Citation: 2008TCC315
Date: 20080704
Docket: 2006-2424(IT)G
BETWEEN:
GESTION E.S.C. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal from a reassessment made
on May 2, 2006, under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) ("the Act"), by which the Minister of National Revenue ("the
Minister") revised the appellant's tax treatment of the amounts that it obtained
under a judgment of the Quebec Superior Court.
[2]
In making the
reassessment under appeal, the Minister relied on the following assumptions of
fact:
[TRANSLATION]
(a)
the appellant's fiscal year-end is
January 31; (admitted)
(b)
in 1994, the appellant operated a formwork and
concreting business; (admitted)
(c)
on May 18, 1994, Hydro-Québec awarded the appellant
a contract for formwork and concreting on part of the Témiscouata dam (hereinafter "the Contract");
(admitted)
(d)
the appellant performed the work under the
Contract from June 12 to December 20, 1994; (admitted)
(e)
due to a mistake made by the cement supplier (Ciment
Québec Inc.), part of the appellant's work was not acceptable, and Hydro‑Québec
asked the appellant to redo the work, which was done in October and
November 1994; (admitted)
(f)
because it had to redo the work, the appellant
incurred major unforeseen additional costs, though it was nonetheless able to
continue operating its business; (admitted)
(g)
the appellant brought an action against Ciment
Québec Inc. and Hydro‑Québec for, inter alia, the costs of redoing
the work ($548,808) and a loss of profit that it said was caused by the undermining
of its ability to enter into other contracts ($1,296,779); (admitted)
(h)
with respect to the costs of redoing the work ($548,808),
the parties to the action in damages admitted that the loss was actually $431,000;
(no knowledge)
(i)
with respect to the loss of profit related to
the undermining of the appellant's ability to enter into other contracts ($1,296,779),
the parties to the action in damages admitted that the loss should actually be $1,050,000,
but there was no admission of the existence of a causal link between the
alleged error and the loss in question; (no knowledge)
(j)
on November 8, 1999, the Quebec Superior Court
rendered its judgment, allowing the appellant's action in part and ordering Ciment
Québec Inc. to pay the appellant $431,000, plus interest and additional
indemnities from the date of summons (June 13, 1995); (admitted)
(k)
the Quebec Superior Court found Ciment Québec liable
for the costs of redoing the work; (admitted)
(l)
as for the loss of profit related to the
undermining of the appellant's ability to enter into other contracts, the
Quebec Superior Court dismissed this claim because there was insufficient
evidence of a direct causal link between the fault and any loss of earnings; (admitted)
(m)
Ciment Québec Inc. appealed this judgment to the
Quebec Court of Appeal, which dismissed its appeal on June 6, 2002; (admitted)
(n)
on June 19, 2002, Ciment Québec Inc.'s insurance
company paid the appellant $710,473.94, broken down as follows:
|
Additional costs
|
$431,000
|
|
Interest and indemnities
|
$279,474
|
(admitted)
(o)
the amount of $431,000 consists of various
expenses that were deducted in computing the appellant's business income for
the taxation years in which the expenses were incurred; (denied)
(p)
the appellant deducted the legal fees incurred
in connection with its action in damages in computing its business income for
the taxation years in which the expenses were incurred; (no knowledge)
(q)
the additional costs incurred by the appellant in
redoing the work deprived it of amounts that it would otherwise either have used
to operate its business or held primarily to gain or produce income from its
business, notably to obtain the performance bonds required in order for it to obtain
contracts; (no knowledge)
(r)
the interest and indemnities, which totalled
$279,474, are in respect of the lost profits represented by the $431,000 in
additional costs; (no knowledge)
(s)
in its income tax return for its 2003 taxation
year, the appellant treated a sum of $423,000 as proceeds of disposition of
eligible capital property, and a sum of $284,474 as investment income, and did
not include these amounts in computing its income from an active business. (denied)
[3] In its income tax return for the taxation
year ended January 31, 2003, the appellant treated the amounts awarded
under the judgment as follows:
(i)
The amount of $431,000
was treated as proceeds from the disposition of an intangible asset, thereby
reducing the cumulative eligible capital (CEC). The amount in question is
actually the reimbursement of the additional costs incurred by the appellant in
order to redo the work.
