Frank Beban Logging Ltd. v. The Queen, docket 95-3708-IT-G

Date: 19980120

Docket: 95-3708-IT-G

BETWEEN:

FRANK BEBAN LOGGING LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rowe, D.J.T.C.C.

[1] Prior to hearing any evidence, Counsel for the appellant advised that paragraph 5(b) of the Notice of Appeal was no longer in issue and the sole matter to be decided was whether or not the sum of $800,000 received by the appellant from the government of the Province of British Columbia, in 1991, was properly included in taxable income by the Minister of National Revenue (the "Minister") when issuing an assessment of income tax for that taxation year. After including the sum of $800,000 in income, the Minister then allowed an amount to be deducted therefrom on the basis certain expenses were incurred for the purpose of earning said income. Therefore, if the result of this appeal is that the amount of $800,000 should not have been included in income of the appellant, it will follow that the amount of any expenses pertaining to the receipt of said sum is not relevant for purposes of assessment of tax.

[2] Filed as Exhibit A-1, was the transcript of the Examination for Discovery of Brian Wilson, an officer of Revenue Canada produced by the respondent for purposes of the examination. While examining Brian Wilson, Counsel for the appellant referred to a document titled, UNFILED AGREED STATEMENT OF FACTS, and this document was filed, in the within appeal, as Exhibit A-2. Counsel read in the following questions and answers from the examination of Brian Wilson:

1-6, inclusive, 10, 11, 13-25, inclusive, 27-34, inclusive, 36-42, inclusive, 40, 41, 42, 45, 57, 60, 63, 64, 67, 68, 71, 72, 74, 75, 76, 77, 79, 80.

[3] William Verchere testified that, in 1991, he was a shareholder and director of the appellant, Frank Beban Logging Ltd. (FBL) and also served as Secretary-Treasurer and General Manager. The shareholding in the corporation had been divided between himself and Frank Beban, at 30% and 70%, respectively. After the death of Frank Beban on July 27, 1987, Delores Beban, Beban's wife, held those shares. The business of the appellant was logging contractors and logging-road contractors. He was referred to a document - at Tab A - Exhibit A-2 - which he identified as the last contract the appellant had with Western Forest Products Limited (WFPL). He pointed out that, by virtue of paragraph 14(b), WFPL could terminate the contract under certain conditions provided the appellant was given 30 days notice. Verchere explained that, in 1974, there had been a logging moratorium imposed on harvesting timber on Burnaby Island and, as a result, the appellant moved its operations to Lyell Island. The appellant was contracted to build roads during 1976 and, in 1977, was able to commence logging operations. The contract, dated January 1, 1986, was entered into by the appellant and WFPL at a time when it looked as though logging on the Queen Charlotte Islands would end in the foreseeable future. The 30-day cancellation provision had been in all of the contracts signed over the years with WFPL. Verchere referred to a document entitled Memorandum of Understanding, between The Right Honourable Brian Mulroney, Prime Minister of Canada and The Honourable William Vander Zalm, Premier of British Columbia found at Tab B - Exhibit A-2, and, having reference to paragraph 4.1, believed the appellant would be included in that provision as being an entity having third party forest interests. The last day of logging on Lyell Island was July 1, 1987 at which time the appellant had 60 employees and/or subcontractors on its payroll or payment schedule and the business of FBL on Lyell Island constituted 40% of its overall revenue. At Tab C - Exhibit A-2, Verchere identified an agreement dated September 25, 1987, between Her Majesty The Queen In Right of the Province of British Columbia and the appellant. The agreement called for the government of British Columbia to pay out-of-pocket expenses to FBL incurred as a result of the government shutting down all logging operations on Lyell Island thereby causing FBL to move its own equipment and that of various subcontractors back to Vancouver Island or to the mainland of British Columbia. Verchere testified he had met with The Honourable Dave Parker, the Minister of Forests, and had explained the difficulties and costs associated with hiring barges to transport 30 large pieces of logging and roadbuilding equipment together with 20 pick-up trucks a considerable distance across open seas. He stated he submitted invoices, receipts and other supporting documents to an auditor acting on behalf of the Minister of Forests. The appellant received compensation from the Province of British Columbia as set forth in the letter dated 88-02-05 at Tab D - Exhibit A-2. The appellant also acted as trustee for employees and subcontractors and administered payments totalling $482,810.55 including, if required, making the necessary deductions for Canada Pension Plan, income tax and unemployment insurance premiums and remitting same to Revenue Canada. Verchere testified that after learning of the existence of a memorandum between the government of British Columbia and the federal government on the subject of creating a park on South Moresby, he wrote a letter to the Ministry of Forests of British Columbia, dated July 28, 1988 (Tab E - Exhibit A-2). He received a reply dated August 29, 1988 (also at Tab E - Exhibit A-2) enclosing therein extracts of certain provisions of the agreement signed by the governments of Canada and British Columbia on July 12, 1988. After perusing the material he realized the appellant was excluded from any compensation package as structured by the signatories. He sought legal advice from the Vancouver law firm Davis & Company and received an opinion that FBL had no legal claim against either government but could pursue the matter on the basis it had a moral claim for compensation. As a result of their counsel, John Hunter, having received a letter dated September 9, 1988 from the South Moresby Forestry Compensation Committee (Compensation Committee), it was clear it had not been an oversight that FBL was excluded from the compensation process. Verchere stated, in light of the opinion of counsel, he knew he had to pursue compensation by other means and retained the services of Ted Schellenberg, a former Member of Parliament, to lobby on behalf of the appellant. Another individual with connections to the party forming the provincial government had also been retained to lobby on behalf of FBL. As well, the firm of Chartered Accountants, Bestwick & Partners was instructed to calculate the loss to the appellant as a result of the decision of the governments of British Columbia and Canada to prevent any further logging in the area of FBL operations. The loss, as set out in the resultant report, was in excess of $11 million. Verchere stated, by mid-1990, it looked as though FBL would never receive any further compensation other than the out-of-pocket expenses which had been paid earlier. In October, 1990, for the first time in his life, he joined the Social Credit League - the political party which had formed government in the province for the past 14 years - and purchased a Life Membership which entitled him to attend a breakfast at which various Cabinet Ministers would be in attendance. The breakfast session was part of the annual convention of the party. At the breakfast, he met certain persons who were well connected to the ruling party and he also knew an election had to be held by the autumn of 1991 as the 5-year mandate was running out. As a result of his discussions at the Convention, he encountered some sympathetic responses but had nothing concrete upon which to rely. On October 17, 1990 he wrote a four-page letter - Tab H - Exhibit A-2 - to The Honourable Claude Richmond, Minister of Forests for the Province of British Columbia. On October 26, 1990 he attended, together with his accountant and Ted Schellenberg, the lobbyist, a meeting with the co-Chair of the South Moresby Forestry Compensation Committee. At the meeting, Verchere stated he was handed a letter, - Exhibit A-3 - dated that day, indicating FBL would be paid certain additional compensation by way of further out-of-pocket expenses provided they were approved by audit. Verchere described the tone of the meeting as unpleasant and acrimonious. For his part, he stated he attempted to explain that FBL had lost the "best part of its business, without compensation". When he and his advisers left the meeting, he was convinced no further payment - other than vouchered additional out-of-pocket expenses - would be paid to FBL by the government of British Columbia. He considered "going public" by contacting the press and electronic media to explain the unfair treatment of FBL. Instead, he wrote a letter dated November 20, 1990 to The Honourable Claude Richmond - Tab I - Exhibit A-2, stating in paragraph 2:

