The Queen v. Cranswick, 82 DTC 6073, [1982] CTC 69 (FCA)

LeDain, J:—This is an appeal from a judgment of the Trial Division allowing an appeal from a reassessment of income tax in respect of the respondent’s 1977 taxation year.

The issue is whether a sum paid by the majority shareholder of a company to a minority shareholder to avoid a possible complaint about the sale of part of the company’s assets is income in the hands of the recipient.

The essential facts, which are not in dispute, were the subject of an agreed statement of facts in the Trial Division. They may be summarized as follows. The respondent was at the relevant times a shareholder of Westinghouse Canada Limited (hereinafter referred to as “Westinghouse Canada” or “WCL”). The majority shareholder of Westinghouse Canada was Westinghouse Electric Corporation (hereinafter referred to as “Westinghouse Electric”). In 1974 Westinghouse Electric sold its appliance business to White Consolidated Industries Inc, a United States corporation, and Westinghouse Canada agreed to sell certain assets of its appliance business to WCI Canada Limited, the Canadian subsidiary of White Consolidated Industries Inc, for an amount consisting of their net book value, to be paid by WCI Canada Limited, and $8 million, to be paid by Westinghouse Electric. This sale was not completed because the necessary approval under the Foreign Investment Review Act, SC 1973-74, c. 46 was refused. In 1976 Westinghouse Canada agreed to sell its appliance business to Canadian Appliance Manufacturing Company Limited (“CAMCO”) for $6 million less than the book value of the business as of December 31, 1976. The closing of the sale took place on June 30, 1977. On February 8, 1977 Westinghouse Electric made an offer to the other shareholders of Westinghouse Canada consisting of the following alternatives: (a) to purchase their shares at $26 per share; or (b) to pay them the sum of $3.35 per share. The respondent accepted alternative

(b) and received the total sum of $2,144 in respect of his 640 common shares in Westinghouse Canada. The reason for the offer by Westinghouse Electric is described in paragraph 10 of the agreed statement of facts as follows:

10. The alternative offers were made by Westinghouse Electric for its business purposes and in the hope of avoiding controversy or potential litigation on behalf of minority shareholders of WCL which may have arisen in respect of the sale of the household appliance division, particularly as a result of the disallowance of the Original sale to WCI Canada Limited pursuant to the Foreign Investment Review Act. The respective offers were not made by reason of any enforceable claims by WCL shareholders against Westinghouse Electric.

In a preliminary report to its shareholders for the year 1976 Westinghouse Canada made the following references to the offer:

As you will recall on November 11, 1976, a press release was issued by Westinghouse Canada which stated in part . . . “a plan is being developed by which the shareholders — other than Westinghouse Electric Corporation — will be offered benefits in lieu of those which otherwise would have been available in the original proposed sale to White Consolidated Industries”.

In summary, the plan extends to shareholders of Westinghouse Canada the alternatives of accepting a direct cash payment of $3.35 per share from Westinghouse Electric or of tendering their shares to Westinghouse Electric at $26 per share, which includes a premium over the recent market price. This cash payment is intended to put the shareholders in a position comparable to that contemplated in the White Consolidated transaction. For those shareholders who, in view of the disposition of the household appliance business, or for any reason, prefer to sell their shares, the tender offer provides a premium over the recent market price.

The testimony of the respondent in the Trial Division indicated that he was not a shareholder or employee of Westinghouse Electric or otherwise connected with it, or a party to any agreement with it; that he had had no prior communication with that company concerning the offer and that it “came as a complete surprise” to him; and that he had had no contact with the other minority shareholders of Westinghouse Canada and did not know whether there had been any litigation instituted. The clear implication of his testimony was that while he had been disappointed that the proposed sale to WCI Canada Limited had not gone through he had not considered taking any action as a result of the disposition that was ultimately made of the household appliance business of Westinghouse Canada.

In computing his income for the 1977 taxation year the respondent did not include the payment of $2,144 received from Westinghouse Electric. By Notices of Reassessment dated September 25, 1978 and October 31, 1978 the Deputy Minister of National Revenue reassessed the respondent in respect of his 1977 taxation year and adjusted his income to include the amounts of $1,474 and $670, for a total of $2,144. The respondent appealed against these reassessments.

The Trial Division held that the payment was not income and accordingly allowed the appeal.

The appellant contends that the payment by Westinghouse Electric to the respondent was income from property within the meaning of sections 3 and 9 of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63, and in any event that it was income from a “source” within the meaning of section 3. Section 3 provides for inclusion in the taxpayer’s income for a taxation year of his income “from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property”, and section 9 provides that “a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.”

The appellant argues that the respondent received the payment by virtue of, and only by virtue of, his ownership of shares in Westinghouse Canada, and that the shares were therefore the source of the payment. It was conceded that the case was an unusual one, and that there were no decisions directly in point. Counsel for the appellant reasoned by analogy from certain cases in which receipts of an unusual nature were held to be income because of their particular relationship to an employment or office. He referred to The Queen v Poynton, [1972] CTC 411; 72 DTC 6329, in which “kick- backs” received by an employee of a company were held to be benefits received by him in respect of, in the course of, or by virtue of his employment; to Herbert v McQuade, [1902] 2 KB 631, in which it was held that a grant to a beneficed clergyman from a fund established to supplement the income of benefices enjoying less than £200 per year was income as a perquisite or profit accruing from his office; and Ryall v Hoare, 8 TC 521, in which it was held that commissions received by directors for guaranteeing a bank overdraft of a company were taxable income as an instance of “casual profit.” Counsel for the appellant in the present case contended that the sum paid to the respondent by Westinghouse Electric was a case of “casual profit” arising from the fact that the respondent held shares in Westinghouse Canada.

