Citation: 2007TCC647
Date: 20071220
Dockets: 2005-3860(IT)G
2005-3861(IT)G
BETWEEN:
RCI ENVIRONNEMENT INC.
(CENTRES DE TRANSBORDEMENT
ET DE VALORISATION NORD‑SUD INC.),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] RCI Environnement Inc. (RCI) and Centres de Transbordement et de
Valorisation Nord‑Sud Inc. (CTVNS) are appealing from the
assessments made by the Minister of National Revenue (Minister) for the
1999 and 2000 taxation years. The issue is essentially the same for both
companies; they each received $6,000,000 under a settlement (Settlement)
between RCI, Société en commandite Saint‑Mathieu (SEC) and CTVNS, on the one side, and WMI Waste
Management of Canada Inc. (WMI), on the
other, signed on December 16 and 17, 1998. Under the Settlement, Canadian Waste
Services Inc. (CWS), a corporation related to WMI, paid $12,000,000 to Placement
St‑Mathieu Inc. (PSM)
on December 16, 1998, to terminate non-competition agreements and all rights
and obligations under the agreements and to release WMI and its related corporations from all obligations, claims and undertakings
resulting from the non-competition agreements and a formal notice dated August
18, 1998. In their financial statements, RCI and CTVNS included half of that
figure, $6,000,000, as an extraordinary item that they considered to be
non-taxable for the purposes of the Income Tax Act (Act).
[2] Under subsection 9(1) of the Act, the Minister
included the $6,000,000 in the income of RCI and CTVNS for their fiscal year
ended July 31, 1999, as income from a business, and the consequence was to
change the non-capital loss carried forward to the 2000 taxation year. The
outcome of the appeal for 2000 depends entirely on the tax treatment of the
$6,000,000 for 1999. Alternatively, the Respondent argues that a fraction of
that amount is taxable income under section 14 (eligible capital property)
or section 38 (taxable capital gain). By certificate dated February 1, 2006, CTVNS merged with RCI and the corporation
resulting from the merger is RCI Environnement Inc. (RCI 2006). That
corporation still argues that the funds that RCI and CTVNS received are
non-taxable windfall gains.
Facts
[3] In argument, counsel for the Respondent produced
the chronological summary of facts reproduced below. I have made a few changes,
indicated in square brackets, in many cases to reflect suggestions made by
counsel for RCI 2006:
[TRANSLATION]
CHRONOLOGICAL SUMMARY OF
FACTS:
1. In the 1980s, Lucien Rémillard1 owned
Intersan Inc. [Intersan operated and still operates a waste management business
in the greater Montréal region and has a dump site in St‑Nicéphore, near Drummondville.]
2. Mr. Rémillard sold Intersan Inc. to "Philip
Environmental Inc." [Philip] (a roughly 70% share in 1991 and the
rest in 1995) [for about $100,000,000].
[2.1 In 1996 and 1997, CWS, a subsidiary of USA Waste
Services Inc. (USA Services), acquired companies operating solid
waste management businesses or assets used in companies of that nature. First
came the acquisition of Philip, then Laidlaw, and in early 1997, assets owned
by WMI, except for assets in Quebec. Philip’s assets still included Intersan. According to Exhibit I‑2
and the testimony of Mr. Sutherland‑Yoest, the president of CWS at that
time.)]
3. In 1997, Mr. Rémillard created the appellant
corporations2 to acquire assets [all located in Quebec] owned by … WMI …, including all the
shares of WMI Québec Inc., which were held by WMI ("the acquisition").
4. On or about June 27, 1997, … PSM paid ... CWS
$3,000,000 so that CWS could have Philip ... release PSM and Lucien Rémillard from
a non-competition clause signed on July 31, 1995, at the time of the
sale of Intersan (I‑1, tab 2). David Sutherland‑Yoest was
the person who encouraged that transaction and introduced L. Rémillard to
WMI. …
5. On July 30, 1997, the following acquisitions
were made: RCI [acquired] assets for the sum of $3,608,600,3 CTVNS [acquired]
the shares of WMI
Québec Inc. for the sum of $1,200,0004 (or $1,202,899, based on the
exchange rate used for the assets), and also a lot and building (transfer
station) for the sum of $3,000,0005 (or $3,007,199, based on the
exchange rate used for the assets).
6. In addition, ... SEC acquired rights in the
contracts [for the provision of services to WMI’s customers in Quebec] for $9,350,000 [and,
according to the admission by counsel for RCI 2006, the services were performed
by RCI under a subcontract given by SEC. According to the notes to RCI’s
financial statements, RCI received $9.1 million for those services in 1998
(note 10), $5.6 million in 1999 (note 12) and $3,2 million in 2000
(note 12), while for the same years it paid "referral fees" of
$99,928 in 1998, $375,868 in 1999 and $565,241 in 2000. (See Exhibit A‑2,
tabs 1 to 3).]6
7. PSM [PSM, SEC, RCI and CTVNS (Groupe RCI)]
also acquired the accounts [receivable] of WMI and WMI Québec Inc. for the sum of $1,361,053.7
8. The total price of all of the transactions on
July 30, 1997, was therefore about $17,250,0008 [$12,500,000 US],
plus $1,361,053 for the accounts [receivable] (those figures do not take
into account the $3 million paid [by PSM] to CWS to settle the non-competition
agreement with Philip).
9. As a condition of the transactions on July 30, 1997,
WMI had to sign
non-competition agreements with RCI and CTVNS [and a non-solicitation agreement
with SEC (the three agreements are referred to as "non-competition
agreements")].
10. No monetary consideration was paid by [Groupe
RCI] for the non-competition agreements (no portion of the sale price was
allocated to that clause in particular). See Exhibit I‑1, tab 2
(schedule 2.3) and notice of appeal, 2005‑3861(IT)G, para. [7] and
notice of appeal 2005‑3860, para. [7] and Exhibit I‑7, pp.
[32] and [53], [excerpts from the discovery testimony of Jacques Plante, who
was the director of finance at RCI at the time].
11. The term of those agreements was 60 months (5
years). They contained undertakings on a number of matters, and in
particular, WMI had to [make reasonable business efforts to refer customers to RCI] for
certain [accounts], referred to as "National Accounts" [where possible].9
12. At the time the non-competition agreements were
signed (July 30, 1997), Intersan Inc. was operating in Quebec, and specifically in the Greater
Montréal area.
13. The territory where RCI and CTVNS carried on
business was Greater Montreal, and the biggest competitor was Intersan .... [Other
competitors, including Browning Ferris Industries (BFI), were also
active. BFI also had a dump site there.] CTVNS operates transfer centres [in] Laval and [in] St-Rémi.
[Intersan operates a transfer centre in Longueuil.]
14. In addition, a contract entitled "General
Agreement" was signed on July 30, 1997. One provision of the contract was
that any compensation payable in relation to the various acquisition contracts,
or related contracts, was limited to $12.5 million US. However,
Davi[d] Sutherland‑Yoest said that he had not been made aware of
that clause.
15. In the year following the acquisition by [Groupe
RCI], WMI merged with [USA
Services]. [It is more accurate to say that WMI’s parent company, Waste
Management Inc. (WMI USA) merged with USA Services.] Intersan was then owned by CWS, a subsidiary
of [USA Services] (see I‑2). The new merged entity became Waste
Management Inc. (WM [1998]). [Because of the merger, WMI and CWS
(including its subsidiary Intersan) became subsidiaries of WM 1998. (See
paragraph 13 of RCI’s notice of appeal.) As a result of the merger, the
non-competition undertaking given to RCI by WMI became binding on its parent
company, WM 1998, and CWS’s new subsidiaries (including Intersan). (See
paragraph 14 of the notice of appeal, admitted by the Respondent.) Total
sales volume for WM 1998 was $12 billion.]
16. The merger agreement was announced in a news
release on March 11, 1998 [and the merger was completed on July 17, 1998] (I‑3, tabs 1 and
9 and testimony of David Sutherland-Yoest).
17. On March 25, 1998 (barely eight months after the
acquisition), RCI and others [represented by Maurice Trudeau] sent
Intersan a formal notice ..., citing the news release of March 11, 1998, and
reminding Intersan of the obligations assumed by WMI in the non-competition
clauses. The Appellants alleged that no effort whatsoever was made to have WMI’s "National
Accounts" contracts transferred to them. They further alleged that Intersan
... was engaging in a price war to acquire those National Accounts, and more
specifically the Winners store accounts (I‑3, tab 1, p. 2).
18. By letter dated March 25, 1998, RCI and others
demanded the immediate cessation of those activities and the payment
of "compensation representing damages now estimated at $250,000.00"
(I‑3, tab 1, p. 2).
19. On March 27, 1998, Dick Van Wyck replied for Intersan ...,
in a brief letter, to the formal notice of March 25 (I‑3, tab 2) [among
other things, asking Mr. Trudeau to provide him with the non-competition
agreements].
20. On April 16, 1998, RCI and others [represented by
Mr. Trudeau] sent a fresh formal notice to Intersan ... and its General Manager
(I‑3, tab 3). [In the letter, the recipients were alleged to have
violated their contractual and legal obligations, in particular regarding the
transfer of the "national accounts", and to have engaged in unfair competition.]
21. It noted that nothing had been done in response
to the first formal notice. It also alleged acts by which Intersan ... had
given Mr. Rémillard and the Appellant a bad reputation. It stated: "Intersan's
monopoly position in Quebec ... resulting from its numerous acquisitions and the
merger of [USA Services] with [WMI USA] cannot put Intersan ... above the laws of Quebec and Canada." The next
paragraph of the letter asked for immediate action to be taken to "limit
the prejudice suffered by RCI to date", [and it then alluded to]
the possibility of an administrative remedy being sought from the Competition
Bureau of Canada. [However, no reference was made to the quantum of damages in
the letter.]
22. On July 29, 1998, an American law firm delivered
a legal opinion which, according to I-6, dealt with the possibility of
compelling specific performance of the non-competition agreements under the
laws of Delaware in the United States (I-3, tab 4). [The
substance of the opinion was not placed in evidence.]
23. On August 3, 1998, the sole director (Lucien Rémillard) of RCI and
CTVNS passed resolutions. They stated, among other things, that RCI and CTVNS believe
it to be important that SEC be a party to any proceedings that might be
brought against WMI,
that SEC was prepared to agree to that if it did not incur any expense[s], and
that it waived any benefit it might obtain as a result of the decision of a
court of competent jurisdiction or an out-of-court settlement. [No other
evidence was introduced in relation to the agreement with SEC.] The resolutions
conclude by saying that because the parties wish to establish the terms on
which proceedings would be instituted, it is therefore resolved that RCI and
CTVNS be part[ies] to an agreement to be signed on that date between RCI, CTVNS
and SEC, … (I‑3, tab 5). [No proceedings were instituted after those
resolutions were passed.]
24. On August 18, 1998, a fresh formal notice was delivered by RCI and
others. This time, the law firm Langlois, Gaudreau was retained, and the formal
notice was delivered to all of the corporations involved in Groupe [WM 1998]
(I-3, tab 7). [In the letter, Groupe WM 1998 was reminded that WMI was bound by
certain agreements as of July 30, 1997 — non-competition agreements, non-solicitation
agreements and an agreement not to interfere in the conduct of the business of the
corporations for whose benefit the agreements were entered into — that had been
made with Groupe RCI. Under the non-competition agreements, WMI, on behalf of itself
and its related corporations, agreed not to engage in competition with Groupe
RCI, directly or indirectly, for a period of 60 months. The letter stated that
because of the merger of WMI USA and USA Services, Groupe WM 1998, including its
subsidiary Intersan, was bound by the non-competition agreements. In general,
the formal notice letter was a reminder of the various obligations under the non-competition
agreements. It referred to certain violations, including the fact that WMI had violated its
obligation to make its best efforts to transfer the national accounts to Groupe
RCI, the fact that WMI was also in breach of its obligation not to solicit the
national customers actively, directly or through Intersan, the fact that
Intersan was then operating a solid waste management business within a
150-kilometre radius of WMI’s former establishment in Quebec, and the fact that WM
1998 held financial interests in a firm carrying on a solid waste management
business, in particular through Intersan, within a 150-kilometre radius of
WMI’s former establishment. In addition, WMI and Intersan were in breach of
their obligation not to solicit customers belonging to Groupe RCI, not to
interfere in the activities of Groupe RCI and not to attempt to persuade
customers or suppliers to change their relationship with Groupe RCI. However,
no quantum of damages was mentioned or claimed in the letter.]
25. On August 31, 1998, RCI received its first
statement of account from Langlois Gaudreau (I‑3, tab 8).
26. On receipt of that letter, David Sutherland-Yoest
was informed of the "problem". He was instructed to resolve it and he
reported to John Drury, President of [WM 1998], on the steps he took.
27. On September 4, 1998, Dick Van Wyck replied to that letter on
behalf of Groupe [WM 1998, that is, WM
1998, WMI, CWS and Intersan], denying that Intersan ... was bound by the non-competition
agreements, in particular because it was already carrying on business within
Greater Montréal in 1997 (at the time of the acquisition). As well, the
allegations against Intersan ... were denied and an invitation to hold a
meeting "to clear the air" was issued (I-3, tab 9). ...
