Loukras v. MNR, 90 DTC 1557, [1990] 2 CTC 2044 (TCC)

Sarchuk, T.CJ.:— This is an appeal from a reassessment of tax with respect to the appellant's 1974 taxation year. The following events and circumstances gave rise to this matter.

In November 1970, the appellant and his wife together with another couple acquired a 100.029-acre farm in Pickering in undivided ownership. The interest of the appellant and his wife was 75 per cent and that of the other party was 25 per cent. The purchase price was approximately $150,000 of which the sum of $100,000 was obtained by way of a mortgage on the property. The appellant and his wife occupied a house located on the property as their principal residence from early 1971 until August 1973.

Pursuant to section 4 of the Expropriation Act, R.S.C. 1970, 1st Suppl. c. C-16, a notice of intention to expropriate their interest in the said property was registered on March 2, 1972, by the Department of Public Works of the Government of Canada against the title to the property. In accordance with sections 9 and 12 of the Expropriation Act a notice of confirmation of such expropriation was registered against the title on January 30, 1973. On April 24, 1973, the Department of Public Works made an offer to the appellant pursuant to the provisions of section 14 of the Expropriation Act. On August 15, 1973, the appellant commenced an action in the Federal Court, Trial Division against Her Majesty the Queen claiming compensation in respect of the expropriation of the said property.

Amounts of compensation were received by the appellant in 1973, 1974, 1976 and 1978 from the Government of Canada in respect to the expropriation. Although there is not complete agreement, for the purpose of this appeal the appellant accepts the respondent's figure of $406,462 as representing the total compensation paid. Of this amount in 1973 and 1974 the appellant and his coowners received, without prejudice to their rights to appeal the quantum of compensation, the following:

These amounts included, inter alia, compensation for the market value of the said property, compensation for various "disturbance" amounts, compensation for the loss of the appellant's "preferred interest" in the mortgage on the property and amounts described as "interest".

The appellant pursued his action in the Federal Court and a judgment was rendered by the Trial Division on July 24, 1974. Supplementary reasons were handed down on September 20, 1974 on which date the judgment was signed. The appellant filed a notice of appeal to the Federal Court of Appeal on October 17,1974 and on January 7,1975 the respondent filed a notice to vary the trial judgment by deleting therefrom the sum of $2,000 awarded as compensation for disturbance. The respondent did not pay the disputed $2,000 to the appellant in 1974.

The appellant filed a notice of discontinuance in the Federal Court of Appeal on February 19, 1976. Subsequently on May 2, 1976, the Government of Canada paid the $2,000 to the appellant. The Minister of National Revenue has agreed that this amount is not required to be included in income for the 1974 taxation year. Other payments were made following the discontinuance of the appeal in April of 1978. The first, a payment in the amount of $39,965.09, was made on an ex gratia basis and the parties have agreed that it is not subject to tax in 1974. A second amount was paid in 1978 and related to interest in the amount of $6,511.70. It and an interest item paid to the appellant on November 26, 1974, in the amount of $6,624.28, are the subject of a remission order and an amended remission order, the effect of which was to remit any tax payable to the appellant in respect to interest received pursuant to the expropriation. It is also agreed that these amounts are not taxable in 1974 or indeed at any time.

The appellant filed his 1973 income tax return prior to April 20, 1974. The following statement was included in that return: “During 1973 Dr. and Mrs. Loukras disposed of their principal residence (farmland and house at R.R.3 Claremount, Ontario) for total proceeds of $198,112.00.” In filing his 1974 income tax return, prior to April 30, 1975, the following statement was made: “During 1974, Dr. and Mrs. Loukras received additional proceeds, from the sale of their principal residence in 1973, amounting to $78,220.00.” The original assessment in respect of the 1974 taxation year was issued on July 7, 1975. The assessment in so far as the subject property was concerned, was made on the basis that it was a principal residence as asserted by the appellant.

On or about June 7, 1979, the Department of National Revenue approached the appellant and requested that he execute a waiver in respect of his 1974 taxation year pursuant to the provisions of subsection 152(4) of the Income Tax Act. The appellant agreed to do so. By notice dated January 14, 1981, the respondent reassessed the appellant in respect of his 1974 taxation year by adding to his income an amount of $30,503.04 as an additional taxable capital gain from the disposition of the said property. A notice of objection was duly filed in which the appellant gave as one of his reasons for the objection: "If. . . there was a capital gain then the calculation is incorrect in that the proceeds assessed include amounts applicable to the 1973 taxation year. . .” On November 24, 1981, the appellant received a letter from the Toronto District Taxation Office stating that the notice of reassessment had been reconsidered and that his objection was allowed. A notice of reassessment bearing the date November 24,1981 adjusted his income to the same amount as shown in the original assessment.

On August 30, 1982, a notice of reassessment was issued in respect of the 1978 taxation year. An amount of $30,781.18 was added to the appellant's income, again on the basis that it represented one-half of the capital gain realized by him on the disposition of the subject property. A notice of objection was duly filed in which as one of the reasons for his objection the

appellant stated: “If . . . there was a taxable capital gain then the calculation is incorrect in that the proceeds assessed include amounts applicable to the 1973 and 1974 taxation years." This objection was apparently allowed in full by way of notice of reassessment made on November 10, 1983.

On December 5, 1983, Palmer, Reed, the appellant's accountants wrote a letter to Mr. R.W. Shoobert, Director, Revenue Canada in which they noted that the respondent was again proposing to reassess the appellant's 1974 taxation year by bringing into his income the amount of $30,596.30, being one- half of the capital gain realized by him on the disposition of the subject property. The propriety of this proposed reassessment was raised and a series of representations were made on behalf of the appellant, first to officials in Revenue Canada and then to the Minister. It appears that no further steps to reassess were taken by the Minister while these representations were being made. Ultimately, those avenues were exhausted and on April 8, 1986 a notice of reassessment was issued in respect of the 1974 taxation year on the basis indicated. The appellant duly filed a notice of objections the notice of reassessment was confirmed and this appeal was launched.

A number of issues are raised by the appellant.

A. The Validity of the Reassessment

Counsel submits that the reassessment under appeal is void because the Minister of National Revenue is only permitted to make one reassessment pursuant to a waiver and is required to make such reassessment in an expeditious manner. According to counsel the reassessment of the 1974 taxation year which is under appeal was the second reassessment following the waiver and was made almost seven years after the appellant granted the waiver.

Subsection 152(4) of the Act provides:

152(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

It should be noted that under the Act as it read at that time there was no statutory provision which permitted the appellant to file a notice of revocation of waiver.

Counsel for the appellant submitted that the Minister's right to reassess pursuant to subsection 152(4) of the Act must be examined within the context of Division I—Returns, Assessments, Payment and Appeals, in which division this subsection appears. It was contended that each of the administrative actions to be performed by the Minister pursuant to the various provisions found in this division are required to take place within certain time constraints. For example, pursuant to subsection 152(1) the Minister is required to issue an original assessment “with all due dispatch", following which he may then reassess any number of times within the four-year period following the original assessment. There are also definite time periods within which a notice of objection may be filed and within which an appeal may be taken. The Minister is also required to act “with all due dispatch” when considering whether to vacate, vary or confirm a notice of objection. By analogy counsel argued that it had not been intended by Parliament that a taxpayer by filing a waiver pursuant to paragraph 165(3)(a) was to place himself in a position where he was open to reassessment indefinitely.

Counsel urged the Court to find that the phrase "as the circumstances may require” in subsection 152(4) imparted a limitation upon the Minister's right to reassess. He asked this Court to draw a distinction between a taxpayer who provided a waiver and a taxpayer who committed fraud or misrepresentation. In the latter case, the existence of fraud or misrepresentation can be taken to entitle the Minister to reassess as many times as required with no obligation to act with all due dispatch. However, in the case of a waiver the words above quoted require the Minister to have regard to the taxpayer's right to some certainty in ordering his affairs and it follows that the Minister can only reassess once where a waiver has been granted. Counsel conceded that the Minister may defer such reassessment until he has had the opportunity to conduct any necessary re-examination of facts or until any subsequent events that may affect the taxpayer's liability have taken place. However, he argued that thereafter the Minister must act with due dispatch in making the reassessment. If he does not do so the reassessment is void.