"As stated previously, there is no desire on our part to embarrass the Government or engage in protracted litigation procedures. We are therefore anxious to see the matter resolved quickly in a reasonable manner, with fair compensation, allowing us to continue our operations without continued financial burdens and the uncertainty of delayed compensation payment."

[4] He explained the government was at its lowest point in the opinion polls, the Premier was under attack for certain financial dealings concerning a family-owned business and it appeared as though the opposition, the New Democratic Party, would form the next government following the inevitable fall election. Verchere stated the last time that party formed government it had caused FBL to close operations on Burnaby Island and move to Lyell Island and it was regarded by him as being anti-logging. The lobbyist hired by the appellant to deal with the provincial government had advised him the current administration was in disarray. This information was part of the reason he referred to litigation in his letter to the Minister of Forests even though no such process had been commenced. In that letter he requested FBL be paid compensation in the sum of $1,750,000. He stated he does not know why he chose that particular amount but at that point FBL had not yet received the additional out-of-pocket expenses pursuant to the procedure outlined in the letter of October 26, 1990. In any event, any such additional expenses, as vouchered and proven by supporting documents, would be dealt with exclusively by the Compensation Committee. Certainly, he did not see the sum of $1.75 million as representing payment to FBL for lost income. At this juncture, he believed Mr. Richmond did not want any more bad press that could result from the appellant going public with its story of bad treatment at the hands of the provincial government. By January 31, 1991 - the date of the letter from the Minister of Forests - (Tab K - Exhibit A-2) FBL had received $240,276 for additional out-of-pocket expenses and was pleasantly surprised to read the Cabinet was considering additional payment. He also spoke with a public servant in the Ministry of Crown Land which led him to believe additional funds would be forthcoming. Prior to receipt of the letter of April 19, 1991 from The Honourable Claude Richmond - Tab L - Exhibit A-2 - he had received a telephone call from Mr. Richmond offering the sum of $800,000 as compensation to FBL. Verchere stated he quickly called Delores Beban - the 70% shareholder - and also spoke with Gordon Hubley, C.A. the company's accountant. About 15 minutes after having received the offer, he telephoned Mr. Richmond to advise he was accepting the offer on behalf of FBL and would be prepared to sign a release foregoing any legal action against the governments of British Columbia and Canada. Verchere stated this was of no concern to him as he was well aware FBL had no legal right to compensation in any event and he was satisfied that WFPL - the general logging contractor with whom FBL had a long-standing relationship - would be willing to provide any other releases or assurances, as required, to the Ministry of Forests. As far as Verchere was concerned, the sum of $800,000 had no reference, at all, to anything.