28. On October 16, 1998, and November 12, 1998,
two more statements of account were issued by Langlois Gaudreau to RCI, in connection
with the non-competition clauses (I-3, tab 9).
29. Between September and November 1998, David
Sutherland-Yoest came to Montréal to meet with L. Rémillard ... . He first
proposed the solution of entering into business agreements to "combine"
the operations of the appellant and Intersan, a profitable solution for both parties.
30. L. Rémillard refused to negotiate agreements of
that kind as long as the "problem" relating to the non-competition
agreements was not resolved.
31. David Sutherland-Yoest proposed a $3 million
payment to settle the "problem". L. Rémillard requested $20 million.
They negotiated. Mr. Rémillard having told David Sutherland-Yoest what CWS
considered to be its investments in Quebec [that is, about $200,000,000 in assets]. ... Mr.
Sutherland-Yoest did not identify a specific argument he could have relied on
to reduce Lucien Rémillard’s claims. He apparently just said that he would not
pay the amount sought, while making a counter-offer, and so on.
32. In November 1998, an agreement for $12 million
was finally reached, orally, between Mr. Sutherland-Yoest and Lucien Rémillard
(with the approval of John [Drury] to whom Mr. Sutherland-Yoest reported,
because Mr. Sutherland-Yoest did not have the authority to commit that
amount). [According to Mr. Sutherland-Yoest, the approval did not require
authorization by the WM 1998 board of directors because it was not a large
enough amount, for a corporation with annual sales of $12 billion.] Mr.
Rémillard [then] asked Roch Provencher, C.A. and external auditor
for Mr. Rémillard’s companies, whether the agreed amount was "reasonable". That question was never
put to Mr. Provencher in relation to the tax impact of that figure.
33. On December 16, 1998, the out-of-court settlement
agreement (entitled "Release, Settlement and Termination Agreement") was
signed [by Lucien Rémillard on behalf of RCI, CTVNS and SEC] and provided for
payment of $12 million in consideration for the cancellation [as of that date]
of the non-competition agreements signed for the benefit of RCI, [SEC] and
CTVNS and termination of any past or future proceedings in connection with the non-competition
agreements [concerning the corporations in Groupe WN 1998 and their officers,
directors, employees and agents] and any claim contained in the letter of
August 18, 1998, [without reference to the formal notices previously given by
Mr. Trudeau]. The agreement was signed by Mr. Sutherland-Yoest for WMI [on December 17, 1998]
(I‑3, tab 10).
34. The $12 million was not broken down among the
various items [for which that figure] was intended to "compensate".
35. The $12 million cheque was drawn on the bank
account of CWS (I‑3, tab 12) [although, according to the lawyer for
RCI 2006, the payer, under the Settlement, was Groupe WM 1998]. It is possible
that either CWS or Intersan recorded the outlay, for accounting purposes. ...
36. Mr. Sutherland-Yoest told us that it is very
probable that Intersan (like the other CWS subsidiaries) paid management fees
to CWS. For one thing, CWS holds the rights in the national contracts.
Accordingly, the subsidiaries have to pay the parent company for the use of
those contracts. The parent company is also the one that has the administrative
personnel to negotiate those contracts, among others. ... Mr. D’Addario [manager
of WMI Québec before the
acquisition and manager of RCI thereafter] told us that the relationship was
identical for RCI [(both before and after the acquisition) in relation to the
national contracts], which [billed] WMI [for its services], because WMI had not "transferred"
the national contracts to it, as provided for in the non-competition agreements.
[In fact, those agreements provide that WMI must refer customers or prospective
customers of the national accounts program to RCI. However, article 4.3 of the
contract for the purchase of certain WMI assets by RCI refers to "transfer" of the
national accounts. According to Mr. D’Addario, those contracts were
subcontracted to RCI, and RCI was paid for its services by WMI. Accordingly,
notwithstanding the sale of its Canadian assets to CWS, it seems that WMI continued to operate a
business.]
37. A series of transactions took place on the
same date [December 17, 1998], including [a lease], an agreement for
services to be performed by RCI for [CWS and] Intersan, "assignments of
customer contracts", [an agreement relating to the unloading of waste at
the CTVNS transfer station in St‑Rémi and a consultation agreement] (I‑3,
tabs 13 to 20). These contracts were to "combine" the operations
of the two [groups of] corporations and were profitable for both. [Under this
series of transactions, RCI also paid $7 million to CWS and Intersan, of
which $5 million was part payment for dumping rights and $2 million was
for the acquisition of equipment (Exhibit I‑3, tabs 15 and 20).
CWS and] Intersan [were to] acquire [RCI and CTVNS under article 13 of the
agreement for services], but that did not take place.
38. RCI and CTVNS divided the [$12 million]
received equally between them.
39. They reported [their share of that money] in a
note to their financial statements [as an "extraordinary item"
received "to avoid potential litigation arising out of the merger in the
United States of USA Waste Services Inc. and Waste Management Inc. (U.S.)"]
and treated [it] as [a non‑taxable amount]. [In their notice of appeal, RCI
and CTVNS described the "extraordinary items" as] windfall gains.
RCI, however, deducted the professional fees [totalling $24,076.82 before
taxes (see Exhibit I‑3, tabs 4 and 8)] incurred for the formal
notices and other services performed to obtain the $12 million in its business
[current] expenses. [Surprisingly, PSM also included the $3,000,000 outlay made
under the June 27, 1997, services agreement to release PSM and Mr. Rémillard
from the non-competition agreement with Philip in 1997 as current expenses (Exhibit I‑1,
tab 2 and testimony of Mr. Provencher).]
40. Lucien Rémillard did not testify. He did not
explain how he determined the "reasonable" amount he was prepared to
accept to resolve the "problem". Nor do we know the substance of the
opinions he received from his legal advisers, because the Appellant chose not
to waive professional privilege.
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1
|
Lucien Rémillard is the [president and] sole director of the Appellant
(CTVNS and RCI, at the time). [CTVNS and RCI were held by a trustee for other
unidentified persons. However, it is clear that they were sister companies.]
|
|
2
|
CTVNS was created on June 20, 1997, and RCI was created on May 1, 1997.
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|
3
|
See I‑1, tab 4 (schedule 2.3) for the breakdown of the
sale price among the assets.
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4
|
This is the amount shown in the schedule to the "letter of intent",
I‑1, tab 3. The price on the contract is US $869,587). [Curiously,
it seems that WMI
Québec was acting only as mandatary of WMI after January 1, 1993, and it was WMI that
reported all of the income of WMI Québec with its own. See p. 2 of the contract for
the sale of accounts receivable by WMI to PSM on July 30, 1997, Exhibit I‑1,
tab 10.]
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|
5
|
This is the amount shown in the schedule to the "letter of intent",
I‑1, tab 3. The price on the contract is US $2,173,932).
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|
6
|
This is the price stated in a schedule to the "letter of intent"
dated June 20, 1997, between WMI and [PSM], I‑1, tab 3.
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7
|
Exhibit I‑1, tab 10, p. 4. [All of the corporations in Groupe
RCI are described in the contracts relating to the sale of WMI’s assets as
having their head office at 85 rue St‑Paul Ouest, Montréal, and
their president, who represented them, was Lucien Rémillard (Exhibit I‑1,
tabs 4 to 12)].
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8
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I‑1, tab 2 (schedule to the letter of intent).
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9
|
These are contracts relating to customers seeking services in Quebec and other provinces
of Canada. Examples would be
chains of businesses such as the Winners stores. [See article 5.5 of the
non-competition agreement, Exhibit I-1, tab 8]
|
[4] The impression Mr. Sutherland-Yoest had of Mr. Rémillard's intentions
at the time the cancellation of the non-competition agreements was negotiated was
that Mr. Rémillard wanted to get back his former company, Intersan. In
addition to wanting to buy back the company, Mr. Rémillard wanted WM 1998
to abandon the Greater Montréal market. Mr. Sutherland‑Yoest also
thought that Mr. Rémillard's argument to justify increasing the initial
$3,000,000 offer made
by Groupe WM 1998 was about as follows: "his [Mr. Rémillard's] argument
was by [his] selling the non competition undertakings, we [WM 1998]
would be protecting our assets in the Quebec market, on
which we spent so much as $200,000,000."
[5] Given the importance of the non-competition
agreements dated July 30,
1997, it is worth
reproducing here the main clauses describing the obligations of WMI (referred
to as the party of the "First Part"):
ARTICLE III
CONFIDENTIALITY
3.1 The
FIRST PART hereby agrees that it shall not, divulge, diffuse, sell, transfer,
give, circulate or otherwise distribute to any Person whatsoever or whomsoever,
or otherwise make public, any Confidential Information for a period of sixty
(60) months from the date of this Agreement.
3.2 Except
when authorized in accordance herewith, under no circumstance shall the FIRST
PART reproduce any Confidential Information without the SECOND PART [sic] prior
written consent. All reproductions of Confidential Information shall be
governed by this Agreement and shall be treated as Confidential Information
hereunder.
3.3 Any
document or work composed, assembled or produced by the FIRST PART and
containing Confidential Information shall be deemed to be Confidential
Information within the meaning of this Agreement and shall be treated as such.
3.4 Notwithstanding
any provision hereof, nothing in this Agreement shall prevent the disclosure of
Confidential Information if such disclosure must be made in response to the
formal request of a governmental body or is otherwise required under any
applicable law; it being understood, however, that the FIRST PART, save for any
filling [sic] and reporting to governmental or regulatory body in the
normal course of business, shall inform the SECOND PART of such a request for
disclosure in order that the latter may, at the appropriate time, decide
whether or not to contest the said disclosure.
ARTICLE IV
NON‑COMPETITION
4.1 The
FIRST PART shall not, for a period of sixty (60) months after the date of this
Agreement, on his own behalf or on behalf of any Person, whether directly or
indirectly, in any capacity whatsoever including, without limitation, as an
employer, employee, mandator, mandatory, principal, agent, joint venturer,
partner, shareholder, independent contractor, franchisor, franchisee,
distributor, consultant, trustee or through any Person, carry on or be engaged
in or have any financial interest in or be otherwise commercially involved in
the Activity in all or part of the Territory.
4.2 Without
limiting the generality of the foregoing and for greater certainty, the
restrictions in this Section 4.1 above shall not prevent the FIRST PART:
(i) from owning 20% or less of the shares or
interest in any company or other entity that carries on or is engaged in or has
any financial or other interest in or is otherwise commercially involved in any
activity in all or part of the Territory which is the same as, substantially
similar to or in competition with the Activity;
(ii) from owning the shares of Gestion des Rebuts
D.M.P. Inc., which owns an expropriation claim for the St‑Etienne
landfill;
(iii) from being involved in or owning an
incinerator, the Ste‑Gertrude landfill and/or to repossess eventually the
St‑Etienne landfill or to own and/or operate any landfill outside the
Territory and to receive Solid Waste from within the Territory provided such
Solid Waste was not solicited by the FIRST PART;
(iv) from performing environmental engineering or
counseling;
(v) from rendering services of consultant on waste
management primarily on non solid waste;
(vi) from carrying [on] an industrial process waste
services business;
(vii) from marketing, processing, transporting and
selling recyclables, save for collecting of recyclables;
(viii) from carrying on the business of industrial
cleaning.
ARTICLE V
OBLIGATION OF NON‑SOLICITATION OF CUSTOMERS
5.1 The
FIRST PART shall not, with respect to the Territory only, for a period of sixty
(60) months from the date of this Agreement, on his own behalf or on behalf of
any other Person, whether directly or indirectly, in any capacity whatsoever,
including, without limitation, as an employer, employee, mandator, mandatory,
principal, agent, joint venturer, partner, shareholder, independent contractor,
franchisor, franchisee, distributor, consultant, trustee, or through any
Person:
(a) canvass or solicit any Customer or procure or assist the canvassing or
soliciting of any Customer for purposes similar to or of the same nature as the
Activity;
(b) canvass or solicit any Prospective Customer or procure or assist the canvassing or
soliciting of any Prospective Customer for purposes similar to or of the same
nature as the Activity.
5.2 The
FIRST PART shall not, with respect to the Territory only, for a period of sixty
(60) months after the date of this Agreement, on his own behalf or on behalf of
any other Person, directly or indirectly, in any capacity whatsoever,
including, without limitation, as an employer, employee, mandator, mandatory,
principal, agent, joint venturer, partner, shareholder, independent contractor,
franchisor, franchisee, distributor, consultant, trustee, or through any
Person:
(a) accept, or procure or assist the acceptance of,
any business from any Customer for purposes similar to or of the same nature as
the Activity;
(b) accept, or procure or assist the acceptance of,
any business from any Prospective Customer for purposes similar to or of the
same nature as the Activity.
5.3 Sections 5.1
and 5.2 shall not prevent the FIRST PART:
(i) from owning 20% or less of the shares or interest
in any company or other entity that carries on or is engaged in or has any
financial or other interest in or is otherwise commercially involved in any
activity in all or part of the Territory which is the same as, substantially
similar to or in competition with the Activity as presently carried on by the
FIRST PART;
(ii) from owing the shares of Gestion des Rebuts
D.M.P. Inc., which owns an expropriation claim for the St‑Etienne
landfill;
(iii) from being involved in or owning an
incinerator, the Ste‑Gertrude landfill and/or to repossess eventually the
St‑Etienne landfill or to own and/or operate any landfill outside the
Territory and to receive Solid Waste from within the Territory provided such
Solid Waste was not solicited by the FIRST PART;
(iv) from performing environmental engineering or
counseling;
(v) from rendering services of consultant on waste
management primarily on non solid waste;
(vi) from carrying an industrial process waste
services business;
(vii) from marketing, processing, transporting and
selling recyclables, save for collecting of recyclables;
(viii) from carrying on the business of industrial
cleaning.
