Seaforth Plastics Ltd. v. The Queen, 79 DTC 5174, [1979] CTC 241 (FCTD)

Collier, J:—This is a taxpayer’s appeal against an assessment, made by the Minister of National Revenue, under the Income Tax Act.

The parties filed a statement of agreed facts. I set it out in full:

1. At all times material to this appeal the Plaintiff, a company incorporated under the laws of the Province of British Columbia, was engaged in the manufacture and sale of flexible plastic film products which business it carried on in Burnaby, British Columbia and in Winnipeg, Manitoba.

2. The Burnaby, British Columbia, operations were carried on in premises leased by the Plaintiff using machinery owned by it.

3. In 1974 a fire destroyed the buildings, their contents, the machinery, equipment, tools and inventories of goods and supplies at the Burnaby location. As a result, the Plaintiff, in its 1975 tax year, received the following proceeds under a fire insurance policy then in force and attached hereto as Exhibit A:

(a) for replacement
of capital assets	$4,002,043
(b) as compensation
for interruption of
its business
activities on
account of:
loss of profits
Burnaby	$3,378,013
less increased
profits—
Winnipeg	(214,234)
	$3,163,579
loss of future profit	379,519
	$3,543,098
less expense of
preparing loss claim	(42,836)
sub-total	$3,500,262
continuing expenses	$ 412,960
extra expenses	109,157
expense of
preparing loss claim	42,836
sub-total	564,953
	4,065,215

(c) as compensation

for:

loss inventory	$ 553,093
engravings	461,904
property of others	11,887
sundry inventories	16,494
small tools	14,724
total	1,058,102
Total Proceeds	$9,125,360
4. In its tax return for 1975 the Plaintiff allocated proceeds
of	$4,002,043
and	3,500,253
	$7,502,296
as having been
received on account
of capital, proceeds
of	$1,058,102
and	564,952
	1,623,055
as income receipts,
for total recoveries
of	$9,125,350

Note: There is an unexplained difference of $10.00 between the amounts shown in Plaintiff’s tax return and Statement of Claim ($4,065,205) and the detailed accounting records ($4,065,215).

5. There is no dispute with respect of items (a) and (c) above. The sole issue is whether the sums listed under heading (b), above, were received on capital account (proceeds from disposition of property) or on revenue account (income, replacement of income or reimbursement of expenses, as the case may be).

6. The Plaintiff paid the premium for the fire insurance policy annually and charged the amount thereof to administrative expenses which, with other current business expenses, were deducted in computing the income of the Plaintiff for tax purposes.

As stated in paragraph 4, the plaintiff initially considered the sum of $564,952 as an income receipt. On this appeal it took the position the amount should be treated as on account of capital.

The issue, then, is whether the sum of $4,065,215, paid under the business interruption provisions of the insurance policy, are to be treated as capital or income. The Minister, in his assessment, brought the amount into income. The plaintiff disagreed. I shall later set out the plaintiff’s contention.

Certain provisions of the policy are relevant:

3. Property and Interests Covered:

A. THIS POLICY COVERS ALL REAL AND PERSONAL PROPERTY of every kind and description, now or hereafter existing in any form, including newly acquired property and stock sold but not removed, and such property of others held in trust by the Insured or for which the Insured may be liable, or for which, prior to loss, the Insured may have assumed liability, or which the Insured may have an obligation to insure.

B. BUSINESS INTERRUPTION (as hereinafter defined in Paragraph 7B).

7. Bases of Recovery:

The bases of recovery hereunder shall apply as follows:

A. Real and Personal Property:

The cost of repair or replacement new with material of like kind and quality, and without deduction for depreciation, subject to the following provisions and limitations:

(1) Liability shall not exceed the actual expenditure for repairs or replacement (meaning equivalent as distinguished from reproduction of identical) of the property damaged or destroyed, or the actual cost of replacement thereof with any other facility for use in the Insured’s business activities (if Insured elects so to replace the property damaged or destroyed); provided that in case of replacement with any other facility, liability hereunder (a) shall not exceed the estimated cost of repair or replacement of the damaged or destroyed property and (b) shall not be less than the liability under Paragraph

(2) of this Section had the Insured elected not to replace such damaged or destroyed property.

(2) On Real and Personal Property (a) which is obsolete and not maintained in operating condition, (b) which the Insured elects not to replace either in kind or with any other facility; (c) Plant properties at Fraser Mills and Ocean Falls; the basis of recovery shall be the ACTUAL CASH VALUE of such property at the time of loss, which for purposes of this coverage is defined as the amount which it will cost to rebuild, repair or replace the property with material of like kind and quality within a reasonable time after such loss with proper deduction for depreciation.

B. Business Interruption: The conditions of this Policy are that if Real or Personal property described as covered by this Policy and/or used by the Insured, while anywhere within or between Canada or the United States of America is destroyed or damaged by a peril insured against, occurring during the term of this Policy, so as to necessitate a total or partial suspension or prevention of or delay in normal operation of the business of the Insured, the Insurers shall be liable under this policy for the ACTUAL LOSS SUSTAINED arising therefrom, commencing with the date of loss and not limited by the expiration date of this Policy, for the time during which the business shall be effected in consequence of the damage.

