Westcoast Energy Inc. v. The Queen, 91 DTC 5334, [1991] 1 CTC 471 (FCTD), briefly aff'd 92 DTC 6253 (FCA)

Denault, J.:—This is an appeal from a reassessment by Revenue Canada of the plaintiff's corporate income tax return. It involves a sum of $20,250,000 received by the plaintiff from Interprovincial Steel and Pipeline Corporation (hereinafter referred to as" IPSCO”) in settlement of a court action. The parties have narrowed the issue to a question of whether the amount is a reimbursement pursuant to paragraph 12(1)(x) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). If the settlement award falls under paragraph 12(1)(x), it should have either been included in the plaintiff's corporate income or the undepreciated capital cost of the plaintiff should have been reduced by the amount received in the taxation year 1985.

Facts

The facts are not in dispute and the material ones were agreed to by the parties.

The plaintiff is a company with its head office in Vancouver B.C. It is involved in buying unprocessed gas in B.C., Alberta, the Yukon and the Northwest Territories. It sells processed gas to customers in B.C. and the U.S. In 1977, the plaintiff required a line approximately 100 miles long to transmit unprocessed gas from a number of gas fields to its Pine River processing plant. The line became known as the Grizzly Pipeline. The plaintiff hired IPSCO to manufacture and test the pipe to be used in the Grizzly Pipeline. The plaintiff installed the pipeline in 1978. The line was first used to transmit sweet gas and commencing January 1980, the pipe began to carry sour gas.

The Grizzly Pipeline failed on July 20, 1981 after which it was shut down for repair. It failed again on July 27, 1981 after which its use was restricted by the National Energy Board on the grounds of public safety. Both of these failures occurred as a result of cracking on the inside of the longitudinal weld of the pipe.

On March 29, 1982 the plaintiff's Board of Directors approved the expenditure to replace the Grizzly Pipeline after which the plaintiff constructed a new pipeline to carry out the transmission of sour gas on approximately 27 kilometres of the existing Grizzly Pipeline. The costs incurred by the plaintiff in replacing the defective pipe were included in the undepreciated capital of the plaintiff's class 10 property.

The plaintiff commenced an action against IPSCO and others on May 4, 1982 alleging that the failed pipe was defective and did not meet contract specifications. It claimed damages for breach of contract, negligence and breach of duty of IPSCO to warn the plaintiff. The plaintiff's claim was estimated to be $22,032,000. On October 30, 1985 before the trial, an agreement of release and settlement was entered into whereby the plaintiff was paid $20,250,000 in complete and full satisfaction of all claims and demands set forth in the further amended statement of claim. Upon joint application by the plaintiff and IPSCO the terms of the Agreement were incorporated by reference to an order of the Supreme Court of British Columbia on October 30, 1985 and entered on November 7, 1985.

In its income calculation for the 1985 taxation year, the plaintiff excluded the amount received from IPSCO as being damages, and therefore, not subject to taxation pursuant to any of the provisions of the Act. The plaintiff did not reduce the undepreciated capital cost of Class 10 property by the amount received by IPSCO.

By notice of Reassessment dated August 2, 1989, Revenue Canada reassessed the plaintiff including in its income the amount of $20,250,000 as “Reimbursement re: Grizzly Pipeline” alleging that this was an amount received by the plaintiff as a reimbursement in respect of the cost of replacement pipe in the Grizzly Pipeline and on that basis was required to be included in the income of the plaintiff for 1985 pursuant to subparagraph 12(1)(x)(iv) of the Act.

By notification filed September 21, 1989, the plaintiff objected to the Reassessment which the defendant confirmed November 8, 1989. The plaintiff appeals this reassessment.

Plaintiff's Argument

The plaintiff submits that the $20,250,000 paid to the plaintiff by IPSCO was a payment of damages and as such it was not a reimbursement as the word is used in paragraph 12(1)(x)(iv). The money was given to the plaintiff to compensate it for the defendant's wrongdoing. The plaintiff spent between 22 and 25 million dollars on putting in new pipe where the old pipe was damaged. The cause of action against IPSCO was for the damage that was done to the old pipe and it was based on breach of contract and negligence.