5.4 Sections 4.1,
5.1 and 5.2 shall not prevent the solicitation and servicing through sub‑contracts
of Customers or Prospective Customers of the FIRST PART’s present or future “National
Accounts Programs”, save for accounts of customers of such program assigned to
the SECOND PART by the FIRST PART and save for solicitation of Customers within
the Territory whose headquarters are based within the Territory.
5.5 The
FIRST PART shall make its best effort to direct to the SECOND PART the
Customers or Prospective Customers of the FIRST PART’s present or future “National
Accounts
Program”, if permitted under such Accounts Program.
ARTICLE VI
NON‑INTERFERENCE
6.1 The
FIRST PART shall not, for a period of sixty (60) months after the date of this
Agreement, on his own behalf or on behalf of any other Person, whether directly
or indirectly, in any capacity whatsoever, including, without limitation, as an
employer, employee, mandator, mandatory, principal, agent, joint venturer,
partner, shareholder, consultant, supplier, trustee, or through any Person,
interfere or attempt to interfere with the Activity carried on by the SECOND
PART in the Territory or persuade or attempt to persuade any Customer,
Prospective Customer or supplier of the SECOND PART to discontinue or alter
such Person’s relationship with the SECOND PART.
[6] It is also useful to reproduce the
Settlement agreement:
RELEASE, SETTLEMENT and TERMINATION AGREEMENT
1. Whereas WMI Waste Management of
Canada Inc. entered into two non‑competition agreements, one each with
RCI Environnement Inc. and Centre [sic] de Transbordement et de
Valorisation Nord‑Sud Inc., and a non‑solicitation agreement with
Société en Commandite St‑Mathieu (Contrat), being a limited partnership,
all three agreements being dated July 30th, 1997 and
hereinafter collectively called the “Non‑Competition Agreements”;
2.
And whereas RCI Environnement Inc., Centre [sic] de
Transbordement et de Valorisation Nord‑Sud Inc. and the Société en
Commandite St‑Mathieu (Contrat), hereinafter collectively called “RCI”,
have made a claim by virtue of a letter dated August 18th, 1998
to the effect that, among other things, Waste Management, Inc., WMI Waste Management of
Canada Inc., Canadian Waste Services Inc. and Intersan Inc. (collectively
called “WMI Canada”) are in breach of the obligations under the Non‑Competition
Agreements;
3.
And whereas the parties wish to terminate the Non‑Competition
Agreements and settle and release all rights, claims and obligations
arising under the Non‑Competition Agreements as well as the
claims set out in the said letter;
4.
Now therefore, in consideration of the payment by WMI Canada of the sum of
$12,000,000 to RCI, which payment is to be made on or before December 17th,
1998 (the “Effective Date”), the undersigned parties hereby:
(1)
agree that the Non‑Competition Agreements and all rights and obligations
arising thereunder are hereby terminated as of the Effective Date; and
(2)
unconditionally forever release and discharge Waste Management, Inc., WMI Waste Management of
Canada Inc., Canadian Waste Services Inc. and Intersan Inc., and their affiliated
companies and their respective officers, directors, employees, representatives
and agents, as of the Effective Date, from any and all obligations, claims,
undertakings and covenants, whether past, present or future, known or unknown,
contingent or otherwise, arising under or related in any manner to: (i) the Non‑Competition
Agreements; and (ii) the claims, allegations and facts set out in that
certain letter dated August 18th, 1998 issued by Langlois,
Gaudreau on behalf of RCI Environnement Inc. and its affiliated companies.
5.
Provided always, that in the event of default of payment of the
foregoing consideration on the Effective Date, then this Release, Settlement
and Termination Agreement shall be of no force or effect and in such event
shall be annulled and cancelled.
6.
The undersigned parties hereby direct and authorize WMI Canada to pay the aforemention[ed]
consideration of $12,000,000 to “Placements St‑Mathieu Inc.”.
7.
This Release, Settlement and Termination Agreement shall be governed by
the laws in force in the Province of Quebec. It is the specific request of all parties that this
Release, Settlement and Termination Agreement be drafted in English. Les parties à la présente
ont exigé que la présente convention soit rédigée en langue anglaise.
...
[Emphasis added.]
[7] To justify his assessment, the auditor
wrote the following conclusions in his report:
[TRANSLATION]
The taxpayer considers this amount to be a “windfall”. We take the contrary
position because the work done by its lawyer resulted in receipt of that
amount. It cannot be concluded that it is an unforeseen gain; the
competition was harming the normal business of GROUPE RCI and thus contributing
to a reduction in its income. It can be assumed that if there had been no
satisfactory agreement between the parties, the matter would not have rested
there and legal proceedings might have been instituted. Under the non‑competition
agreement, RCI, like CTVNS, was entitled to demand compensation regardless of
the nature and amount of the compensation.
[Emphasis added.]
[8] In his testimony, Mr. D'Addario said
that business was not going well for WMI in Quebec at the time of the acquisition. It was operating with outdated equipment
and having labour relations problems with its unions. After the acquisition by
RCI, new investments were made for the acquisition of new equipment,
specifically trucks and containers; the labour relations problems were resolved
and the number of sales representatives at RCI was increased, and in Mr. D'Addario's
view this resulted in a 30% increase in sales in 1998 over 1997. Income
continued to rise after that. According to Mr. D'Addario, the price
list used by RCI was essentially the same as WMI's. The prices could be increased only based on the inflation rate, the
cost of disposing of solid waste, the price of fuel and wages. He said that RCI
had expanded during 1997 and 1998 at the expense of Intersan and BFI.
[9] In his testimony, Mr. Provencher said
that sales attributable to the WMI assets acquired by Groupe RCI were
$13,500,000 at the time of the acquisition in July 1997, $18,000,000 a
year later, a 35% increase (actually 33.33%), and $21,000,000 in fiscal 1999, a
60% increase (actually 55.5%) over the figure at the time of the acquisition,
and a 25% increase (actually 17%) over July 31, 1998, which was a few days
after the merger of WMI USA and USA Services took
effect. According to Mr. Sutherland‑Yoest, CWS (and, in all
likelihood, Intersan) was losing market share to RCI and BFI at the time of the
merger of WMI USA and USA Services in 1998, and that
situation continued after the merger. The apparent goal of counsel for RCI 2006
in calling these witnesses was to show that RCI and CTVNS had not suffered any
damages as a result of the violation of the non‑competition agreements, contrary
to what he himself alleged in his formal notice of March 25, 1998, addressed to Groupe RCI.
Positions of the Parties
RCI 2006
[10] Counsel for RCI 2006 submits that
the Minister assumed the following premises in adding $6,000,000 to the income
of RCI and CTVNS as income from a business under subsection 9(1) of the Act:
the competition had harmed RCI's business, income had declined and RCI was
entitled to demand compensation, regardless of the nature or amount of
compensation. In counsel’s submission, the evidence introduced by RCI 2006 clearly
showed that RCI and CTVNS had not suffered any drop in income. On the contrary,
their income had risen significantly: by 60% (actually 55.5%) from 1997 to
1999.
[11] In addition, the outcome of the action
taken by RCI and CTVNS was very unpredictable, given that Intersan was already
operating a business in the Montréal region at the time when WMI signed the non‑competition
agreements, and at that time Intersan was not affiliated with WMI. Essentially, counsel for RCI 2006 took the
same position as counsel for WMI took on September 4, 1998, in reply to the formal notice letters
from Groupe RCI, that is, the position that CWS and Intersan were not bound by
the non‑competition agreement as a result of the merger of WMI USA and USA Services. He also pointed out that the
formal notice letter from Langlois Gaudreau made no claim for compensation, but
rather demanded compliance with the non‑competition agreements. He also
argued that the reason why WMI paid the $12,000,000 was that it wanted
to settle the dispute once and for all, and to buy peace.
[12] The final submission by counsel for RCI 2006
was to cite the principles of civil law holding that in order to obtain
damages, fault and injury must be proved, and a causal link between the fault
and injury demonstrated. That link must be direct and certain. In counsel’s
submission, Groupe RCI did not succeed in proving this.
[13] On the Respondent's alternative arguments,
primarily that receipt of the $12 million triggered the application of
section 14 (eligible capital amount) or section 38 (taxable capital
gain) of the Act, counsel for RCI 2006 submits that these are new grounds
that cannot be advanced to justify a reassessment after the time allowed for
that purpose has expired, as held by McLachlin J. in Continental Bank of
Canada v. Canada, [1998] 2 S.C.R. 358, [1998] S.C.J. No. 62 (QL),
at paragraph 18.
[14] In response to the Minister's alternative
arguments, counsel for RCI 2006 also argued that the non‑competition
agreements were not property for the purposes of the Act, in particular because
they are property that is not an object of commerce. In the alternative, he
argues that even if they are property, there was no disposition for the
purposes of the Act, and no proceeds of disposition. Moreover, if the
$12 million was proceeds of disposition of property disposed of in
December 1998, subsection 14(1) of the Act would not apply because of
item E of the formula set out in the definition of "cumulative
eligible capital" in subsection 14(5) of the Act and the rule of
interpretation known as the "mirror image" rule. That rule holds
that if RCI and CTVNS had paid the $12 million, it could not have been
considered to be an eligible capital expenditure because, if we look at things
from the perspective of all the real payers of the money, they would not have
incurred that expenditure in order to earn income from a business. According to the interpretation of the
Settlement agreement proposed by counsel for RCI 2006, the corporations
that paid the $12 million, WM 1998, WMI, CWS and Intersan, are all Groupe
WM corporations. Accordingly, the payment would have to be an eligible capital
expenditure for each of those corporations. The evidence adduced by the
Respondent is insufficient to allow for an assessment of the circumstances that
existed in each of those four corporations.
[15] Counsel’s final submission was that the
$12 million was a windfall gain under the tests recognized by the courts,
and in particular the tests set out in Canada v. Cranswick, [1982] F.C.J.
No. 28 (QL) and [1982] 1 F.C. 813. The tests adopted by Le Dain J.A.,
then of the Federal Court of Appeal of Canada, were as follows:
13 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.
[16] In the submission of counsel for RCI 2006, RCI
and CTVNS had no cause of action in respect of the $12 million; they had
made no organized effort to receive payment of that amount, and had merely sent
a formal notice. The effort had actually been made by Mr. Sutherland‑Yoest.
In fact, it was Mr. Sutherland‑Yoest who had made the initial
$3 million offer. In counsel's submission, RCI and CTVNS had also not
sought payment of the amount in question.
[17] Counsel also cited the decision in Cartwright
and Sons Limited v. M.N.R., 61 DTC 499. The issue in that case was whether a lump sum payment of $7,000 by The
Carswell Company Limited to the appellant in an action in damages for copyright
violation that was settled out of court constituted income. Mr. Fordham
concluded that the money had none of the characteristics of income. He stated
the relevant facts as follows (at pages 500 et 501):
Before going further, one or two
other uncontradicted facts should be mentioned. The appellant did not lay claim
to any financial loss suffered through the publication of Carswell's directory.
In fact, the appellant expressly disclaimed having experienced any loss of
income by reason of Carswell's infringement of the appellant's copyright. This,
in itself, is an unusual and important circumstance, as ordinarily some
ascertainable degree of loss is suffered by anyone in the appellant's position.
However, such was not the case here. On the contrary, sales of the appellant's
law list increased noticeably. Furthermore, no discernible yardstick was used
in arriving at the $7,000.00 ultimately agreed on as the amount that should be
paid to the appellant. Mr. W. B. Cartwright, who gave evidence, testified
that, at the meeting at which settlement was arranged, first the sum of
$15,000.00 was mentioned, then $5,000.00 and then $7,000.00. These figures
merely were taken from the air, so to speak; no particular basis of computation
was utilized. He considered that a substantial sum should be obtained from
Carswell's as punitive damages.
[18] Counsel for RCI 2006 sees a lot of similarities
between the facts in Cartwright and the facts in these appeals.
Respondent
[19] At paragraph 22 of the amended reply
to the notice of appeal, the Respondent sets out the following arguments in
support of the conclusion that the $6,000,000 was not a windfall gain:
[TRANSLATION]
(q) The $6,000,000 received by the Appellant was not
a windfall gain because:
(i) the Appellant had an enforceable claim for
payment of the $6,000,000;
(ii) the Appellant made efforts to obtain payment of
the $6,000,000;
(iii) the Appellant sought and solicited payment of
the $6,000,000 through the negotiations that led to the agreement that terminated
the non‑competition agreement;
(iv) the $6,000,000 was paid as consideration for
cancellation of the non‑competition agreement and the obligations under
that agreement; and
(v) this was not an unforeseeable gain.
[20] In the submission of counsel for the
Respondent, the $6,000,000 each paid to RCI and CTVNS was meant to replace
future income that RCI and CTVNS could have earned if there had been no breach
of WMI's obligations.