(ii)
The amount of $279,474,
consisting of interest plus the additional indemnity, was treated as investment
income.
[4] For her part, the respondent submits that
the $431,000 constitutes business income, not cumulative eligible capital
(CEC), because it was paid to reimburse expenses that were incurred by the appellant
and that were, moreover, attributed to the fiscal year in which the work was
redone.
[5] In support of this position, the Minister argues
that the appellant deducted the legal fees that it incurred in connection with the
litigation during the taxation years in which those expenses were paid.
[6] The appellant is challenging the
correctness of the reassessment in which the Minister determined that the
damages obtained through legal proceedings constituted business income.
[7] At the objection stage, the Minister
rejected the appellant's claims and arguments and confirmed his initial
decision.
ISSUES
[8] Did the Minister correctly determine that
the amount of the reimbursement of the additional costs, which amount was obtained
by the appellant under a judgment, should be included in its business income
for the 2003 taxation year?
[9] Did the Minister correctly determine that
the interest and additional indemnity obtained by the appellant under the
judgment constituted business income?
FACTS
[10]The appellant
operates a construction business that specializes in formwork and concreting.
[11]In 1994, the appellant
did formwork and concreting for Hydro-Québec at the Témiscouata
hydroelectric dam.
[12]At one point, the appellant
used cement that did not meet the requirements for the site. This was due to an
error made by the cement supplier, Ciment Québec Inc.
[13]Hydro-Québec, the corporation
for which the appellant did the work, refused to accept it because the inappropriate
and non-conforming cement put the integrity of the construction at risk.
[14]Hydro-Québec therefore
demanded that the appellant redo some of the work, having determined that it
was non-conforming and unacceptable. The appellant promptly agreed to redo the
work for which the wrong cement had been used. The work was indeed redone
in the fall of 1994.
[15]After it completed
the work, the appellant brought an action against Ciment Québec Inc. and Hydro‑Québec
to recover the additional costs of redoing the work.
[16]On November 8, 1999,
the Quebec Superior Court allowed the appellant's action in part and ordered
Ciment Québec to pay the appellant $431,000 plus interest and the additional
indemnity.
[17]Ciment Québec appealed
from this decision, and, on June 6, 2002, the Quebec Court of Appeal affirmed
the judgment of the Quebec Superior Court.
[18]On June 19, 2002, the
judgment was complied with, and the appellant was paid $710,473.94 in
satisfaction of the damages, interest and additional indemnity awarded. The
relevant excerpts from the two judgments are as follows:
- Superior Court judgment (Exhibit A-1, Tab 22, at
pages 7, 8 and 20):
[TRANSLATION]
. . .
The parties have made the following admissions with respect to the
damages claimed:
·
Due to the events that occurred, the plaintiff
claimed $548,807.76 for the demolition and rebuilding of the weirs and
pillars affected by the wrong mortar (contractual loss). The parties admit that
this loss amounts to $431,000. The plaintiff is no longer contesting the correctness
of the decision by Hydro-Québec to demand the demolition and rebuilding.
·
The plaintiff also claimed $1,296,778.56 in
damages for harm to its professional reputation as a contractor, for the
limitation of its financial ability to enter into other contracts, and for loss
of business profits (allegation #48 of its amended statement of claim). There
are expert reports dealing with this head of damages.
The defendants admit the quantum of this portion of the claim to be
$1,050,000, subject to the following conditions: the defendants still maintain
that, even though the plaintiff lost this amount, there is no causal link between
this loss and the error that was made on the job site.
·
The plaintiff claimed other amounts from Hydro-Québec
(allegations #49 to #54 and first item of relief sought in the amended
declaration). This part of the claim was settled out of court by the plaintiff
and Hydro‑Québec and the Court need not concern itself with it.