[5] Prior to commencing cross-examination of William Verchere, Counsel for the respondent filed, as Exhibit R-1, a Book of Documents and, as Exhibit R-2, a Supplemental Book of Documents. Verchere stated that Western Forest Products Limited (WFPL) did not give notice to Frank Beban Logging Limited (FBL) to terminate the contract between the two corporations. Instead, WFPL did not apply for any new cutting permits and the former one had expired in May, 1987. A cutting permit relates to a specific area of forest known as a Tree Farm License or TFL. Verchere stated that FBL ceased to work under any further contract with WFPL solely for the reason no further cutting permits were issued for that area by the Ministry of Forests of the Province of British Columbia. FBL had been told by The Honourable Dave Parker, Minister of Forests, that no further cutting permits would be issued. Verchere stated he considered whether FBL had any legal action against WFPL but decided the cessation of logging in the South Moresby area by reason of a creation of a park pursuant to a joint project undertaken by the governments of Canada and British Columbia was completely beyond the control of WFPL. Further, it would have been foolish to alienate WFPL, a major player in the forest industry in British Columbia. Verchere was directed to his letter of October 17, 1990 - found at Tab 11 of Exhibit R-1 - written to The Honourable Claude Richmond, Minister of Forests, in which he referred, at paragraph 13(a), to the problem associated with suing a major forest company. Verchere stated Mr. Hunter, their counsel at Davis & Company, had initially considered there might be some right accruing to FBL on the basis of the two levels of government having undertaken an expropriation but after further consideration concluded there was no legal remedy to be pursued and, at best, only a "moral" claim remained. The decision was taken by FBL to forego any such legal action because it would consume money and could not lead to any satisfactory result. At all times, FBL merely wanted to be included within the framework of the compensation package offered to others by the federal government and the government of British Columbia. Initially, FBL management had believed the corporation would be covered by the compensation process and, instead of attempting to join with WFPL in the claim process, elected to proceed independently. Then, after October 26, 1990 when it was clear FBL had no right to pursue any compensation claim through the Compensation Committee, it attempted to link a claim to the one WFPL had commenced earlier but was told, by WFPL, it was now too late. In January, 1989 FBL hired Ted Schellenberg, former Member of Parliament for Nanaimo, to assist in the recovery process and paid Schellenberg the sum of $2,000 per month and also agreed to pay a certain percentage based on actual recovery, if any, and this bonus was later paid. Schellenberg, a former MP for the party in power in Ottawa, lobbied both levels of government on behalf of FBL and was paid approximately $64,000 and expenses for his efforts. Verchere stated he maintained close contact with Schellenberg, as required, depending on the progress of events, or lack thereof, from time to time. At the outset of the compensation process, there was some delay in establishing the Compensation Committee and retaining appraisers. At Tab 28 - Exhibit R-1, Verchere identified a 51-page report prepared for FBL by Bestwick & Partners, Chartered Accountants, in which the value of the interest of FBL in the logging business through the contracts held with WFPL was estimated to be nearly $12 million. On May 11, 1987, at a meeting with various officials of the Forestry Service, the Deputy Minister, Minister of Forests and the Premier of British Columbia, Verchere stated he was asked to provide a "ballpark" estimate of the loss to FBL if logging ceased on Lyell Island and he replied, "about eleven million dollars." In a letter dated August 18, 1987 to the Minister of Forests (Tab 24 - Exhibit R-1), Verchere, at paragraph 4, requested the appointment of a mediator or negotiator to address compensation to FBL for "disruption to the rest of our business as well as compensation for the loss of profits at Lyell Island". By agreement dated September 25, 1987 - Tab 23 -Exhibit R-1 - the government of British Columbia agreed to pay certain out-of-pocket expenses to FBL and to employees and subcontractors of FBL who had been affected by the decision to prohibit further logging on Lyell Island. At paragraph 17 of the agreement, Verchere agreed the clause permitted FBL to pursue further claims for compensation pursuant to the process established by the Memorandum of Understanding between Canada and British Columbia dated July 11, 1987. Employees and/or subcontractors of FBL, in return for receiving payment of certain funds, signed a release of any claim or right of action against FBL, WFPL, Canada and British Columbia. Verchere was referred - Tab 19 - Exhibit R-1 - to the letter of FBL counsel, John Hunter, dated July 29, 1988 to The Honourable Tom McMillan, Minister of Environment for Canada and to The Honourable Terry Hubert, Minister of Parks for British Columbia with responsibility for forests, in which Hunter referred to the obvious oversight in drafting terms of the compensation process so as to exclude FBL. Verchere was directed to a passage in the Hansard of June 16, 1987 - Tab 4 - Exhibit R-2- in which The Honourable Tom McMillan (Minister of the Environment) during Commons Debate stated, "We have offered to compensate in an unprecedented way the logging contractor, Frank Beban". Verchere stated no offer of compensation was ever received by FBL from the federal government. Notwithstanding, Verchere reiterated he was surprised, in 1988, to discover FBL was not included within the terms of the compensation package, as defined by the terms of the process. Verchere was referred to a letter - at Tab 13 - Exhibit R-1, dated January 26, 1989 by The Honourable Lucien Bouchard, Minister of the Environment for Canada to The Honourable Dave Parker, Minister of Forests for British Columbia in which, at page 2, there was specific reference to FBL as being one of the companies which might deserve some consideration despite not being covered by the Forest Act which governed payment of compensation in accordance with the terms of reference utilized by the South Moresby Forestry Compensation Committee. Then, by letter dated October 26, 1990 - Tab 10 - Exhibit R-2 - the Compensation Committee rejected all further claims by FBL for any compensation other than out-of-pocket expenses. This led to the exchange of letters - dated November 20, 1990 (Tab 9 - Exhibit R-1) and January 31, 1991 (Tab 4 - Exhibit R-2) - between Verchere and The Honourable Claude Richmond, Minister of Forests for British Columbia. At Tab 5 - Exhibit R-1, Verchere was referred to a letter dated January 21, 1991 written by Ted Schellenberg - the FBL lobbyist - to The Honourable Robert de Cotret, Minister of Environment and Parks for Canada, in which Schellenberg mentioned the British Columbia Cabinet, after long delay, had "agreed to compensate Beban Logging for their dislocation and loss of income as a result of the creation of a national park on South Moresby". The letter went on to state the amount decided on was $1.8 million. Verchere was then referred to Tab K - Exhibit A-2, - the January 31, 1991 letter to him from The Honourable Claude Richmond - in which there is a notation in handwriting at the bottom as follows:

"Allan Fry phone (sic) me March 13/91 - out of pocket approved."

Below that, these words appear:

"$1.8 - two Minister."

[6] Verchere stated that at this juncture there was about $180,000 outstanding in out-of-pocket compensation to FBL for expenses as the sum of $240,276 had been received on December 24, 1990. He did not know of any connection between the notation on the letter - which he does not think is in his handwriting - nor does he have any other recollection to create any link between such an amount and the reference to $1.8 million in the letter from Schellenberg to The Honourable Robert de Cotret. He assumes he spoke with Allan Fry on March 13, 1991 but cannot recall details of any conversation. He does, however, recall receiving the telephone call from The Honourable Claude Richmond advising that the Minister had arranged for FBL to be paid the sum of $800,000 provided certain releases were forthcoming. This conversation was followed by the letter dated April 19, 1991 at Tab L - Exhibit A-2. Following receipt of the letter, Verchere contacted Davis & Company and requested certain releases be prepared. On April 23, 1991 Verchere wrote to Roger Manning at WFPL requesting the assurances and/or releases be provided as requested by Minister Richmond. Verchere identified releases (unsigned) and stated originals of same had been executed by him on behalf of FBL but he did not understand that the payment of out-of-pocket expenses had been ex gratia in nature. When Minister Richmond had telephoned him, there had been no mention of the sum of $1.75 million set out in Verchere's letter of November 20, 1990 and there were no discussions, at all, concerning the sum of $800,000 which was announced by the Minister as the figure he had been able to arrange to be paid to FBL provided certain releases were forthcoming. Verchere stated it had always been the position of FBL that the government of British Columbia owed it a moral obligation to deal fairly with the corporation in light of the cessation of logging on Lyell Island. Verchere was referred to a Statement of Profit and Loss for FBL covering the year ending December 31, 1991 in which the sum of $764,075 is shown as an extraordinary item of income. Verchere explained that once compensation - other than out-of-pocket expenses - had been rejected by the Compensation Committee only a political solution could be pursued. Prior to the rejection by the Compensation Committee, he had made contact with certain bureaucrats and elected members. In so doing, he kept pressing for compensation for loss of future business or "whatever you want to call it". He did not want to contact the media to tell the story of the financial harm done to FBL until the out-of-pocket expense payments had all been received. During the years since the death of Frank Beban, Verchere stated he ran the company as Delores Beban was not an active shareholder and when the offer of $800,000 was received from Minister Richmond, he telephoned Gordon Hubley, C.A. and asked him to contact Mrs. Beban immediately with the recommendation that FBL "take the money and run". In response to the question, "What do you consider the payment was received for?", Verchere replied, "the loss of our business".

