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Citation: 2006TCC510
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Date: 20060925
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Docket: 2004-3506(IT)G
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BETWEEN:
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VALLEY EQUIPMENT LIMITED,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
CampbellJ.
[1] This appeal is from an assessment for the 2000 taxation year. By Notice of Reassessment the Appellant was advised that its liability for income tax had been reassessed to include in income additional taxable capital gains.
[2] The parties filed the following Agreed Statement of Facts:
NOTE: The Appellant and the Respondent, by their solicitors, agree to the following facts provided that: 1) such admissions are made for the purpose of these proceedings only; and 2) the parties are permitted to adduce additional evidence which is not contrary to these agreed facts.
1. The Appellant is a company incorporated under the laws of the Province of New Brunswick and was the successor by amalgamation of Valley Equipment Ltd. and R.M. Cook Holdings Ltd.
2. In or about 1964 the original Appellant was incorporated and operated a John Deere Ltd. ("JDL") dealership at Hartland, New Brunswick. Originally the dealership handled both commercial and farm equipment. By about 1968 JDL decided it wanted to split its dealerships between commercial or construction equipment and farm equipment and in the result the Appellant lost the heavy equipment products.
3. By 1973 Raymond Cook ("RC") had acquired all the shares of the Appellant from the original shareholders and had taken on the sale of other products such as cars and trucks. Eventually the Appellant held distributorships for Freightliner trucks, utility trailers and JDL farm equipment.
4. From inception the JDL distributorship was established under written distributorship agreements that were renewed from time to time. The latest of these "Dealer Agreements" came into effect as of February 14, 1986 and March 12, 1991.
5. Between 1988 and 1992 relations between JDL and the Appellant were strained. Eventually however, the Appellant had submitted to the various requests and conditions imposed by JDL that permitted the Appellant to continue as a JDL dealer. These conditions included hiring a new General Manager and the construction of new facilities for the JDL portion of the Appellant's business. The facilities were in fact built by RC and rented to the Appellant.
6. On September 28, 1995, JDL terminated its Dealer Agreements with the Appellant. The privilege of continuing to sell and service John Deere equipment and parts was extended to the Appellant until January 15, 1996.
7. On September 29, 1995, RC and his son Peter entered into an agreement with Roy and Murray Culberson (herein after called the "Culbersons") which specified that the Culbersons were to acquire the John Deere division of the Appellant for $500,000.00; to lease the building owned by RC at $54,500.00 a year for the term of one year; and to acquire the parts and service inventory at cost.
8. On January 14, 2000, Mr. Justice Peter Glennie issued his decision (Valley Equipment Ltd. V. John Deere Ltd. [2000] N.B.J. No. 28), a copy of which is attached hereto as Exhibit "A". Mr. Justice Glennie concluded that JDL had wrongfully cancelled the Appellant's dealer agreements and awarded damages and interest.
9. In the notes to the financial statements that accompanied the Appellant's T2 corporate tax return for the taxation year ending December 31, 2000, note 11 stated "Contributed Surplus: The company received court awarded damages from John Deere Limited for wrongful cancellation of its dealership agreements. The damages received, less applicable legal costs, have been determined by counsel to be a non-taxable receipt and have, therefore, been excluded from net income and retained earnings in the financial statements".
10. On the T2 schedule 8 (Capital Cost Allowance schedule), filed for the 2000 taxation year, the company did however reflect a small portion of the damages awarded as being proceeds of disposition in regards to Class 8 and Class 10 assets.
11. The Minister issued a T7 W-C which was received by the taxpayer on May 29, 2003. The document does not show a "Date of Mailing' and revises the taxpayer's 2000 Net Income by including a "Taxable Capital Gain per January 21, 2003 letter" of $536,457.00".
[3] The Notice of Appeal raised three issues:
1. Whether the amount received by the Appellant was for the destruction or loss of a distinct part of its business and as such is a capital receipt.
2. Whether the amount received by the Appellant represents a capital gain from the disposition of property as defined by paragraph 39(1)(a) of the Act.
3. Whether the amount received by the Appellant represents an eligible capital amount and is subject to inclusion in income pursuant to subsection 14(1) of the Act.
The Respondent abandoned the third issue respecting eligible capital account.
[4] The Appellant argued that the monetary award did not arise from a disposition of property and did not fall within the pertinent definitions contained in the Income Tax Act (the "Act"). Instead the award was made to compensate the Appellant for the overall tortious conduct of John Deere Limited with the calculation of damages based on lost opportunity to sell the business. The Respondent argued that the dealer agreements with John Deere Limited reflected a right which comes within the definition of property as defined in the Act and that the damages represented an award for the unlawful cancellation of the agreements which are proceeds of disposition. Therefore a capital gain on the disposition of the agreements was properly calculated and included in the Appellant's income.