The plaintiff's reasoning is threefold. First, counsel for the plaintiff reviews the history of taxing damage awards and distinguishes these authorities from what paragraph 12(1)(x) was designed to capture through the word reimbursement. It draws the analogy between damages for personal injury. If damages are included in the word reimbursement, there is no distinction when someone is injured by a truck and sues for damages.

The fact that it was a settlement award does not change its character as a damage award in law (Henley v. Murray (1949), 31 T.C. 351 (K.B.) at 366). Furthermore, the agreement between Westcoast and IPSCO was incorporated by reference into an order of the B.C. Supreme Court. Therefore, it was a judgment.

Second, the measurement of the amount of the payment does not determine its character. The fact that the amount of the claim for damages was based on the cost to the plaintiff of putting itself in a right position does not change the character of the award which was damages for the wrongdoing committed by IPSCO against the plaintiff.

Third, it states that the amount received is not a reimbursement under either the ordinary or legal meaning of the word. The dictionary meaning of reimbursement is “to repay or make up to a (person) the sum expended: to repay, recompense (a person)". The damage award is distinguished from the ordinary meaning of the word reimbursement which connotes a restoration of a flow of benefits between the parties. IPSCO was not recompensing the plaintiff for any benefit IPSCO derived from an expenditure made by the plaintiff; IPSCO's payment was for the wrongdoing it had committed with respect to the old pipe. In other words it was not repaying an amount to the plaintiff, it was simply compensating for its own wrong.

Along this line of argument, Mr. Macintosh the lawyer for the plaintiff in its suit against IPSCO, framed the action in breach of contract, negligence and failure of the duty to warn. In Mr. Macintosh's opinion, there was no basis for an action in reimbursement with respect to the new pipe. Therefore, the damages cannot be considered a reimbursement under paragraph 12(1)(x)(iv) of the Act.

Defendant's Argument

The defendant's position is that the $20,250,000 was a reimbursement, and therefore taxable income pursuant to paragraph 12(1)(x) of the Act. It reads as follows:

There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(x) payments as inducement or as reimbursements etc.—any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(iv) as a reimbursement, contribution, allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an expense to the extent that the amount

(v) was not otherwise included in computing the taxpayer's income for the year or a preceding taxation year,

(vi) except as provided by subsection 127(11.1), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the expense, as the case may be,

(vii) does not reduce pursuant to subsection 13(7.4) or paragraph 53(2)(s),

the cost or capital cost of the property, as the case may be, or

(viii) may not reasonably be considered to be a payment in respect of the acquisition by the payor or the public authority of an interest in the taxpayer, his business or his property.

The defendant's submission centres around its interpretation of the section. The purpose of the section is to require a taxpayer to apply reimbursements against either the costs of the property by reducing the undepreciated capital cost or alternatively to have the amount included in income.

This section was implemented in response to certain court cases, in particular The Queen v. Consumer's Gas Co., [1987] 2 F.C. 69; [1987] 1 C.T.C. 79; 87 D.T.C. 5008 (A.D.); affg [1986] 1 C.T.C. 380; 86 D.T.C. 61321 [1] in which the taxpayer was in the business of distributing natural gas. The taxpayer received certain payments from third parties in respect of certain pipeline relocation carried out at the latter’s request. The taxpayer treated the reimbursements as capital receipts which resulted in reducing the annual depreciation of the assets and the taxpayer's income was higher than it would have been had the reimbursements been taken into account. The Federal Court of Appeal held that (1) the corporation was not required to include that amount in its income and (2) it was also not required to adjust its capital cost base. This decision created an inequity to which Parliament addressed its attention. This is evidenced by the budget speech for 1985:

It is a generally accepted commercial principal that the cost of an asset or the amount of an expense should be reduced by any reimbursement or similar payment received that relates to the acquisition of the asset or the incurring of the expense. For example, a commercial tenant who was reimbursed by a landlord for part or all of the cost of making leasehold improvements, would subtract the payment in computing the cost of such property. A similar result would arise with respect to the manufacturer's rebates.