[7] In re-examination, Verchere stated that by May 11, 1987 he knew logging by FBL would soon be finished and on July 1 it was banned on Lyell Island and South Moresby. He described receiving advice from John Hunter at Davis & Company to the effect he could "vent his anger by suing the government" but would not be successful, in law. Verchere stated he spoke to Allan Fry about the out-of-pocket expenses and perhaps, at a very early stage, on the subject of how FBL could be included in the compensation process established by the agreement between Canada and British Columbia. As for the comments in Hansard by the federal minister responsible, he surmised it may have related to the payment of the out-of-pocket expenses.

[8] Gordon Hubley testified he is a Chartered Accountant and a partner in Bestwick & Company. He prepared the report - dated July 11, 1987 - found at Tab 28 - Exhibit R-1- concerning the loss of value in forest interests to FBL as a consequence of the decision by the two levels of government to create a national park and prohibit logging on Lyell Island. Tree Farm License (TFL) #24 was held by WFPL. Later, he discovered FBL was not included in the compensation package and, in September, 1988, was present when John Hunter of Davis & Company advised Verchere there was not any strong legal basis - in fact, none existed at all - to pursue a claim against the two governments and there was only a moral claim which was expensive to pursue and it had no real basis in law. In October, 1990 he was present at a meeting with Verchere and the co-Chairs of the Compensation Committee. It was extremely clear during the course of the 30-minute meeting additional out-of-pocket expenses would be paid upon proper supporting documentation being provided by FBL but no other compensation would be forthcoming. As a long-time resident of Nanaimo, British Columbia he was aware of controversy surrounding the Premier and the low standing, in the public opinion polls, of the party in power which had to face the electorate in an impending election. Hubley stated he had no discussions with Verchere concerning the payment of $800,000 by the government of British Columbia and recalled receiving a telephone call from Verchere advising that Minister Richmond had made the offer and requesting Delores Beban be contacted to inform her of the situation. Hubley complied quickly and telephoned Verchere to state Mrs. Beban agreed the offer should be accepted. He could not see any relationship between the sum of $800,000 and any claim by FBL and he does not know why the amount was paid. When payment was received, it was placed into the category of income in the Statement of Profit and Loss for the year ending December 31, 1991 in accordance with Generally Accepted Accounting Principles to reflect increase or decrease in net wealth to the equity holders in the company. However, when the return of income was prepared, the sum of $764,000 - after deduction of lobbyist fees and other related expenses - was not included in calculation of taxable income.

[9] In cross-examination, Hubley stated he had attended the meeting with John Hunter at Davis & Company as a representative of Delores Beban, the majority shareholder in FBL, and as the accountant for the corporation. He stated Hunter had raised and then discounted a claim for compensation and cannot recall Hunter suggesting any other remedies to pursue. He recalled Hunter saying to Verchere, "We'll take this case because you have been a long-standing client" while indicating there was no real chance of success. On behalf of FBL, he met with auditors during the process of collecting out-of-pocket expenses. At some point - probably in late 1990 or early in 1991 - he heard the sum of $1.8 million mentioned but does not know the context or to what it pertained. In his opinion, the payment of the sum of $800,000 was made in order to forestall any activity at the political level by FBL or by presenting its case through the media during difficult days in the last few months of the mandate of the current government. However, he stated this was his own personal assessment and was not based on anything told to him by anyone else. In his view, the sum of $800,000 was a very small portion of the loss to FBL which he had calculated, in his report, as amounting to nearly $12 million. Payment of the sum of $800,000 would ensure that FBL would cease and desist in any efforts to be included in the framework of the compensation package. The quantum made no sense and could not relate to any actual effect on the future financial position of FBL created by the loss of the ability to log on Lyell Island through recurring contracts with WFPL. He agreed FBL had initially pursued compensation through the structure administered by the Compensation Committee, as established by the two levels of government, and when rejected, lobbied politically, sought legal advice, continued to seek a political solution and was then offered some money, in effect, to "go away". He considered the payment could have been made by the government of British Columbia to FBL as a "matter of conscience". He agrees there is no reference in any release signed by FBL to any actions required to be foregone which could lead to any "embarrassment" on the part of the government. When out-of-pocket expenses were received, they were placed into income and then disbursed to employees and subcontractors and expensed as such, as were the moving expenses of FBL. The auditors for the Compensation Committee did not want to be bothered by any administration costs to deal with the employees. He pointed out that any receipt of extraordinary income may be accorded different treatment for purposes of a financial statement to the shareholders or other interested parties than is eventually used during reporting of income and calculation of tax.

[10] Counsel for the appellant submitted there could have been no valid cause of action by the appellant against either level of government involved in the creation of the national park. Similarly, there was no cause of action by FBL against WFPL under their contract and there was no need for WFPL to give any 30-day notice of cancellation as it was obvious to everyone there would be no more logging in the South Moresby area after July 1, 1987. Since the cessation of logging was not within the control of WFPL, there would be no legal remedy available to FBL. Counsel submitted it was clear William Verchere, General Manager of FBL understood there was no right of action against either government, Canada or British Columbia, and any lawsuit was doomed to fail. For purposes of the assessment of income tax issued to the appellant, Counsel pointed out the Minister admitted there was no legal obligation for the government of British Columbia to have made the payment since there was no valid cause of action for expropriation or otherwise pursuant to any legislation or at common law. Any promises ever made by any member of either level of government were made without any consideration having been given by FBL and were purely political statements. Since the payment was clearly defined by the payor as a payment, ex gratia, and such definition was amply supported by all of the evidence, the assessment by the Minister was wrong in including the sum of $800,000 - less certain related expenses - into income of the appellant for the 1991 taxation year.

[11] Counsel for the respondent conceded the payment to FBL by the government of British Columbia was not made pursuant to any legal obligation. However, the Minister was correct to regard the payment as being income from a source because the release executed by the appellant was sufficiently broad in scope that FBL was giving up the right to continue to press its moral claim for compensation and further that it agreed to obtain the agreement of WFPL that no portion of the claim for compensation arising from the cancellation of TFL #24 would be advanced on behalf of FBL. By obtaining this assurance and agreeing in the release not to permit any other person to bring an action or make a demand or claim against either the government of Canada or the government of British Columbia, there was consideration for the payment of the money as the government did not want to duplicate any payments pursuant to the compensation package. Counsel submitted that a perusal of a variety of documents produced in evidence indicates the British Columbia Cabinet and the various Ministers having responsibility for forests were considering the claim being put to them by FBL as one based on a business loss. Having regard to all of the circumstances, Counsel submitted the ex gratia label attached to the payment by the payor need not be binding and the payment can properly be seen to be one requiring inclusion when determining the income of the appellant.