·
There was also an admission in another matter
between the parties that stems from the same facts. A judgment in that matter
has been filed today.
. . .
ORDERS the defendant Ciment Québec Inc. to pay the plaintiff
$431,000, as well as interest and an additional indemnity from the date of the summons
(June 13, 1995) and costs, including the costs and fees of the
expert François Gagnon, C.A., which are fixed at $10,000;
. . .
- Judgment of the Court of Appeal (Exhibit A-1, Tab
25):
[TRANSLATION]
[1] THE COURT, on the appeal from a judgment of the
Honourable Mr. Justice Édouard Martin of the Superior Court, District
of Quebec City, dated November 8, 1999, ordering the appellant to pay
Stellaire Construction Inc. the sum of $431,000 in connection with rebuilding work
done in 1994 on the Témiscouata dam, and on the cross‑appeal by Stellaire
Construction Inc.;
[2] Having examined the file, heard the parties, and
deliberated;
[3] For the reasons stated by Chamberland J.A., in which Baudoin
and Thibault JJ.A. concur;
[4] DISMISSES the appeal, with costs, and
[5] DISMISSES the cross-appeal, also with
costs.
. . .
[19]The amount awarded by
the Superior Court and confirmed by the Quebec Court of Appeal is essentially
based on a document that the parties to the litigation before the Superior
Court submitted to that court.
[20]The court moreover attached
considerable importance to the contents of that genuine agreement because it
awarded only this one particular element of the appellant's claim. The document
in question can be found at Tab 21 of the appellant's book of exhibits (Exhibit A‑1)
and reads as follows:
[TRANSLATION]
|
Agreement between parties as to quantum
|
|
|
Appendix 3.1 Revised version
of 1999-09-21
Stellaire v. Hydro-Québec claim
Settlement of 1999-09-15
|
|
|
HEAD OF DAMAGES
|
CLAIMED BY STELLAIRE
|
AGREED
|
|
|
|
Costs of redoing work
other than fixed head-office costs and interest costs
Fixed head-office costs
Interest costs
Delay of contract 6674-96-201
Performance bond costs
Head-office costs
TOTAL
|
$420,602.00
$48,463.00
$12,536.00
--------------------
$481,601.00
----------------
$41,760.00
$2,750.00
$93,465.00
----------------
$137,975.00
----------------
$619,576.00
|
$385,000
Nil
$8,000
----------------
$393,000
----------------
$37,000
$1,000
Nil
----------------
$38,000
----------------
$431,000
|
NOTE 1
NOTE 1
|
|
NOTE 1-
Technically, these amounts are part of the $1,700,000 claimed under loss of
income.
|
|
|
|
|
|
Such are
the facts and evidence based on which the Court must dispose of this appeal.
ANALYSIS
Indemnity for contractual loss
[21]I should note, preliminarily, that an amount of $8,000,
which the appellant treated as interest income and the Minister considered as
business income, was not varied in the notice of reassessment dated March 4,
2005.
[22]In fact, counsel for
the respondent made the following unequivocal statements in that regard
(transcript, page 37, lines 11-20):
[TRANSLATION]
This leads me to the first point: the characterization of the actual
damage amount of $423,000. We have showed you that the $431,000 in damages
included $8,000 which Gestion E.S.C. Inc. considered to be interest.
Ms. Dionne indicated to us the connections with the documents. That amount
was not altered in the Minister's assessments. This was, in fact, explained in
our Reply to the Notice of Appeal, and we will not revisit it. We will address
the matter of the $423,000 only.
[23]Thus, the amount of
the indemnity for contractual loss that will be considered here is not
$431,000, but $423,000, because the Minister did not question the treatment of
this amount in the reassessment.
[24]Therefore, the first
question to be determined is the appropriate tax treatment of the $423,000 that
the appellant received as a result of its action against Ciment Québec Inc.