She based her argument on the formal notice letter from Langlois Gaudreau, which
demanded compliance with the non‑competition agreements. In her
submission, the effect of the potential competition from Groupe WM 1998 and its
subsidiary Intersan in Quebec was to reduce the income that RCI could
have earned. Counsel also relied on the formal notice sent on March 25, 1998, in which Mr. Trudeau claimed [TRANSLATION] "payment
of compensation representing damages now estimated at $250,000". The
formal notice stated that Intersan was bound by the obligations contracted by
WMI pursuant to the merger of the parent corporation WMI USA with USA Services. The allegations
regarding the breach were that no effort had been made to transfer WMI's
national customers to RCI and that Intersan was unfairly engaging in a price
war in order to acquire RCI's customers (Exhibit I‑3, tab 1).
[21] In the submission of counsel for the
Respondent, the reason that RCI's profits rose after the acquisition was that
the corporation had made new investments in new equipment and hired new sales
representatives. She believes that RCI and CTVNS wanted to protect their
profits by sending multiple formal notices to Groupe WM 1998. She pointed out
that RCI and Mr. Rémillard wanted Groupe WM 1998 to leave the Montréal
market, the impact of which, in her submission, would have been to increase Groupe RCI's
profits.
[22] She also cited the decision of the
Supreme Court of Canada in Tsiaprailis v. Canada,
2005 CSC 8, 2005 DTC 5126 (Fr.), [2005] 2 C.T.C. 1, and [2005] 1 S.C.R.
113. That decision refers to the surrogatum principle, which Charron J.
described at paragraph 7 by summarizing the position taken by her colleague
Abella J., as follows:
...
As she explains, in assessing
whether the monies will be taxable, we must look to the nature and purpose
of the payment to determine what it is intended to replace. The
inquiry is a factual one. The tax consequences of the damage or
settlement payment is then determined according to this characterization.
In other words, the tax treatment of the item will depend on what the amount is
intended to replace. This approach is known as the surrogatum
principle. As noted by Abella J., it was defined in London and Thames
Haven Oil Wharves, Ltd. v. Attwooll, [1967] 2 All E.R. 124 (C.A.), and
subsequently adopted in a number of Canadian cases: see P. W. Hogg, J. E.
Magee and J. Li, Principles of Canadian Income Tax Law (4th ed. 2002),
at pp. 91-93; and V. Krishna, The Fundamentals of Canadian Income Tax (8th
ed. 2004), at pp. 413-15.
[Emphasis added.]
[23] In the alternative, counsel for the Respondent
submits that a fraction of the amount in issue is income under section 14
or 38 of the Act. I will use some of her arguments in my analysis, which
follows.
Analysis
[24] To the knowledge of both counsel for the parties
and the Court, there has been no decision in which the tax consequences of a
payment to have non‑competition agreements cancelled have been addressed.
In my opinion, selecting the appropriate tax treatment in this case requires an
appropriate characterization of the transactions that took place in 1997 and
1998. It is also essential to determine the precise nature of the contractual
rights that are central to the debate, in order to determine the true nature of
the $12 million paid in the settlement.
[25] In order to determine this, we will review the
most significant facts in relation to those transactions. In 1997, Groupe
RCI acquired all or almost all of the assets owned by WMI in Quebec for the operation of its solid waste
disposal business, a business that involves the collection, transportation,
transfer and dumping of that waste. For reasons that were not explained, the
Quebec corporation WMI was not transferred in its entirety to a single
purchaser; rather, the assets of the corporation were dispersed, at the same
time, among various corporations in Groupe RCI that each has its head office on
rue St‑Paul in Montréal and each has the same president, Lucien Rémillard.
The assets of the corporation that were transferred included the permits,
licences and operating rights associated with the corporation (and in
particular transfer and dumping permits), immovables, rolling stock, equipment,
office furniture, contracts with customers of the corporation and the telephone
numbers used by WMI's Quebec operation. With WMI's Quebec operation came all its personnel except for four
individuals. On the other hand, Groupe RCI reserved the right not to hire certain
members of the administrative staff. The assets described in the agreement
between CTVNS and WMI (Exhibit A‑3, tab 9)
included the WMI Québec goodwill. It should be added that WMI Québec was acting as mandatary for WMI. Some of the assets were excluded from
the sale to Groupe RCI, in particular the names under which WMI operated in Quebec, computer software, patents and trade secrets, and the goodwill
associated with such intellectual property. Article 3.1.2 of the
agreement between RCI and WMI dated July 30, 1997 (Exhibit A‑2, tab 9),
provides as follows:
3.1.2 all computer software and software licenses,
proprietary information, intellectual property, trade secrets, patents, patent
applications, patent licenses, trademarks and trade names, applications for
trademarks and trade names, industrial designs and applications for
registration of industrial designs, copyrights, applications for copyrights,
licenses of intellectual property, goodwill associated with such intellectual
property, all future income and proceeds from the foregoing intellectual
property, and all material and processing specifications and designs owned or
used by the SELLER, including without limitation all rights to the names “Waste
Management”, “WMI”, “WMI Waste Management of Canada Inc.”, “WMI Québec Inc.” and “Port‑O‑Let”
and any other business name used by the SELLER or WMI QUEBEC INC., including the
software used by the SELLER in their portables [sic] computers (Palm
tops/pricing for profit); and certain computer hardware used to communicate
with corporate main frames and servers that are not located in Anjou, Laval or
St‑Rémi, Province of Quebec.
[26] It should also be noted that the parties to the
agreement waived the provisions of articles 1767 to 1778 of the Civil
Code of Québec (C.C.Q.) relating to the sale of an enterprise.
Article 1767 C.C.Q provides that the sale of an enterprise is a sale which
has as its object the whole or a substantial part of an enterprise and which is
made outside the ordinary course of business of the seller. The parties also
relied on section 167 of the Excise Tax Act, which allows the
purchaser to avoid paying goods and services tax (GST) when there is a sale of
all or substantially all of the property used in carrying on the business that
is sold.
[27] A key factor in all these agreements was that
the acquisition of all these assets was conditional on non‑competition
undertakings given by WMI to RCI, CTVNS and SEC. It
should be noted that it seems that SEC obtained the most important asset, the
contracts to supply services to WMI's customers, for
which it paid $9.3 million out of a total price of $18.56 million for WMI's
entire Quebec operation.
As a result, I have no doubt that WMI transferred the
goodwill of its Quebec operation, in very large part, to Groupe
RCI in July 1997.
[28] Nor is there any doubt in my mind that the
purpose of the non‑competition agreements was to preserve the goodwill
thus acquired by Groupe RCI. Although they were valid only for five years and
about seven months had already passed at the time the Settlement was agreed to,
the non‑competition agreements provided the beneficiaries of those
agreements, the corporations in Groupe RCI, with an advantage of an
enduring nature. In Associated
Newspapers Ltd. v. F.C. of T.; Sun Newspapers Ltd. v. F.C. of T.,
(1938) 5 A.T.D. 87, 61 C.L.R. 337 and Associated Portland Cement
Manufacturers, Ltd. v. C.I.R., [1946] 1 All E.R. 68, 27 T.C. 103,
118, 120, cited in No. 481 v. M.N.R., 58 DTC 41, 44, it was
recognized that agreements of this nature confer an advantage of an enduring
nature and are an addition to a capital asset:
. . .
[Two British cases]
I was unable to find a case in Canada on the actual non-compete question. But in Great Britain this very question was dealt with in
a few cases. I am of the opinion that the principles, which were applied in the
consideration of those cases can be justified in the present appeal. The test
of those principles can be found in two cases. The first one is Associated
Portland Cement Manufacturers, Ltd. v. C.I.R., (1946) 1 All E.R. 68, 27 T.C.
103, 118, 120. In brief, here are the facts. Two of the directors of
company, who were both sixty years of age, in consideration of the payment to
them of sums totalling £30,000, entered into world-wide covenants with the
company not to compete with it for the rest of their working lives after their
retirement. It was held by the Court of Appeal that the company had
gained by these payments “an advantage of an enduring nature” in that the value
of its goodwill had been enhanced by “dangerous potential competitors”
having been bought off; the deduction claimed was therefore
inadmissible as being of a capital nature. At page 399 of The
Principles of Income Taxation by Hannan and Farnsworth, Lord Greene, M.R.,
said, with regard to the above-cited case:
In my opinion in the
present case the language of Lord
Cave (in Atherton's Case — A.F.) is satisfied by the
facts. This was an expenditure once and for all with a view to bringing into
existence “an advantage for the enduring benefit of the trade”. There was
nothing temporary about this advantage. It was to last during the lives of the
two directors in question. That that advantage was a solid one, I have already
endeavoured to point out. That it was “for the benefit of the trade” in a very
true sense is again quite clear, because when analysed its effect was
unquestionably to add to the value of the goodwill . . . these benefits
acquired by the company were solid; they were permanent and they were
world-wide. They protected the company against certain risks, and the value to
be set out on that protection was shown by the company itself in deciding to
pay these amounts.
The other case to which I wish to
refer is the case of Associated Newspapers Ltd. v. F.C. of T.; Sun
Newspapers Ltd. v. F.C. of T., (1938) 5 A.T.D. 87, 61 C.L.R. 337.
The facts: The companies were engaged in the publication of the newspaper “The
Sun” which was published in the evening and sold at 1 1/2d per copy. “The World”
was a competitive evening newspaper also sold at 1 1/2d a copy. It became known
that proposals were on foot for publishing in place of “The World” an evening
newspaper to be known as “The Star”, at the price of 1d. The persons interested
in the proposed newspaper were approached by a representative of the appellant
companies and he agreed to pay them £86,500 (by instalments) as the purchase
price of their interest in “The World” and, further, in consideration of
their withdrawal of the arrangements to start a new paper and binding
themselves for three years not to produce a morning or evening daily paper
or a Sunday newspaper in or within three hundred miles from Sydney. Latham,
C.J., of the High Court of Australia,
held that the
expenditure in question was an outgoing of capital. He says at
page 89, (1938) 5 A.T.D.):
The evidence shows
that the disappearance of “The World” and the prevention of the threatened
competition was advantageous to the appellant companies. They were saved
from the risk of losing circulation and of being forced to reduce the price of “The
Sun” and their advertising rates . . .
It is true that the
payments did not result in obtaining a new capital asset of a material
nature, but they did obtain a very real benefit or advantage for the
companies, namely, the exclusion of what might have been serious
competition. When the words “permanent” or “enduring” are used in this
connection it is not meant that the advantage which will be obtained will last
forever. The distinction which is drawn is that between more or less recurrent
expenses involved in running a business and an expenditure for the benefit of
the business as a whole . . . The effect of the payment was to enlarge the
good-will of the enterprise, which was one of its most valuable assets.
In substance it
amounted to the addition of a capital asset, immaterial in character but
substantial in value and significance, to the general equipment of the business enterprise
of the appellant companies.
[Emphasis added.]
[29] It is immediately apparent that the goodwill
acquired with the other assets of a business is eligible capital property, and
that the cost of acquisition of that property cannot be considered to be a
current expense; rather, it is a capital expense. Acquiring a customer list, as
SEC did, in a way, by purchasing WMI's commercial
accounts, is also a capital expense. (See, in particular, Canada v. Farquhar
Bethune Insurance Limited, [1982] F.C.J. No. 6012 (QL), 82 DTC 6239.) Note
must also be made of the decisions in Aliments CA‑MO Foods Inc. v.
The Queen, 80 DTC 6043 (F.C.T.D.), Cumberland
Investments Ltd. v. Canada, [1975] F.C.J. No. 511 (QL), 75 DTC
5309, [1975] C.T.C. 439 and Gifford v. Canada, 2004 DTC 6128 (SCC), which confirmed that acquisition of a
customer list, together with a non‑competition agreement, is an advantage
of an enduring nature, and is thus a capital expense.
[30] A very strong indication of the value of the
enduring advantage in this case—to which we will return later—is that CWS paid
$12 million to buy out the non‑competition agreements, representing
over 55% of the value of the assets that Groupe RCI had purchased from WMI at the time it acquired the claims.
Windfall Gain
[31] In paragraph 39 of his amended reply to the
amended reply to the notice of appeal, counsel for RCI 2006 submits that
receipt of the $12 million was unexpected, unforeseen and exceptional and not
the result of any effort by RCI to obtain it, and that RCI was in fact not
entitled to any pecuniary compensation whatsoever. Accordingly, that sum was a
windfall gain.
[32] In my opinion, that assertion is entirely
without basis. The $12,000,000 was not paid, as was the case in Cranswick,
unexpectedly, unforeseeably and without any effort by Groupe RCI to obtain
it. Here, the evidence shows that counsel for RCI 2006 himself sent two formal
notice letters, the first of which, on March 25, 1998, claimed
[TRANSLATION] "compensation representing damages now estimated at
$250,000.00", which was to be paid within 10 days of the date of the
notice. The second formal notice was sent on April 16, 1998. In addition, an
American law firm was asked for a legal opinion and a third formal notice
letter was then sent by Langlois Gaudreau on August 18, 1998. The legal fees and other costs for that
work were at least $24,076. At the meetings initiated by Mr. Sutherland‑Yoest,
held during October and November 1998, there were negotiations that led to a
settlement of the dispute arising out of the merger of the American parent
corporations of WMI and CWS, that is, the dispute regarding the technical violation
of the non-competition agreements signed by WMI for the benefit of RCI, CTVNS and SEC. Mr. Sutherland‑Yoest offered
$3,000,000 to buy out the agreements, while Mr. Rémillard apparently
demanded $20,000,000. As a result of the negotiations, the amount was set at $12,000,000.