[12] Counsel for the appellant, prior to calling William Verchere and Gordon Hubley to testify, read in certain portions from the Examination for Discovery of Brian Wilson. The effect of those questions and answers, structured as they were with reference to specific documents contained in Exhibit A-2, together with the evidence of Verchere and Hubley and other documentary evidence establishes, as fact, when viewed in total, the statements contained in paragraphs 1-15, inclusive, of the document entitled, Agreed Statement of Facts, (a misnomer, as it turned out) prepared in anticipation of the Examination for Discovery of Brian Wilson, found at the front of Exhibit A-2.

[13] It is clear that FBL had no legal right to pursue against WFPL and the lack of notice pursuant to paragraph 14(b) of their contract dated January 1, 1986 is without meaning as it was well understood by the parties that, through no fault of either one, the governments of Canada and British Columbia had agreed to ban logging and, instead, to create a national park. The appellant had no legal right to pursue any compensation from either level of government and was able to obtain payment - through the process established to be administered by the Compensation Committee - of certain out-of-pocket expenses and acted as trustee to disburse certain of those funds intended for employees and subcontractors of FBL at the time logging operations ceased. It was extremely clear, as of October 26, 1990, the Compensation Committee would consider no further payment to FBL other than for additional out-of-pocket expenses, properly vouchered and supported by relevant documents and as approved by the auditors for the Ministry of Forests. The payment of the sum of $800,000 to FBL was made by the government of British Columbia with the concurrence of the government of Canada but it is unclear whether the federal government actually contributed any money to that payment. Certainly, the Minister of Forests for British Columbia advised his federal counterpart of the arrangement and, in the letter of April 19, 1991 referring to the payment of $800,000, The Honourable Claude Richmond stated to Verchere:

"The Honourable Robert de Cotret, Federal Minister of the Environment, and I are pleased to inform you that we have reviewed the case of Frank Beban Logging, Limited (FBL). We remain of the view that, aside from the out-of-pocket expenses incurred by the company when logging was terminated on Lyell Island, there is no legal basis to pay compensation to FBL. We are satisfied, however, that the company did suffer financial hardship when logging was halted.

Accordingly, we have agreed that an ex gratia payment, in the nominal amount of $800,000.00, should be made to FBL, subject to the following conditions and understandings:

(Reference to releases and assurance from WFPL.)

italics added."

[14] The payment was not made through the vehicle of the Compensation Committee, which is not surprising since, on October 26, 1990, it had categorically refused any further compensation to FBL other than the out-of-pocket payments which were not in the same category as those made to third party forest interest holders such as WFPL. It is clear there was no bargaining process leading to the sum of $800,000 having been chosen and there is no relationship between that sum and any losses FBL regarded as flowing from the cessation of logging on Lyell Island. Other than corporate citizen to government, there was no other relationship existing between FBL, as recipient, and the government of British Columbia, as payor, with the concurrence, if not financial contribution, of the government of Canada. The payor did not disclose any basis for the amount being paid and it was clear there was no basis for further negotiation, a fact readily appreciated by Verchere, who acted quickly to ensure the payment could be obtained while it was still available. It is apparent the payment was not made in contemplation of any future trading relationship or that the payor was seeking any advantage other than to address the long-standing concern of FBL that it had not been dealt with fairly in the wake of the agreement by the two levels of government to ban logging and create a park. Under all of these circumstances, the payor expressly stated the payment was not made pursuant to any legal obligation but in recognition that FBL did suffer financial hardship when logging was terminated and a nominal payment was being made as a consequence of an appreciation of that result. The offer of payment was communicated to Verchere at FBL by the Minister of Forests for British Columbia, personally, and the request for releases was nothing more than following usual practice based on traditional legal advice. At that point, FBL gave up nothing in return for the payment. It had no cause of action against WFPL or either government. If FBL was prohibited, directly, from claiming compensation according to the procedures administered by the Compensation Committee and WFPL had never included in its claim any component, whatsoever, of anything that FBL considered it was owed (and declined later on to permit FBL join in such a process) then it is obvious the execution of the release and obtaining the assurance of WFPL not to act as surrogate, in the future, for FBL to pursue an earlier rejected compensation claim was merely a matter of form and done to facilitate receipt of the one-time payment of $800,000. The releases covering both the payment of the sum of $800,000 and the total payment of out-of-pocket expenses referred to the discharge of Her Majesty The Queen In Right Of Canada and Her Majesty The Queen In Right Of British Columbia from " all manners of action, causes of action, suits, claims, demands, debts, duties, acts, contracts or covenants of whatsoever kind or nature which the Releasor ever had, now has or can, shall or may hereafter have as a result of or in any way arising out of the cessation of logging in the Queen Charlotte Islands for the purposes of creating South Moresby National Park".

[15] It is apparent the release was structured in accordance with usual practice and did not, in any way, contemplate any consideration being given by FBL in the form of foregoing any opportunity to tell its story to the press or for the officers and/or shareholders of FBL to exercise any right to criticize the payor and/or the federal government for having banned logging in the area and choosing to create a new national park.

[16] The position of the respondent is that the Minister's inclusion of the sum of $800,000 into income for the appellant is correct because the amount was paid by the Ministry of Forests, British Columbia as compensation for the loss of profits FBL suffered as a result of the cessation of logging on South Moresby and, specifically, the end of the logging operations under contract with WFPL on TFL #24. The payment was seen by the Minister as having been received by FBL in respect of its business activities as a result of constant and organized efforts to obtain the payments.

[17] At issue is whether the $800,000 ex gratia payment received by FBL constitutes taxable income within the meaning of section 3 of the Income Tax Act. The relevant portions of that section read as follows:

"3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property; ..."

[18] Since there are no other provisions in the Income Tax Act to provide any further definition of "income" the only restriction placed on that definition is that it come from a "source" as stated in section 3.

[19] The Federal Court of Appeal in Bellingham v. The Queen 96 DTC 6075 considered the case of the taxpayer who had been one of a group of landowners whose lands had been expropriated by a municipality. An award was made for compensation and it included the item of "additional interest" which the Minister of National Revenue treated as income. Robertson, J.A., writing for the Court, at page 6079, discussed the concept of income and historical origins of the source doctrine, as follows:

"The notion of what receipts constitute income for purposes of taxation is central to the workings of the Act. Standing alone, the term income is susceptible to widely diverging interpretations. Narrowly construed, income may be defined to include only those amounts received by taxpayers on a recurring basis. Broadly construed, income may be defined so as to capture all accretions to wealth. Canadian taxpayers are more likely to embrace the former definition. The latter approach reflects the economist's concern for achieving horizontal and vertical equity in a taxation system. Such a concern translates into a broad understanding of what receipt items should be included in income. This perspective is reflected in the Report of the Carter Commission. Working from the Haig-Simon's definition of income, that Commission recommended a modified, but comprehensive tax base. Had its recommendations become law we would have witnessed, for example, the taxation of gifts and inheritances. Instead, the concept of income under the Act remains undefined, except to the extent that income must be from a source.