In concluding that the payment to the respondent was not income the learned trial judge relied particularly on the judgment of Cameron, J in Federal Farms Limited v MNR, [1959] Ex CR 91; [1959] CTC 98; 59 DTC 1050, and the criteria suggested there. That case involved a voluntary payment or grant from a fund established to provide relief and assistance for persons who suffered loss or damage as a result of a hurricane and flood. Cameron, J considered the cases such as J Gliksten and Son, Limited v Green, [1929] AC 381, and London Investment and Mortgage Co Ltd v IRC, [1958] 2 All ER 230, which had established that insurance or other compensation for the loss of stock in trade was income, but held that the case before him was distinguishable on the ground that the taxpayer had contributed nothing to the relief fund and had no legal right to claim payment from it, as in the case of insurance or compensation for expropriation or war damage. He concluded that the payment received by the appellant from the relief was “in the nature of a voluntary personal gift and nothing more.” Again, to the same effect, he said, “The gift here in question, it seems to me, is of an entirely personal nature, wholly unrelated to the business activities of the appellant.”

The learned trial judge in the present case listed several features by which Cameron, J had distinguished the relief fund payment from insurance compensation. He said:

Cameron, J, distinguished the case from Gliksten et al v Green (supra) on the basis that (a) the payment was entirely voluntary, (b) it was given by persons who had no business relations with the taxpayer, (c) it was unrelated to the taxpayer’s business activities, (d) the taxpayer had no legal right to demand any portion of the fund, (e) at the time of the loss he had no expectation of being so compensated, and (f) it was unlikely ever to happen again.

With these features in mind the trial judge concluded from the facts of the present case as follows:

There was no evidence other than that contained in such paragraph 10, to indicate the nature of the controversy or litigation which Westinghouse Electric hoped to avoid by the payments made to the minority shareholders who retained their shares. If an action could have been brought against some of the parties involved as a result of the disallowance of such sale any recovery by the plaintiff would not ordinarily have the characteristics of income. In any event as far as the plaintiff was concerned the payment to him was voluntary and no relationship existed between the payor and the taxpayer who had no expectation of receiving the same until he received the offer (ex 2). It is most unlikely that a further payment will be made to him in respect of the transaction. The payment might be termed a windfall. I am convinced it was not a payment of income within the provisions of the Income Tax Act.

Counsel for the respondent adopted the indicia which the trial judge had emphasized in commenting on the Federal Farms decision and submitted a more elaborate list which is set out in his memorandum as follows:

(a) The Respondent had no enforceable claim to the payment:

(b) There was no organized effort on the part of the Respondent to receive the payment;

(c) The payment was not sought after or solicited by the Respondent in any manner;

(d) The payment was not expected by the Respondent, either specifically or customarily;

(e) The payment had no foreseeable element of recurrence;

(f) The payor was not a customary source of income to the Respondent;

(g) The payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the Respondent; it was not earned by the Respondent, either as a result of any activity or pursuit of gain carried on by the Respondent or otherwise.

Counsel for the respondent cited several cases as supportive or illustrative of these indicia. For the most part they involved the relationship of a particular payment to an office or employment or to a business or trade as a source of income. None of them involved shares as a source of income so they are of limited assistance in determining what should be regarded as income from that source. What many of the cases reflect is the distinction between a receipt arising from an office or employment, or from a business or trade, and a gift that is personal to the taxpayer. This distinction is reflected in Seymour v Reed, [1927] AC 554, and Moore v Griffiths, [1972] 3 All ER 399, cases involving special payments to athletes in recognition or appreciation of their achievements, and in Walker v Carnaby, Narrower, Barham & Pykett, [1970] 1 All ER 502, and Simpson v John Reynolds & Co (Insurances) Ltd, [1975] 2 All ER 88, cases involving voluntary payments to auditors and insurance brokers upon termination of their services, made in appreciation of those services and as a consolation for their termination. The last two cases, in which the payments were held to be gifts and not income from the business of the recipients, have a certain affinity with the payment in the present case. Like it, they were made without legal obligation, but to make it easier for the recipient to accept what could be considered to be an adverse turn of affairs — in other words, for reasons of goodwill. A somewhat similar case is Murray v Goodhews, [1978] 2 All ER 40, in which voluntary payments by the owners of commercial premises to the tenants upon termination of the tenancies were held not to be income from the business of the recipients. The payments were found to have been made in recognition of the long and friendly association between the owners and the tenants and to maintain the image and goodwill of the owners in the trade.

Counsel for the respondent also relied on such cases as Graham v Green, [1925] 2 KB 37 and MNR v H E Morden, [1962] Ex CR 29; [1961] CTC 484; 61 DTC 1266, in which it was held that the particular gambling activity of individuals had not assumed the proportions of a business so that their winnings should be treated as business income. These cases, as I understood counsel, were cited in support of his criterion that there must be some organized effort to earn a payment before it can be characterized as income.

Having regard to the indicia suggested by counsel for the respondent, which I think are all relevant, although no one of them by itself may be conclusive, I am of the opinion that the payment received by the respondent was not income earned by or arising from the respondent’s shares, which are the only possible source of income in this case. In the absence of a special statutory definition extending the concept of income from a particular source, income from a source will be that which is typically earned by it or which typically flows from it as the expected return. The income which is typically earned by shares of capital stock consists of dividends paid by the company in which the shares are held. The payment in the present case was of an unusual and unexpected kind that one could not set out to earn as income from shares, and it was from a source to which the respondent had no reason to look for income from his shares. I agree with the learned trial judge that it was in the nature of a “windfall.”

For these reasons I would dismiss the appeal with costs.