Counsel further submitted that the second reassessment, currently before this Court, was in any event not made expeditiously and for the reasons expressed, void. He submitted that the final ex gratia payment was made on April 14, 1978, approximately a year prior to the day on which the waiver was obtained. Since no additional facts came to light subsequent to the making of this payment, the Minister should have known that there would be no further events which could influence the taxation year in which the proceeds were to be taxed. Counsel said, and I quote:

The first reassessment with respect to the 1974 taxation year was made on January 14, 1981, approximately three years after the last compensation payment was received. The Minister once again reconsidered the matter when he vacated the Notice of Objection filed by the appellant in response to the 1981 reassessment. He then considered the matter again when he reassessed the appellant on August 30, 1982 for the 1978 taxation year. He presumably considered the matter again when he vacated that reassessment on November 10, 1983. He then waited a further 2 /2 years before issuing the second reassessment in respect of the 1974 taxation year. It is submitted that a second reassessment made 11 years after the tax return in respect of the 1974 taxation year was filed, 7 years after the Waiver was granted and 8 years after the last compensation payment was received, is not made with all due dispatch.

Counsel submitted that it could not have been the intention of the legislative draftsmen to permit the Minister to reassess as frequently as he saw fit or to act without any time restraints, and suggested that the subsequent enacted subsection 152(4.1) permitting the waiver to be revoked clearly supports that only one reassessment may be made pursuant to the waiver.

A number of cases in which the meaning of the phrase “with all due dispatch" was considered were cited including Jolicoeur v. M.N.R., [1960] C.T.C. 346; 60 D.T.C. 1254 (Ex. Ct.); No. 737 v. M.N.R. (1961), 28 Tax ABC 134; M.N.R. v. Appleby, [1964] C.T.C. 323; 64 D.T.C. 5199 (Ex. Ct.); Rodmon Construction Inc. v. The Queen, [1975] C.T.C. 73; 75 D.T.C. 5038 (F.C.T.D.); Hutterian Brethren Church of Wilson et al. v. The Queen, [1979] C.T.C. 1; 79 D.T.C. 5052 (F.C.T.D.); Stollar Construction Ltd. v. M.N.R., [1989] 1 C.T.C. 2171; 89 D.T.C. 134 (T.C.C.).

Counsel also argued that once the Minister makes the first assessment he has exercised his discretion to reassess pursuant to the waiver and he is functus officio. He maintained that the Minister's authority, like that of a judge, magistrate, arbitrator or other official who derives his authority by statute is exhausted once he has made his order or given his decision. Counsel cited Mordue v. Palmer (1870), 6 Ch. App. 22; Re V.G.M. Holdings Ltd., [1941] 3 All E.R. 417; Pure Spring Company Ltd. v. M.N.R., [1946] C.T.C. 169; 2 D.T.C. 844 (Ex. Ct.).

With respect to this issue the appellant's position cannot be sustained. In the absence of specific statutory language it cannot be seriously argued that the Minister is limited or restricted solely to one reassessment following the granting of the waiver. The judgments cited by counsel for the appellant provide little support for his position. Mordue v. Palmer and Re V.G.M. Holdings Ltd. dealt with circumstances where a judge in one case and an arbitrator in another made an order and in each instance the order was passed and entered. The appellate courts held that in such circumstances it was well settled that although a court can vary any order before it is passed and entered thereafter, however, the court is functus officio and can make no variation itself. Any variation which may be made must be made by a court of appellate jurisdiction. The Minister's carrying out of his statutory duty to assess pursuant to the specific provisions of the Income Tax Act cannot be equated to the making of a judicial order.

Seeking support for his proposition in Pure Spring Company Ltd., supra, counsel quoted Thorson, J. from page 197 (D.T.C. 857):

. . . When the Minister has exercised his discretion under section 6(2), he does not exercise it over again when he makes his assessment under section 55; indeed, he cannot do so, for once he has exercised it he is functus officio in respect thereof.

The appellant can find no support in this comment either. It was taken out of context from an extremely lengthy paragraph in which Thorson, J. elaborated on the difference between the Minister's discretionary determination under subsection 6(2) of the Act as it then read and the assessment levied by him under the powers conferred by Part VII, particularly section 55. Thorson, J. held that subsection 6(2) empowers the Minister to exercise his discretion to disallow any expense regardless of whether it is allowed or disallowed in any other section of the taxing statutes and empowers the Minister to exercise his discretion to determine what is a reasonable or normal expense for the business carried on by the taxpayer. Thorson, J. described the discretionary determination and the power to assess as two operations which "are quite separate and distinct in point of time and scope of substance” and the Minister's functions in respect of them are fundamentally different in character. In discussing this difference in character Thorson, J. said at page 197 (D.T.C. 857):

. . . In so far as the Minister’s determination may involve duties of a quasi-judicial nature such as, for example, giving the taxpayer an opportunity to make his representations, he must perform them. In the assessment operation, on the other hand, there are no quasi-judicial duties of any kind to be performed. The operation is solely administrative. There is an even more vital difference. The determination involves the exercise of a discretion of a policy nature, that is legislative in effect. When that function is finished, all that the Minister need consider in respect of this item, when he comes to the assessment operation, is the amount of his statutory determination. The assessment operation is quite different; no exercise of discretion is involved. When the Minister has exercised his discretion under section 6(2), he does not exercise it over again when he makes his assessment under section 55; indeed, he cannot do so, for once he has exercised it he is functus officio in respect thereof. Moreover, the assessment operation does not depend upon considerations of policy to be defined by the Minister. He makes it according to the facts as ascertained and the application of the Act thereto.

As I read that paragraph and indeed the whole of the judgment I cannot conclude that the remarks of Thorson, J. either directly or indirectly support the proposition that in circumstances such as those before me the Minister is precluded from reassessing on the basis that he is functus. The comment quoted by counsel for the appellant was applied by Thorson, J. solely to the Minister’s discretion under subsection 6(2). Furthermore, if counsel for the appellant is suggesting that since Thorson, J. found that the exercise of Ministerial discretion under subsection 6(2) could only be exercised once, and that by analogy such principle should be applied to the Minister's right to reassess, let me unequivocally state that I find nothing in the judgment of Thorson, J. to support that proposition.

Counsel for the respondent submitted that the Exchequer Court decision in Coleman C. Abrahams v. M.N.R., [1966] C.T.C. 690; 66 D.T.C 5451 was for all practical purposes determinative of the issue before me. I agree.

In Abrahams, the Court was considering an appeal from a reassessment dated September 6, 1963 in respect of the 1961 taxation year (the "first reassessment"). One week after this appeal had been filed, the Minister again reassessed the appellant for the same taxation year. In the appellant's view, the second reassessment which had the effect of further increasing his taxable income was invalid because [it was] made while the first reassessment was sub judice, appeal therefrom being already before the Court. Jackett, P. referred to subsection (4) of section 46 of the Act which set out the Minister’s power to reassess. This section is the predecessor of and is identical to paragraph 152(4)(b), which is before me. At page 692 (D.T.C. 5452) Jackett, P. stated:

I can find no principle of interpretation that restricts the clear effect of subsection (4) of Section 46, which expressly authorizes the Minister, within the four-year period defined by paragraph (b) to "re-assess" "as the circumstances required". When read with Section 31(1)(e) of the Interpretation Act, R.S.C. 1952, chapter 158, which provides inter alia that, in every Act, unless a contrary intention appears, “if a power is conferred . . . the power may be exercised . . . from time to time as occasion requires”, I am of opinion that the power conferred by Section 46(4) may be exercised from time to time as circumstances may require. If this were not so, the Minister would not be able to make a second or third re-assessment for the purpose of reducing a taxpayer's liability when circumstances reveal that the taxpayer has been over-taxed. Furthermore, the power is the same in the case of a re-assessment made within the four-year period contemplated by paragraph (b) of Section 46(4) as it is in a case of "fraud" or "waiver" covered by paragraph (a) of that subsection and it would seem clear that the scheme of the Act calls for as many reassessments as the circumstances require in such cases. The fact that an appeal has been initiated should not make any difference in the application of the provision.