Recent court decisions have indicated that this principle may not apply for all income tax purposes.

The budget proposes to require that all payments in the nature of reimbursements or inducements in respect of the acquisition of an asset or the incurring of a deductible expense be included in income for tax purposes unless the recipient elects to reduce the cost basis of the related property or the amount of related expense. [2]

Since Parliament directed its mind to solving this inequity, the plaintiff must either include the $20,250,000 as income or adjust its capital cost base.

In support of its position, the defendant submits that the evidence indicates that the replacement cost and reimbursement of the old pipe were inextricably linked. In other words while the plaintiff sued for the wrong committed by IPSCO and sought compensation for its wrong, the replacement factor weighed heavily in its cost summaries for the pipe replacement and in its recourse against IPSCO. The defendant refers to the position paper prepared by Mr. Kavanagh who is the vice president of Engineering and Construction at Westcoast. He recommended that [Recourse be sought from IPSCO for the replacement of the pipe and installation for all of the pipeline constructed. . .”.

Furthermore, the defendant submits that the settlement does not make any admission of liability. This supports the conclusion that the plaintiff's action was in reimbursement and not damages.

With respect to the plaintiff's argument that the amount represents a damage award and is therefore not taxable, the defendant argues that whether it is labelled a reimbursement or damages does not matter, because recent tax law goes beyond this distinction to characterize damages as reimbursements to a large extent.

The defendant withdrew its alternative arguments. It had alternatively argued that the $20,250,000 constituted compensation for property injuriously affected or compensation for property damages pursuant to paragraphs 13(21)(c), 13(21)(d) and 13(21)(f) and that it therefore should reduce the undepreciated capital cost claimed by the plaintiff. It withdrew its further alternative argument that the amount is taxable as compensation for repairing damaged property pursuant to paragraph 12(1)(f). Therefore, the sole issue in this trial is whether the $20,250,000 is a reimbursement pursuant to paragraph 12(1)(x)(iv).

Findings

In an income tax appeal by the taxpayer, the onus is on the plaintiff to discharge the basis of the Minister’s assessment (M.N.R. v. Pillsbury Holdings Ltd., [1964] 1 Ex. C.R. 676; [1964] C.T.C. 294; 64 D.T.C. 5184 (S.C.C.); Johnston v. M.N.R., [1987] 2 C.T.C. 2374; 87 D.T.C. 632 (T.C.C.)). In the present appeal, Revenue Canada took the view that the amount received from IPSCO was intended to reimburse the plaintiff for the cost of the new pipe and not for the damages relating to the cost of the old pipe and secondly that the amount received was not damages, but was a reimbursement.

Having reviewed the evidence, including the testimonies of Messrs. Kavanagh and Macintosh, I have reached the conclusion that the lawsuit against IPSCO was an action in damages and not in reimbursement. I find as a fact that it was an action for breach of contract and negligence.

Counsel for the defendant emphasized the fact that the release and settlement agreement with IPSCO made no admission of liability. However, for several reasons, this argument does not support his submission that the action was one for reimbursement. Rarely does a settlement agreement make any admission of liability. Mr. Macintosh indicated in his testimony that the main concern was a clause in the contract limiting IPSCO's liability to the cost of the pipeline. In the action, Westcoast attempted to recover all of the costs including the replacement of the damaged pipeline, as well as the cost of all of the research and studies that it had conducted. In short, the objective of the lawsuit was to put Westcoast in the same position as if IPSCO had built the pipeline according to the contract specifications. The limitation of liability clause was one of the motivating factors to settle the matter out of court because Westcoast was concerned that the Court might apply the clause, thereby reducing the claim. However, Mr Macintosh testified that he is certain that the plaintiff would have obtained judgment at trial.

