Pinard J. [Translation] : —This is an appeal by an action pursuant to subsections 172(2) and 175(3) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, brought by the taxpayer Sani Sport Inc. following a notification of confirmation of a notice of assessment by the Minister of National Revenue for the 1980 taxation year.
At the start of the hearing the parties agreed on the following facts and filed by consent the documents referred to in this agreement.
(1) On July 18, 1973 Mr. Jean Garceau, acting for a corporation to be formed, made an offer to purchase a piece of land located in Boucherville to be used to build a sports centre. (See document 1.)
(2) Mr. Garceau approached the Mayor and the councillors of the town of Boucherville to get a zoning change and the services needed to build this sports centre. In his letter there was a brief description of the proposal to build this sports centre, which was to be in three stages over a six-year period. (See documents 2 and 3.)
(3) The plaintiff was incorporated under the Quebec Companies Act on August 16, 1973 for the purpose of building and operating a sports centre. (See document 4.)
(4) The land on which the plaintiff held an option was subject to a right of way in favour of Hydro-Québec over an area of some 88,051 square feet. Before purchasing the land, the plaintiff obtained permission from Hydro-Québec to use the part of the land subject to the servitude as a parking lot, as it represented approximately the area needed by its business for parking. This permission was given on March 1, 1974. (See documents 5, 6 and 27.)
(5) After obtaining the zoning change, the plaintiff on May 29, 1974 purchased the land on which it built its sports centre. (See documents 7 and 8.)
(6) Work began on the first stage in spring 1974 and concluded on October 1, 1974. The original construction included ten tennis courts and a services section.
(7) On April 18,1975 the plaintiff wrote the Mayor and councillors of the town of Boucherville asking for a new change in the zoning so that the facilities of the sports centre could be enlarged by the building of five new tennis courts and the addition of an auxiliary services section. The town of Boucherville had refused to dezone all the land bought by the plaintiff in the initial phase, preferring to dezone it as the plaintiff's expansion took place. (See document 10.) The clerk of the town of Boucherville then informed the plaintiff that the town could not issue it a permit because Hydro-Québec had filed a notice of expropriation to obtain real and perpetual rights of way allowing it to build electric power transmission lines. (See document 9.)
(8) This notice was registered in the registry office on January 13,1975 and by an error was not sent to the plaintiff. On August 1, 1975, Hydro- Québec officially notified the plaintiff that it was taking prior possession for the purpose of acquiring real and perpetual rights of way. (See document 11.) This notice of taking of possession had the effect of prohibiting the plaintiff from undertaking construction of any kind. (See document 12.)
(9) In the months that followed the plaintiff made efforts to persuade Hydro-Québec to move its right of way, to get permission to use part of the right of way for the installation and operation of tennis courts or to buy other land for the expansion of the plaintiff's facilities. The approaches made to Hydro-Québec were unsuccessful and the purchase of new land was not possible as a change in the zoning by-law for the land could not be obtained. (See documents 13, 14 and 15.)
(10) The plaintiff had to resign itself to negotiating a claim for compensation for the right of way, damage to the remainder of the land and the damage suffered by its business because it was unable to increase the number of its tennis courts. Hydro-Québec made a preliminary offer of $125,000, including the sum of $33,838 to compensate for the land needed for a new right of way and the land already served, $6,552 for damage to the remainder of the land and $65,000 for damage suffered by the business. (See documents 15, 16 and 17.)
(11) The plaintiff retained the legal services of Me Paul Trudeau for its claim against Hydro-Québec and brought the necessary legal proceedings. The firm of chartered accountants Clarkson, Gordon was retained to value the damage suffered by the business as the result of loss of earning capacity and the firm of real estate appraisers Therrien, Dan- sereau, Courcelles & Associés Inc was retained to determine the value of the real rights expropriated and other damage. Hydro-Québec asked its internal audit department, and later the administrative consultants Male- tte, Girouard, Letendre Limitée, to determine the damage suffered by the plaintiff's business as a result of the expropriation. (See documents 18, 19, 20 and 22.).