[5] Without over simplifying all of this, I believe a resolution of the issues here is dependent upon my findings in respect to what the award of damages was actually for. The judgment of Mr. Justice Peter Glennie is close to one hundred pages long. It recounts a sequence of events replete with copious duplicities on the part of John Deere Limited and its representatives. His findings of fact point to a very blatant and shameful picture of cunning and deception initiated to undermine the Appellant's contractual arrangements with John Deere Limited. Mr. Justice Glennie made numerous findings of acts of bad faith on the part of John Deere Limited. However on a review of the judgment in its entirety, I conclude that Mr. Justice Glennie awarded damages to the Appellant for breach of the dealer agreements by John Deere Limited. In the final few pages of the judgment, under the heading "Conclusion and Disposition", Mr. Justice Glennie states:
On the basis of my review of all the evidence I conclude that Valley's Dealer Agreements were wrongfully cancelled by John Deere. Since John Deere was not entitled at law to cancel Valley's Dealer Agreement, Valley and Raymond Cook are entitled to damages as a consequence.
It seems to me that this wording is concise and definitive in respect to the nature of the damage award. As a result, I do not accept the Appellant's view that the Minister of National Revenue (the "Minister") incorrectly equated the receipt of damages to a disposition of property. The Appellant's argument is that the award is for the overall tortious conduct of John Deere. However the trial judgment does not explicitly refer to tortious conduct as the basis for the damage award. Mr. Justice Glennie expresses his opinion that many of John Deere's actions amounted to bad behaviour and bad faith but in the end he clearly made specific conclusions respecting the cancellation of the dealer agreements.
[6] The applicable statutory provisions are as follows:
"Capital gain" is defined in subsection 40(1) as:
Except as otherwise expressly provided in this Part
(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount, if any, by which the taxpayer's proceeds of disposition exceed the total of the adjusted cost base to the taxpayer of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition, or
"Disposition" is defined in subsection 248(1)(a) to include:
"disposition" of any property, except as expressly otherwise provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property,
The same subsection 248(1) also defines the term "property" as:
property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes
(a) a right of any kind whatever, ...
The relevant portions, of the definition of "proceeds of disposition", in section 54 state:
"proceeds of disposition" of property includes,
(a) the sale price of property that has been sold,
(b) compensation for property unlawfully taken,
[7] On a review of the dealer agreement (Exhibit A-3), I conclude that this agreement represents property within the definition of the Act. While the Appellant argued that this right under the Agreement to be a John Deere dealer could not be sold or transferred without the consent of John Deere Limited, I believe, by the very fact that the Appellant had negotiated a deal with the Culbersons's worth half a million dollars, that a third party recognized that the Appellant had something valuable to sell under the agreement. The definition of property clearly encompasses the commercial right of the Appellant to be a John Deere dealer. Although the dealer agreement does not specifically refer to this right to be a dealer, it is a logical conclusion to make when the agreement is viewed in its entirety. When John Deere Limited unlawfully cancelled the dealer agreement, it cancelled the property in that agreement, which entitled the Appellant to compensation for property unlawfully taken. This type of receipt is deemed proceeds of disposition because a disposition is deemed to be a transaction or event that entitles a taxpayer to proceeds of disposition according to the definition sections. The damage award is therefore a receipt of proceeds of disposition.
[8] The Appellant argued that the word "taken" in the definition of proceeds of disposition is not satisfied because the word implies that "...you must move it from one person to another and it does not involve the destruction of that particular item" (page 40 of Transcript). Both the Appellant and Respondent referred to the definition of the verb "take" as contained in the Encarta World English Dictionary, St. Martin's Press, New York. The first part of that definition states:
vt. Remove Something. To remove or steal something belonging to somebody else.
According to this definition, it is clear that the Appellant's rights under the dealer agreement were removed, although unlawfully by John Deere's cancellation. I do not believe that one must remove something and give it to someone else, as the Appellant suggests, in order to fall within the definition of "take". Although this is not a necessary component to the definition, I believe it could be argued that the Appellant's rights under the agreement, although unlawfully cancelled, were then transferred by John Deere Limited to the Toners who became successors to the dealership rights in this area.
