Bellingham v. The Queen, 94 DTC 6564, [1994] 2 CTC 290 (FCTD)

Jerome A.C.J.:—This is an appeal from a notice of confirmation by the Minister of National Revenue dated July 28, 1986, with respect to the reassessment of income tax for the plaintiff’s 1984 taxation year.

Facts

The facts in this case are not in dispute and are contained in the statement of agreed facts and Issues filed by the parties. The plaintiff Mrs. Bellingham was one of a small group of landowners whose land was expropriated effective June 2, 1981, by the town of Grande Centre located in northeastern Alberta. The land expropriated comprised two adjacent quarter sections outside, and within a mile, of the town's corporate limits. The plaintiff had an undivided 50 per cent interest in one of the quarter sections, namely, the NE quarter of S. 21 (Parcel A).

As the amount which the town proposed to pay for the land was quite low, the landowners appealed to the Land Compensation Board to fix the amount of their compensation pursuant to the provisions of the Alberta Expropriation Act, R.S.A. 1980 c. E-16. By decision dated May 25, 1983, Paterson Park Ltd. v. Grand Centre (Town), 28 L.C.R. 288, (Alta. T.D.), aff'd by the Alberta Court of Appeal (1984), 29 L.C.R. 97, the Board awarded the landowners the following compensation:

1. The amount of compensation payable by the town to the owners (Paterson Park Ltd. and Brenda E. Bellingham) is the sum of $955,000 together with interest thereon at the rate of 16 per cent per annum, compounded annually, computed from June 2, 1981 until paid, with proper adjustments taking into account any moneys previously paid by the town to such Owners.

2. The town shall pay to the owners (Paterson Park Ltd. and Brenda E. Bellingham) additional interest pursuant to subsection 66(3) with respect to the sum of $955,000. The amount of such additional interest shall be calculated at the rate of 16 per cent per annum for the period of 66 days.

3. The town shall pay to the owners (Paterson Park Ltd. and Brenda E. Bellingham) additional interest pursuant to subsection 66(4) with respect to the sum of $764,000 being the amount by which the compensation awarded exceeds the amount of the proposed payment. the amount of such additional interest shall be calculated at the rate of 16 per cent per annum, computed from November 4, 1981 until paid.

Thereafter, the town refused to pay the award and sought ways to avoid its liability. It took the position it did not want the land and attempted to have the landowners take it back. It then appealed the board's decision to the Alberta Court of Appeal, which dismissed the appeal and ordered the town to pay costs on a solicitor-client basis. After the landowners seized the town’s bank account, the town caused a private member's bill to be initiated in the Alberta legislature seeking legislation to overturn its liability for compensation. The matter went to a hearing before a legislature subcommittee where it was decided not to pass the private member's bill. Accordingly, the town continued to owe the landowners a substantial sum.

The award made by the board was a total of $3,800,000. Ultimately, the landowners and the town, after many months of negotiation, reached a cash settlement, effective June 18, 1984, whereby the town paid the landowners a total of $2,800,000, representing approximately 74 per cent of the award made by the board. On July 3, 1984, a cheque for $2,900,000, ($2,800,000 plus $100,000 for legal costs) was delivered to the landowner's representative. Of this amount, the plaintiff received $577,106.19. In the final settlement and payment of the settlement, no allocation was made amongst the various heads of the award made by the Land Compensation Board.

Ms. Bellingham reported her profit from the expropriation on her 1984 income tax return as business income and it was so assessed by the Minister of National Revenue on October 22, 1985. However, by notice of objection dated December 5, 1985, the plaintiff objected to the assessment on the basis that a portion of the amount received, $114,272, was tantamount to non-taxable punitive damages which ought to be excluded from the calculation of her taxable income. The Minister maintained the entire amount was fully taxable as income.