There can be no doubt that the source doctrine serves to narrow the reach of the charging provisions of the Act so as to permit certain receipts to escape taxation, including gifts and inheritances. The more difficult question relates to the precise scope of the doctrine and the legal criteria to be applied when assessing whether a particular receipt is taxable. The statutory source of the doctrine itself is, of course, section 3 of the Act which provides the basic framework for determining a taxpayer's income for a taxation year for purposes of Part I of the Act. It is paragraph 3(a) which introduces the concept of income from a source:

3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;

[Emphasis added]

The historical origins of the source doctrine are well known and worth highlighting when contrasted with the manner in which it has been recast in the above paragraph. The adoption of the source concept of income can be traced to England's taxing statutes of the 19th century, which required taxpayers to file separate returns for each source of income. The legislated objective was to ensure that no one official knew a person's total income. More importantly, the source doctrine distinguished between the receipt of income from a source and the disposition of the source itself. In an agarian society, land is considered to be the source of income. Profits are derived from the annual harvest and represent income. A disposition of the land itself, that is to say the capital, is considered to be of a different character and, hence, the distinction between income and capital is critical. The distinction is as important today as it was in centuries past.

The English taxation system retains the source concept of income, now referred to as the schedule system. Unless a receipt comes within one of six named schedules it is simply not taxable. Thus gifts, inheritances and windfalls, not being from a specified source, are treated as non-taxable receipts. The distinction drawn between income and capital is preserved and, thus, capital gains are immune from taxation.

The Canadian approach is similar to its English counterpart, but only to the extent that the definition of income is circumscribed by the source doctrine. The critical distinction between the two approaches lies in the fact that paragraph 3(a) refers initially to income from any source and then goes on to identify the traditional sources: income from each office, employment, business and property. Paragraph 3(a) makes it clear that the named sources are not exhaustive and, thus, income can arise from other unidentified sources. In summary, Parliament has chosen to define income by reference to a restrictive doctrine while recasting it in such a manner as to achieve broader ends. Commentators, however, are agreed that paragraph 3(a) continues to receive a narrow construction: see Arnold, supra, at 48 et seq.,V. Krishna, The Fundamentals of Canadian Income Tax, 4th ed., (Toronto: Carswell 1993) at 129-130, and J.A. Rendall "Defining the Tax Base", in B.G. Hansen, V. Krishna and J.A. Rendall, eds., Canadian Taxation (Toronto: Richard De Boo, 1981) at 59.

The restrictive interpretation imposed on paragraph 3(a) can be traced, at least in part, to the pre-1984 understanding that ambiguities in the charging sections of taxing statutes - being penal in nature - were to be resolved in favour of the taxpayer: see e.g., British Columbia Railway Company v. The Queen, [1979] C.T.C. 56, 79 DTC 5257 (F.C.T.D.). That traditional view went unchallenged until the decision of the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen [84 DTC 6305], [1984] 1 S.C.R. 536. In that case the Supreme Court displaced the rule of strict construction with the contextual approach to statutory interpretation advocated by E.A. Driedger in his classic work, Construction of Statutes, 2nd ed., (Toronto: Butterworths, 1983) where at page 87 the author observed:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament."

[20] Robertson, J.A., at page 6082 continued:

"Finally there are two decisions of the Supreme Court which must be acknowledged. The first is Curran v. M.N.R. [59 DTC 1247], [1959] S.C.R. 850. In that case the taxpayer received $250,000 from a third party as an inducement to leave his present employment. The agreement between the taxpayer and the third party stipulated that the payment was "in consideration of the loss of pension rights, chances for advancement, and opportunities for re-employment..." (at 853). A majority of the Supreme Court recognized that the source of the payment was the taxpayer's employment with the third party. The payment of $250,000 received by the taxpayer was held to be income within the meaning of what is now paragraph 3(a) of the Act.

The other decision of the Supreme Court which must be acknowledged is Canada v. Fries [83 DTC 117], [1990] 2 S.C.R. 1322. In that case the Supreme Court held that strike pay does not constitute income from a source under paragraph 3(a). The taxpayer had gone on strike and received weekly strike pay, from his union, equal to his normal net take-home pay. The union's strike fund was accumulated from the tax deductible dues paid by its members. At the time the union members voted to go on strike they were aware of a union recommendation that they be reimbursed for their loss of salary and benefits in return for their strike support. In reversing the judgment of the Federal Court of Appeal, the Supreme Court restored the decision of the Tax Review Board. The analysis offered by the Supreme Court is limited to the conclusion that "the benefit of the doubt must go to the taxpayers" (at 1323), see [1989] 3 F.C. 362 (C.A.); aff'g [1985] 2 F.C. 378 (T.D.); rev'g [1983] C.T.C. 2124, 83 DTC 117 (T.R.B.).

I do not find it necessary to rely on the residual presumption to support the conclusion that a punitive damage award constitutes a windfall gain. Nor am I prepared to base my decision on the fact that an award of additional interest is, arguably, non-recurring, unexpected or an unusual form of income. As a general proposition, I accept that monies received by a taxpayer from an expropriating authority constitute income from a productive source. As well, I accept that the taxpayer has an enforceable right to additional interest once the Board concludes that there was fault on the part of the expropriating authority. Furthermore, it matters not whether the taxpayer actively sought payment of additional interest. The critical factor is that the punitive damage award does not flow from either the performance or breach of a market transaction. Of course, no distinction should be drawn between voluntary and involuntary market exchanges.

In the case at hand, the source of the additional interest award is not the expropriating authority. That body is merely the payor. The true source of the award is the Expropriation Act which dictates as a matter of public policy, that expropriating authorities are obligated to pay a penal sum in circumstances where their behaviour falls below a prescribed standard. An award of additional interest under subsection 66(4) of the Expropriation Act is unrelated to the issue of fair compensation for expropriated lands. That concern is dealt with fully under section 42 and subsection 66(2). In certain respects an award of additional interest possesses the attributes of a gift. The taxpayer is the beneficiary, not of the expropriating authority's largesse, but of the legislature's desire to ensure that minimum standards of commercial behaviour are observed. The taxpayer's gain is the expropriating authority's loss. The payment in question does not flow from either an express or implied agreement between the parties. There is no element of bargain or exchange. There is no consideration. There is no quid pro quo, on the part of the taxpayer. The payment is simply a windfall and, therefore, not income under paragraph 3(a) of the Act."