As a legal principle, the fact that there was no admission of liability does not prevent the payment from being an award for a damage claim (Henley v. Murray, supra, at pages 366-67). In The Queen v. Atkins, [1976] C.T.C. 497; 76 D.T.C. 6258 (F.C.A.) at 498 (D.T.C. 6258), Jackett, C.J. (as he then was) reiterated the legal principle as follows:

Once it is conceded, as the appellant does, that the respondent was dismissed “without notice”, monies paid to him (pursuant to a subsequent agreement) “in lieu of notice of dismissal” cannot be regarded as "salary", "wages" or" remuneration" or as a benefit” received or enjoyed by him. . . in respect of, in the course of, or by virtue of the office or employment”. Moneys so paid (ie, “in lieu of notice of dismissal”) are paid in respect of the "breach" of the contract of employment and are not paid as a benefit under the contract or in respect of the relationship that existed under the contract before the relationship was wrongfully terminated. The situation is not altered by the fact that such a payment is frequently referred to as so many months'"salary" in lieu of notice.

In the present case, even if it was settled, the British Columbia Supreme Court issued an order requiring the defendant IPSCO to pay the impugned sum "in complete and full satisfaction of all claims”. Therefore, the overwhelming evidence shows that IPSCO was paying the $20,250,000 for the wrong it had committed in constructing the old pipeline. There is no other reason why IPSCO would give the plaintiff this sum of money.

This finding is consistent with the intention of damage awards. Harvey McGregor in his treatise McGregor on Damages, (1988) London: Sweet & Maxwell Ltd., 15th ed. at page 7 demonstrates the historical object of an award of damages: "The object of an award of damages is to give the plaintiff compensation for the damage, loss or injury he has suffered.” And later on he elaborates:

The statement of the general rule from which one must always start in resolving a problem as to the measure of damages, a rule equally applicable to tort and contract, has its origin in the speech of Lord Blackburn in Livingstone v. Rawyards Coal Co. He there defined the measure of damages as " that sum of money which will put the party who has been injured or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.”

In the present case, the amount received by the plaintiff from IPSCO went towards putting it in the same position that it should have been if the latter had not committed the wrong in the first place. The fact that the cost of replacing the pipeline weighed heavily in the cost summaries for the pipeline replacement does not change the character of the award which is the crucial factor. In this case, the measure of damages with respect to the old pipe is based on what it cost to replace the pipeline. The fact that Mr. Kavanagh once recommended that" recourse be sought from IPSCO for the replacement of the pipe and for installation for all of the pipeline” does not change the character of the lawsuit. The lawsuit against IPSCO was in relation to the failure of the old pipe. The replacement cost was a factor only insofar as it established the amount of damages.

Having found that the $20,250,000 received by the plaintiff from IPSCO was an award of damages, the question is whether the word damages falls within the meaning of reimbursement as set out in paragraph 12(1)(x)(iv).

Both parties in their oral arguments have referred to jurisprudence on the issue of including damage awards as taxable income. I will review briefly the history of damage awards. The issue is the relationship between previous case law relating to the taxation of an award of damages and paragraph 12(1)(x).

Prior to 1971, there was no taxation on capital gains income. Thereafter, the question of whether a damage award was taxable focused on the issue of whether the amount was for income or for capital. In 1972, the new Income Tax Act began to tax capital gains, and more specifically some types of damage awards. Subparagraph 54(h)(iii) defines proceeds of disposition as including compensation for property destroyed.

If the damage award was compensation for loss of profits, it was taxable. The reason for this rule was that the performance of a business contract will result in income and accordingly damages for non-performance will also be income, thereby attracting taxation consequences. On the other hand if the contract was of sufficient importance to constitute part of the company's business structure, compensation paid on its termination was capital in nature and not taxable. An example of a taxable damage award was in Bayker Construction Ltd. v. M.N.R., [1974] C.T.C. 2318; 74 D.T.C. 1236 (T.R.B.), wherein the taxpayer was compensated for its loss of inventory or loss of profits. The damage award was considered income from the conduct of the taxpayer's business. On the other hand, the termination of a mail transportation contract materially crippled the structure of a delivery company’s profit-making apparatus (Courrier M.H. Inc. v. The Queen, [1976] C.T.C. 567; 76 D.T.C. 6331 (F.C.T.D.)). The Court found that the compensation award was capital in nature and Hot taxable.