Plaintiff's submissions

Ms. Bellingham submits that once the land was expropriated, her rights as a landowner were supplanted by the statutory rights imposed under the Alberta Expropriation Act. Accordingly, the capital gains regime in the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), governs and deems the nature and character of the compensation, except for ordinary interest, to be proceeds of disposition. It is further argued the settlement funds should be allocated in accordance with, and in the same proportion, as the constituent elements appearing in the board's award. Although such an allocation did not appear in the settlement, the plaintiff maintains it was clearly the basis for determining her share of the settlement.

Defendant's submissions

The defendant argues the entire amount of the settlement represents income from business and is not a capital gain. Accordingly, the amount is properly taxed as income pursuant to section 9 of the Income Tax Act. The monies in question, it is submitted, represent payment of a global amount by way of settlement, without any express allocation under the various heads of the award made by the Land Compensation Board. Alternatively, if there is to be an allocation of the funds among the various components of the board’s award, the Minister submits the amount representing ordinary interest would be taxable as interest, and the remaining amount received with respect to the land together with the additional interest under subsection 66(4) of the Alberta Expropriation Act, are taxable as income from a business.

Analysis

The jurisprudence is clear that if the property was acquired as an adventure in the nature of trade, a fact admitted by the plaintiff, then any profit realized on its disposition is taxable on income account whether the property is disposed of by way of sale or expropriation. Expropriation itself does not affect the taxability of the amount received for the property. In Schefner Estate v. M.N.R., [1993] 2 C.T.C. 273, 93 D.T.C. 5482, Denault J. made the following comments at page 278 (D.T.C. 5485):

In a case not argued by either side, Hillside Shopping Centre Ltd. v. Canada, [1981] C.T.C. 322, 81 D.T.C. 5261 (F.C.A.), the taxpayer had acquired some land in a plan to develop a shopping centre. The plan fell through, and the land was expropriated. The taxpayer received compensation for the land and treated it as a non-taxable capital receipt. The Minister assessed tax on the compensation, viewing it as income from an adventure in the nature of trade. The Court of Appeal, like the trial judge, saw that the taxpayer had two intentions in acquiring the land: to develop the shopping centre or to dispose of the land at a profit. As in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902, [1960] C.T.C. 384, 60 D.T.C. 1270, this was enough to make the compensation income from an adventure in the nature of trade and taxable. Mr. Schefner's plans in relation to the land purchased by East End and expropriated by Ville d'Anjou may be similarly characterized.

[Emphasis added.]

The plaintiff relies on the decision of this Court in E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114, 86 D.T.C. 6364 (F.C.T.D.), as support for her position the settlement constitutes a capital gain. However, that case involved expropriation of land which was a capital asset and accordingly, any comments made by Mr. Justice McNair must be interpreted in that context. The capital gains provisions of the Income Tax Act were applicable in the Fisher case, supra, because the property in question was a capital property. In the present case, the property was not a capital property and those provisions therefore do not apply.

I am satisfied, however, that part of the settlement funds constitute ordinary interest, and should be taxed accordingly. This was the approach taken by the Federal Court of Appeal in Shaw v. M.N.R., [1993] 1 C.T.C. 221, 93 D.T.C. 5121, wherein Linden J.A. stated at page 224 (D.T.C. 5123):

The sum paid to Mr. Shaw as compensation, therefore, was payable because of the expropriation of his land, but that is not true of the "interest" payment. The expropriation resulted in the government owing Mr. Shaw a capital sum. The interest on the capital sum, however, was due because the government did not immediately pay that capital sum; it was not owing for "property taken” by an expropriation. Accordingly, the interest was not paid as damages or compensation for expropriation.

In the present case, the parties agree the ordinary interest component of the settlement ought to be determined on a pro rata basis in the amount of $181,319. That portion therefore is to be taxed as interest in accordance with paragraph 12(1)(c) of the Income Tax Act. The remaining amount of $491,287, being the amount received with respect to the land and the additional interest pursuant to subsection 66(4) of the Alberta Expropriation Act, are taxable as income from a business.

Conclusion

For these reasons, the plaintiff’s appeal is allowed to the extent that the sum of $181,319, representing ordinary interest, is to be taxed as interest. In all other respects the appeal is dismissed. The plaintiff is entitled to costs.

Appeal dismissed.