[25]This involves an analysis
that requires us to ask the following question: What do the damages awarded
seek to compensate, or, what is their basis? The answer to this question
requires no interpretation or clarification, because the appellant itself made
official admissions at the trial before the Superior Court. The amount
represented additional construction costs.
[26]Moreover, the contents of Exhibit A-1, Tab
21 (page 145), reproduced at paragraph 20 of these reasons, and the
excerpt from the Superior Court judgment, reproduced at paragraph 18 of these reasons,
appear to be in clear conflict with the submissions of the appellant, who
states at page 84 of the transcript:
[TRANSLATION]
If I may make a small clarification: Contrary to what has
been said, my client never admitted that the amount was a reimbursement of
expenses; what it admitted was that the amount was a satisfactory settlement
for damage that it suffered, and there was never any direct factual link made
between the expenses incurred and the amount received.
[27]This is not a case in
which the amounts awarded by the judgment encompass a variety of components
ranging from loss of income to the endangerment of the company itself following
a dispute as to the validity of a debt.
[28]In the instant case,
the appellant, in its court action, broke down the damages amount into a number
of component parts. The court essentially accepted the component respecting
which the parties to the litigation, including, obviously, the appellant, had come
to an agreement. Moreover, explanation was provided regarding the amount
in question.
[29]If it were possible
to change or alter through a judgment the tax treatment of damages obtained, that
would mean that the fact of bringing legal action could alter damages claimed,
a result that would clearly make no sense. In other words, the fact that litigation
was commenced would alter the basis of the claim, assuming the competent court granted
relief.
[30]First of all, the Act
contains no specific provision regarding the tax treatment of amounts obtained
as damages in court or under an out-of-court settlement as a result of actual legal
proceedings. Thus, in determining how an amount received by way of
litigation is to be treated for tax purposes, consideration of the facts that
gave rise to the dispute is certainly justified.
[31]This is an eminently
logical principle; indeed, it is reassuring to see that the tax treatment of an
amount obtained under a judgment of a competent court is the same as the
treatment that would have prevailed if the amount had not been the subject of
such a judgment.
[32]In the case at bar,
not only is surrogatum the appropriate approach, but one sees from the
record that there is a factor that not only validates this approach but, far
beyond that, provides confirmation that it is the correct one, namely, that
the parties whose dispute resulted in the Superior Court judgment have
themselves described the nature of the amount by making very specific admissions
with regard thereto. Despite the clarity of the document reproduced at Tab 21
of Exhibit A‑1 (page 145), the appellant suggests an approach
that appears to me to be inconsistent with what is clearly shown by the
document.
[33]Moreover,
that is most certainly the basis of the surrogatum principle oft
referred to in the cases on this subject.
[34]In this regard, the respondent
referred to Schwartz v. Canada,
a decision of the Supreme Court of Canada, which applied the surrogatum
principle as developed by Diplock
L.J. in London & Thames Haven Oil Wharves, Ltd.
[35]The Supreme Court
dealt with the surrogatum principle once again in Tsiaprailis, where its scope
was broadened from commercial cases to take in a much wider range of income
sources.
[36]Diplock L.J. made the
following statement concerning the principle:
Where,
pursuant to a legal right, a trader receives from another person compensation
for the trader's failure to receive a sum of money which, if it had been
received, would have been credited to the amount of profits (if any)
arising in any year from the trade carried on by him at the time when the
compensation is so received, the compensation is to be treated for income tax
purposes in the same way as that sum of money would have been treated if it had
been received instead of the compensation.
[37]Thus, under the surrogatum
principle, the tax treatment of amounts paid as damages or in an out-of-court
settlement is closely connected to the basis of the dispute.
[38]The tax treatment of
an indemnity depends on the nature of the rights involved in the dispute and
does not result from an exercise in which the origins and the reasons for the
dispute are not taken into account.
[39]In this regard, the appellant
seems to be arguing that a litigious right is in itself a right whose
foundations are secondary because it must be accorded a tax treatment that is
specific to it. In other words, the appellant is saying that the tax treatment
of an indemnity received under a judgment must be determined from the litigious
right, and thus, independently from the reasons for the dispute.