In the circumstances, it is difficult to argue that Groupe RCI made no
effort to obtain the $12,000,000 and did not solicit that payment in any way. Under
the non‑competition agreements, Groupe RCI had legal remedies that
it could have exercised against WMI, and perhaps
against Intersan, to enforce the undertakings set out in the non‑competition
agreements.
[33] In addition, given that Mr. Rémillard hoped
that Intersan and Groupe WM 1998 would leave the Montréal
market and that he could buy back his old company, Intersan, it is not
surprising that his efforts led to payment of an amount as large as $12,000,000.
The final point, and we will come back to it later, is that the $12,000,000 was
paid entirely for cancellation of the non‑competition agreements. Accordingly,
the test set out at paragraph 13(g) of Cranswick has not been met. In
fact, the only test that might have been met here is the test at paragraph
13(f), that the payment did not come from a customary source of income.
[34] Prima facie, therefore, the $12,000,000 could
not have been considered to be a windfall gain under the tests set out in the
case law. I say "prima facie" because there is nothing to
prevent the $12,000,000 from being considered a non‑taxable amount if there
is nothing in the Act to justify including all or part of that sum in the
income of RCI and CTVNS. We can determine whether the amount is in fact taxable
only after analyzing the other arguments submitted by the Respondent.
Income from a business under section 9 of
the Act
[35] In support of her position that the $12 million
was income from a business, because the formal notice of March 25, 1998,
contained a demand for payment of compensation in the amount of $250,000 and a
very large portion of the $12 million was to replace future income that RCI
and CTVNS could have earned, counsel for the Respondent cited, in addition to Tsiaprailis,
a number of decisions including Transocean Offshore Ltd. v. Canada, [2005] F.C,J. No. 496 (QL), 2005 DTC
5201, 2005 FCA 104, and
in particular paragraphs 49 and 50:
49 The Crown cites, in support of its
interpretation, two cases in which an amount paid to a landlord as compensation
for early termination of a lease was held to be taxable as income if the
payment if found to be a replacement or substitute for future rent: Grader
v. Minister of National Revenue, 62 D.T.C. 1070, [1962] C.T.C. 128 (E.C.), Monart
Corporation v. Minister of National Revenue, 67 D.T.C. 5181, [1967] C.T.C.
263 (E.C.). A recent case illustrating the same principle is R. Reusse
Construction Co. v. Canada, [1999] 2 C.T.C. 2928, 99 D.T.C. 823 (T.C.C.).
50 ... The concept of “profit” is very
broad, but it is not broad enough to include capital receipts. Thus, the
question addressed in these cases was whether a payment made to a
landlord as damages or settlement of the termination of a lease is income or
a capital receipt. For the purposes of Part I of the Income Tax Act,
the answer to that question requires the application of a judge-made rule, sometimes
called the “surrogatum principle”, by which the tax treatment of a
payment of damages or a settlement payment is considered to be the same as the
tax treatment of whatever the payment is intended to replace. Thus, an amount
paid as a settlement or as damages is income if it is paid as compensation
for lost future rent (Grader, Monart, Reusse Construction, cited
above). It is a capital receipt if it is compensation for a diminution of
capital of the recipient: Westfair Foods Ltd v. Minister of National
Revenue, [1991] 1 C.T.C. 146, 91 D.T.C. 5073 (F.C.T.D.), affirmed [1991] 2
C.T.C. 343, 91 D.T.C. 5625 (F.C.A.).
[Emphasis added.]
[36] Counsel for the Respondent also cited Canadian
National Railway Co. v. Canada, [1988] F.C.J. No. 524 (QL), 88 DTC 6340 (F.C.T.D.), in which Strayer J.A. had to
decide whether $824,874 paid by Canadian Bechtel Limited on termination of a
rail transportation contract had to be included in the income of the railway
company. To answer that question, he set out the relevant legal principles at
paragraphs 6 and 7:
6 There is much jurisprudence on the question of
whether compensation paid on the occasion of the termination of some business
arrangement is capital or income. To a large extent each case turns on its
own facts. It appears to me that there are two aspects which a court
must consider in examining such a situation retrospectively: was the purpose
of the payment to replace capital or income; and, whether or not the
purpose can be reliably determined, was the effect of the payment to replace
capital or income? It appears to me to be a dual test because the purpose
may not be discernable, or it may not be reliably discernable in the sense that
parties to settlements should not, by misstating the real purpose, determine
the tax consequences of the receipt of such compensation. It is therefore
necessary to look at both purpose and effect.
7 With respect to purpose, the essential
question is to determine what the compensation - whether paid pursuant to a
contract, a court award of damages, or otherwise - is intended to replace1. In some cases the contract
providing for compensation may be clear2. The measure employed for calculating
compensation is not always determinative: potential lost income may be
taken into account in calculating a capital sum to be paid3. Nor on the other hand does the fact
that an amount is paid as damages for breach of a contract necessarily make it
a capital sum and not income4.
On the contrary it appears to me that whatever the source of the legal right to
the compensation, be it the contract or the law of damages, the substantive
issue is: what is this amount intended to replace? 5
1See e.g., London
and Thames Haven Oil Wharves Ltd. v. Attwooll, [1967] 2 All E.R. 124 (C.A.); followed in The
Queen v. Manley, [1985] 1
C.T.C. 186, 85 D.T.C. 5150 (F.C.A.).
2 See e.g. C.I.R.
v. Fleming & Co. (Machinery), Ltd. (1951), 33 T.C. 57 (Ct. of Sess.)
3 See e.g., The
Glenboig Union Fire Clay Co., Ltd. v. C.I.R. (1922), 12 T.C. 427 (H. of L.)
at 39-40; Barr, Crombie & Co., Ltd. v. C.I.R. (1945), 25 T.C. 406
(Ct. of Sess.) at 410.
4 Cf. The Queen v.
Atkins, [1976]
C.T.C. 497, 76 D.T.C. 6258 where the Federal Court of Appeal held
that damages paid in respect of breach of a contract of employment could not be
regarded as salary income received by the taxpayer “from an office or
employment”. While the Federal Court of Appeal has adhered to this position in The
Queen v. Pollock, [1984]
C.T.C. 353, 84 D.T.C. 6370 notwithstanding the doubt cast upon it by
the Supreme Court of Canada in Jack Cewe Ltd. v. Jorgenson, [1980] 1
S.C.R. 812 at 814 , the Court has in the Manley decision, supra
note 1 confined the Atkins principle to the particular pleadings in that
case.
5 See cases cited supra
note 1.
[37] In that case, Strayer J.A. applied the surrogatum
principle, and concluded (at paragraph 18) "that
the compensation received was no more than a surrogatum for the future
profits surrendered. Therefore that payment should be treated as income."
[38] Was the $12,000,000 meant to replace income or
capital? First, I believe that the starting point has to be the Settlement
agreement itself; for convenience, I will again reproduce the key passage:
4. Now therefore, in consideration of the payment by WMI Canada of the sum of
$12,000,000 to RCI, which payment is to be made on or before
December 17th, 1998 (the “Effective Date”), the undersigned
parties hereby:
(1)
agree that the Non‑Competition Agreements and all rights and
obligations arising thereunder are hereby terminated as of the Effective
Date; and
(2)
unconditionally forever release and discharge Waste Management Inc., WMI
Waste Management of Canada Inc., Canadian Waste Services Inc. and Intersan
Inc., and their affiliated companies and their respective officers, directors,
employees, representatives and agents, as of the Effective Date, from
any and all obligations, claims, undertakings and covenants, whether
past, present or future, known or unknown, contingent or otherwise, arising
under or related in any manner to: (i) the Non‑Competition
Agreements; and (ii) the claims, allegations and facts set out in
that certain letter dated August 18th, 1998 issued by
Langlois, Gaudreau on behalf of RCI Environnement Inc. and its affiliated
companies.
[Emphasis
added.]
[39] Although paragraph 4(2) of the Settlement
says that the companies in Groupe WM 1998 and their affiliated companies,
officers, directors, representatives and agents are released from all claims
for damages arising out of breaches of the obligations created by the non‑competition
agreements, I do not believe that enough evidence has been produced to
establish that any injury was suffered by Groupe RCI. I believe that the
position taken by counsel for RCI 2006 on this issue is correct.
[40] Although the formal notice of March 25, 1998, alleges injury in the amount of $250,000, there is
nothing in the evidence produced in court that establishes, on a balance of
probabilities, that Groupe RCI suffered any such injury. On the contrary,
the evidence shows that Groupe RCI was able to supply its services to WMI's
national customers and that its sales had risen significantly. On this point,
we have the testimony of Mr. D'Addario and Mr. Provencher, in
particular. It is one thing to say in a formal notice that one has suffered
injury, and it is another thing to prove this in court. The fact that the
formal notice of August 18,
1998, did not reiterate the
demand for compensation is a serious indication that no such injury was
suffered. In my opinion, this was simply an initial position taken to put
pressure on Groupe WM 1998 in response to the merger. In fact, as the
extensive case law relating to interlocutory injunctions shows, when the
creditor of a non‑competition obligation wishes to obtain a court order
to enforce the obligation, it is difficult to quantify the damages that may
result from breach of the obligation.
Rather, I believe that the provision releasing Groupe WM 1998 and its
employees from all actions was included in the Settlement only out of caution,
to avoid any subsequent legal proceedings on that question. It is a stipulation
that any good lawyer who wishes to protect his or her client properly will
demand, even if there is no reason to believe that the client has caused any
injury.
[41] In my opinion, we must not place any great
probative weight on the testimony of Mr. Plante at discovery, which
indicates that some of the facts alleged in the formal notices corresponded to
the reality of the situation. For example, when counsel for the Respondent
examined him on the second point listed in the letter of August 18, 1998,
the assertion that WMI had breached its obligations as set out
in the non‑competition agreements because it had actively solicited
Groupe RCI’s national customers, she asked him (Exhibit I‑7,
page 78):
[TRANSLATION]
Q. [222] ... Am I to understand that they had
solicited national contracts that you had already obtained as well?
A. Yes.
Q. [223] This is something that was actually done,
that was to your knowledge?
A. Yes.
Q. [224] Was this more than one contract or ...
A. I don’t remember.
Q. [225] ... do you have an example of a single one?
A. I don’t remember.
[Emphasis
added.]
[42] Earlier, Mr. Plante had given the following
answers to questions dealing with the first point set out in that same formal
notice letter, that WMI was not fulfilling its obligations to make its best
efforts to transfer the national customers. Because he had first said that this
had not been done, counsel asked him (Exhibit I‑7, page 77):
[TRANSLATION]
Q. [221] That was not done at all?
A. Pretty much not. Not at all.
[43] In my opinion, those two answers are
contradictory, and the "not at all" is contradicted by the answer to
question 222 reproduced above. And lastly, even if WMI had breached the agreements, that did not
necessarily cause damage to Groupe RCI. At page 79, Mr. Plante states that
WMI solicited Groupe RCI customers, and gave the following answers to
these questions (Exhibit I‑7, page 79):
[TRANSLATION]
A. Yes, there were representatives who regularly
solicited our customers.
Q. [227] Including customers you had acquired from
them?
A. Yes.
Q. [228] In the acquisitions of July 30?
A. That’s right. Unsuccessfully, most of the
time.
[Emphasis
added.]
[44] As a final point, the comment made by
Mr. Plante must be noted, in which he stated that the purpose of the
formal demands [TRANSLATION] "was to stop their operations, to enforce the 'Non‑Compete' ... We
just wanted them to honour the agreements they had made with our companies."
(Exhibit I‑7, p. 67)
[45] It should also be noted that Intersan and CWS were
operating their business and competing with RCI at the time the non‑competition
agreements were signed, when they and WMI were not
affiliated. It was only when they joined Groupe WMI USA, in the merger, that any issue relating to
enforcement of the non‑competition agreements arose. The problem arose
out of WMI's agreement not to hold any financial
interest, directly or indirectly, in a business competing with Groupe RCI. Groupe
RCI's remedy was therefore to ask WM 1998 to divest itself of its
interests in CWS and Intersan, in any event in relation to their assets in Quebec. The remedy was therefore by way of permanent
injunction, which would have compelled WM 1998 to comply with the
obligations that WMI had agreed to by contract.
[46] Mr. Sutherland‑Yoest in fact acknowledged, in his
testimony, that he had offered the $12 million "to get out of the non‑competition
issue" so that Groupe WM 1998 could continue to operate its waste
management business freely in Montréal.