[Emphasis added.]

With respect to the subsequently enacted subsection 152(4.1), which provides that the Minister may not make a reassessment, additional assessment or assessment after the day that is six months after the date on which a notice of revocation of the waiver in prescribed form is filed, counsel's submission that this wording supports the proposition that only one reassessment may be made pursuant to a waiver is also without merit. Subsection 152(4.1) does not, as counsel suggests, make it clear that subsection 152(4) has always restricted the Minister to one reassessment where he reassesses beyond the four-year limit pursuant to a waiver, nor is it merely a clarification of the intended meaning of subsection 152(4). To so find would be to completely distort the clear and unambiguous language of subsection 152(4) as it existed at the relevant time. Counsel's suggestion that the comments of Jackett, P. were obiter, and in any event made prior to the addition of subsection 152(4.1) is also of little assistance to the appellant, since I am of the view that they correctly state the law.

I turn next to the submission that the Minister did not act "with all due dispatch". It must also be rejected. This phrase is found in subsection 152(1) and, as counsel for the respondent noted, it applies only to what is referred to in that section, being the examination of the taxpayer's return and the initial assessment of the tax for that taxation year. The legislative scheme created for this procedure sets no time limit for the initial assessment. Rather, it uses the phrase "with all due dispatch”. This must be contrasted with subsection 152(4) where the legislators, after setting out that the Minister may at any time assess tax, go on to state in clear and unambiguous language:

(4) ... and may

(a) at any time, if the taxpayer or person filing the return

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

reassess or make additional assessments, . . .

[Emphasis added.]

I agree with the submission made by counsel for the respondent that the effect of a waiver is to remove the taxpayer from the class of cases falling under paragraph 152(4)(b) under which the Minister may only reassess within four years of the mailing of an original assessment and instead place him in the class of cases that fall under paragraph 152(4)(a) where on any reading of the section it is apparent that the Minister may reassess a person at any time governed only by the last phrase in that section "as the circumstances require”. The phrase “with all due dispatch” has no application to paragraph 152(4)(a). The decision of this Court in, Stollar Construction Ltd. v. M.N.R., [1989] 1 C.T.C. 2171; 89 D.T.C. 134 applies. In that case counsel for the Minister attempted to convince the Court that the provisions of subsection 152(1) of the Act including the words "with all due dispatch" must be read in light of the phrase "The Minister may at any time assess .. .” found in subsection 152(4). With respect to this submission Bonner, J. said at page 2172 (D.T.C. 135):

Those words, she said, apply to the initial assessment of tax for a year, that is to say to the assessment referred to in subsection 152(1). According to the argument the words "with all due dispatch" apply only to the examination of the return required by subsection 152(1). This argument was not supported by any authority. I do not agree with it. The language of the statute is plain. The words in question apply to all the duties imposed on the Minister by the subsection. Section 152 deals with events in the normal sequence or flow, that is to say, the examination of the return, the initial assessment and the reassessment, if any. There is no basis for a conclusion that the subsection (4) word "anytime" applies to the initial assessment called for by subsection 152(1). It is clearly intended to apply to the subsequent assessment which the respondent is, by the subsection (4) word "may", permitted and authorized to make (subject always to the subsection (4) time limits).

[Emphasis added.]

The foregoing comments apply by analogy to the submission made by counsel for the appellant in the present appeal.

I would not be prepared in any event to find that the Minister acted in a dilatory fashion in assessing when he did. Although the length of time required to issue the final reassessment for the 1974 taxation year is unusual, a number of factors, several of which can be attributed to the appellant, contributed to the delay.

The initial income tax return for the 1974 taxation year filed in the spring of 1975 disclosed only that the appellant received additional proceeds from the sale of a principal residence in 1973. As noted previously, the assessment issued by the Minister in July of 1975 accepted the appellant's principal resi- dence assertion. The appellant pursued his action with respect to compensation and ultimately further proceeds of disposition were received by him in 1978. It was not until 1979 that the waiver was sought and obtained with respect to the 1974 taxation year. The first time that a calculation of the capital gain on disposition was made, including a principal residence allocation, was in the reassessment which followed the waiver.

In paragraph 7 of his pleadings the Minister sets out the following:

With respect to paragraphs 19, 20 and 21, the Respondent admits that he included the amount of $30,503.04 in the computation of the Appellant's income for the 1974 taxation year, then transferred that assessment to the Appellant's 1978 taxation year, then later transferred back that assessment to the Appellant's 1974 taxation year and says that, at all material times, it was understood by the Appellant that the transfer of the inclusion of the said amount to the 1978 taxation year was a replacement of that assessment for the 1974 taxation year and, subsequently, the transfer of the inclusion of the said amount to the 1974 taxation year was a replacement for the inclusion by way of assessment in respect of the 1978 taxation year.

Although the appellant testified that he had no communication with anyone in Revenue Canada with regard to this series of reassessments, I am satisfied that the position as expressed by the Minister in his pleading is correct. It is clear from the evidence including the various notices of objections filed that the appellant's accountants were actively involved in the process and that the sequence of reassessments as set out in paragraph 7 of the reply to notice of Appeal was understood by the appellant and his agents. I am satisfied that the Minister acted properly within the framework of subsection 152(4) of the Act in reassessing as the circumstances required in this particular instance.

B. Are the Proceeds of Disposition Taxable in 1974?

The second issue raised by the appellant is whether all or any of the proceeds of disposition received by the appellant are required to be included in income for the 1974 taxation year. As counsel for the appellant noted the payments may be divided into two groups, those received in 1973, and those received on or after May 10, 1974. No amounts were received between January 1,1974 and May 10, 1974.

Reliance is placed on the provisions of subsection 44(2) of the Act which reads:

44(2) For the purposes of this Act, the day on which a taxpayer has disposed of a property, the proceeds of disposition from which are described in subparagraph 13(21)(d)(iii) or (iv) or 54(h)(iii) or (iv), and the day on which an amount has become receivable by that taxpayer as proceeds of disposition of such a property shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation to him for the property lost, destroyed, taken or sold,

(b) where a claim, suit, appeal or other proceeding has been taken before one or more tribunals or courts of competent jurisdiction, the day on which the taxpayer's compensation for the property is finally determined by such tribunals or courts,

(c) where a claim, suit, appeal or other proceeding, referred to in paragraph (b), has not been taken before a tribunal or court of competent jurisdiction within two years of the loss, destruction or taking of the property, the day that is two years following the day of the loss, destruction or taking,

(d) the day on which the taxpayer is deemed by section 48 or 70 to have disposed of the property, and

(e) where the taxpayer is a corporation other than a subsidiary corporation referred to in subsection 88(1) the day immediately before the winding-up and he shall be deemed to have owned the property continuously until the day so determined.

This subsection, counsel submitted, was added to the Act by 1974-1975, c. 26, s. 18(1) applicable in respect of "amounts that have become receivable after May 6, 1974”. Accordingly the appellant asserts that amounts received by him in 1973 are to be included in income for the 1973 taxation year since they were received unconditionally in that year. Furthermore he argued, subsection 44(2) when applied to the compensation payments received after May 6, 1974 requires those payments to be included by the appellant in his income for taxation year 1976, the year in which his appeal to the Federal Court of Appeal was discontinued, and not in taxation year 1974 as assessed by the Minister.

B. (i) Taxability of Amounts Received in 1973

The Appellant's Position

With respect to the amounts received in 1973 counsel for the appellant submitted:

Subparagraph 14(1)(b)(ii) of the Expropriation Act requires the Minister to make an offer to any person in writing which is

not conditional upon the provision by that person of any release or releases and without prejudice to the right of that person, if he accepts the offer, to claim additional compensation in respect thereof.

Subsection 14(4) requires a statement to this effect to be included in the offer.

