Bowman J.T.C.C.:—This appeal, from an assessment for the appellant's 1989 taxation year, puts in issue the question whether any portion of the amount received by the appellant from TransCanada PipeLines Ltd. ("TCP"), ostensibly as the sale price of a farm owned by him and his wife, represents compensation for loss of income. It was agreed that the appeal of his wife, Janice Spies, would abide the result of this appeal.
In 1984, the appellant and his wife purchased jointly a 320-acre farm near Dryden, Ontario. They carried on the business of raising and selling exotic livestock such as buffalo, fallow deer, barbary sheep, llamas, yaks, tigers and cougars. They conceived the idea of opening the farm to the public for an admission fee and earning additional income from displaying the animals and from operating a restaurant and gift shop. To this end between 1984 and 1988 they constructed pens and cages for displaying the animals, a restaurant, washrooms and a parking lot, as well as fencing to keep certain of the animals separated to prevent cross-breeding or to prevent some of the animals, such as tigers or cougars, from injuring or killing the others. They intended to open the "Northern Wildlife Safari" business in the spring of 1989.
TCP had an easement across the Spies’ farm which permitted it to run gas pipelines under the surface of the property. Under the terms of the easement it had the right to lay additional pipelines and in December 1988 it informed the Spies that it intended to lay an additional pipeline under the surface of their land and that it proposed to do the work necessary for this purpose in the spring and summer of 1989. The installation of the third pipeline would have disrupted the proposed safari park business and would have delayed the projected opening in the spring of 1989.
Since the Spies were entitled to damages resulting from the installation of the pipeline they retained Mr. Douglas Hannah, a chartered accountant of BDO Dunwoody Ward Mallette, to prepare a study of the cost to the Spies of the business interruption. A detailed report, paid for by TCP, was prepared and submitted by the Spies to TCP. It concluded, somewhat optimistically, that the business interruption would result in a loss of revenue for 1989 of $201,700, together with additional out of pocket costs of $10,000 for a total claim of $211,700.
Shortly thereafter, on March 28, 1989, Mr. Spies, together with his accountant Mr. Hannah, met with Mr. Walter Watt, the right-of-way supervisor of TCP and another official of TCP, Mr. Hamelin. The meeting lasted about two hours and alternatives to paying Mr. and Mrs. Spies compensation for business interruption were discussed. One alternative was that TCP simply buy the farm outright. The feasibility of this alternative was suggested by Mr. Hannah who pointed out that, with the number of visitors who would be coming to the park, heavier gauge steel on the new and existing pipelines would be required for safety reasons. That the regulations made under the National Energy Board Act would have required heavier steel is not disputed and Mr. Hamelin and Mr. Watt both recognized that it would be much more expensive to replace the existing pipelines than simply to buy the farm.
On March 31, 1989 Mr. Spies called Mr. Watt and, rightly or wrongly, had the impression that Mr. Watt had agreed that TCP would buy the farm for $1,000,000. Mr. Spies stated in his letter to Mr. Watt of April 12, 1989 that he had asked for an additional $200,000 "for compensation to assist in the relocation of the stock and the lost revenue". He stated in his evidence that Mr. Watt was not particularly encouraging about this latter request.
In any event, and notwithstanding Mr. Spies’ belief that he had a firm deal with Mr. Watt, TCP was not at that point prepared to buy the farm and on April 18, 1989 Mr. Watt wrote to Mr. Spies stating that he never offered to buy the farm and that TCP was not prepared to do so, but that it would continue to endeavour to negotiate appropriate compensation.
On April 20, 1989 Mr. Hamelin met with Mr. Spies. In his memo to Mr. Watt he reported that he had offered Mr. Spies $100,000 for loss of revenue for 1989 and $200,000 for relocation of animal pens for the duration of the construction and then reinstallation to the original location. He stated that Mr. Spies rejected the offer and asked for $550,000 for fence removal and replacement, $12,000 for one summer's feed of hay and $200,000 for three years’ loss of revenue. Mr. Spies stated that this memo was not an accurate reflection of the discussion.
On April 27, 1989 Mr. McClenaghan, Manager, Thunder Bay Region, TCP, met Mr. Spies at the Journey's End Motel in Kenora and gave him a draft letter stating that TCP was prepared to enter into an agreement “in the form attached" (no form was in fact attached), containing the following additional stipulation, inter alia:
1 The purchase price of $900,000 is to include payment for lands referenced above, for buildings or structures shown circled in red on the attached plan, and for losses of every kind and character whatsoever associated with the real estate transaction, with potential business interruption, or with pipeline construction. You will undertake to remove all other buildings, structures or property from the pipeline right-of-way by the closing date of 1989-06-30, or such other date as may be mutually agreed prior to closing.
On April 28, 1989 Mr. Spies, acting on advice from his accountant, signed the letter back having amended the price to $912,500. In due course he received a draft land acquisition agreement which he rejected as it would have permitted TCP to walk away from the deal. An amended agreement was signed on May 24, 1989. The agreement contained the following recitals and covenants:
WHEREAS the owner is the registered owner of an estate in fee simple in the lands hereinafter referred to, which lands are required by the company for certain works to be used in connection with its pipeline;
AND WHEREAS the company will be constructing certain facilities to be used in connection with or incidental to its pipeline and for this purpose requires title in fee simple, free and clear of all liens, claims, charges or encumbrances to the lands of the owner described in, or as shown on the sketch attached as, Appendix "A" hereto and forming a part hereof (the "lands");
AND WHEREAS the owner has agreed to sell the lands to the company and the company has agreed to purchase the lands from the owner upon the terms and conditions hereinafter set forth;
NOW THEREFORE this agreement witnesseth that in consideration of these presents, and in consideration of the payment or payments made or to be made to the owner by the company in accordance with the provisions of this agreement, the owner agrees to sell to the company and the company agrees to purchase from the owner the lands upon the terms and subject to the conditions hereinafter set forth in respect of which the owner and the company respectively covenant and agree as follows:
1. The owner acknowledges receipt of the sum of $200,000 from the company as a non-refundable deposit paid on account of the purchase price for the lands which is payable pursuant to paragraph 3 of this agreement.