He wanted to protect the $200 million investment that Groupe WM 1998 had
made in the Montréal region because Mr. Rémillard wanted that group to
leave the province and to have Groupe RCI reacquire Intersan. That is why,
in his own words, he brought the money to the table, to resolve the problem of
the non-competition agreements. The $12 million paid by CWS was to have that
obligation cancelled, and not to compensate Groupe RCI for loss of future
income. The $12 million figure had nothing to do with profits that Groupe RCI could
have earned. When Mr. Rémillard, on behalf of Groupe RCI, demanded
$20 million and ultimately accepted the $12 million that Groupe
WM 1998 offered him, it was not by way of quantifying the damages RCI
might have suffered or quantifying the loss of future income, but rather to convert
into cash the right that Groupe RCI had to prevent WM 1998 from holding
$200 million interests in companies that were competing with Groupe RCI in
Montréal. In my opinion, the $12 million has to be considered to have been
paid wholly for cancellation of the non‑competition agreements.
[47] It remains to be determined whether the $12 million
paid to cancel the non‑competition agreements is a capital receipt or
replacement of income.
[48] It should be noted first that this was not the
cancellation of a contract made in the ordinary course of the business of
Groupe RCI. It was not the cancellation of a transportation contract as in
Canadian National Railway Co. or of a lease as in Grader, R. Reusse Construction Co.
and Monart Corporation (all cited supra). It was the cancellation
of the non‑competition agreements made at the time of the acquisition by Groupe RCI
of the Quebec assets of WMI’s business, the purpose of those
agreements being, as noted earlier, to protect the goodwill acquired with that
business, and that was plainly a capital transaction. By agreeing to waive the non‑competition
agreements, Groupe RCI accepted "compensation
for a diminution of capital", to use the words of
Sharlow J.A. in Transocean Offshore Ltd. Because Groupe RCI could no
longer benefit from the non‑competition agreements, it is very likely
that the market value of its goodwill was reduced. It is reasonable to believe
that a potential purchaser would have been inclined to pay more on
December 15, 1998, for the purchase of Groupe RCI than what it might
have offered on December 18, 1998, once the non‑competition
agreements were cancelled and the $12 million was removed from the group's
assets (for example, if it had been declared as a dividend). Accordingly, the
purpose of the $12 million was not to replace the income that Groupe RCI could have earned if the
contract had not been cancelled, and that money cannot be considered, for the
purposes of subsection 9(1) of the Act, to be profit from a business;
rather, it was meant to compensate for a reduction in capital.
Disposition of Capital Property or of
Eligible Capital Property?
[49] Having found that the $12 million was paid
as compensation for the reduction in the capital of Groupe RCI, we must
ask whether that payment can give rise to a capital gain or an eligible capital
amount.
[50] Before analyzing these two questions, we must
first dispose of the preliminary argument made by RCI 2006, that the
Minister could not argue a new ground to justify his assessment after the
normal reassessment period. At the beginning of the hearing, I rejected that
argument, relying on subsection 152(9) of the Act and the recent decision
of the Federal Court of Appeal in Walsh v. Canada, [2007] F.C.J.
No. 813 (QL), 2007 CarswellNat 1552. In that decision, Richard C.J. quoted
Rothstein J.A. in Anchor Pointe Energy Ltd v. Canada, [2003] F.C.J.
No. 1045 (QL), 308 N.R. 125, 2003 FCA 294, at paragraph 38: "Anchor
Pointe tries to distinguish between a new
basis of assessment and a new argument in support of its assessment. I do not
find that semantical argument productive. ..."
[51] In Walsh, the Minister had assessed the
taxpayers under subsection 2(1) and sections 5 and 7 of the Act in
relation to benefits arising out of share purchase options that had been
exercised. In their notice of appeal, the taxpayers argued that the assessments
had to be vacated on the ground that they were non‑residents of Canada. In his replies to the notices of appeal, the
Minister had reiterated the position taken when he made the assessment. A motion
to amend the reply to the notice of appeal in each case was then made to the
Tax Court of Canada, in which the Respondent argued, in support of the motion,
that the benefit arising out of the purchase options could have been taxable
under paragraph 115(1)(a) of the Act. The appellants argued that
this was a new ground. In dismissing that argument, Richard C.J. stated
the following rule and guidelines:
10 The right of the Crown to
present an alternative argument in support of an assessment is now governed by
subsection 152(9) of the Act, which applies to appeals disposed of after June
17, 1999. Subsection 152(9) of the Act states:
|
152(9) Le ministre peut avancer un nouvel argument à l'appui d'une cotisation
après l'expiration de la période normale de nouvelle cotisation, sauf si, sur
appel interjeté en vertu de la présente loi:
|
152(9) The Minister may advance an alternative argument in support of an
assessment at any time after the normal reassessment period unless, on an
appeal under this Act
|
|
a)
d'une part, il existe des éléments de preuve que le contribuable n'est plus
en mesure de produire sans l'autorisation du tribunal;
|
(a) there is relevant evidence that the taxpayer is no longer
able to adduce without the leave of the court; and
|
|
b)
d'autre part, il ne convient pas que le tribunal ordonne la production des
éléments de preuve dans les circonstances.
|
(b) it is not appropriate in the circumstances for the court to
order that the evidence be adduced.
|
…
18 The following conditions
apply when the Minister seeks to rely on subsection 152(9) of the Act:
1) the Minister cannot
include transactions which did not form the basis of the taxpayer's
reassessment;
2) the right of the Minister
to present an alternative argument in support of an assessment is subject to
paragraphs 152(9)(a) and (b), which speak to the prejudice
to the taxpayer; and
3) the Minister cannot use
subsection 152(9) to reassess outside the time limitations in
subsection 152(4) of the Act, or to collect tax exceeding the amount in the
assessment under appeal.
[52] In my opinion, the Minister’s alternative
arguments may be made under subsection 152(9) of the Act and the
guidelines laid down in Walsh. The assessments in this case are not
meant to tax a transaction different from the one for which CWS paid the
$12 million. If the new arguments are accepted, the amount of the
assessment will not increase. On the contrary, a lower amount would then be set.
[53] In my opinion, the starting point for deciding
whether the $12 million is relevant for the purposes of computing the
income of RCI and CTVNS is an analysis of the relevant provisions of the Act on
taxability:
38.
Taxable Capital
Gains and Allowable Capital Losses —For the purposes of
this Act,
(a) subject
to paragraphs (a.1) and (a.2), a taxpayer’s taxable capital gain
for a taxation year from the disposition of any property is 1/2 of the
taxpayer’s capital gain for the year from the disposition of the property;
...
39(1) Taxable Capital Gains and Allowable Capital
Losses -- For the purposes of this Act,
(a) a
taxpayer’s capital gain for a taxation year from the disposition of
any property is the taxpayer’s gain for the year determined under this
subdivision (to the extent of the amount thereof that would not, if section 3
were read without reference to the expression “other than a taxable capital
gain from the disposition of a property” in paragraph 3(a) and without
reference to paragraph 3(b), be included in computing the taxpayer’s
income for the year or any other taxation year) from the disposition of any
property of the taxpayer other than
(i)
eligible capital property,
...
40(1) General rules -- Except as otherwise expressly provided in this Part
(a) a taxpayer’s gain
for a taxation year from the disposition of any property is the amount,
if any, by which
(i) if the property was disposed of in the year, the amount, if any,
by which the taxpayer’s proceeds of disposition exceed the total of the
adjusted cost base to the taxpayer of the property immediately
before the disposition and any outlays and expenses to the extent that they
were made or incurred by the taxpayer for the purpose of making the
disposition, ...
54 In this subdivision,
“eligible capital
property” of a taxpayer means any property, a part of the consideration for
the disposition of which would, if the taxpayer disposed of the property, be an
eligible capital amount in respect of a business;
14(1) Inclusion in
income from business –
Where, at the end of a
taxation year, the total of all amounts each of which is an amount
determined, in respect of a business of a taxpayer, for E in the
definition “cumulative eligible capital” in subsection (5) (in this
section referred to as an “eligible capital amount” or for F in that definition exceeds the
total of all amounts determined for A to D in that definition in respect of the
business (which excess is in this subsection referred to as “the excess”),
...
(b) in
any other case, the amount, if any, by which the excess exceeds ½ of the amount
determined for Q in the definition “cumulative eligible capital” in subsection
(5) in respect of the business shall be included in computing the
taxpayer’s income from that business for that year.
14(5) In this section,
“eligible capital
expenditure” of a taxpayer in respect of a business means the portion of any
outlay or expense made or incurred by the taxpayer, as a result of a
transaction occurring after 1971, on account of capital for the purpose
of gaining or producing income from the business, other than any such outlay
or expense
(a) ...
(b) ...
(c) that
is the cost of, or any part of the cost of,
(i) tangible
property of the taxpayer,
(ii) intangible
property that is depreciable property of the taxpayer,
(iii) property
in respect of which any deduction (otherwise than under paragraph 20(1)(b))
is permitted in computing the taxpayer’s income from the business or would be
so permitted if the taxpayer’s income from the business were sufficient for the
purpose, or
(iv) an interest
in, or right to acquire, any property described in any of subparagraphs (i) to
(iii)
but,
for greater certainty and without restricting the generality of the foregoing,
does not include any portion of
...
“cumulative
eligible capital” of a taxpayer at any time in respect of a business of the
taxpayer means the amount determined by the formula
(A + B + C + D + D.1) - (E + F)
where
A is 3/4 of the total of all eligible capital expenditures in respect
of the business made or incurred by the taxpayer before that time and after the
taxpayer’s adjustment time,
...
E is the total of all amounts each of which is ¾ of the amount, if
any, by which
(a) an
amount which, as a result of a disposition occurring after the taxpayer’s
adjustment time and before that time, the taxpayer has or may become entitled
to receive, in respect of the business carried on or formerly carried on by the
taxpayer where the consideration given by the taxpayer therefor was such that, if
any payment had been made by the taxpayer after 1971 for that
consideration, the payment would have been an eligible capital
expenditure of the taxpayer in respect of the business
exceeds
(b) all
outlays and expenses to the extent that they were not otherwise deductible in
computing the taxpayer’s income and were made or incurred by the taxpayer for
the purpose of giving that consideration, …
...
[Emphasis added.]
The Concept of Property
[54] In argument, counsel for RCI 2006 submitted that
sections 14, 39 and 40 of the Act were not applicable to the non-competition
agreements because they were not "property", and even if they were, there
was no "disposition" of property in this case. He said, for example,
that the definition of "disposition" found today in subsection 248(1) of the Act came into force only on December 23, 1998, a few days after the
date of the Settlement. In addition, the definition of "disposition" in
section 54 of the Act before that date did not apply for the purposes of
section 14. Although a careful reading of subsection 14(1) and item E in the definition
of "cumulative eligible capital" in subsection 14(5) of the Act
shows that it does not relate to "property", but to disposition only, I believe it
is possible to dispose of these two arguments without referring to the
distinction between the wording of section 14 and the wording of
section 40.
[55] In support of his argument that the agreements
were not property, counsel for RCI 2006 relied on, inter
alia, the provisions of the Civil Code and the civil law commentators of Quebec. In my opinion, it is not necessary
to refer to the civil law definitions in order to determine what constitutes
property for the purposes of the Act, since the Act defines that concept in
subsection 248(1), as
follows:
|
“property” means
property of any kind whatever whether real or personal or corporeal or
incorporeal and, without restricting the generality of the foregoing,
includes
(a) a right of any kind whatever, a share
or a chose in action,
(b) unless a contrary intention is evident,
money,
(c) a timber resource property, and
(d) the work
in progress of a business that is a profession.
|
“biens” Biens de toute
nature, meubles ou immeubles, corporels ou incorporels, y compris,
sans préjudice de la portée générale de ce qui précède:
a) les droits de quelque nature qu’ils soient,
les actions ou parts;
b) à moins d’une intention contraire évidente, l’argent;
c) les avoirs forestiers;
d) les travaux en cours d’une entreprise qui est une
profession libérale.
[Emphasis
added.]
|
[56] Because the English version says "'property'
means", this is clearly, in my opinion, an exhaustive definition. What it
is important to take from the definition is the fact that the concept includes
both corporeal and incorporeal property, including a right of any kind. It is
not necessary here to determine the precise scope of the concept of "right",
which is not defined in the Act. In the usual sense of the word, "droit"
(right) includes, according to Le Petit Robert: "[TRANSLATION]
… Something that is required or permitted under a precise, express rule (law,
regulation)". A contract could have been included in that list of the
sources of rights.
[57] To determine whether the non-competition
agreements gave RCI and CTVNS "rights", it must be noted, first, that
the non-competition agreements are governed by the laws of Quebec, as provided in article 2.8 of the agreements
(see Exhibit I‑1, tabs 7 and 8). Book Five of the Civil Code deals
with obligations. For the purposes of this appeal, it is useful to reproduce
some of the general provisions in Chapter 1 of Title One of Book Five, and
specifically articles 1371, 1372 and 1373:
1371. It is of the essence of an obligation that there be persons
between whom it exists, a prestation which forms its object, and, in the case
of an obligation arising out of a juridical act, a cause which justifies its
existence.
1372. An
obligation arises from a contract or from any act or fact to which the effects
of an obligation are attached by law.
An
obligation may be pure and simple or subject to modalities.
1373. The object
of an obligation is the prestation that the debtor is bound to render to the
creditor and which consists in doing or not doing something.
The
debtor is bound to render a prestation that is possible and determinate or
determinable and that is neither forbidden by law nor contrary to public order.
[Emphasis added.]