Section 32 of the Expropriation Act applies where the expropriated party has appealed the quantum of the compensation to the Federal Court, Trial Division. It states that, where an appeal is taken and the compensation as judged by the Court is less than the compensation paid, the shortfall "constitutes a debt due to the Crown".

It seems clear that the payments received by the Appellant were received unconditionally. He was entitled to them absolutely and their receipt did not preclude him from claiming additional amounts. However, when he chose to appeal the quantum of the compensation to the Federal Court, he ran the risk that he might become indebted to the Crown for an amount by which the judgment fell short of the compensation offered by the Department of Public Works. In fact, the Federal Court awarded him a greater amount than was offered so that he never was indebted to the Crown. If the payments were not received by the Appellant unconditionally, section 32 would not be necessary.

Counsel for the appellant relies on a number of decisions including M.N.R. v. Ben Lechter, [1966] C.T.C. 434; 66 D.T.C. 5300 (S.C.C.); M.N.R. v. Benaby Realties Ltd., [1967] C.T.C. 418; 67 D.T.C. 5275 (S.C.C.); Vaughan Construction Ltd. v. M.N.R., [1970] C.T.C. 350; 70 D.T.C. 6268 (S.C.C.).

With respect to these decisions counsel stated, and I quote from his written submissions:

M.N.R. v. Ben Lechter, [1966] C.T.C. 434 (SCC) concerned an individual who was required to report income arising on the disposition of land on an accrual basis. The business's fiscal year ended on January 31. On July 14, 1954, an agreement was reached that an amount of $234,506 was to be paid to the respondent by the Crown pursuant to the expropriation of certain lands in the parish of St. Laurent in Montreal. The amount was actually paid to the respondent on February 11, 1955. The Court concluded that, since the respondent operated on an accrual basis, the amount was receivable prior to the taxation year commencing on February 1, 1955. Although the Lechter case establishes the principle that an amount must be ascertainable before there can be said to be “an amount receivable”, it does not address the characterization of an advance payment that has actually been received unconditionally.

M.N.R. v. Benaby Realties Ltd., [1967] C.T.C. 418 (SCC) also concerned a taxpayer who was required to report the income from the disposition of land on an accrual basis. The fiscal period ended on April 30. Land situated on the Island of Montreal was expropriated by the Crown on January 7, 1954. An agreement as to the amount was reached in 1955. The amount was also paid in 1955. The Court concluded that the right to claim compensation, where the amount of compensation remained undetermined, did not constitute an amount receivable.

Vaughan Construction Ltd. v. M.N.R., [1970] C.T.C. 350 (SCC) also concerned a taxpayer who was required to report the income from the disposition of land on an accrual basis. The appellant's fiscal period ended on December 31. Certain lands owned by the appellant were expropriated by the Province of Nova Scotia. The City of Halifax and the respondent were jointly entitled to receive the expropriation proceeds. The apportionment of such proceeds as between the City and the respondent was subject to dispute. On November 28, 1956, a judgment was rendered, fixing the expropriation proceeds at $280,000 plus interest plus 5% for compulsory taking. On April 1, 1987, [sic] 1957 the same judge determined that the appellant's entitlement to the proceeds was at least $87,520 plus interest plus 5% for compulsory taking. Accordingly, an order was made on June 4, 1957 for the payment of such amounts which were received by the appellant in 1957. The order was not appealed. The City was ultimately awarded one-half of the balance of the total compensation of $280,000. The Minister included the amount of $96,415 received in 1957 pursuant to the order of June 4 of that year in the appellant's income for the 1957 year. The appellant argued that this amount should not be included in income for that year. The Court stated as follows at page 355:

Applying the principle of M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12; [1967] C.T.C. 418, to the different facts in the present case, I am of the opinion that no amount of the compensation became receivable until the order of Judge Pottier of June 4, 1957. What was then directed to be paid (and which was in fact paid in that year) was, so far as it represented in any portion thereof a gain arising out of the appellant's business, properly assessable in 1957.

Since the sum in question remained undisturbed in the final disposition by this Court in 1961, I need not be concerned with a situation where there was such a variation as to reduce what had been ordered to be paid in 1957.

The appellant submitted that by parity of reasoning since the Federal Court did not adjudge the compensation owing to be less than that offered to Loukras, the amount received in 1973 was an “amount receivable” (and also received) in that year. Counsel further submitted that:

M.N.R. v. Pine Ridge Property Ltd., [1971] C.T.C. 752 (F.C.T.D.); aff’d [1973] C.T.C. 201 (F.C.A.) which concerned a taxpayer who was required to report the income from the disposition of land on an accrual basis. The fiscal period ended on September 30. Land was expropriated by a school board and the appellant was awarded $104,658 by the arbitrators on September 22, 1966. The school board appealed the award which was dismissed on November 28, 1966. It was held that the award became receivable on September 22,1966 and, accordingly, was taxable in the 1966 taxation year.

A similar conclusion was reached in The Cementation Co. (Canada) Ltd. v. M.N.R., [1977] C.T.C. 2360 (T.R.B.) where the Board stated that “[i]n my view, the possibility of an appeal does not affect the nature of the amount in question as a receivable or its character as income.”

On the basis of the foregoing, counsel submitted that the amounts received by Dr. Loukras in 1973 were required to be included in income in that year and not in the 1974 taxation year.

The Respondent's Position

With respect to the 1973 payments counsel contended that even before subsection 44(2) was enacted, expropriation proceeds were taxable only after the amount of compensation was ascertained. That did not occur until the judgment of the Federal Court, Trial Division fixed the amount of compensation payable on or about September 20, 1974, and it is a fact that as a result of Urie, J.'s judgment all amounts, with the exception of the $2,000 previously referred to, were paid prior to the end of 1974.

Counsel for the respondent relied on Benaby Realties and in particular the following comment of Mr. Justice Judson at page 421(D.T.C. 5277): “My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained . . .” and argued that prior to the ascertainment by way of a Federal Court order of the actual amount of compensation payable, the amounts paid to the appellant were nothing more than advances against possible compensation. He relied on section 32 of the Expropriation Act and on the fact that the statement of claim challenging the quantum of compensation was filed by the appellant on August 15, 1973 which, he said, clearly brought this situation within the scope [of] the principles enunciated by the Supreme Court of Canada in Benaby Realties. Put in other words counsel’s submission was that although the money was received in 1973, until the amount of compensation was ascertained that money did not have the character of proceeds of disposition. It was merely an advance against the proceeds of the disposition to be determined or ascertained.

Analysis and Conclusion

It is true that prior to May 6, 1974 no specific provision existed in the Income Tax Act for dealing with the question of when an amount has become receivable by a taxpayer as proceeds of disposition, in this case, by way of compensation for property taken under statutory authority, and is required to be included in income. While reference to Benaby Realties as well as to Ben Lechter and to Vaughan Construction is instructive, because these decisions can be distinguished both on a factual and statutory basis careful consideration must be given as to whether the principles enunciated therein are nonetheless applicable.

Let me first turn to the Expropriation Act as it read in 1973 and 1974. By virtue of section 13 of that Act upon registration of a notice of confirmation the interest confirmed to be expropriated becomes absolutely vested in the Crown. Paragraph 14(1)(b) of the Expropriation Act then provides:

14.(1) Where a notice of confirmation has been registered, the Minister shall,

(b) within ninety days after the registration of the notice,

make to each person who is entitled to compensation under this Part in respect of an expropriated interest to which the notice of confirmation relates, an offer in writing of compensation, in an amount estimated by the Minister to be equal to the compensation to which that person is then entitled under this Part in respect of that interest, not conditional upon the provision by that person of any release or releases and without prejudice to the right of that person, if he accepts the offer, to claim additional compensation in respect thereof.

[Emphasis added.]

This offer is to be based on a written appraisal of the value of the expropriated party's interest and where such an offer is accepted the amount thereof shall be forthwith paid to that person. An offer under paragraph 14(1)(b) was accepted by the appellant on April 25, 1973; then, as he was entitled to, pursuant to the provisions of section 29 of the Expropriation Act, he commenced proceedings in the Federal Court for the recovery of additional compensation. Payments were then made to him in 1973 as required by section 15 of the Expropriation Act.