2. This agreement shall be completed on the June 29, 1989 unless otherwise agreed to in writing by the parties hereto.
3. On closing the company shall pay to the owner or such other person as may be entitled thereto and as directed by the owner the lump sum in cash or by cheque of lawful money of Canada of $912,500 per the whole of the lands (the sufficiency of which is hereby acknowledged by the owner), less the amount of the deposit referred to in paragraph 1 of this agreement.
12. Subject to the provisions of paragraph 10, the company shall compensate the owner for all damages suffered by the owner as a result of the operations of the company.....
The transaction closed and a deed was registered in which the affidavit under the Land Transfer Tax Act stated that the total value of the land, building, fixtures and goodwill was $912,500. The reporting letter from TCP’s lawyers stated that the purchase price for the property, in accordance with the agreement, was $912,500, and this price was reflected in the statement of adjustments.
In addition to the $912,500 which the Spies received for the farm, Mr. Spies received $5,660 in respect of the loss of his hay crop and the loss of a portion of his pasture. He signed a release in which he stated that in consideration of such payment he released TCP and the pipeline construction company. . ."from all claims, demands, actions, and causes of action. . .in respect of any damage to persons or property arising out of any matter or thing done or omitted by TransCanada Pipelines Ltd. . .or. . . contractors. . . ."
The respondent contends that of the $912,500, $202,500 was paid to Mr. and Mrs. Spies as compensation for lost revenue. In support of this contention it relies upon a number of matters, as follows:
A. The fact that, before it was decided that rather than buy the farm TCP would pay compensation to Mr. Spies for the interruption of his business, Mr. Spies in these negotiations submitted the Dunwoody report claiming lost profits for one year of $201,700.
B. Mr. Hamelin in his memorandum of April 24, 1989 to Mr. Watt stated that Mr. Spies "demands" included $200,000 for three years' loss of revenue.
C. The fact that in the letter agreement quoted above in reference was made to “potential business interruption".
D. Mr. Watt, in a memorandum to Mr. Lamont of TCP instructing him to draft a land acquisition agreement, stated that "Our appraisal of the property to be acquired is $710,000, the remainder of our $912,500 offer being for damages".
As to this memorandum, Mr. Watt agreed that when the memo was drafted he was no longer involved in the negotiations and his statement was based upon his understanding of what other unspecified officials of TCP may have told him. Mr. Spies stated that he would not have sold the property for $710,000. In fact a real estate agent did provide TCP on March 13, 1989 with a two page "letter of opinion" (not an appraisal) that the replacement cost value of the property was $710,000. The letter is not evidence of the value of the property. It is evidence that TCP received such a letter and evidently used it as the basis of a statement of value in a notice filed under section 87 of the National Energy Board Act. Mr. Spies was not involved in the preparation of any of these documents. They do not bind him and I do not regard them as having any evidentiary value that is relevant to the issue to be decided here.
This case is, I think, a clear one. The negotiations between TCP and Mr. Spies relating to the type of compensation he might receive if they constructed the pipeline the lands did not come to fruition. What that compensation might have been, or what its components might have been—loss of potential profits, cost of relocating, new fencing and cages and other heads of damage—is purely conjectural. No meeting of the minds was ever reached and a fundamentally different agreement was struck. The farm, admittedly a capital asset, was to be sold for $912,500. It may well be—indeed I should be surprised if it were not so—that Mr. Spies, in agreeing to a price of $912,500, had in mind the profits that he might otherwise have made had he not sold the farm. In determining the selling price of any income producing asset the revenue that the vendor will lose by being deprived of the asset is a factor that would normally be taken into account. Such considerations lie at the root of all business valuations and are subsumed in the capital amount negotiated as the price. The fact that TCP, for its own internal purposes to which Mr. Spies was not a party, chose to treat as a deduction from the capital amount paid the amount of an opinion of value that it received, is no justification for taxing the Spies on the difference. The parties made no allocation of the purchase price simply because there was none to be made. The entire receipt in the Spies’ hands was the consideration for the sale of a capital asset, their farm. Their proceeds of disposition of the farm were the sale price within the meaning of subparagraph 54(h)(i) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). While the Minister may not necessarily be bound by unreasonable allocations made by the parties there must be some evidentiary basis for his allocating a portion of the selling price to some other element. Here there is none. The substance of the transactions does not in any way differ from the legal reality that underlies it. There is a world of difference between being compensated for a loss of profits in an ongoing business (see London and Thames Haven Oil Wharves Ltd. v. Attwooll, [1967] 2 All E.R. 124 at page 134; The Queen v. Mohawk Oil Co. Ltd., [1992] 1 C.T.C. 195, 92 D.T.C. 6135) and being paid the consideration for the sale of a capital asset where the price may take into account the income producing potential of the property.
The appeal is allowed, with costs, and the assessment referred back to the Minister of National Revenue to reassess on the basis that the entire $912,500 received on the sale of the farm represents the purchase price of the farm, and no portion represents taxable income of the appellant as compensation for lost profits.
Appeal allowed.
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