[21] An example of a receipt which falls outside the scope of the source doctrine is a windfall gain. Canada Tax Words, Phrases & Rules, Carswell, 1977, provides a definition taken from a passage in the judgment of McNair, J., at p. 6367 of E.R. Fisher Ltd. v. The Queen, 86 DTC 6364, as follows:

"Generally speaking, a windfall payment is a payment of an unusual or extraordinary nature which cannot be characterized as income from a business, property or any other source because it is unrelated to the business of the taxpayer or to any exertion on his part to produce income or profit and because the payment is not of a recurrent nature or related to the productive potential of the property."

[22] The Federal Court of Appeal in The Queen v. Cranswick, 82 DTC 6073 dealt with the case of a taxpayer who, as a minority shareholder in a company, had been paid a sumby the majority shareholder to avoid a possible complaint about the sale. At p. 6075, LeDain, J.A., writing for the Court, stated:

"In concluding that the payment to the respondent was not income the learned Trial Judge relied particularly on the judgment of Cameron J. in Federal Farms Limited v. The Minister of National Revenue [1959] Ex. C.R. 91 and the criteria suggested there. That case involved a voluntary payment or grant from a fund established to provide relief and assistance for persons who suffered loss or damage as a result of a hurricane and flood. Cameron J. considered the cases such as J. Gliksten and Son, Limited v. Green [1929] A.C. 381, and London Investment and Mortgage Co. Ltd. v. Inland Revenue Commissioners [1958] 2 All E.R. 230, which had established that insurance or other compensation for the loss of stock in trade was income, but held that the case before him was distinguishable on the ground that the taxpayer had contribited nothing to the relief fund and had no legal right to claim payment from it, as in the case of insurance or compensation for expropriation or war damage. He concluded that the payment received by the appellant from the relief fund was "in the nature of a voluntary personal gift and nothing more". Again, to the same effect, he said, "The gift here in question, it seems to me, is of an entirely personal nature, wholly unrelated to the business activities of the appellant".

The learned Trial Judge in the present case listed several features by which Cameron J. had distinguished the relief fund payment from insurance compensation. He said:

Cameron, J., distinguished the case from Gliksten et al. vs. Green (supra) on the basis that (a) the payment was entirely voluntary, (b) it was given by persons who had no business relations with the taxpayer, (c) it was unrelated to the taxpayer's business activities, (d) the taxpayer had no legal right to demand any portion of the fund, (e) at the time of the loss he had no expectation of being so compensated, and (f) it was unlikely ever to happen again.

With these features in mind the Trial Judge concluded from the facts of the present case as follows:

There was no evidence other than that contained in such paragraph 10, to indicate the nature of the controversy or litigation which Westinghouse Electric hoped to avoid by the payments made to the minority shareholders who retained their shares. If an action could have been brought against some of the parties involved as a result of the disallowance of such sale any recovery by the plaintiff would not ordinarily have the characteristics of income. In any event as far as the plaintiff was concerned the payment to him was voluntary and no relationship existed between the payor and the taxpayer who had no expectation of receiving the same until he received the offer (ex. 2). It is most unlikely that a further payment will be made to him in respect of the transaction. The payment might be termed a windfall. I am convinced it was not a payment of income within the provisions of the Income Tax Act.

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 forseeable 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."

[23] At p. 6076, LeDain, J.A., continued as follows:

"Having regard to the indicia suggested by counsel for the respondent, which I think are all relevant, although no one of them by itself may be conclusive, I am of the opinion that the payment received by the respondent was not income earned by or arising from the respondent's shares, which are the only possible source of income in this case. In the absence of a special statutory definition extending the concept of income from a particular source, income from a source will be that which is typically earned by it or which typically flows from it as the expected return. The income which is typically earned by shares of capital stock consists of dividends paid by the company in which the shares are held. The payment in the present case was of an unusual and unexpected kind that one could not set out to earn as income from shares, and it was from a source to which the respondent had no reason to look for income from his shares. I agree with the learned Trial Judge that it was in the nature of a "windfall.""

[24] In Federal Farms Ltd. v. M.N.R. 59 DTC 1050, Cameron, J., of the Exchequer Court of Canada held that the sum of $40,000 paid to the taxpayer by way of relief as an incorporated business carrying on a large vegetable farming operation which had suffered damage caused by Hurricane Hazel was not a receipt of income subject to tax. At page 1053, Cameron, J., stated:

"In the present case, I can find no analogy between the monies received from the Relief Fund and the monies received from insurance policies on stock-in-trade which has been destroyed by fire. Here the Relief Fund received nothing whatever from the appellant by way of contribution, insurance premiums, services, salvage or otherwise. The appellant had no legal right at any time to demand payment of any amount from the Relief Fund and clearly, at the time of its loss, had no expectation of getting anything. There was no contract of any sort between the donor and the donee, and the trustees of the Relief Fund, had they so desired, need not have paid the appellant anything. I can find nothing in the circumstances outlined which would indicate that the giving and receiving of the amount was in any sense a business operation or arose out of the taxpayer's business."

[25] Other receipts held not to be income:

voluntary payments made by the Province of Alberta to each taxpayer over the age of 21 in order to distribute part of a budget surplus to the residents. (German v. M.N.R. 59 DTC 420) (Tax Appeal Board);

three payments made on a "no strings attached" basis from a client's new insurance brokers to the client's former brokers.(McMillan v. M.N.R. 82 DTC 1287) (Tax Review Board).

[26] In the case of Layton v. The Queen 94-2444(IT)I, unreported, Beaubier, J.T.C.C. heard an appeal from an assessment whereby the Minister of National Revenue had included into the taxpayer's income an amount received under the provisions of the Shipbuilders' Workers Adjustment Program (SWAP) as "other income" pursuant to the provisions of subparagraph 56(1)(a)(vi) of the Income Tax Act. However, Judge Beaubier held that the payment had not been "prescribed" within the required definition and the subparagraph was not applicable. At p. 3 of his judgment, he continued:

"The payment is not income from an office, employment, business or property. According to the evidence, it is a grant from the Government which was paid to the taxpayer after Versatile shipyards was closed. While it is alleged that Government officials made a promise, the workers did not give any reciprocal promise or undertaking. They were simply laid off when Versatile shipyards closed. No agreement was made with them to pay them for that, nor did any regulations specify the nature of the payment in question."