[58] This last article is interesting in that it
provides that the object of an obligation consists in doing or not doing
something. In the former Civil Code of Lower Canada, article 1058 also
provided that the object of an obligation was to give. In his commentary on the
bill respecting the Civil Code of Québec, the Minister of Justice of
Quebec said that it was decided not to mention the obligation to give because
it was now included in the obligation to do. A prestation consisting in doing
can include the idea of transferring property (for example, by a contract of
sale) and also of performing a service (in particular, under the terms of a
contract of employment). A prestation consisting in not doing can be found in non‑competition
agreements as it can in contracts dealing with immovable property where a
servitude is created, for example when someone agrees not to build a wall of a
certain height.
[59] We should also note article 1412 of the
Civil Code, which deals with the object of a contract:
1412. The object
of a contract is the juridical operation envisaged by the parties at the time
of its formation, as it emerges from all the rights and obligations created
by the contract.
[60] If we analyze the non-competition agreements having
regard to these Civil Code rules, we see that each of the obligations on the
part of the debtor (WMI) gives a right to the creditor (Groupe RCI): the right
to require that the debtor perform each of its obligations. The object of WMI’s obligations consists (in very large part) in not
doing something: article 3 of the agreements obliges WMI not to disclose confidential
information; article 4, not to compete with Groupe RCI by operating a solid
waste management business within the territory covered by the agreement or by
acquiring a financial interest in a business of that nature; article 5,
not to solicit customers or prospective customers of WMI; and article 6, not to interfere in the operation of the business in
the territory in question or persuade customers or suppliers to discontinue
relations with Groupe RCI. In short, the non‑competition agreements gave
RCI and CTVNS the right to require that WMI not compete with them directly or
indirectly, in any way whatsoever.
[61] In my opinion, counsel for RCI 2006 is mistaken
in arguing that the object of the agreements is freedom to carry on business
and that because the non‑competition agreements are not objects of
commerce they cannot be considered to be property for the purposes of the Act.
One of the decisions he cited was Manrell v. Canada, [2003] F.C.J. No. 408
(QL), 2003 FCA 128, and in particular paragraphs 24 and 25, reproduced
below:
24 Professor Ziff, in Principles of Property Law,
3rd ed (Scarborough: Carswell, 2000), says this about property
(emphasis added) (at page 2):
Property is
sometimes referred to as a bundle of rights. This simple metaphor provides one
helpful way to explore the core concept. It reveals that property is not a
thing, but a right, or better, a collection of rights (over things)
enforceable against others. Explained another way, the term property signifies
a set of relationships among people that concern claims to tangible and
intangible items.
25 It is implicit in this notion of “property”
that “property” must have or entail some exclusive right to make a claim
against someone else. A general right to do something that anyone can do,
or a right that belongs to everyone, is not the “property” of anyone. In
this case, the only thing that Mr. Manrell had before he signed the
non-competition agreement that he did not have afterward was the right he
shares with everyone to carry on a business. Whatever it was that Mr.
Manrell gave up when he signed that agreement, it was not “property” within the
ordinary meaning of that word.
[Emphasis
added.]
[62] In my opinion, that passage hinders his case
more than it helps: Sharlow J.A. was correct in concluding that a
shareholder who sells shares in his or her company and does not give the
purchaser a non‑competition undertaking has not disposed of his or her
freedom to carry on business. The only property the shareholder has disposed of
is the shares of the company that were sold. By signing the non‑competition
agreements, the shareholder merely undertook not to do something. If we adopt
the civil law analysis, the object of the obligation is not "giving"
something but "not doing" something. Where the object of the
obligation is not doing, it seems obvious to me that no property is transferred
under that obligation.
[63] Unlike the facts in Manrell, RCI and
CTVNS in this case are not receiving money in consideration of an obligation
not to compete. We are in the opposite situation. They are the ones who are the
beneficiaries of WMI's undertakings, and the creditors of the obligation of not
doing. RCI and CTVNS have a right under the non‑competition agreements to
demand that WMI honour its obligation of not doing. By
terminating the non‑competition agreements, that right was cancelled. It
is clear that the rights created by the non‑competition agreements were
property for RCI and CTVNS within the meaning of subsection 248(1) of the
Act. In Quebec law, those rights can be characterized
as personal rights, because
they give the creditor a right to demand a prestation from another person, the
debtor. Those rights, which can also be characterized as claims, can be the
object of transfers and are recognized, in tax law, as property for the
purposes of the Act. In Manrell, Sharlow J.A. cited several decisions to
which she had been referred by counsel for Mr. Manrell, recognizing that
rights of that kind are property:
52 Counsel for Mr. Manrell has provided what appears to be an
exhaustive list of all the cases in which something has found to be “a right of
any kind whatever”. I will not reproduce the whole list. But I will cite a
few illustrative examples. The right represented by a term life insurance
policy that has no cash surrender value but is convertible without evidence of
insurability is a “right” for purposes of the definition of “property” in the Estate
Tax Act, S.C. 1958, c. 29 (a definition very similar to the definition in
the Income Tax Act): Estate of Harry A. Miller v. Minister of
National Revenue, [1973] C.T.C. 793, 73 D.T.C. 5583(F.C.T.D.). An
entitlement to receive payments from the pension plan of a deceased spouse is a
“right” for purposes of the definition: Driol v. Canada, [1989] 1 C.T.C. 2175, 89 D.T.C.
122 (T.C.C.). An irrevocable promise in a marriage contract to pay a sum of
money to the spouse during the marriage gives rise to a right in the hands of
the recipient spouse as of the date of the promise, and that right is at that
time a “right” for purposes of the definition: Furfaro-Siconolfi v. Canada,
[1990] 2 F.C. 3, [1990] 1 C.T.C. 188, 90 D.T.C. 6237 (F.C.T.D.). An
entitlement to maintenance or alimony is a “right” for purpose of the definition:
Canada v. Burgess,
[1982] 1 F.C. 849, [1981] C.T.C. 258, 81 D.T.C. 5192 (F.C.T.D.), see also Nissim
v. Canada, [1999] 1
C.T.C. 2119, Donald v. Canada, [1999] 1 C.T.C. 2025 (T.C.C.).
[64] As Létourneau J. acknowledged at page 6221
of The Queen v. La Capitale, Compagnie D’Assurance Générale, 98 DTC
6215, the term "property" in the Act includes practically any type of
economic interest and practically any sort of interest a person can possess.
Obviously, the rights that RCI, CTVNS and SEC possessed had considerable economic value, because CWS paid
$12 million to terminate them. It is difficult to argue, as counsel for RCI
2006 did, that these are not objects of commerce because they cannot be sold.
It must also be noted that the non‑competition agreements expressly
provide, in article 2.9, that the rights created by the agreements may be
transferred. Article 2.9 states:
2.9 Assignment. All
of the provisions of this Agreement shall be binding upon the FIRST PART and be
enforceable by the SECOND PART, its successors, affiliated and subsidiary
corporations and their respective assigns. For greater certainty, the parties
acknowledge and agree that the sale of the SECOND PART or of all its
operating assets to any other party shall not in any way limit, reduce or
negate the obligations of the FIRST PART to the SECOND PART hereunder and in
such event of sale, this Agreement will automatically benefit to the party
purchasing the SECOND PART and/or all its operating assets.
[Emphasis added.]
[65] The decisions cited above seem to be consistent
with the interpretation adopted by the Supreme Court of Canada in Canada v.
Golden, [1986] 1 S.C.R. 209, [1986] 1 C.T.C. 274, 86 DTC
6138. At paragraph 7, after quoting the definition of "property"
in subsection 248(1) of the Act, Estey J. wrote:
... This extremely
broad definition of property leaves very little in the “non‑property”
classification. It would appear to include a contract right and might in
some circumstances include a right to assert a covenant by a vendor to
deliver “know‑how”. ...
[Emphasis
added.]
[66] The same approach was taken in Pe Ben
Industries Co. v. The Queen, F.C.T.D., T‑1583‑82, June 8, 1988, 88 DTC 6347.
Strayer J. concluded that the rights in the transportation contract were
property for the purposes of the Act. He wrote, at page 10 (6351 DTC):
This leaves the
question as to whether the amount in question was the proceeds of disposition
of an asset thereby rendering it potentially subject to treatment as a capital
gain. It may first be noted that both the plaintiff and the defendant contend
as an alternative that the sum in question should be so treated. I am in
agreement that it should in accordance with the various definitions in the Income
Tax Act. Paragraph 39(1)(a) indicates that a capital gain arises "from
the disposition of any property". Subsection 248(1) of the Act defines "property"
as meaning "property of any kind whatever" including "(a) a
right of any kind whatever, a share or a chose in action. . ." I
believe that the plaintiff's rights under the contract with NAR which it gave
up in return for a final payment would constitute such a right or a chose in
action. ...
[Emphasis added.]
[67] In conclusion, the rights that RCI and CTVNS had
in the non‑competition agreements are property for the purposes of the
Act.
The
Concept of Disposition
[68] The other question to be answered in determining
whether section 14(1) or section 38 of the Act should be applied is
whether there was a "disposition" within the meaning of item E
of the definition of "cumulative eligible capital" in
subsection 14(5) of the Act or a "disposition" within the
meaning of sections 28, 39 and 40 of the Act. Counsel for RCI 2006 is
correct in saying that on December 17, 1998, that is, the date when the
Settlement was agreed to, the word "disposition" was not defined in
the Act for the purposes of section 14 of the Act. It was defined only for
the rules relating to taxable capital gains.
[69] However, when an expression is not defined in
legislation, we must look to the usual meaning. In Canada v. Compagnie
Immobilière BCN, [1979] 1 S.C.R. 865, 79 DTC 5068,
the Supreme Court of Canada determined the meaning of the words "disposed
of" in the English version, and the word "aliené" in the
French version of subsection 1100(2) of the Income Tax Regulations (Regulations),
which deals with the capital cost allowance deduction. At page 874 (page 5072
DTC), Pratte J. wrote:
The expressions “disposed
of” or “aliénés”
used in Regulation 1100(2) are nowhere defined; it is apparent,
however, that they must be ascribed the meaning which conforms with that of
their companion defined expressions “disposition of property” and “proceeds
of disposition”.
[70] After quoting various definitions from the Oxford
English Dictionary and considering the writings of commentators in France and Quebec, Pratte J.
stated the following conclusions, at pages 878 and 879 (page 5075 DTC):
As already indicated, the verb “to
dispose of”, in its first meaning, encompasses the idea of destruction; one of
the meanings of the verb “to destroy” is “to put an end to, to do away with”
(Shorter Oxford English Dictionary, see Destroy). The extinction of a right
through merger is but one method of “destroying” that right, that is of putting
an
end to its existence. In Re Leven, it was said that the word “disposition”
taken by itself and used in its most extended meaning was “wide enough to include
the act of extinguishment”.
The acquisition by respondent of the
lessor's rights under the first lease brought about the automatic termination
of the leasehold interest; such interest was extinguished, it was destroyed.
In my view, the rights of respondent
under the first lease should be regarded as having been “disposed of” in
January 1965.
[Emphasis added, footnotes
omitted.]
[71] If we apply that interpretation to the facts of
this case, it is apparent that the cancellation of the non‑competition
agreements was a disposition for the purposes of section 14. In my
opinion, there is no reason to adopt a definition of "disposition"
for the purposes of the rules in section 14 that is different from the
definition that applies for the purposes of the rules relating to the capital
cost allowance deduction. There is also nothing in the text of section 14
to indicate a different meaning for the concept of disposition from the meaning
adopted by the Supreme Court of Canada. Accordingly, cancellation of the rights
created by the non‑competition agreements constitutes a "disposition"
of "property".
[72] Accordingly, the rights created by the non‑competition
agreements were, for the purposes of sections 38, 39 and 40 of the Act,
property referred to in subsection 248(1) of the Act, and cancellation of
those rights constitutes a disposition for the purposes of those sections and of
section 14 of the Act.
Income from a Business under
Section 14 (Eligible Capital Property)
[73] The remaining question is whether the
cancellation of the non-competition agreements makes sections 14 and 38
applicable. As we saw earlier, section 39 provides that a capital gain may
be "from the disposition of any property ... other than eligible capital
property". Eligible capital property is property "a part of the
consideration for the disposition of which would ... be an eligible capital
amount" (section 54, supra). The question here is therefore
whether the $12 million represents an amount of that nature. To answer it,
we must refer to the content of item E in the definition of "cumulative
eligible capital" and determine whether all of the requirements set out in
that item are met in this case. For convenience, I will reproduce it again here:
E is
the total of all amounts each of which is ¾ of the amount, if any, by which
(a) an
amount which, as a result of a disposition occurring after the
taxpayer’s adjustment time and before that time, the taxpayer has or may become
entitled to receive, in respect of the business carried on or formerly
carried on by the taxpayer where the consideration given by the taxpayer
therefor was such that, if any payment had been made by the taxpayer
after 1971 for that consideration, the payment would have been an
eligible capital expenditure of the taxpayer in respect of the business
exceeds
(b) all
outlays and expenses to the extent that they were not otherwise deductible in
computing the taxpayer’s income and were made or incurred by the taxpayer for
the purpose of giving that consideration, …
...
[Emphasis added.]
As we saw earlier, there was a "disposition"
here because of the cancellation of the rights created by the non‑competition
agreements. Accordingly, the first requirement has been met.
