Murray Barrett Ltd. v. MNR, 94 DTC 1886, [1994] 1 CTC 2880 (TCC)

Allan, D.J.T.C.C.:—Murray Barrett Ltd., referred to in these reasons as "the appellant”, has appealed the respondent's assessment under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the taxation year 1986. The issue is whether the sum of $23,589 admittedly received by the appellant as its share of the sum paid in settlement of a lawsuit was income or a capital receipt.

The facts are somewhat complex and I have summarized them as follows.

By agreement dated November 1, 1977 Marianne Burow agreed to sell certain lands and premises (herein referred to as "the property") situated at 91 Plains Road East in Burlington, Ontario to Dayenu Ltd. (herein referred to as "Dayenu") an Ontario company of which Herbert Grossman was a director and president.

Grossman and Aaron Milrad, his lawyer, arranged with a group of interested parties (herein referred to as "the group") consisting of Albert Reinstein, Murray Barrett, Sol Haar and Aaron Mi I rad himself as an investor and acting as trustee for several Ontario corporations, namely: Murray Barrett Ltd., which has taken this appeal and is hereafter referred to as "the appellant”, Dekinder Investments Ltd., Angular Holdings Ltd., and Surreal Holdings Inc. (which corporations are respectively referred to herein as "Dekindera", "Angular" and "Surreal"). The group agreed to enter into a joint venture by purchasing and developing the property and leasing part of a building to be constructed on the property, to a tenant found by Dayenu.

Albert Reinstein was the president of Dekinder, Murray Barrett was the president of the appellant, Sol Haar was the president of Angular, and Aaron Mi I rad was the sole shareholder of Surreal.

In or about the month of January 1978 the group entered into an agreement (herein referred to as "the contract") with Dayenu by which Dayenu agreed to assign its interest as purchaser of the property to Reinstein in trust, Barrett in trust, and Haar in trust for a stated consideration of $140,000 and entered into other covenants contained in the contract. The group in fact advanced funds which were applied on the purchase from Mrs. Burow and in financing the construction of the building to be leased to Ultramart Discount Foods (herein referred to as "Ultramart"), a partnership.

Terms of the obligations of the respective signatories to the contract were set out, including conditions for payment of the purchase price and advancement of moneys for the construction of the building, terms relating to the nature and cost of the building, intended mortgage guarantee insurance, the statement that Ultramart has taken possession, the terms of its lease and obligations, rights of renewal of its lease, and a document entitled “offer to lease" executed by Dayenu and the tenant were annexed to the contract and contained numerous provisions. These documents were far from being a model of draughtsmanship, and when the tenant became insolvent and the group learned that the tenant had made an assignment under the Bankruptcy Act, R.S.C. 1970, c. B-3, a lawsuit resulted.

The lawsuit was commenced in the Supreme Court of Ontario at Toronto by writ issued April 18, 1980 on behalf of Reinstein, Dekinder, Murray Barrett, the appellant, Sol Haar, and Angular as plaintiffs against Herbert Grossman and Dayenu as defendants, claiming rescission, return of moneys expended by the plaintiffs, alternatively damages for breach of contract, costs, prejudgment interest. The writ was served and third party proceedings resulted and subsequently Aaron Mi I rad was joined as a party defendant and damages claimed against him by the plaintiffs for professional negligence. Proceedings to amend and file new pleadings were taken and ultimately before trial a settlement was reached whereby Mi I rad paid $100,000 and the plaintiffs in the action agreed to assign to him their claims against the other defendants.

The settlement was approved by the Supreme Court of Ontario and judgment given in that Court in accordance with the settlement. The plaintiffs in the action agreed among themselves as to division of the moneys paid in settlement, and Murray Barrett was paid 27.5 per cent of the settlement amounting to a net sum of $23,589 which he paid over to the appellant. He testified on this appeal that that money belonged to the appellant.

At the outset of this appeal, heard at Toronto, a number of documents were filed as evidence by agreement between the appellant and the respondent:

A-1 Letter July 17, 1990 from Teplitsky, Colson, solicitors to David Sugar-

man, accountant.

A-2 Letter April 13, 1987 from Teplitsky, Colson, solicitors to David

Sugarman, accountant.

A-3 Package of copies of documents from the Ontario Supreme Court in

action No. 51876/80 in the Toronto registry, and from the registry of the Tax Court of Canada in this appeal, No. 90-3816, including:

Statement of claim in the action against Grossman and Dayenu;

Statement of defence in said action;

Notice of motion in said action to add Mi I rad as a party defendant and for leave to file and deliver a fresh statement of claim;

Affidavit of Martin Teplitsky in support of said motion;

Proposed fresh statement of claim in said action;

Order of Master Peppiatt made January 8, 1982 in said action, adding Mi I rad as a defendant and granting leave to file the fresh statement of claim in said action;

Copy of the contract between the parties to said action, with copy of offer to lease attached;

Letter April 13, 1987 from Teplitsky Colson, lawyers, of advice to Mr. Sugarman, accountant as to the nature of the payment of $23,589 received by Barrett;

Letter July 17, 1990 from Teplitsky Colson to Sugarman giving more particulars of the nature of said payment;

Letter December 21, 1990 from Hattin Moses Sugarman to the registrar of the Tax Court of Canada enclosing summary of facts and reasons for objection to the reassessment; and

Copy of appellant's tax return for 1986 with notice of reassessment attached.

Murray Barrett Limited, the appellant, duly filed its return of income for the taxation year 1986 but did not declare the said sum of $23,589 or any part thereof.

By reassessment, notice of which was dated October 3, 1990, the respondent Minister of National Revenue reassessed appellant for its 1986 taxation year on the basis that said sum of $23,589 was income received in that year and imposed a penalty under subsection 163(2) of the Income Tax Act.