[9] With respect to the Appellant dealer agreement the Appellant argued that the compensation was not a disposition of property but a receipt of funds for the overall tortious conduct of John Deere with damages calculated in relation to a "lost opportunity" to sell. A damage award is not necessarily a tax-free windfall simply by virtue of being in respect to a tort. If I accepted the Appellant's characterization of the award, it would not necessarily follow that it is tax-free and the Appellant is therefore faced with overcoming a second hurdle respecting the nature of the tort damages for tax purposes. The wording of Mr. Justice Glennie's judgment poses a problem in the Appellant's approach because the judgment never explicitly linked the conduct of John Deere Limited to the award. There is no explicit discussion of tortious behaviour in the reasons and in fact the words "tort" or "tortious" are absent from the judgment. There are direct and oblique references to contract law but the relationship between the "bad behaviour" of John Deere Limited and the breach of contract is not canvassed in such a way that one could readily conclude that the claim is in respect to a business-related tort. In addition I believe the damages are calculated with respect to a lost sale of a capital asset or the right to be a John Deere dealer. The wording of the judgment poses an obstacle to the Appellant since Mr. Justice Glennie specifically detailed that the damages were intended to compensate the Appellant for the wrongful cancellation of the dealer agreement. Although part of the calculation of the damage award was based on the lost sale to Culbersons, the judgment makes it clear that the monetary compensation was for the wrongful cancellation of the agreement.
[10] Even if the Appellant had presented a compelling argument that John Deere's behaviour was tortious, which I do not believe it has, the explicit words of Mr. Justice Glennie are difficult to ignore. Mr. Justice Glennie determined that the relationship between the Appellant and John Deere Limited was defined in the dealer agreement, that John Deere violated this agreement by wrongfully terminating it, that John Deere showed bad faith, breaching standards of contractual behaviour and that it was generally unreasonable and unfair in its involvement in the process leading up to the breach of contract. According to Mr. Justice Glennie, John Deere Limited exercised pressure, or economic compulsion, upon the Appellant to meet certain conditions and when the Appellant successfully complied, John Deere still cancelled the contract. Ultimately this wrongful termination of the dealership contract deprived the Appellant of the opportunity to complete the negotiated sale of the dealership and consequently part of the calculation of damages was based on this lost sale. The Appellant talked about damages for tortious conduct and also damages in respect to a lost opportunity. However the Appellant has not successfully convinced me that the lost business opportunity arose from some kind of intentional tort, particularly in light of my earlier comments in respect to the wording contained in the judgment of Mr. Justice Glennie.
[11] In oral submissions the Appellant addressed the tax treatment of the award of pre-judgment interest. The Respondent submitted that although this issue had not been pleaded, I should apply the general proposition adopted by Revenue Canada that if the principal is not taxable, neither is the interest. Generally speaking, interest is captured and included in income by paragraph 12(1)(c). Prima facie this captures the receipt of pre-judgment interest. However in paragraph 4 of Interpretation Bulletin IT-365R2 "Damages, Settlements and Similar Receipts", Canada Revenue Agency states that in certain situations interest on damage awards may not be taxable even if the amount is explicitly described as being interest. This position appears to contradict the wording contained in paragraph 12 of IT-396R entitled "Interest Income". More recently the administrative position of the Agency as presented at the 2003 Tax Foundation Conference supports the proposition advocated by the Respondent, and that is, that the taxation of pre-judgment interest should follow the tax treatment of the associated award. However this administrative position does not entirely square with the case law as reviewed by Justice Bowie in Coughlan v. R., [2001] 4 C.T.C. 2004. My characterization of the nature of the interest payment must be gleaned from the judgment of Mr. Justice Glennie. However it fails to give me much, if any, insight into the nature of the interest award. It may have been intended to compensate the Appellant for the lack of availability of the money to which it was lawfully entitled for an approximate period of four years or it may have been simply intended as an additional amount of damages. Based on the wording in the judgment, I am just simply unable to ascertain the exact nature. Since it is difficult, if not impossible, to specifically categorize this amount, I am going to follow the principle advocated by the Respondent which is to include the interest award with the rest of the damage award so it will receive the same tax treatment. This will be to the taxpayer's benefit here to have it so included.
[12] In the Respondent's Memorandum of Fact and Law, submitted at the hearing, the Respondent devoted several paragraphs to the surrogatum principle. However at the hearing the Respondent pointed out that, since this principle was not pleaded, I was not being asked to make any findings on this basis. Although I believe I may have been able to apply the surrogatum principle in this appeal simply because it is a common law principle, I do not intend to do so as I am able to dispose of the appeal based on the legislative provisions.
[13] In summary, the appeal is dismissed, with costs, on the basis that there is a disposition of property and proceeds of disposition with a resulting taxable capital gain. The judgment of Mr. Justice Glennie is clear. He reviewed a complex set of facts and concluded that the Appellant's dealer agreements were wrongfully cancelled. He then went on to review a number of alternate calculations for the damage award for this unlawful cancellation before settling on the method he considered to be the proper measure for these damages.
Signed at Ottawa, Canada, this 25th day of September 2006.
Campbell J.
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