[74] The second requirement is that the amount must have
been received in respect of the business that RCI and CTVNS were carrying on. During
the 1999 taxation year, RCI and CTVNS carried on a solid waste management
business in the Greater Montréal region, the business they had acquired from
WMI in July 1997. Among the numerous agreements signed in relation to that
acquisition were the three non‑competition agreements. Those three non‑competition
agreements were the subject of the Settlement and were cancelled in
consideration of the $12 million. As noted earlier, the purpose of those
agreements was to protect the goodwill of CTVNS and RCI. By waiving the rights
granted by the agreements, those two companies agreed to waive the enjoyment of
those rights, which, in all likelihood, they could have exercised to prevent
Intersan and any Groupe WM 1998 company or affiliate from carrying on
business within a 150 km radius of the centre of Montréal. The $12 million
received by RCI and CTVNS, in equal shares, was therefore received in respect
of their business.
[75] In the submission of counsel for RCI 2006, the
third requirement — "if any payment had been made by the taxpayer
after 1971 for that consideration, the payment would have been an eligible
capital expenditure of the taxpayer" — presents a problem.
[76] Before applying that requirement, it is
important to consider the principle stated by the Supreme Court of Canada in Shell
Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, 99 DTC 5669. McLachlin J. (as she then was) wrote,
for herself and six of her colleagues,
that the duty of the courts is to apply the unambiguous provisions of the Act.
At paragraph 40 of the decision, she wrote:
40 Second, it is well
established in this Court’s tax jurisprudence that a searching inquiry for
either the “economic realities” of a particular transaction or the general
object and spirit of the provision at issue can never supplant a court’s duty
to apply an unambiguous provision of the Act to a taxpayer’s transaction.
Where the provision at issue is clear and unambiguous, its terms must simply be
applied: Continental Bank, supra, at para. 51, per
Bastarache J.; Tennant, supra, at para. 16, per
Iacobucci J.; Canada v. Antosko, [1994] 2 S.C.R. 312, at pp. 326-27 and
330, per Iacobucci J.; Friesen v. Canada, [1995] 3 S.C.R. 103, at
para. 11, per Major J.; Alberta
(Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at para. 15, per Cory J.
[77] In my opinion, the text is clear and unequivocal
in this case. In the context of item E of the definition of cumulative
eligible capital, the consideration in question is what the "taxpayer"
gave in order to receive the payment to which item E refers. In this case,
what RCI and CTVNS (and also SEC), the "taxpayers", gave as
consideration for the $12 million were the rights they held under the non‑competition
agreements. Now, if the taxpayer (and not the parties that paid the "amount")
had made a "payment" "for that consideration", would "the
payment" have been an eligible capital expenditure "of the taxpayer"?
That is, if RCI and CTVNS had paid $12 million for that consideration, the
"rights" created by the non‑competition agreements, would that
expenditure have been an eligible capital expenditure of RCI and CTVNS? Clearly
the question must be decided from the perspective of the taxpayer, and not of
the payer of the amount. If these two companies had acquired the rights created
by the non‑competition agreements after 1971, this would, in my opinion,
have been an eligible capital expenditure. The amounts would not have been
deductible as current expenses in computing their income, having regard to the
prohibition in paragraph 18(1)(b) of the Act regarding capital
expenditures. It would have been an eligible capital expenditure because
obtaining the non‑competition agreements would have procured an enduring
advantage for their business;
the expense would have been incurred in order to earn income from their
business and none of the exceptions provided in the definition of "eligible
capital expenditure" in subsection 14(5) of the Act would have applied.
[78] Even though it is not necessary to examine
Parliament's objectives when it enacted the text of the third requirement set
out in item E of the definition of cumulative eligible capital, I cannot help
observing that the result described above seems to me to be consistent with
Parliament’s objectives. When section 14 and paragraph 20(1)(b)
were added to the Act in the 1972 tax reform, the purpose was to allow
businesses to deduct a portion of their capital expenditures on incorporeal
property over a period of several years; these included the cost of goodwill,
which would not have been an eligible expenditure before 1972. In addition to
recognizing that this type of expenditure was eligible, rules were also made to
include in income, when the proceeds of disposition exceeded the unamortized
portion of those expenditures, the amounts deducted under paragraph 20(1)(b)
as a result of the disposition of eligible capital property and to tax the capital
gain realized in the disposition. It is possible to own goodwill without having
purchased it. For example, an entrepreneur who creates a new business and
operates it successfully for several years develops a skilled workforce and
builds a reputation and customer base; the entrepreneur has then created goodwill,
that is, has created an ability to make a profit. If the entrepreneur sells the
business, he or she is often able to convert that ability into cash, even if
the asset does not appear on the balance sheet as a separate item. An indicator
that there is goodwill is the fact that a business is sold for more than the
fair market value of all of the business’s corporeal property. Accordingly, in
order to determine whether the property was part of inventory, capital property
or eligible capital property, there had to be a way of ensuring that
section 14 applied only to eligible capital property.
[79] Accordingly, applying item E of the
definition of "cumulative eligible capital" as that definition is
written avoids the problem raised in the position advanced by counsel for RCI
2006. It is not necessary to ask whether the payment by Groupe WM 1998 is an
eligible capital expenditure for each of the companies in the group. How would
the nature of an expenditure for a third party be relevant in determining
whether the money received for waiving the rights created by the non‑competition
agreements was an eligible capital amount for RCI and CTVNS? There is no point in determining the
status or nature of the expenditure in the hands of Groupe WM 1998, because it
is the nature of the rights waived by RCI and CTVNS that must determine the tax
treatment of those rights. Applying the interpretation advanced by counsel for
RCI 2006 could produce absurd results. If it is necessary to choose between an
interpretation that produces absurd results and another interpretation that is
consistent with the objectives of Parliament, the choice is obvious.
[80] Because all of the requirements for finding that
the $12 million is an eligible capital amount have been met, that amount
must be taken into account in applying subsection 14(1) of the Act.
[81] If I were mistaken as to the clear and
unequivocal nature of subsection 14(1) and item E of the definition
of cumulative eligible capital in subsection 14(5) of the Act, and it had
to be determined whether, looking at it from the payer’s perspective, the
$12 million represented an eligible capital expenditure, I would come to
the same conclusion, that the requirement has been met in this case.
[82] First, the argument advanced by counsel for
RCI 2006 must be considered: that RCI and CTVNS have to be placed in the situation
of each of the Groupe WM 1998 companies referred to in the Settlement. At
first blush, I see nothing in the wording of item E that requires that the
expenditure be an eligible capital expenditure for each of the parties that
made the payment for cancellation of the rights created by the non‑competition
agreements.
[83] In any event, the interpretation advanced by
counsel for RCI 2006, that all of the companies in Groupe WM 1998 are
payers for the purposes of the agreement, is incorrect, in my opinion. I do not
believe that the payer of the $12 million was each of the companies in Groupe
WM 1998. Even though the second paragraph of the Settlement defines WMI as including WM 1998, WMI, CWS and Intersan, only WMI signed the Settlement. In addition, in
paragraph 4 of the Settlement,
that definition was not applied; each of the companies that are released from
their non‑competition agreement is named individually. Accordingly, I
find that, because of the context, the reference to WMI in paragraph 4
refers only to WMI itself and not to Groupe WM 1998.
[84] If we were to rely solely on the written
Settlement agreement, we would have to conclude that there was only one payer: WMI.
Contrary to what it says, however, it was not WMI that paid the $12 million, it was CWS (para. 35 of the
chronological summary of facts). For the purposes of the mirror image rule,
must we use the payer shown in the written Settlement agreement or the one that
actually paid the money, in this case CWS? I believe it is the latter. The
person who was the president of CWS on December 16, 1998, Mr. Sutherland‑Yoest,
said in his testimony that the $12 million paid by CWS was not only paid
by that company, but also entered in its accounts. He doubted that it was
entered in Intersan's accounts. In addition, CWS was a party to at least six of
the seven agreements signed on December 16, 1998,
giving effect to the agreement between Groupe WM 1998 and Groupe RCI to combine
their operations in the Greater Montréal region (see Exhibit I‑3, tabs 14
to 20). In the case of the "Service Agreement", which was a contract
for services signed by CWS and Intersan with RCI (the first two companies were
called Intersan for the purposes of that contract), the final "whereas"
says: "Intersan wishes to use the services of RCI and to subcontract the
business to RCI." In addition, clause 2.1.4 of the contract defines "business"
as meaning "the C.W.S. and INTERSAN commercial, industrial and
institutional customer contracts". It is therefore plain from those
documents that CWS was operating a business in Quebec and that it was in its interests to pay the $12 million. Because
there is no evidence that the $12 million was recovered from other Groupe
WM 1998 companies, I conclude that the payer for the purposes of the mirror
image rule was CWS.
[85] Because CWS was operating its business in Quebec
and its business was solid waste management, the $12 million paid to have
the non‑competition agreements cancelled — which agreements concerned it,
in all likelihood, since the merger of its parent corporation, USA Services, with
WMI USA — was a capital expenditure because it gave CWS the right to
continue operating its business in Quebec, which was a benefit of an enduring
nature for it. The expenditure related to all of its operations in Quebec and was not made for the purpose of obtaining
cancellation of a current expense, as was the case in Goodwin Johnson,
supra, "by getting rid of an operational contractual expense". In support of that conclusion, I
would also recall the testimony of Mr. Sutherland‑Yoest, who
explained how CWS had come to pay the $12 million. He recounted the
argument used by Mr. Rémillard: "by selling the non‑compete,
they were protecting their 200 million dollar investment in Quebec".
[86] Even if we had to choose WMI, which had signed the non‑competition
agreements and was the only Groupe WM 1998 company that signed the
Settlement, as the payer, it would have to be recalled that it was the owner of
the property at 9501 boulevard Ray‑Lawson in Anjou. That property had been excluded from the sale of
the business by WMI to RCI in July 1997 and the non‑competition clause
defined the territory to which it applied as the area within a 150 km radius "from
the actual premises located at 9501, Ray‑Lawson boulevard, Anjou"
(see Exhibit I‑1, tab 7). As well, under the memorandum of
agreement signed by PSM and WMI on June 20, 1997, that property,
after the sale of the business, was to be leased to RCI by WMI for six months
starting on the date the agreement was signed (Exhibit I‑1, tab 3,
page 3). When the two groups' operations were merged on December 16, 1998, a seven-year lease was signed for the property. In
addition, according to Mr. D'Addario's testimony, RCI billed WMI for
services to WMI's national customers (see paragraph 36
of the chronological summary of facts, supra). There is therefore every
reason to believe that WMI was carrying on a business in Canada and the reasoning that applied to CWS could also be
applied to WMI in terms of the treatment of the
$12 million payment, for the purposes of the mirror image rule.
Accordingly, the amount of $6 million must be taken into account by RCI
and CTVNS in computing the eligible capital amount under subsection 14(1) of
the Act.
Taxable Capital Gain: Section 38 of the
Act
[87] If that conclusion were incorrect and the
$12 million were not an eligible capital amount and, therefore, the rights
created by the non‑competition agreements were not eligible capital
property, the taxable capital gains rules might apply.
[88] In my opinion, the cancellation of the non‑competition
agreements was a disposition of property, not only in the common law sense, as
was held in Compagnie Immobilière BCN, supra, but also based on
paragraph (a) of the definition of "disposition of property"
as it appeared, at the time in question, in section 54 of the Act; under
paragraph (a), a disposition included "any transaction or event entitling a taxpayer to proceeds of
disposition of property", In
section 54, the expression "proceeds of disposition" includes "compensation
for property destroyed", which encompasses the cancellation of contractual
rights, as Strayer J.A. also acknowledged in Pe Ben (supra, pages 10 and 11 (6351 DTC)):
... Further, a "disposition" of
property is defined by subparagraph 54(c)(i) as including "any transaction
or event entitling a taxpayer to proceeds of disposition of property".
This would cover the payment made by NAR to the plaintiff, whether one regards
it as payment pursuant to the contract or for termination of the contract. This
view is reinforced by the definition in subparagraph 54(h)(iii) of "proceeds
of disposition" to include "compensation for property destroyed.
. ." The money paid by NAR to the plaintiff was for termination of any
claim which the plaintiff might have against NAR under the contract which claim
was thus "destroyed".
[Emphasis added.]
[89] We therefore have all of the necessary elements
in this case to conclude that there was a taxable capital gain if the rights
resulting from the non‑competition agreements were not eligible capital
property. Because the evidence is that RCI and CTVNS paid nothing to acquire
those rights, the adjusted base price of the rights is nil. Accordingly, the
whole of the $12 million would be a capital gain. It should be noted that RCI
and CTVNS have already expensed the legal fees they paid to obtain the
Settlement. Counsel for the Respondent indicated that she was not seeking an adjustment
in respect of the treatment of those expenses.
[90] For all these reasons, the appeal by RCI 2006 is
allowed and the assessments in relation to computation of the income of RCI and
CTVNS are referred back to the Minister for reconsideration and reassessment on
the basis that the
$6 million figure must be included for both companies in computing the
income from a business for the 1999 taxation year under subsection 14(1) of the Act. The Respondent is entitled to three
quarters of her costs.
Signed at Ottawa, Canada, this 20th day of December 2007.
"Pierre Archambault"
Translation certified true
on this 26th day of March 2008.
Brian McCordick, Translator
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