(12) As negotiations on the claim had lasted a very long time and were still dragging on, the plaintiff filed an application for a priority hearing to settle the matter. In this application reference was made to large commercial damages exceeding $400,000. (See document 21.)
(13) As the Hydro-Québec appraisers and those of the plaintiff placed similar values on the right of way and the damage to the remainder of the land, the parties quickly agreed on a value of $42,406 for the right of way and an indemnity of $21,060 for the depreciation suffered in respect of the remainder of the land. (See document 17 and the valuation report of Therrien, Dansereau, Courcelles.)
(14) On the other hand, the firm of Malette, Girouard, Letendre Limitée valued the commercial loss caused by the expropriation of real rights at $33,000, while the firm of Clarkson, Gordon valued this loss at some $300,000. (See the valuation report of Clarkson, Gordon.)
(15) A few days before the case was heard, there was a final meeting in an effort to settle the matter out of court.
(16) This meeting took place at the offices of Malette, Girouard, Letendre Limitée and the discussion centred primarily on the quantum of the damage suffered by the plaintiff's business.
(17) After a long discussion an offer of $350,000 was made to compensate for the value of the right of way, the damage suffered by the remainder of the land and the damage suffered by the plaintiff's business. The plaintiff's representative initially refused this general offer of settlement. Under pressure from its advisors, the plaintiff reconsidered the offer and indicated it would be willing to accept it if in addition to $350,000, Hydro- Québec paid the fees of all the professional experts it had hired. This offer was accepted by Hydro-Québec.
(18) Following the acceptance of this offer, Hydro-Québec prepared an offer of settlement for the right of way and a draft out-of-court settlement, which was signed by the plaintiff. (See documents 23, 24 and 35.) (19) In addition to the fees paid by Hydro-Québec, the plaintiff had to pay a further sum of $5,000 to its counsel, Me Trudeau, and the sum of $3,824 to its president Mr. Jean Garceau.
(20) The plaintiff received the sum of $350,000 on April 22, 1980. (See document 34.)
(21) Relying on Interpretation Bulletin IT-264R (see document 31), the plaintiff treated the proceeds of disposition applicable to the right of way, namely the sum of $42,406 and the sum of $21,060, as reducing its adjusted cost base. By this means no capital gain or loss was made. (See documents 25 and 26.)
(22) The plaintiff did not include in its income the sum of $286,534, compensation for the damage suffered by the plaintiff through loss of business, since it regarded the sum as a payment on capital account which did not produce any gain. (See documents 25, 26 and 27.)
(23) In her notice of reassessment the defendant considered that the full amount of $350,000 represented the proceeds of disposition by the plaintiff of the expropriated property. (See documents 28-33 and the notice of reassessment.)
(24) In her notice of reassessment the defendant included in the plaintiff's income the sum of $154,213 calculated as follows:
Partial proceeds of disposition | $350,000 |
Deduct: | |
— Adjusted cost base relating to this | |
disposition (38% of $84,889) | $ 32,750 |
— Costs incurred to collect indemnity | $ 8,824 |
Capital gain | $308,426 |
Taxable capital gain | $154,213 |
(See documents 29 and 30 and the notice of reassessment.)
(25) In her notice of objection the defendant sic] objected to the inclusion in her income of the sum of $154,213.
(26) In her notice of notification the defendant confirmed her assessment. (27) To limit the discussion the plaintiff was prepared to assume that the sum of $63,446 did not reduce the adjusted cost base of its land and constituted proceeds of disposition resulting in a capital gain calculated as follows:
Proceeds of disposition | $ 63,466 |
Deduct: | |
— Cost base (38% of $84,889) | $ 32,750 |
— Costs incurred to collect indemnity | $ 8,824 |
Capital gain | $21,892 |
Taxable capital gain | $ 10,946 |
(28) However, the plaintiff continues to dispute treating $286,534 as part of the proceeds of disposition and including this sum in its income.