The appellant has appealed from the said reassessment and has contended that the sum of $23,589 was a capital receipt in the nature of damages and not income, and that the reassessment should be set aside together with the penalty imposed.

Murray Barrett testified that the sum of $23,589 received by him pursuant to the settlement was the property of the appellant. He further testified he is a travelling salesman by occupation and that he was not privy to all the developments as they occurred. He stated that he relied upon his co-investors, and further stated they had been advised the settlement was in the nature of damages, not income. He testified as to the facts leading up to the lawsuit and the settlement reached, the attempts to find tenants and the ultimate sale of the property at a loss.

The issue is as mentioned, whether the moneys received by the appellant in settlement of the action were capital or income within the meaning of the Income Tax Act applicable in that year. Counsel for the respondent Minister of National Revenue takes the position that the payment received by this appellant replaces lost income and is therefore taxable.

Mr. Barrett as agent for the appellant contended that the sum paid in settlement of the lawsuit was a return of capital, that he and the other investors wanted their capital back which had been invested in the transaction.

Counsel for the respondent cited authorities: Donald Hart Ltd. v. M.N.R., [1959] C.T.C. 268, 59 D.T.C. 1134 (Ex. Ct.), per Cameron, J.; The Queen v. Manley, [1985] 1 C.T.C. 186, 85 D.T.C. 5150 (F.C.A.); Société d’Ingénierie Cartier Ltée v. The Queen, [1986] 1 C.T.C. 166, 86 D.T.C. 6025 (F.C.T.D.), per Dubé, J.; Amaco Plumbing & Heating Co. v. M.N.R., [1990] 1 C.T.C. 2482, 90 D.T.C. 1381 (T.C.C.), per Brule, J.

I have read those judgments and other authorities, including the following:

— CCH Index and Finding Lists, page 4065

— Materials on Canadian Income Tax, 7th ed. 1987 at page 490

— Stikeman on Income Tax, page 3036

— Raja's Commercial College v. Gian Singh & Co., [1977] A.C. 312, [1976] 2 All E.R. 801 (P.C.)

— Goldman v. M.N.R., [1953] C.T.C. 95, 53 D.T.C. 1096

— London and Thames Haven Oil Wharves Ltd. v. Attwooll, [1967] 2 All E.R. 124, [1967] Ch. 772 (C.A.)

— Bayker Construction Ltd. v. M.N.R., [1974] C.T.C. 2318, 74 D.T.C. 1236

— Monart Corp. v. M.N.R., [1967] C.T.C. 263, 67 D.T.C. 5181 (Ex. Ct.)

— Parsons-Steiner Ltd. v. M.N.R., [1962] C.T.C. 231, 62 D.T.C. 1148 (Ex. Ct.)

— Blauer v. M.N.R., [1968] Tax A.B.C. 226, 68 D.T.C. 271; rev'd [1971] C.T.C. 154, 71 D.T.C. 5113 (Ex. Ct.); aff'd [1975] C.T.C. 112, 75 D.T.C. 5076 (S.C.C.)

— Courrier M.H. Inc. v. The Queen, [1976] C.T.C. 567, 76 D.T.C. 6331 (F.C.T.D.)

— Canadian National Railway v. M.N.R., [1988] 2 C.T.C. 111, 88 D.T.C. 6340 (F.C.T.D.)

— Jesse Robinson & Sons v. C.I.R. (1929), 12 T.C. 1241 (U.K.)

— Commissioners of Taxation v. Meeks (1915), 19 C.L.R. 568, 32 N.S.W.W.N. 50 (Aus.)

— C.I.R. v. Northfleet Coal and Ballast Co. (1927), 12 T.C. 1102 (U.K.)

— The Burmah S.S. Co. v. C.I.R., [1931] S.C. 156, 16 T.C. 67 (Scot.)

— Kelsall Parsons and Co. v. C.I.R. (1938), 21 T.C. 608 (U.K.)

— Van den Berghs Ltd. v. Clark, [1935] A.C. 431, 19 T.C. 390 (H.L.)

— California Oil Products v. Fed. Commissioners of Taxation, [1934] C.L.R. 28

— Bar Crombie & Co. v. C.I.R., [1945] S.C. 271, 26 T.C. 406 (Scot. Ct. Sess.)

— Cooke v. M.N.R. (1952), 5 Tax A.B.C. 340, 52 D.T.C. 32

— C.I.R. v. Fleming & Co. (Machinery) Ltd. (1951), 33 T.C. 57, [1952] S.L.T. 147 (Scot.)

— H.A. Roberts Ltd. v. M.N.R., [1969] S.C.R. 719, [1969] C.T.C. 369, 69 D.T.C. 5249

— Hafeziv. M.N.R. (1961), 27 Tax A.B.C. 18, 61 D.T.C. 357

— Fraser v. M.N.R., [1973] C.T.C. 164, 73 D.T.C. 164 (T.R.B.)

— Mohawk Oil Co. v. The Queen, [1990] 2 C.T.C. 173, 90 D.T.C. 6434 (F.C.T.D.) — M.N.R. v. Import Motors Ltd., [1973] C.T.C. 719, 73 D.T.C. 5530 (F.C.T.D.); aff'd [1970] Tax A.B.C. 517, 70 D.T.C. 1345

— MacDonald and Cronkwright (Vol. 2) at page 16901 on damages.

I have concluded that the appellant's receipt of its share of the settlement in the action was capital in nature and not taxable as income. It received the payment because the defendant Milrad failed to carry out his professional duty to the appellant thus aborting what could have been a sound capital investment.

I allow the appeal.

Appeal allowed.