[40]Admittedly, a lawsuit
can result in the award of various kinds of relief that are ancillary to the
main issue; I am referring, for example, to damages intended to punish
egregious bad faith, as well as penalties, exemplary damages, specific damages
for abuse of rights, etc., with respect to which it may be necessary to engage
in various exercises, and even some speculation, in order to determine in a
nuanced way the various constituent elements of the total amount obtained under
the judgment.
[41]Here, the amounts awarded by the court are clearly
defined both by the parties themselves and by the court that awarded them.
According to the decision in London & Thames Haven Oil Wharves,
Ltd., each case must be
analyzed having regard to the facts peculiar to it, especially since there may
be some degree of ambiguity, which is obviously not so in the case at bar.
[42]Thus, where a payment
is clearly made in reimbursement of the cost of capital property, the result is
that it must be treated, for income tax purposes, as income on account of
capital.
[43]Conversely, a payment
made in reimbursement of an expense associated with the operation of a business
must be treated as income. In the case at bar, we must identify and define what
the $423,000 awarded by the Superior Court to the appellant was intended
to replace. Was it an amount to be attributed to the capital property account or
to the business income account?
[44]The appellant was
successful with respect to the component of its claim that pertained to
contractual loss, but the court did not accept the appellant's claims with
respect to the other components of the monetary award sought in its action. The
judgment, which, moreover, was affirmed by the Quebec Court of Appeal, states the
following:
[TRANSLATION]
Due to the events that occurred, the
plaintiff claimed $548,807.76 for the demolition and rebuilding of the
weirs and pillars affected by the wrong mortar (contractual loss). The parties
admit that this loss amounts to $431,000. The plaintiff is no longer
contesting the correctness of the decision by Hydro-Québec to demand the
demolition and rebuilding.
[45]This excerpt
unambiguously specifies the basis of the court's decision and the reason for
its awarding $423,000 in damages.
[46]That the expenses associated with redoing the work were
considered to be of the same nature as those incurred for the work that needed
to be redone is entirely reasonable, certainly sensible, and, in the case
at bar, decisive.
[47]The evidence in the
case at bar has shown that the amount awarded by the Superior Court
corresponded exactly to the costs related to the demolition and rebuilding of
the non-conforming and unacceptable structures.
[48]This is work that is
consistent with the company's line of business, and, although unusual, certainly
not abnormal, because it was done in the course of business by a company that was
in that line of business.
[49]In support of her
submissions, the Minister's representative noted that, in computing its
business income, the appellant, in addition to deducting the expenses incurred
in order to carry out the initial formwork and concreting, also deducted the
expenses associated with the demolition and rebuilding of the weirs and pillars
for which the wrong mortar was used.
[50]In so doing, the appellant
reduced its business income, and consequently, its tax burden, for 1994. That
is a sufficient basis for concluding that the payment to the appellant was a reimbursement
of an expense attributable to income.
[51]It is patently
obvious that the compensation awarded by the Superior Court and payable by Ciment Québec was intended to put the appellant
back in the situation that existed before the error was made.
[52]In his oral
submissions, counsel for the appellant suggested — for the first time, and citing the decision in Ipsco — that the amount might be a windfall.
[53]On the basis of decisions
of the Federal Court of Appeal in Mohawk Oil v. Canada, [1992] 2 F.C. 485,
[1992] 1 C.T.C. 195, and Bellingham v. Canada, [1996] 1 F.C. 613, [1996]
1 C.T.C. 187, I do not accept this argument; both decisions clearly articulate the
conditions that must be met in order for one to conclude that there was a
windfall.
[54]In order for income to be considered a tax-exempt
windfall, it cannot be income from a business or property within the meaning of
subsection 9(1) of the Act, nor can it be income from a source
contemplated in paragraph 3(a).