In The Queen v. Atkins, supra, the taxpayer received a lump sum amount for wrongful dismissal. The Federal Court of Appeal held that damages for wrongful dismissal were not salary pursuant to subsection 5(1) of the Act Atkins, supra. Parliament changed the Act, in 1980, the definition of retiring allowance was amended to include an amount received" (b) in respect of a loss of an office or employment of a taxpayer; whether or not received as, on account or in lieu or payment, of damages or pursuant to an order or judgment of a competent tribunal”.

Counsel for the defendant has referred me to The Queen v. Manley, [1986] 2 F.C. 210; [1985] 1 C.T.C. 186; 85 D.T.C. 5150 (A.D.), which involved the issue of damages for breach of warranty of authority. The issue was whether the damages for breach of warranty of authority were required to be included as income pursuant to sections 3, 9 and 248(1) of the Act. The issue was characterized as whether the taxpayer's income was profit from an adventure of trade. The Federal Court of Appeal held that it was. It applied the test articulated by Lord Diplock in London & Thames Haven Oil Wharves, Ltd. v. Attwooll, which is as follows:

Where pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits, (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation.

And further on, Lord Diplock stated:

If the solution to the first problem is that the compensation was paid for the failure of the trader to receive a sum of money, the second problem involved is to decide whether, if that sum of money has been received by the trader, it would have been credited to the amounts of profits (if any) arising in any year from the trade carried on by him at the date of receipt, i.e., would have been what I shall call for brevity an income receipt of that trade.

Counsel for the defendant submits that this case is authority for the legal position that damage awards are taxable. His reasoning is that damage awards are split into two parts, the income stream and the capital stream. If an award falls within the income stream, and it can be proven that the damages relate to lost profits, or for example, salary, then it attracts taxation. However, if the award falls within the capital stream, the issue is not as clear cut. There are clear cut examples such as damages relating to a capital gain which attract taxation. With the issue of capital, the issue is more complicated, and there are various provisions in the Act which include capital damage awards as taxable income. In the defendant's submission, paragraph 12(1)(x) is the most recent provision to tax capital stream damage awards. Effectively what he is arguing is that the word reimbursement in paragraph 12(1)(x) incorporates the case law on taxing damage awards in the capital stream of income. However, it is necessary to examine the plain and ordinary meaning of the word reimbursement, as well as the legislative intent in enacting paragraph 12(1)(x).

To recapitulate, the relevant portions are as follows:

There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(x) payments as inducement or as reimbursements etc.—any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(iv) as a reimbursement, contribution, allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an expense to the extent that the amount

(v) was not otherwise included in computing the taxpayer's income for the year or a preceding taxation year,

(vi) except as provided by subsection 127(11.1), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the expense, as the case may be,

(vii) does not reduce pursuant to subsection 13(7.4) or paragraph 53(2)(s),

the cost or capital cost of the property, as the case may be, or

(viii) may not reasonably be considered to be a payment in respect of the acquisition by the payor or the public authority of an interest in the taxpayer, his business or his property;

Paragraph 12(1)(x) was added in 1986 (An Act to amend the Income Tax Act and related statutes, S.C. 1986 c. 6, s. 6(2), amending S.C. 1970-71-72, c. 63). The paragraph included a transitional provision as follows:

. . .with respect to amounts received after May 22, 1985 other than amounts received after that date pursuant to the terms of an agreement in writing entered into before 4:30 p.m. Eastern Daylight time on May 23, 1985 or to the terms of a prospectus or registration statement filed before May 24, 1985 with a public authority in Canada pursuant to and in accordance with the securities legislation in Canada or of any province and, where required by law, accepted for filing by such authority.

The paragraph was designed to capture the amount received for the cost of an asset by any reimbursement or similar payment received that relates to the acquisition of the asset or the incurring of the expense. Examples given include reimbursement to a commercial tenant by the landlord for leasehold improvements. To accomplish this, the budget required that“ all payments in the nature of reimbursements or inducements in respect of the acquisition of an asset or the incurring of a deductible expense be included in income for tax purposes unless the recipient elects to reduce the cost basis of the related property or the amount of related expense" (supra, note 2). Obviously, the Court is not bound by Parliamentary debates, and it must interpret the legislation as it is, in its final form.