The case at bar involves the expropriation of real and perpetual rights of way over a portion of land owned by the plaintiff for use by Hydro-Québec.
The indemnity paid to the plaintiff is described as follows, in paragraph 7 of the release signed by the parties concerned and entered in the record:
7. The total indemnity owed TO THE OWNER as a result of expropriation of the aforesaid real and perpetual rights of way has been set by mutual agreement between the parties at the sum of THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000) in full and final settlement of any amount owed for any reason whatever.
Hydro-Québec thus became owner by expropriation of the real and perpetual rights of way in question pursuant to the powers conferred on it by the Hydro-Quebec Act (R.S.O. 1977, c. H-5, as amended). In particular, the relevant provisions of s. 33 of that Act state:
33. With the authorization of the Government, the Corporation may: . . .
(3) acquire by expropriation: .. . .
(b) any immoveable, servitude or construction required for the exploitation of waterpowers held by the Corporation or for the generation, transmission or distribution of power. . .
Section 35 of the Expropriation Act, R.S.O. 1977, c. E-24, makes the provisions of section 58 of that Act applicable to the indemnity paid by HydroQuebec to the plaintiff; section 58 provides:
58. The indemnity shall be fixed according to the value of the property expropriated and the amount of damages resulting directly from the expropriation.
It is thus essentially a question of determining whether the sum of $286,534 forming part of the total indemnity of $350,000 constitutes proceeds of disposition resulting in a capital gain within the meaning of the Income Tax Act.
The plaintiff argued that this sum of $286,534 represents strictly damages to its business and that it is therefore not an indemnity relating to the expropriated property. It submitted that the sum of $286,534 is an indemnity which should be similar to that applicable to moneys paid for bodily injury, which are not subject to income tax. In its written submissions, the plaintiff went on to say that even if these are not bodily injuries, "the fact remains that there was a permanent amputation of the plaintiff's assets, resulting in a loss of earning capacity"; it concluded that the parallel is “significant and valid".
Counsel for the defendant, for his part, based his principal argument on the provisions of sections 39(1)(a) and 54(c)(i) and (h)(iv) of the Income Tax Act. Additionally, the Minister of National Revenue's notification of confirmation referred not to subparagraph 54(h)(iv) of the Act but to subparagraph 54(h)(v), which has not been subsequently amended or corrected. Further, in his argument counsel for the defendant relied alternatively on clause 54(c)(ii)(B) of the Act. Accordingly, I must take into account that the defendant has a duty to establish the validity of her notice of assessment, since she sought to justify it by means different from those originally put forward. (See Maxine Wise et al. v. The Queen, [1986] 1 C.T.C. 169; 86 D.T.C. 6023.)
The following relevant provisions of the Income Tax Act need to be reproduced here:
39. Meaning of capital gain and capital loss. (1) For the purposes of this Act,
(a) a taxpayer's capital gain for a taxation year from the disposition of any property is his gain . . . for the year from the disposition of any property of the taxpayer. . .
54. (c) "Disposition" of property. — “disposition” of property. — “disposition” of any property, except as otherwise expressly provided, includes
(i) any transaction or event entitling a taxpayer to proceeds of disposition of property,
(ii) any transaction or event by which
(B) any debt owing to a taxpayer or any other right of a taxpayer to receive an amount is settled or cancelled . . .
54. (h) "Proceeds of disposition" — "proceeds of disposition” of property includes ... .
(iv) compensation for property taken under statutory authority . . .
The plaintiff's position appears to me to be inconsistent with these provisions of the Income Tax Act, which must be interpreted in accordance with the usual grammatical meaning of the words they contain, taking into account their general context, the structure and purpose of the statute and finally the intention of Parliament. I thus apply the modern rule of legislative interpretation as defined by the writer E.A. Driedger and stated as follows by the Supreme Court of Canada, in interpreting the provisions of the Income Tax Act, in Stubart Investments Limited v. The Queen, [1984] C.T.C. 294 at 316; 84 D.TC. 6305 at 6323:
While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed, (1983), at 87, E.A. Dreidger, put the modern rule succinctly:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
Subparagraph 54(h)(iv) of the Act speaks of "compensation for property taken under statutory authority".