It is significant that no similar provisions are to be found in the former Expropriation Act (R.S.C. 1970, c. 106) which was under consideration by the Supreme Court of Canada in Benaby Realties, Lechter and Vaughan Construe- tion. As was noted in Benaby Realties, from the moment of expropriation the taxpayer no longer had its land but had instead the right to receive compensation pursuant to section 23 of the former Expropriation Act. That section read:

23. The compensation money agreed upon or adjudged for any land or property acquired or taken for or injuriously affected by the construction of any public work stand in the stead of such land or property; and any claim to or encumbrance upon such land or property shall, as respects Her Majesty, be converted into a claim to such compensation money or to a proportionate amount thereof, and is void as respects any land or property so acquired or taken, which, by the fact of the taking possession thereof, or the filing of the plan and description, as the case may be, becomes and be absolutely vested in Her Majesty.

There was no provision in the former Expropriation Act requiring the payment of any amount to the expropriated party on an unconditional and non- prejudicial basis as now mandated by section 14 of the Expropriation Act. It is therefore in the context of the different statutory provisions regarding expropriation that the comments in Benaby Realties must be considered.

In Benaby Realties, Judson, J. noted at page 420 (D.T.C. 5276):

. . . It is true that at the moment of expropriation the taxpayer acquired a right to receive compensation in place of the land but in the absence of a binding agreement between the parties or of a judgment fixing the compensation, the owner had no more than a right to claim compensation and there is nothing which can be taken into account as an amount receivable due to the expropriation.

He went on to say at page 421 (D.T.C. 5277):

Under the Canadian Expropriation Act, there is no doubt or uncertainty as to the right to compensation, but I do adopt the principle that there could be no amount receivable under section 85B(1)(b) until the amount was fixed either by arbitration or agreement.

The principles expressed by Judson, J. were summarized by de Grandpre, J. in Maple Leaf Mills Ltd. v. M.N.R., [1976] C.T.C. 324; 76 D.T.C. 6182 at page 330 (D.T.C. 6186) as:

This test is the one this court has applied in income tax cases resulting from expropriations; for an amount to become receivable in any taxation year, two conditions must co-exist: (1) a right to receive compensation; (2) a binding agreement between the parties or a judgment fixing the amount. The principle is to be found in MNR v. Benaby Realties Ltd., [1968] SCR 12; [1968] CTC 418; 67 DTC 5275 and in Vaughan Construction Ltd. v. MNR, [1974] SCR 55; [1970] CTC 350; 70 DTC 6268 . ..

[Emphasis mine.]

In this context certain remarks made by Urie, J. in Commonwealth Construction Ltd. v. The Queen, [1984] C.T.C. 338; 84 D.T.C. 6420 are of assistance. The facts as set out in the [D.T.C.] headnote were:

The taxpayer received a certain amount in its 1974 taxation year pursuant to a judgment in a mechanics' lien action and a further amount for its costs of the action in its 1975 taxation year. The mortgagee involved in the action had paid these amounts but filed an appeal from the decision. In the meantime, however, the taxpayer was under no restrictions as to the use of the funds other than the obligation to repay them in whole or in part in the event that the appeal was successful. The taxpayer and the mortgagee settled in 1977 with an amount being repaid by the taxpayer to the mortgagee. The taxpayer reported the income in its 1977 taxation year. The Minister, however, included the amounts received by the taxpayer in its 1974 and 1975 taxation years and the taxpayer's appeal to the Federal Court-Trial Division (82 DTC 6152) was dismissed. The taxpayer further appealed to the Federal Court of Appeal.

The Court found that the amounts in issue were taxable when received by the taxpayer in that they had the “quality of income” because the taxpayer's rights to the funds were absolute and under no restriction as to their disposition, use or enjoyment. Urie, J, considered the judgment of Kearney, J. in the Exchequer Court in the case of M.N.R. v. John Colford Contracting Ltd., [1960] C.T.C. 178; 60 D.T.C. 1131 and then said at page 343 (D.T.C. 6425) in Commonwealth Construction :

Again I can see no difference in the principle to be applied on the facts of this case from that applied in the factual situation in Colford. The appellant here had the right to an ascertained amount in each of the years in 1974 and 1975 by virtue of the judgments in its favour rendered in those years. The sums awarded became receivables which were turned into receipts by payments made during those years. If it were not for the appeals, then, it would seem that there could be no question that the amounts of the payments received were properly included by the Minister in the years of receipt.

Mr. Olsson, however, argued that section 32 of the Expropriation Act supported the respondent's position that payments made pursuant to sections 14 and 15 of the Expropriation Act were merely advances, since section 32 contemplated potential repayment of excess amounts to the Crown. Section 32 reads:

32. Where any compensation has been paid to a person in respect of an expropriated interest pursuant to an offer made to him under section 14, the amount so paid to that person shall be deducted from the amount of the compensation adjudged by the Court under this Part to be payable to him in respect thereof, and where the amount so paid exceeds the amount so adjudged to be payable, the excess constitutes a debt due to the Crown and may be recovered by the Crown in any court of competent jurisdiction.

A similar situation was considered in Commonwealth Construction. In that case Urie, J. said at page 342 (D.T.C. 6424):

To apply phrases from that quotation to the case at bar, the record discloses that the rights of the appellant to the amounts paid to it in 1974 and 1975 were "absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment". They were not held subject to any specific and unfulfilled conditions. Once the conditions precedent imposed in the letter agreements between the parties, supra, had been fulfilled, as they were, the right to receive the moneys and to retain them had accrued and was absolute. True, it might be necessary to return the moneys in whole or in part if the appeal were successful. But, as I see it, that was a condition subsequent which did not affect the unrestricted right of the appellant to use them until such a requirement occurred. It did not, as I see it, affect their quality as income upon receipt.

[Condition subsequent]

As to the difference in effect of a condition precedent from a condition subsequent on the question of an accrual to income, the learned trial judge relied on a quotation from Meteor Homes Ltd. v. MNR, [1960] CTC 419; 61 DTC 1001 at 430-31 [1007-8] which substantiates the view which I expressed, supra:

. . . Mertens, Law of Federal Income Taxation, Vol 2, c 12, p 127, considers "the problem of when items are deductions to the taxpayer on the accrual basis”, and deals with it at p 132 in these terms:

Not every contingency prevents the accrual of income: the contingency must be real and substantial. A condition precedent to the creation of a legal right to demand payment effectively bars the accrual of income until the condition is fulfilled, but the possible occurrence of a condition subsequent to the creation of a liability is not grounds for postponing the accrual.

The possibility of a successful appeal does not, therefore, appear to derogate from the quality of income of the payments in issue at the time of receipt.

[Emphasis mine.]

With respect to the effect of section 32 and Mr. Olsson's submission, I am satisfied that it merely creates a condition subsequent which would not, in the absence of any specific legislative provision to the contrary, affect or "derogate" from the quality of income of the payments received by Loukras in 1973.

As can be seen from the foregoing, these conclusions are premised on facts which did not include the receipt by an owner of unconditional payments as well as on different statutory provisions. In each of Lechter, Benaby Realties and Vaughan Construction the amounts in issue were not paid until after an agreement had been reached by both parties or judgment had been entered fixing the compensation. In the present appeal advance payments were made in accordance with section 14 of the Expropriation Act. So that when Judson, J. agreed with the Crown's argument in Benaby, supra, at pages 419-20 (D.T.C. 5276) that:

. . . the general rule under the Income Tax Act is that taxes are payable on income actually received by the taxpayer during the taxation period; that there is an exception in the case of trade receipts under section 85B(1)(b) which include not only actual receipts but amounts which have become receivable in the year; that the taxpayer's profit from this expropriation did not form part of its income for the year 1954 because it was not received in that year and because it did not become an amount receivable in that year.

[Emphasis added.]

no consideration had to be given to a situation where in fact an amount of compensation had been received unconditionally by the expropriated party in a particular taxation year.