[27] In the case of The Queen v. Mohawk Oil Co. Ltd. 92 DTC 6135, the Federal Court of Appeal held that an amount received by the taxpayer in settlement of its claims arising out of a contract to supply and install a waste oil reprocessing plant was not a windfall but was an income receipt. At p. 6139 Hugessen, J.A., stated:

"Thefindings of the learned trial Judge were that the settlement payment was agreed to by Phillips in order to "get rid" of Mohawk's claim and to preserve its reputation and that it was in excess of the amount provided for in the limitation of damages clause contained in the January 27, 1978 purchase agreement. The manner in which a settlement amount has been characterized by the payor in the course of negotiations would seem to be an unsafe test for determining its true nature. The payor's motives for settling a dispute may be many and varied in any given case, and it must be a difficult thing to know precisely what his true motivation may have been, especially where the settlement amount is represented by a lump sum which the documentation does not assign to any particular head of claim. I do not see how the settlement amount can be viewed as being "akin to a windfall" merely because the respondent says it was paid by Phillips to get rid of the claim.

Nor am I persuaded that the settlement amount is to be viewed as "akin to a windfall" because it exceeded the amount provided for in the limitation of damages clause of the purchase agreement. The evidence is clear that, while Phillips would not agree, the respondent sought from the outset and throughout the settlement negotiations to be made whole including compensation for lost profits and expenditures thrown away. The record suggests that apart from lost profits, the respondent's other losses were for the cost of the plant itself and certain expenditures which were laid out either to acquire land and install auxiliary facilities or in attempting to make the plant operable. The evidence is also clear that the loss in respect of the land and auxiliary facilities did not materialize because those facilities were required for operating the new plant. As I see it, the settlement amount, of necessity, included compensation for lost profits and expenditures thrown away. Such compensation cannot, in my view, be regarded as "akin to a windfall"."

[28] Unlike the situation in Mohawk, supra, the government of British Columbia did not pay the sum of $800,000 to the appellant in the within appeal to conclude an existing business relationship that had not proceeded as originally contemplated by the parties when they entered into a contract.

[29] Turning to the criteria set out in the judgment of LeDain in Cranswick, supra, and applying them to the facts in the within appeal it is undisputed that the appellant had no legal right to enforce such a payment. There was an organized effort on the part of the appellant to receive the payment by hiring two lobbyists and undertaking a series of meetings with various government officials and elected members. After having been told by the Compensation Committee, specially established for that purpose, that FBL was not entitled to any payment - other than for out-of-pocket expenses - the appellant had no reason to expect - as opposed to hope for - any such payment. The payment had no foreseeable element of recurrence. There was no relationship between the payor and the appellant so as to find the payor was a customary source of income. Rather, through a series of levies and taxes applicable to any corporation carrying on business in British Columbia, the reverse would be true. The payment was made only in recognition that FBL had been harmed by the decision to ban logging on Lyell Island and the jurisdiction of the Compensation Committee did not permit FBL to be compensated for such loss. In the event a government chooses to make a payment to an individual or corporation out of a sense of moral duty then it should have the right to perform an act of kindness in the absence of any legal obligation. Whether the payment was made purely as a political decision to remove a potential source of irritation that could emanate from a public discussion of the plight of FBL, a well-known British Columbia logging enterprise, during the waning days of a government about to call an election (which it lost convincingly) or whether it was done in the spirit of providing compensation,ex gratia, in order to "do the right thing" is not relevant. The key point is there is no question the nature of the payment was exactly as described under all of the circumstances and was not disguised in any way nor did it relate to any past, present or future dealings existing or contemplated between the payor and the recipient. Payments of this sort are not that uncommon if government decides to provide relief for a specific purpose under circumstances where there is not the remotest chance the government is ever going to be required to do so as a matter of law. Payments in the nature of flood relief or other damage or loss to individuals or entities from other weather related causes, or widespread economic deprivation due to a shutdown of a specific industry in a particular geographical location come to mind and I am not aware that it is ever intended, until otherwise specified in legislation or in the authorization permitting such payments to be made, that such amounts will be somehow taxable. If such payments were made as an expression of good will, then any warm feeling thus engendered would quickly evaporate around April 30th the following year.

[30] The fact that reference was made by Verchere, on behalf of FBL, or by various government officials or Members of Cabinet to any loss of the appellant as being a loss of profit or loss of business is not material when all of the other factors are considered. The main point to look for, in my view, is that the payment is truly that which it purports to be and is not done in a manner designed to mislead as to the true nature of the payment. It is clear the payor regarded, quite properly, the payment to be ex gratia. There is nothing on the evidence to remove it from that definition, unlike the finding of Cattanach, J., of the Exchequer Court of Canada in Buchanan v. M.N.R. 66 DTC 5257. In that case, a solicitor had been paid a sum equal to, and calculated by his employers, on the basis of three months salary. The amount had been paid to him "as a matter of grace". The Minister of National Revenue wanted to tax the amount as income. Cattanach, J., agreed the sum was taxable, stating, at p. 5262:

"...The payment was a gift in the sense that the legal firm was under no obligation to pay the appellant anything. But they did. The amount paid was identical to three months' pay in lieu of notice. It was treated by the firm as remuneration and I cannot escape the conclusion that it was intended as such rather than as a gift personal to the appellant.

In my view it, therefore, follows that the payment was income in the hands of the appellant from an office or employment being a benefit received by the appellant in respect of, in the course of, or by virtue of the office or employment within the meaning of section 5(1)(a) of the Income Tax Act. "

[31] It can be seen that the payment in Buchanan, supra, had a nexus to a previous relationship between the parties and had been paid directly in connection with the cessation of employment by the recipient and was calculated with reference to the base pay on a monthly basis. In addition, although the payor may have seen the payment as ex gratia, the dismissed employee, although he may not have done better through litigation, at least had the potential to launch a cause of action which had a basis in law.

[32] The appeal is hereby allowed, with costs on a party-party basis, and the matter is referred to the Minister of National Revenue for reconsideration and reassessment on the basis the sum of $800,000 received from the government of the Province of British Columbia be deleted from income. It follows, therefore, there can be no expenses allowed against such an amount as was done by the Minister in the course of the assessment while treating the sum as business income, and the reassessment will, as required, take that into account.

Signed at Toronto, Ontario, this 20th day of January 1998.

"D.W. Rowe"

D.J.T.C.C.