Special Conditions Applicable to Paragraphs 7B and 7C

(1) ACTUAL LOSS SUSTAINED shall mean the net profit (before deducting income taxes) which is thereby prevented from being earned and such charges and expenses as must necessarily continue during the interruption of business, to the extent only that such charges and expenses would have been earned had no loss occurred.

(2) However, such charges shall not include Payroll Expense other than that of officers, executives, department managers, employees under contract, and other important employees.* [1]

The plaintiff’s position is put this way. On the happening of the fire there was a disposition of depreciable property, subsection 13(1); the whole of the insurance proceeds became proceeds of the disposition:

compensation for property destroyed and any amount payable under a policy of insurance in respect of loss or destruction of property (subparagraph 13(21)(d)(iii);* [2]

the whole insurance proceeds are to be taken into account, for income purposes, in the calculation of capital cost allowance recapture; similarly, where taxable capital gains are brought into income (paragraph 3(b) and subsection 39(1)) the proceeds of a disposition include

compensation for property destroyed, and any amount payable under a policy of insurance in respect of loss or destruction of property (paragraph 54(h));

the total insurance proceeds must be included there, as well, for purposes of that calculation.

Pivotal to this submission are the words of the statute:

any amount payable under a policy of insurance in respect of loss or destruction of property

The plaintiff says its policy of insurance provided it with indemnity for the cost of replacement of its real and personal property ($4,002,043 replacement of capital assets, and $1,058,102 for lost inventory, etc (paragraphs 3(a) and 3(c) of the agreed facts)). Further, it is said, the $4,065,215 business interruption indemnity only became payable on the loss or destruction of its property; it was therefore an amount payable in respect of that loss or destruction.

I do not accept that submission.

One must examine first the character of the indemnity paid, under the policy, for business interruption. Having done that, one must then, I think, decide whether the monies so paid were in respect of loss or destruction of property, as those words are used in the Income Tax Act.

The policy insures a number of interests, in addition to real and personal property. They are set out in paragraph 3 of the contract. Indemnity is provided where real or personal property is damaged or destroyed. With certain qualifications, the measure is cost of repair or replacement. Business interruption occurs where there is a suspension or delay, as a result of the damage to or destruction of the insured’s property, in the operation of the insured’s normal business. Indemnity is provided for the actual loss so sustained. The actual loss is defined, speaking generally, as the net profit which the insured was thus prevented from earning.

The business interruption coverage is, in my opinion, a separate and distinct coverage from the property damage aspect. True, it is only payable where there is causative property damage or destruction. But there can be property damage or destruction, and yet no suspension of business, and no loss of net profit.

Under the business interruption coverage, the insurer pays the loss of profit resulting from suspension of business operations. It is not indemnifying the insured in respect of loss or destruction of property. The various coverages, in this case, happen to be in one policy with one insurer. That, to my mind, is not significant. They could just as well be in separate policies with different insurers.

On that view of the insurance policy, and the monies paid pursuant to the business interruption coverage, the sum of $4,065,215 was not payable, in my opinion, in respect of loss or destruction of property. It must, therefore, be excluded from the amounts brought into calculation for purposes of subsection 13(1), paragraph 3(b) and subsection 39(1).

Counsel for the defendant relied on BC Fir & Cedar Lumber Co Ltd v MNR, [1930] Ex CR 59 (Maclean, P) and The King v BC Fir & Cedar Lumber Co Ltd, [1932] AC 441 (JCPC). Both decisions arose out of the same facts: a destruction of a lumber manufacturing plant by fire, and payment, by insurers under use and occupancy policies, of fixed charges and loss of profits. The plant was insured, as well, against destruction or damage. Payment had been made under the main fire policies. It was common ground those payments, for tax purposes, were on account of capital. The question in the Exchequer court was whether the amounts paid under the use and occupancy policies were income within the Income War Tax Act. The question in the courts of BC, the Supreme Court of Canada, and the Privy Council was whether the same amounts were income within the British Columbia Taxation Act. The result, in both contests, was the same. The use and occupancy proceeds were held to be on account of income.

Counsel for the plaintiff contends the two decisions are distinguishable. It is true the statutory provisions of the two taxing statutes were somewhat different from the present Federal statute. The policy provisions were, also, a bit different. But the general principles of the two cases are, I think, still applicable: It is necessary first to determine the nature of the insurance payment, and then see where it fits under the taxing statute. The privy Council, and Maclean, P, characterized it as a revenue receipt of the taxpayer’s business, [1932] AC at 447; [1930] Ex CR at 63. In both cases it was held to be income for tax purposes.

The same designation must, in my view, be made in this case. The effect of sections 3, 9, and 13 of the Income Tax Act, when read together as contended by counsel for the plaintiff, does not convert the business interruption proceeds into a payment on account of capital.

The action (appeal) is dismissed.

The defendant is entitled to costs.

Appeal dismissed.