I appreciate that Judson, J. in referring to the principles which applied at that time to the tax treatment of proceeds of disposition arising from an expropriation said, at pages 420-21 (D.T.C. 5276-77):

The Exchequer Court founded its judgment on Newcastle Breweries v. C.I.R. (1927), 12 T.C. 927, which was a case involving the government's requisitioning of a supply of rum in 1918. The company accepted the government's price without prejudice to its right to claim a larger amount. This was subsequently granted under legislation enacted in 1920. This additional sum was received in 1922. The Inland Revenue then reopened the company's 1918 trading account to include this additional sum and the Courts held throughout that this could be done. What happened was that in 1918 there was a compulsory sale at a fixed price with an award of additional compensation under statutory authority three or four years later.

The application of this decision to the Canadian Income Tax Act is questionable. This decision implies that accounts can be left open until the profits resulting from a certain transaction have been ascertained and that accounts for a period during which a transaction took place can be reopened once the profits have been ascertained.

There can be no objection to this on the properly framed legislation, but the Canadian Income Tax Act makes no provision for doing this. For income tax purposes, accounts cannot be left open until the profits have been finally determined. Taxpayers are required to file a return of income for each taxation year (Section 44(1)) and the Minister must “with all due despatch" examine each return of income and assess the tax for the taxation year. However, in many cases, compensation payable under the Expropriation Act is not determined until more than four years after the expropriation has taken place and, in many of these cases, the Minister would be precluded from amending the original assessment because of the four-year limitation for the assessment (section 46(4)).

My opinion is that the Canadian Income Tax Act requires that profits be taken into account or assessed in the year in which the amount is ascertained.

As I have noted this rationale was applied in a substantially different fact situation. In light of that and the existence of new statutory requirements in the Expropriation Act the rationale and the tests enunciated in Benaby Realties are not readily applicable to the facts before me.

That, however, is not the end of the appellant's problems.

B. (ii) Applicability of Subsection 44(2) of the Income Tax Act to Payments

Received in 1973

Counsel for the respondent argued in the alternative that since in fact no gain was assessed for 1973, therefore where the compensation was finally determined after May 6, 1974 and had not been taxed at any earlier time, subsection 44(2) of the Act provides a basis for assessing the gain. In support counsel cited Laurentide Rendering Inc. v. M.N.R., [1982] C.T.C. 2397; 82 D.T.C. 1355, [1] a decision of the Tax Review Board. The facts were that in 1969 the Department of Public Works (Canada) expropriated Laurentide's property. No action, appeal or other proceeding was instituted by Laurentide before any court or tribunal with a view to fixing the amount of compensation. The parties negotiated and ultimately in 1975 an agreement was reached between them fixing compensation. Accordingly, although the expropriation took place in 1969, there was no binding agreement between the parties nor were any amounts received by Laurentide until 1975. The issue to be determined was whether the Minister was correct in applying subsection 44(2) of the Income Tax Act to deem that Laurentide had disposed of the property in 1975.

The Federal Court of Appeal considered the applicability of subsection 44(2) of the Income Tax Act and in her analysis Desjardins, J. stated at page 202 (D.T.C. 6332):

In my opinion the trial judge did not err in law in his interpretation of paragraph 44(2)(a) of the Income Tax Act and of the transitional provision contained in subsection 18(2) of S.C. 1974-75-76, c. 26.

Paragraph 44(2)(a) creates a presumption which delays to the day the taxpayer has agreed to an amount as compensation what would otherwise be

the day on which a person has disposed of property

and

the day on which an amount has become receivable as proceeds of disposition of such a property.

This presumption, which covers the two cases mentioned in, the introductory paragraph of subsection 44(2) (namely the day on which a person has disposed of property and the day on which an amount has become receivable as the proceeds of disposition of such property), applies, under the transitional provision, “in respect of amounts that have become receivable after May 6, 1974”.

Desjardins, J. further said at page 203 (D.T.C. 6333):

Although the expropriation in the case at bar occurred in 1969, the amount representing the proceeds of disposition was not fixed until 1975. The amount representing compensation thus became receivable after May 6, 1974.

I am aware of the fact that integral to the decision of the Federal Court of Appeal in Laurentide was acceptance by that Court of the tests enunciated in Benaby Realties and their application to the fact situation before that Court. I am also aware of the fact that the Federal Court of Appeal did not have to consider the existence of a receivable in a taxation year prior to the year in issue before it.

Do these distinctions preclude me from applying the provisions of subsection 44(2) to the facts before me? I have concluded that they do not. In reaching this conclusion I have considered to the extent possible the language and the legislative intent of this section.

In his article "Tax Problems Resulting from Expropriations of Capital Property", Canadian Tax Journal, Volume 2, No. 1, page 34 at 39-40, J.G. Ware made the following comment:

In many expropriations, partial payments are made to the expropriated taxpayer prior to the time when the total compensation is fixed. If the Benaby Realties principle applies to capital property so that a disposition does not etake place until the compensation is fixed, there appears to be no provision in the Act which would require the expropriated taxpayer to include any portion of such prepayment in income (assuming some portion of the payment represented recaptured CCA or a capital gain) until the total compensation is fixed. This would be an incentive, in many cases, to expropriated taxpayers to extend the negotiation process.

These comments were published in the January-February 1974 volume of the Canadian Tax Journal and predate the announcement of the addition of subsection 44(2) of the Act.

The proclamation of the Expropriation Act on July 7, 1971 no doubt exacerbated a situation which existed in 1970-1974 (and perhaps earlier) because of the fact that in many expropriations partial payments were being made to the owners prior to the time when the total compensation was agreed upon or fixed. For example, the Expropriation Act (Ontario), R.S.O. 1970, c. 154 required the expropriating authority, within three months after legal title vested in the authority and before it took possession of the land, to offer the registered owner immediate payment of 100 per cent of the amount of the market value of the owner's land as estimated by the expropriating authority. The payment was without prejudice to the owner's rights in respect of the determination of compensation. Therefore the situation in 1973 was that there was no provision in the Income Tax Act which would require the expropriated taxpayer to include any portion of such prepayment in his income. Into this void came subsection 44(2).

In a paper titled “Involuntary Dispositions And The 1974 Budget” found in the Canadian Tax Foundation 1974 Conference Report at page 542, J.G. Ware commented (page 543):

As part of the Federal Budget of May 6, 1974, the Minister of Finance, the Honourable John N. Turner, introduced Notices of Ways and Means Motions to amend the Act. Resolution Number 30 of those Motions is an exhaustive and exhausting revision and clarification of the tax results of an involuntary disposition of capital property that is deemed to occur after May 6, 1974.

When introducing Budget Resolution 30, the Minister of Finance spoke of the timing problems referred to above as follows:

It has also come to my attention that the tax system does not apply fairly where property has been expropriated, lost or destroyed. Quite often a taxpayer may be faced with a significant tax liability long before a settlement date has been agreed upon and funds are available. This seems quite unfair, and I am introducing a relieving amendment which will insure that under such circumstances no tax is payable until the compensation has been finally determined.

Budget Resolution 30 has two primary objectives. The first is to define the point in time at which an involuntary disposition arises. The second is to clarify and expand the provisions of the Act relating to the deferral of the recapture of capital cost allowance and the rollover of a capital gain either or both of which may arise as the result of an expropriation loss or destruction of capital property.

[Emphasis added.]

Resolution Number 30 of the Federal Budget of May 6, 1974 became Resolution Number 30 of the Federal Budget of November 18, 1974 which was implemented into Bill C-49. Bill C-49 added subsection 44(2) to the Income Tax Act.

The CCH Canadian Tax Reporter 2 Can. Tax Rep. (CCH, para. 6706) says:

Subsection 44(2) provides that the disposition is deemed to have taken place and the proceeds are deemed to have become receivable on the earliest of five specified days

(1) the day when the taxpayer agrees to the full compensation for the stolen, destroyed or expropriated property; if he agrees to a certain minimum amount and actually receives that pending final agreement as to the full compensation, it would appear that he would not regard the initial amounts as proceeds until he has agreed upon the full amount;

(2) the day when the taxpayer's compensation is finally determined by a court or other competent tribunal;

It will be observed that points (1) and (2) above reflect the decision in M.N.R. v. Benaby Realties Ltd., (S.C.C.) 67 DTC 5275 in which it was held that while an expropriation was effective to divest the taxpayer of ownership of the property, his proceeds were not receivable until they were finally determined. Subsection 44(2) extends this principle to provide that the time of disposition is itself postponed until the compensation is determined.