I refer to a decision of my colleague Joyal, J. in which he held that paragraph 12(1)(x) was a departure from the previous law rather than a clarification of existing law. In Woodward Stores Ltd. v. Canada, [1991] 1 C.T.C. 233; 91 D.T.C. 5090, Joyal, J. considered whether inducements to attract the retail tenant Woodward Stores were taxable prior to the enactment of paragraph 12(1)(x). Joyal, J. held that the provisions of paragraph 12(1)(x) represent a statutory departure from generally accepted accounting principles. He held that the existence of a transitional provision seemed to rebut a presumption that the legislator intended merely to clarify the existing state of law when that paragraph was enacted. Moreover, Joyal, J. reasoned at page 246 (D.T.C. 5100), the new paragraph introduced a choice to the taxpayer either to reduce the undepreciated capital cost or include the amount in income. "This is definitely a change in the law, as it was held in the Federal Court of Appeal in Consumers' Gas, supra, that the capital cost of depreciable property need not be reduced by the amount of the payment for capital cost allowance purposes”.

The facts in the case at bar, are different from Woodward Stores Limited. However, the reasoning with respect to the legislative intent of paragraph 12(1)(x) is applicable. Paragraph 12(1)(x) represents a statutory departure from existing law to include in the taxpayer's income money as a reimbursement. The same choice is available to the taxpayer, and the same transitional provision applies. The inclusion of the word reimbursement was designed to remedy the situation as found in Consumers' Gas. I conclude that the word reimbursement is a change in the law. However, the question is whether the statutory change was intended to capture damage awards, as it has developed through statutory change and case law.

The word reimbursement in the ordinary sense, as defined in the Shorter Oxford English Dictionary, is as follows:

Reimburse—to repay or make up to (a person) the sum expended: to repay, recompense (a person).

Reimbursement—the act of reimbursing, repayment.

Black's Law Dictionary also defines the word reimburse as: "to pay back, to make restoration, to repay that expended; to indemnify or make whole”.

Examples of the word reimbursement in different legal relationships were cited. First, there is a compulsory payment. This is a situation where a person has been compelled by law to pay and pays money for which another is ultimately liable. The payer can make a claim for reimbursement from the latter individual. Second, there is the example of where a person makes repairs or improvements to property which he believes to be his own. He can claim a reimbursement against the owner of the property. Third, there is the situation where a person, such as a guarantor, discharges more than his proportionate part of a debt. He can take action for reimbursement against the coguarantors. Finally, in the law of agency, a principal is liable to reimburse his agent for reasonable expenses incurred in an emergency, even if the agent exceeded his actual authority.

Based on the above analysis, I accept these examples as an accurate reflection of what the word means and the meaning that Parliament intended to capture by enacting paragraph 12(1)(x). The budget debates referred to similar situations, such as the landlord/tenant leasehold improvements. Moreover, as previously discussed, the amendment was designed to capture a situation such as in Consumers’ Gas, supra, wherein the taxpayer made an improvement to its property at the request of ratepayers and was later reimbursed for its expenditure. It was also the case in Consumers' Gas that the taxpayer frequently relocated pipelines and it always sought reimbursement from the requesting party up to the maximum amount permitted by law. In this case, the damage award was a one time payment and it was not made at the behest of the party paying the sum. Rather, it was paid in order to release the defendant IPSCO from liability for its breach of contract.

In all of the examples of the word reimbursement, there exists a flow of benefits between the respective parties. The person who benefits is under a legal obligation to pay back the amount expended. In this case, the plaintiff expended a sum of money to replace a defective pipeline emanating from a breach of contract. There is no other reason why the plaintiff would have expended the money. Nor was there any legal obligation on the part of IPSCO to pay back the money expended. The legal obligation that IPSCO incurred arose when the action was settled out of court. I have found as a fact that the court settlement represented a damage award. There is no other reason why the defendant IPSCO would have given the plaintiff $20,250,000.

