was employment income
pursuant to paragraph 5(1)(a) of the Act, which
included in income:
... benefits of any kind whatsoever ... received ... in
respect of, in the course of, or by virtue of the office or
employment ...
[30] The
Federal Court of Appeal disagreed, stating at page 6258:
Once it is conceded, as the appellant does, that the
respondent was dismissed "without notice", monies paid
to him (pursuant to a subsequent agreement) "in lieu of
notice of dismissal" cannot be regarded as
"salary", "wages" or "remuneration"
or as a benefit "received or enjoyed by him ... in respect
of, in the course of, or by virtue of the office or
employment". Monies so paid (i.e., "in lieu of notice
of dismissal") are paid in respect of the "breach"
of the contract of employment and are not paid as a benefit under
the contract or in respect of the relationship that existed under
the contract before that relationship was wrongfully
terminated.
[31] He said
that although that decision was questioned in obiter by
the Supreme Court of Canada in Jack Cewe Ltd. v.
Jorgenson, 80 DTC 6233 (S.C.C.), the Federal Court of Appeal
subsequently reaffirmed its decision in The Queen v.
Pollock, 84 DTC 3670. He said further that the Federal Court
of Appeal in Buccini v. The Queen, 2000 DTC 6685 affirmed
the Atkins decision. In that case, an amalgamation between
the taxpayer's employer and its majority shareholder
terminated all outstanding options to purchase shares of the
employer and the option-holders were compensated with a release
payment. The Crown argued that the amount received was a benefit
in respect of employment. The Federal Court of Appeal disagreed,
stating at page 6689:
It is, however, well-settled law that damages for breach of a
contract of employment are not taxable under section 6 of the
Act. This proposition was established in The Queen v.
Atkins, and remains good law.
[32] Counsel
said that such damages were in respect of the loss of the
Business rather than in respect of the Business. He said further
that the words "in respect of the business carried on or
formerly carried on" are not inconsistent with that
interpretation. He stated that the phrase "formerly carried
on" ensures that payments made to a taxpayer for the
transfer of a business did not escape the ambit of section 14
merely because the taxpayer no longer carried on the business at
the time his entitlement to the payment arises. He said that such
entitlement would ordinarily not arise until after the business
was actually transferred and a taxpayer no longer carried on the
business.
[33] Finally,
Appellant's counsel suggested that the damages received by
the Appellant in respect of its inability to relocate its
Business should not be taxable unless it was clear under section
14, and that any reasonable doubt in that regard should be
resolved by recourse to the residual presumption in favour of the
taxpayer. He referred to The Queen v. Fortino et al, 97
DTC 55 where this Court, referring at page 65 to the Supreme
Court of Canada's decision in Schwartz v. The Queen,
96 DTC 6103, said:
... Our courts seem to act very carefully in including in
taxable income amounts that are not specifically covered in the
Act. ... I will recall here what has been said by the
Supreme Court of Canada in CUQ 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 favour of the taxpayer.
RESPONDENT'S SUBMISSIONS:
[34] Counsel
for the Respondent submitted that the amount of $9,000,000 paid
to the Appellant would have been an eligible capital expenditure
if it had been paid by the Appellant.
[35] She
submitted that the tax law provides special rules for
business-related expenditures that are neither deductible in
full, being of a capital nature, nor eligible for a capital cost
allowance. She said that those expenditures on account of
"eligible capital property" include goodwill, certain
customer lists and trademarks and quota rights.
[36] She said
that paragraph 14(5)(a) defines a taxpayer's
cumulative eligible capital. She said that the account operates
on a pooled basis requiring, in general, that a portion of
expenditures made by a taxpayer in respect of eligible capital
property be added to the pool and that a portion of amounts
received by the taxpayer in respect of dispositions of such
property be subtracted from the pool. She added that where the
balance in the pool is negative at the end of a taxation year,
the negative balance must be included in income. She said that
the policy behind the treatment of proceeds of disposition of
eligible capital property was that the proceeds should be
deducted in determining a taxpayer's cumulative eligible
property at the time of disposition because it represents in
large part, the recapture of a "write-off" that has
previously been deducted.
[37] Counsel
submitted that an amount is determined to be an eligible capital
amount of a taxpayer under subparagraph 14(5)(a)(iv) if,
instead of being the recipient of the amount, the taxpayer had
made any payment for that consideration after 1971 and the
payment would have been an eligible capital expenditure of the
taxpayer in respect of the Business. She said that an eligible
capital expenditure is defined in paragraph 14(5)(b) as
being the portion of an outlay or expense (other than certain
enumerated outlays or expenses) made or incurred by the taxpayer
as a result of a transaction occurring after 1971, on account of
capital for the purpose of gaining or producing income from the
business. Then she said that it was necessary in determining
whether an amount received was an eligible capital amount, to ask
what consideration was given to the taxpayer for the amount. She
referred to Black's Law Dictionary, 5th Ed. (St. Paul,
Minnesota: West Publishing Co. 1979) saying that
"consideration" was defined as follows:
The inducement to a contract. The cause, motive, price or
impelling influence which induces a contracting party to enter
into a contract. Some right, interest, profit or benefit accruing
to one party, or some forbearance, detriment, loss or
responsibility given, suffered, or undertaken by the other.