There is no doubt that the real and perpetual rights of way expropriated by Hydro-Quebec constitute "property taken under statutory authority”. Subsection 248(1) of the Act indicates that "property" means property of any kind whatever, whether real or personal or corporeal, and that "property" includes, without restricting the generality of the foregoing, a right of any kind whatever. As we have seen, this property was taken or expropriated under Quebec statutes known as the Hydro-Quebec Act and the Expropriation Act.
Then, the legal provision uses the word "afférente" [for]. The Grand Larousse de la langue française defines the word "afferent" as "that which relates, which is appropriate to someone or something"; Le Robert gives the following definition: "that which relates to". As the damage to the business is an obvious consequence of the exercise of real and perpetual rights of way by Hydro-Québec over part of the plaintiff's property, it is clear that there is a relationship between this damage and the rights of way expropriated. The total compensation of $350,000, including the disputed amount of $286,534, accordingly relates to the real and perpetual rights of way expropriated, or is for them, since as the release in question states (document 34 of Exhibit P-1), the total compensation owed to the plaintiff as a result of expropriation of the real and perpetual rights of way in question was set by mutual agreement between the parties at the sum of $350,000 in complete and final settlement of any amount owed for any reason whatever by HydroQuebec as a result of the said expropriation. On these facts, in my opinion, the plaintiff's argument that the Act uses the expression "afferent aux biens pris en vertu d'une loi” [for property taken under statutory authority] rather than the words "afférente à la prise des biens en vertu d’une loi” [for the taking of property under statutory authority] cannot be accepted in view also of the fact that the provision mentions as well “toute indemnité ["compensation] (my emphasis) and that section 58 of the Expropriation Act of Quebec, cited above, provides that such an indemnity shall be fixed in accordance with not only the value of the property expropriated but the damages resulting directly from the expropriation as well. Finally, surely the very word "indemnité" [compensation] implies redress for damage suffered.
Moreover, all this seems quite consistent with the English version of the Act, in which subparagraph 54(h)(iv) simply uses the words "compensation for property taken under statutory authority” and subsection 248(1) also defines "property" as meaning "property of any kind whatever" and including "a right of any kind whatever".
This accordingly leads to the application of paragraphs 54(c) and 39(1)(a) set out above, the wording of which is not in dispute, so that the sum of $286,534 which forms part of the total compensation of $350,000 is to be regarded as proceeds of disposition resulting in a capital gain within the meaning of the Income Tax Act.
Additionally, it is interesting to note that in E.R. Fisher Limited v. The Queen, [1986] 2 C.T.C. 114; 86 D.T.C. 6364, McNair, J. of the Federal Court of Canada implicitly recognized that damage to a business following an expropriation (valued at $38,250) had to be regarded as within the definition of "proceeds of disposition” in paragraph 54(h) of the Income Tax Act; at 121 (D.T.C. 6369-70), McNair J. said the following:
In my opinion, the payment of $144,172.43 is clearly attributable to a disposition of property and the proceeds of disposition thereof within the meaning of clause 54(c)(ii)(B) and paragraph 54(h) of the Income Tax Act. It was paid to the plaintiff as a transaction or event by which the right of the taxpayer to receive the amount was settled. The total amount received by the plaintiff in consideration for the expropriation of his interest in the Sparks Street property was $756,256.20. This was the culmination of the transaction whereby the whole amount falls within the definition of proceeds of disposition in paragraph 54(h) of the Income Tax Act inasmuch that it was compensation for property taken under statutory authority.
I consider that the defendant has successfully shifted the burden upon her in this particular case of establishing the validity of the assessment at issue and judgment is rendered dismissing the plaintiff's action with costs.
Action dismissed.