I have concluded as follows. The Benaby Realties judgment provided a rationale for the special treatment to be given to proceeds of disposition. That rationale has been incorporated into subsection 44(2) and its effect is to tax advance or partial expropriation payments on the day when full compensation has been finally determined for the expropriated property, be it by agreement or court order.

I am satisfied that subsection 44(2) of the Act is. For the purposes of this appeal the effect of the presumption created by subsection 44(2) is to delay the date upon which the proceeds of disposition are deemed to have become receivable to the day when Loukras' compensation was finally determined by a court. For reasons which follow I have found that day to be September 20, 1974.

As to the suggestion by counsel for the appellant that such retroactive application of the Act was not intended I refer again to the Federal Court of Appeal decision in Laurentide. As Desjardins, J. noted in speaking of the presumption created by subsection 44(2) at page 203 (D.T.C. 6333):

The effect of this presumption is that the transitional provision in subsection 18(2) has no retroactive effect, since the 1975 agreement making the presumption applicable is subsequent to the amendment.

The effect of this presumption is not to impose double taxation. The taxpayer was not taxed in 1969. The effects of subsection 18(2) of the transitional provision is that he will never be taxed again for the taxation year 1969.

Accordingly the expropriation proceeds received by the appellant in 1973 are to be included in his income for the 1974 taxation year pursuant to the provisions of subsection 44(2) of the Act.

C. Taxability of Amounts Received in 1974

With respect to the amounts paid to the appellant after May 6,1974 counsel for the appellant argued that:

Paragraph 44(2)(b) refers to the circumstances where an appeal has been taken “before one or more tribunals or courts". Under such circumstances, the day on which the proceeds become receivable is the day on which the compensation “is finally determined by such court or tribunal”. Prior to the enactment of subsection 44(2), it was clear that compensation rewards became receivable when the first court or tribunal had determined the amount of compensation owing (see M.N.R. v. Pine Ridge Property Ltd., supra). The purport of section 44 is, in contrast, intended to defer the time at which compensation awards become receivable until the amount has ultimately been determined by the last appellate court.

Subsection 29(6) of the Compensation Act provides as follows:

A judgment, whether by consent, default or otherwise, in any proceedings under this section bars all further claims of the parties thereto and any persons claiming through or under them, . . .

Thus, it is the day on which the compensation proceeds are finally determined by the Federal Court, Trial Division or, where an appeal is taken, by the Federal Court of Appeal, that is the day on which the amounts become receivable under paragraph 44(2)(b).

The supplementary reasons for judgment of Urie J. in the Federal Court, Trial Division were rendered on September 20, 1974. A Notice of Appeal was filed on October 17, 1974 and the Crown's Notice to Vary was filed on or about January 7, 1975. All additional amounts due to the appellant as a result of Urie J.'s judgment were paid prior to the end of 1974, with the exception of the $2,000.00 of additional compensation for disturbance. This amount was contested by the Crown in the Notice to Vary and was not paid until 1976.

In Optical Recording Corporation v. M.N.R., [1986] 2 C.T.C. 454 (FCTD), it was held that an Order against the Crown for the payment of money is automatically stayed upon appeal, pending the final disposition of the appeal. It follows that, since the Crown was contesting the $2,000.00 additional disturbance award, this amount was not finally determined until such time as the final disposition of the appeal took place. The appeal was disposed of when it was abandoned by the appellant in 1976.

Counsel for the appellant placed substantial import on the fact that the appellant appealed the amount of compensation awarded by Urie, J. and more specifically that the respondent, by way of a notice to vary, called into question one item in the amount of $2,000. These steps had the effect of holding in abeyance the application of subsection 44(2) of the Act. Counsel said:

I am arguing by analogy that it is clear that when 44(2)(b) talks about the time at which the matter was ultimately determined by the courts, or tribunals, the very fact that the portion of the amount would continue to be at issue and there was no way the taxpayer could claim to have it paid to him. It continued to stay in issue until the discontinuance of the appeal in the Federal Court. That is where I am leading to.

As I understood the appellant's position, the day upon which he filed his notice of discontinuance in the Federal Court of Appeal, being February 19, 1976, was the relevant date for the purposes of paragraph 44(2)(b) of the Acct.

Mr. Olsson, counsel for the respondent, submitted that the appellant's position was based on a faulty premise. He argued that compensation was finally determined by the judgment of Mr. Justice Urie in 1974 and that the notice of discontinuance of the appeal launched by the appellant was not a determination by the Court. As counsel put it, the fact that the appellant launched an appeal and then aborted it did not result in a further determination by any Court. The respondent's position quite simply is that the language of the relevant enactment, being paragraph 44(2)(b) of the Act, deems the relevant day to be”. . . the date on which the taxpayer's compensation for the property is finally determined by such tribunal or courts". This wording, counsel argued, does not contemplate unilateral action of one of the parties by way of abandonment, notice of discontinuance or otherwise.

This issue can be determined by reference to the judgment of the Federal Court of Appeal in Commonwealth Construction. In that case the Court held that certain amounts were received by the taxpayer pursuant to a judgment in 1974 and 1975 and that its rights to the funds were absolute and under no restriction as to their disposition, use or enjoyment other than an obligation to repay them in full or in part in the event that the appeal was successful. An appeal had been taken. Urie, J. held that the possibility of a successful appeal did not alter the taxpayer's right to the funds as the obligation to repay all or part of the funds was a condition subsequent. A judgment is presumed to be valid until reversed or varied on appeal.

With respect to the possibility of a successful appeal the Court said at page 344 (D.T.C. 6425):

This question can be dealt with briefly. In Nouvion v Freeman (1889), 15 App Cas 1 at 10 and 11, Lord Herschell had this to say:

. . . Although an appeal may be pending, a Court of competent jurisdiction has finally and conclusively determined the existence of a debt, and it has none the less done so because the right of appeal has been given whereby a superior Court may overrule that decision. There exists at the time of the suit a judgment which must be assumed to be valid until interfered with by a higher tribunal, and which conclusively establishes the existence of the debt which is sought to be recovered in this country.

The other Law Lords did not dissociate themselves from this view although, on the particular facts of the case, they chose somewhat different language. For example, Lord Bramwell at 15 said this:

. . . There is an essential difference, therefore, between the case where a Court of competent jurisdiction has entertained all the controversies between the parties which they could and chose to raise, and come to a conclusion, which is to be presumed to be accurate, and this case where there is no ground for saying that all possible controversies between the parties have been decided.

The Court of Appeal of British Columbia in Canadian Transport (UK) Ltd. v Alsburg, et al, [1953] 1 DLR 385 at 406 said that an order of a superior court has “full force until reversed on appeal." Other authorities cited to us from various courts are to the same effect and the principle of presumption of the validity of a judgment until reversed or varied on appeal seems to be well established.

I am satisfied that the date upon which the appellant's compensation for the property was finally determined by a court was September 20, 1974. Accordingly, the proceeds of disposition of the appellent's property are to be included in income in that taxation year.

D. Taxability of Specific Items of Compensation

Counsel for the appellant further submits, even if all or a portion of the compensation proceeds are required to be included in this taxpayer's income for the 1974 taxation year, that certain amounts are in any event not taxable.

First, of the amount of $118,704 paid on May 16, 1973, the amount of $27,635.98 is described as "loss of preferred rate of interest on existing mortgage". With respect to this amount counsel submitted that the appellant suffered pecuniary damages attributable to the fact that he was required to refinance property purchased after the expropriation at a time when mortgage rates were substantially higher than those prevailing when the expropriated property had originally been acquired. He argued that there is no element of gain or profit to this award and it does not relate, nor can it be said to relate, to compensation for the property itself. As counsel put it:

My only submission though is, when the Appellant gives up a favourable mortgage he suffers a loss. The cost of his loss if you like is what gave up. Therefore, if you can include in income the compensation he got for it, he would still have gain because you should have added to his cost base what he gave up.