[38] She said
that one must determine the forbearance, detriment or loss given
by the Appellant for the amount of $9,000,000.
[39] Counsel
then submitted that Toronto induced the Appellant to give up its
Business and that the consideration given by the Appellant was
that it gave up its Business. She said that the dollar value of
that consideration was the value of the goodwill of the Business.
She submitted further that the amount is required to be "as
a result of a disposition". She said that the word
"disposition" was not defined in the Act and
therefore must be given its ordinary meaning. She referred to
Black's Law Dictionary, supra, that defines that word
as follows:
Act of disposing; transferring to the care or possession of
another. The parting with; alienation of, or giving up
property.
She submitted that the meaning of that word was broad enough
to cover giving up a business "in the
circumstances".
[40] She then
said that the next question to be asked is whether, if any
payment had been made by the Appellant after 1971 for that
consideration (the giving up of the Business) it would have been
an eligible capital expenditure. She said that the payment would
have to have been made on account of capital for the purpose of
gaining or producing income from the Business.
[41] If the
payment met those two tests, she said that it would then be
necessary to consider whether the payment fell within one of the
enumerated exceptions before concluding that it would have been
an eligible capital expenditure of the taxpayer in respect of the
business.
[42] She
submitted that if the Appellant had made the payment to induce
the notional recipient to give up its Business, the payment
"would probably have been made on capital account". She
also said that the payment "would probably have been made
for the purpose of gaining or producing income". She also
said that the payment would not fall in the exceptions contained
in subparagraph 14(5)(b)(ii). She then said that:
The amount would probably not be deductible by the taxpayer in
computing income from the business. Furthermore, it would
probably not be deductible by virtue of any provision other than
paragraph 18(1)(b) ... Furthermore, it probably would not
be part of the cost of a tangible property of the taxpayer.
Therefore, it is not precluded by paragraph
14(5)(b)(iii).
[43] Counsel
then submitted that three-quarters of the $9,000,000 (less outlay
and expenses) received by the Appellant was an eligible capital
amount in its 1992 taxation year and that, therefore, the amount
of $6,471,277 had properly been determined and included in the
Appellant's income pursuant to subsection 14(1) of the
Act. She submitted further that the value ascribed to
giving up the Business was based on goodwill and that the amount
was paid for the whole income earning apparatus of the
Appellant's Business.
ANALYSIS AND CONCLUSION:
[44] I agree
with the submissions of Appellant's counsel that the
conclusions reached in Johnson, supra, and Pe
Ben, supra, apply to the circumstances of this case. I
agree with his submissions that, because the actual payor's
circumstances must be taken into account, the payment of damages
by Toronto could not be an eligible capital expenditure within
the definition thereof because there was no evidence that Toronto
made the payment for the purpose of earning income from a
Business. I agree that the payment was made in respect of damages
for the inability of the Appellant to relocate its Business to
another area and that it was not made to terminate the Business.
I agree that the payment was not made for the acquisition of
goodwill since Toronto did not acquire the Business. Further, the
payment was not made indirectly to acquire goodwill by
eliminating the Appellant's Business, Toronto not being a
competitor of the Appellant and there being no evidence that it
wished to acquire any customers of the Appellant that became
available upon the inability of the Appellant to relocate.
[45] I agree
with the Appellant's submission that Toronto, not carrying on
Business competing with the Appellant, must add the amount of the
damages paid to the cost of the Real Property purchased from the
Appellant. That amount would not be payable but for the 1988
Agreement of purchase and sale of the Real Property, the damages
being payable pursuant to that Agreement.
[46] I agree
with Counsel's submission that the context of the statutory
provision requires that a disposition be made to some person. I
do not agree with Respondent's counsel's submission that
a disposition in this context means simply "getting
rid" of the Business.
[47] The
damages paid by Toronto to the Appellant cannot be an
"eligible capital expenditure" within the meaning of
paragraph 14(5)(b) because they must be regarded as
"part of the cost of ... tangible property" of the
taxpayer, namely, the real property.
[48]
Accordingly, the appeal is allowed with costs.
Signed at Ottawa, Canada this 23rd day of August, 2001.
"R.D. Bell"
J.T.C.C.
COURT FILE
NO.:
1999-1979(IT)G
STYLE OF
CAUSE:
Toronto Refiners & Smelters Limited v.
The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
August 15, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge R.D. Bell
DATE OF
JUDGMENT:
August 23, 2001
APPEARANCES:
Counsel for the
Appellant:
Brian D. Segal
James R. Sennema
Counsel for the
Respondent:
Judith Sheppard
COUNSEL OF RECORD:
For the
Appellant:
Name:
Brian D. Segal
Firm:
Baker & McKenzie
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-1979(IT)G
BETWEEN:
TORONTO REFINERS & SMELTERS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 15, 2001 at Toronto,
Ontario, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the
Appellant:
Brian D. Segal
James R. Sennema
Counsel for the
Respondent:
M. Judith Sheppard
JUDGMENT
The
appeal from the reassessment made under the Income Tax Act
for the 1992 taxation year is allowed, and the reassessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Costs
are awarded to the Appellant.
Signed at Ottawa, Canada this 23nd day of August, 2001.
J.T.C.C.
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