The strongest factor supporting the defendant's position is that the failed pipeline was replaced and the replacement factor weighed heavily in the plaintiff's lawsuit against IPSCO. The plaintiff paid over $6 million for the original pipeline, while it received more than $20 million in the settlement. Moreover, the plaintiff first built the new pipeline and then sought recovery for damages from IPSCO. These factors, in the defendant's submission constitute a reimbursement for the moneys expended. However, this course of action does not nullify the reason for which the plaintiff sought damages, which was for the negligence and breach of contract of IPSCO.

It is my conclusion that reimbursement does not include damage awards. It is not based on the evidence to say that the plaintiff received a reimbursement as defined in paragraph 12(1)(x). The ordinary and legal meaning of the word does not contemplate an award of damages. In this case, the plaintiff did not rebuild its pipeline at the request of IPSCO, to be reimbursed later by the cost as occurred in the Consumers^ Gas case. Nor is it analogous to a landlord/ tenant situation whereby the tenant will make a leasehold improvement which benefits him during his tenancy and which amounts to an leasehold improvement, thereby benefitting the landlord. In short, there was no flow of benefits between the parties.

I find that it was not Parliament's intention to include the jurisprudence on damage awards which I have outlined within paragraph 12(1)(x). I do not accept the defendant's submission that paragraph 12(1)(x) is just another provision to include capital amounts in damage awards. The paragraph represented a legislative change and it was intended to remedy a particular gap in the law of taxation, which is exemplified in the Consumers' Gas case. There is no evidence that Parliament intended the paragraph to include the jurisprudence on damage awards under the word reimbursement. It is not necessary for me to decide whether the plaintiff's damage award shall be taxable or whether the plaintiff's undepreciated capital cost should be reduced by the amount under other provisions of the Act. The parties have narrowed the issue to reimbursement under paragraph 12(1)(x)(iv).

For example, in changing the definition of "retiring allowance” Parliament intended to remedy the income taxation vacuum as a result of the Atkins case, supra. The case law which I have reviewed dealt with specific sections of the Act. Paragraph 12(1)(x) is a change in the existing law, for the reasons I have outlined. Parliament has not evidenced any intent that the word includes reimbursement commercial damage awards. Moreover, the ordinary and legal meaning of the word reimbursement contemplates different legal relationships than that of parties in a law suit. Therefore, I cannot accept the defendant's submission that the word reimbursement under paragraph 12(1)(x) includes damage awards.

However, I do not accept the plaintiff's analogy between its loss and a personal injury award. The pain and debilitation that a person suffers as a result of a personal injury cannot be compared to a failed pipeline. Moreover, a damage award cannot compensate the loss of a limb, for example. It can only go part way to alleviating the harm that a tortfeasor commits on a victim. In pure monetary terms, the plaintiff's witness Mr. Kavanagh testified that the plaintiff is a cost of service company and that it did not suffer any loss of profits in the wake of the failed pipeline. Westcoast was able to replace the pipeline, make it operational and recover damages for the failure of the first pipeline. The two types of actions are completely different. If commercial damage awards are not reimbursement, then a fortiori a personal injury award does not constitute a reimbursement.

I can appreciate the defendant's position that this situation creates a taxation inequity. The plaintiff in this case added the costs of rebuilding the failed pipeline to its undepreciated capital cost, sought recovery from IPSCO for breach of contract, recovered moneys for the reconstruction, and then did not reduce its undepreciated capital cost by the amount recovered, as well as not including its damage award in its corporate income. However, I am not prepared to expand the legal meaning of the word reimbursement to capture this inequity. It is not the function of this Court to expand the meaning of a word to make the tax system fair. Parliament could have been more specific if the intention was to include commercial damage awards in paragraph 12(1)(x). If there is any ambiguity in legislative intent to tax, the taxpayer is entitled to the benefit of the doubt.

Conclusion

The appeal is allowed and the reassessment for the income tax year 1985 is vacated. The plaintiff is entitled to the costs of this action.

Appeal allowed.