Counsel argued that this was not akin to compensation for business interruption but was simply an item that is non-taxable because there is absolutely no element of gain and in such circumstances the proceeds to that extent should not be subject to tax, since it does not constitute proceeds of disposition within the meaning of subparagraph 54(h)(iv) of the Act.

The second payment in issue, also made in 1973, totalled $10,661.61 and was made up of two items: the first was an amount of $3,000 which the appellant submitted was a "special standard allowance" offered to owners who were in residence at the time of expropriation by the Compensation Review Committee and was paid in respect of the time, miscellaneous cost and inconvenience of seeking alternative properties in the real estate market as it existed at that time. The balance of $7,661.61 related to disturbance costs suffered by an expropriated owner who was in occupation at the time of expropriation. The judgment of Urie, J. in the Federal Court sets out various amounts falling into this category payment of which, he held, arose pursuant to the provisions of paragraph 24(3)(b) of the Expropriation Act. It was submitted that these awards were granted only to owners in possession and accordingly the totality of this amount constitutes damages. Counsel also argued that there was no element of profit or gain involved and the amount should not be subject to tax.

The third payment, made in 1974 amounted to $28,800 and according to counsel represented "the 10 per cent of market value award arising out of the Compensation Review Committee's decision #1". This award he said, was limited to persons living on the property at the time of the expropriation and was intended to compensate them for the fact that they were expropriated at a time when real estate prices in the greater Toronto area were escalating rapidly. The escalation was apparently so rapid that the fair market value of the properties on January 30, 1973, the date by reference to which the fair market value was required to be determined pursuant to the Expropriation Act, was substantially less than such value six months later. The Compensation Review Committee therefore considered an amendment to the section 14 offer of compensation made to the appellant by increasing the amount by ten per cent.

With respect to this amount, counsel argued that it related exclusively to the principal residence and accordingly was not subject to tax. He relied on certain Compensation Review Committee statements and argued that these payments were made on a basis which permitted allocation in their entirety to the principal residence and therefore should not have been included in the proceeds of disposition.

I note as well that mixed into his argument regarding the non-taxable nature of these payments was an attack on the manner in which the Minister allocated the proceeds of disposition as between the principal residence and the balance of the property. In this context, counsel for the appellant chose to rely solely upon the reasons for judgment rendered by Urie, J. [2] from which he asked this Court to draw a number of conclusions. I note that Urie, J. was not required to, nor did he make any such allocation. From this judgment I gather that three experts were called, two on behalf of this taxpayer. Given counsel's submissions, the comments of Urie, J. with respect to these experts warrant reproduction:

Considering the whole of the evidence of the three experts, I am not satisfied that the comparables used by any of them necessarily are those upon which total reliance should be made in fixing market value for the purposes of fixing the compensation in this case. All have some degree of merit in them, but in my view, their use in each case reflects to a lesser or greater extent the interest which the appraiser is serving in determining the value of the expropriated property. This does not mean that I disbelieve the testimony but it does mean that I am wary (sic) of accepting their opinions, based on their respective comparables, alone as conclusive.

Urie, J. rejected the opinions of two experts almost out of hand and accepted the method of valuation of the third appraiser with the following qualifications:

While as previously observed, I am not in total agreement with the use of the base per acre price from which he worked or the application of the percentages of adjustment which he used, I believe that his calculation of a market value of $288,000.00 as at January 30, 1973 utilizing comparative sales appropriately adjusted as to time is reasonable and just in all of the circumstances and I so accept it.

It is clear that Urie, J. reached his own opinion as to value based on a number of factors upon which he expanded in his reasons (including a personal visit to the subject property, with counsel). I do not find any of the figures or comments in this judgment of real support for the appellant's proposal as to the manner in which the exemption for gains on the disposition of the property should be allocated to the principal residence.

I do not propose to deal with this matter further other than to say that it is incumbent on the appellant to challenge by clear and cogent evidence the basis upon which the Minister computed the appellant's capital gain. On the evidence before me I cannot reasonably accept the appellant's calculation of the proceeds of disposition which should have been allocated to the principal residence.

The appellant's primary argument on this issue must also be rejected. The provisions of paragraph 54(h)(iv) of the Act read:

54(h) "proceeds of disposition” of property includes,

(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given,

Counsel for the respondent submitted that this section is to be interpreted on a broad basis and that it includes all of the amounts put into issue by the appellant. I agree. All of these amounts were dealt with quite precisely by Urie, J. With respect to the first amount in issue Urie, J. stated at page 272:

The amount to which the Plaintiffs are entitled pursuant s. 24(8)(a)(ii) of the Expropriation Act shown to be $27,635.98 is for the loss resulting from the difference in interest rates between the mortgage to the vendor of the expropriated property and the prevailing rate of interest.

and at page 273:

The payment of the preferred rate of interest lost in the sum of $27,635.98 may also be considered an item of disturbance to be added into the calculation under s. 24(8).

With respect to the second item amounting to $10,661.66 Urie, J. stated:

Because the expropriated interest was being used by the Plaintiffs Loukras for their residence, it follows that they were in occupation at the time that the Notice of Confirmation was registered, and, therefore the relevant section to determine value is s. 24(3)(b), i.e., market value based on existing use plus disturbance damages. The market value I have found to be $288,000.00. The Defendant has advanced $10,661.66 for disturbance, to which is to be added the additional sum of $2,000.00 which I have awarded under this head.

It is clear from a review of the Compensation Review Committee decisions and of Mr. Justice Urie's decision that the second and third amounts questioned by the appellant were payments made pursuant to the provisions of paragraph 24(3)(b) of the Expropriation Act. As to the third item, being an additional $28,000.00, it clearly forms part of the market value of the property and is part of the proceeds of disposition, subject perhaps to the principal residence exemption, which as I have indicated, has been taken into account by the respondent in assessing. At trial before Urie, J. counsel agreed that he was not to take the $28,000 payment into account in any computation of the compensation for disturbance.

Counsel for the respondent submitted that the structure of the Expropriation Act makes it absolutely clear that these three amounts must form part of the compensation for property within the meaning of subsection 54(h) of the Income Tax Act. He argued that the decisions in Sani Sport Inc. v. The Queen, [1987] 1 C.T.C. 411; 87 D.T.C. 5253 (F.C.T.D.); E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114; 86 D.T.C. 6364, support the Minister’s assessment. I agree. In Sani Sport Inc. the taxpayer received compensation following expropriation of a parcel of its land, a part of which was described as being for a loss of business opportunity. It did not include this amount in computing its capital gain realized on the expropriation on the basis that it related strictly to its business and that it was therefore "compensation for property taken under statutory authority”. The Minister disagreed and the appeal followed.

The Court rejected the appellant's contention that the sum represented strictly damages to his business and that it therefore was not an indemnity relating to the expropriated property. Rather it was similar to an indemnity which it received for loss of earning capacity the tax treatment of which should be similar to that applicable to moneys paid for bodily injury which are not subject to income tax. With respect to this position Pinard, J., after setting out the provisions of paragraph 54(c) and 54(h) of the Income Tax Act, had this to say at pages 416-17 (D.T.C. 5256):

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.

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. [3]

In Fisher, McNair, J. held that an interest penalty payable by the Crown where it has made an offer of less than 90 per cent of the amount subsequently determined to be proper compensation was part of proceeds of disposition. He said, at page 121 (D.T.C. 6369 and 6370):

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 the result of 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 am satisfied that the amounts challenged by the appellant are "compensation for property taken under statutory authority” and formed part of the total compensation he received.

To summarize, the appeal is allowed, without costs, and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the following items of compensation paid to the appellant for his expropriated property:

(i) the amounts of $39,965 and $6,511.70 received in 1978;

(ii) the amount of $2,000 received in 1976; and

(iii) the amount of $6,624.28 received in 1974

are to be excluded from the calculation of the appellant's income in the 1974 taxation year.

Appeal allowed.