[55]In Bellingham, the Federal Court of Appeal held that punitive
damages constituted a windfall because "the punitive damage award does not flow from either the performance or
breach of a market transaction".
[56]Thus, where a court
exercises its power to sanction a person's reprehensible conduct, the award
does not constitute income from a source within the meaning of paragraph 3(a)
of the Act, but is, rather, a tax-exempt windfall.
[57]In the case at bar, the payment results from an error
made by Ciment Québec in the course of a business transaction, that error
consisting in the supply to the appellant of a type of mortar that was
inappropriate for the work that the appellant was doing.
[58]There is absolutely
nothing in the evidence, the judgment of the Superior Court or the
judgment of the Court of Appeal to support a conclusion or finding that the
amounts awarded by the Superior Court were a sanction, a penalty or anything of
that nature. Consequently, they cannot constitute a windfall, because the
damage results from a normal business transaction. In other words, the amounts
awarded by the judgment were intended merely to restore the appellant to the
same situation as that in which it had been.
[59]The appellant further
submits that, in the event that this Court holds that the $423,000 indemnity for
contractual loss was not a windfall, that amount should, at the very least, be
considered a disposition of eligible capital property (ECP).
[60]The disposition of
eligible capital property would give rise to an increase in the amount of
cumulative eligible capital (CEC).
[61]According to the appellant,
the amount of $423,000 must be taken into account in variable E of the
definition of CEC in subsection 14(5) of the Act, which would have the
effect of creating a negative CEC.
[62]A negative CEC would
trigger the application of subsection 14(1), which would increase the appellant's
business income by the amounts determined in paragraphs 14(1)(a)
and 14(1)(b).
[63]The appellant referred
to 656203 Ontario Inc. v. Canada, [2003] T.C.J. No. 226 (QL), in
which Justice Lamarre of this Court held that eligible capital property
had been disposed of.
[64]The respondent answered
— correctly, I might add — that Lamarre J. actually rejected the
appellant's argument that there had been a windfall, saying that she was not
satisfied that ECP had been disposed of, but that a different finding would have
amounted to giving the appellant less favourable treatment than that proposed
by the Minister. For these reasons, she dismissed the appeal and confirmed the
Minister's assessment.
[65] It is difficult
to follow the appellant's thought process and reasoning with respect to the
relationship between the tax treatment of the 1994 contractual loss and its
argument that eligible capital property was disposed of in 2003.
[66]Indeed, the appellant
has claimed an expense for tax purposes in the past, and the amount thereof was
reimbursed by Ciment Québec as ordered by the court. The appellant's treatment
of the expenses in 1994 confirms that they are attributable to the revenue
account, and the civil judgment clearly shows a connection between the expenses
and the amount awarded.
[67]If the appellant had
not claimed an expense equal to the amounts spent on demolishing and rebuilding
the structures on which the wrong mortar was used, and had chosen instead to
capitalize these expenses as an intangible asset (an interest in a debt), then its
argument might have had a better chance, at least from a logical standpoint.
[68]Indeed, a
"disposition", according to the definition of that term in
subsection 248(1) of the Act, includes the settlement or payment of a
debt or a settlement or payment with respect to any other right to receive
an amount. Ultimately, the effect would have been the same, since a
deduction from business income in 1994, coupled with an inclusion in 2003,
yields a neutral result, just as the creation of an intangible asset in 1994,
followed by its disposition for an amount equal to its cost, would have done.
[69]In the case at bar,
the appellant artificially reduced the profit from the contract, thereby
artificially reducing its taxable income for the 1994 taxation year; the
inclusion of this amount therefore puts the appellant, today, in the tax
situation that should have existed but for the error made by Ciment Québec.
Interest and additional indemnity
[70]The issue of the
interest and additional indemnity raises other questions as well, since this
component of the total award, which encompasses principal, interest and the
additional indemnity, is also disputed.
[71]Any debt arising from
the supply of services, or the sale of property, or both, can be disputed for a
variety of reasons, ranging from delay to simple disagreement.
[72]No specific comments were made with respect to the
question of the additional indemnity, and that is as it should be, since the
amount of such an indemnity is essentially a percentage that varies, depending
on the period in issue, in order to better reflect economic realities, whereas legal
interest computed at a fixed rate does not take the numerous fluctuations of
the economy into account.
[73]The appellant submits
that the tax treatment of the interest and additional indemnity should be based
not on the origin of the principal amount, but rather, on all the facts and factors
that gave rise to the litigious right.
[74]The appellant submits
that the interest constitutes investment income that increases the balance of
its refundable dividend tax on hand (RDTOH) account, thereby entitling it to a
dividend refund.
[75]As for the Minister,
he asserts that the interest here is essentially incidental to income from an active
business carried on by the appellant, and is therefore not investment income.
In other words, the Minister submits that the tax treatment of interest is to be
determined on the basis of the question concerning interest: essentially, the
source must be identified.
[76]In our taxation system,
a corporation's investment income is treated less advantageously than income
that it earns from an active business.
[77]In the interest of
integration, part of the additional tax that a corporation pays on investment
income is refunded to it when it pays dividends. This is the dividend refund.
[78]In
subsection 129(3) of the Act, Parliament created the RDTOH, a notional
account in which amounts potentially giving entitlement to a dividend refund
accrue. One of the amounts added to the account is 26.67% of a corporation's aggregate
investment income.
[79]In subsection 129(4),
the term "aggregate investment income" is defined for the purposes of
the RDTOH; subject to certain exceptions, it consists of the capital gains and
income from a source that is property.
[80]In the appellant's submission, interest awarded in a
civil judgment is income from a source that is property. This is a legitimate
interpretation, but it is not the only possible conclusion because the term "income"
is also defined in subsection 129(4) as follows:
"income" or "loss"
of a corporation for a taxation year from a source that is a property
(a) includes the income or loss from a specified
investment business carried on by it in Canada other than income or loss
from a source outside Canada,
but
(b) does not include the income or loss from any
property
(i) that is incident to or pertains to an active business carried
on by it, or
(ii) that is used or held principally for the purpose of gaining
or producing income from an active business carried on by it.
[Emphasis added.]
[81]There is an exception
for income from property that is incident to or used in an active business. By
way of example, interest on funds set aside for the payment of materials ordered
by the corporation would fall under this exception.
[82]These funds were used in an active business as, at the
civil trial, the appellant itself argued that the fact that the funds were
not available considerably reduced its chances of obtaining a performance bond,
which is an essential element in the construction industry.
[83]In the course of the events that gave rise to the
litigation, the appellant's shareholders even had to make an additional investment
in the corporation in order to ensure the business's smooth operation. Despite
this, I do not believe that the situation was any different from one in which
interest is collected on past-due debts; it was clearly a litigious claim, one which
Ciment Québec did in fact dispute, unsuccessfully, in court. In other words,
the result of the litigation was essentially that it took considerably longer
than usual to obtain the interest on the past-due amount.
[84]The amounts spent in
order to meet the additional expenses in 1994 had previously been used in an
active business; consequently, any interest on such amounts was income incident
to that use.
[85]Since the interest
granted by the court was not part of the appellant's aggregate investment
income, it can have no bearing on the balance of the refundable dividend tax on
hand.
[86]Any claim stemming
from the ordinary operation of a business can be disputed for a multitude of
reasons ranging from the frivolous to the highly meritorious.
[87]Consequently, each case
must be subjected to a specific analysis aimed at ascertaining the reason for,
and origin of, the interest.
[88]In the case at bar,
both the principal and the interest awarded by the court and paid by the
defendant Ciment Québec were essentially compensation for work done in the
ordinary course of the appellant's business.
[89]For these reasons, the appeal is dismissed, with costs.
Signed at Ottawa,
Canada, this 4th day of July 2008.
"Alain Tardif"
Translation certified true
on this 9th day of October
2008.
Erich Klein, Revisor
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