Weston J.T.C.C.: — At issue in this appeal is whether or not interest on a payment of compensation for the expropriation of farmland should be characterized as farming income for the purpose of computing income under the Income Tax Act. The amount of interest in question is $13,757.74.
According to the parties’ Agreed Statement of Facts, Ontario Hydro notified the defendant, Robert Elliott, in 1978, of its intent to expropriate a right of way over a portion of the defendant’s property in Brighton, Ontario, pursuant to the Power Commission Act, R.S.O. 1970, c. 354, and the Expropriations Act, R.S.O. 1970, c. 154. Ontario Hydro became the registered owner of the expropriated lands on April 24, 1978, and took possession on August 16, 1978. The lands had been used by Mr. Elliott to carry on the business of farming; however, following the expropriation, the property was no longer suitable for farming.
During the 1980 taxation year, the parties reached a final agreement as to the amount of compensation due to the defendant in respect of the expropriated property. On March 10, 1980, an Agreement for Compensation was entered into between Mr. Elliott and Ontario Hydro. The final settlement of compensation included the sum of $44,425.00, together with an additional sum of $2,575.00 as payment to Mr. Elliott for health reasons. A portion of the final settlement, namely $9,150.00, was intended to compensate Mr. Elliott for the approximate market value of the expropriated property. The remaining portion provided additional compensation for loss of the use of the land.
In addition, as part of the settlement agreement, it was agreed that interest would be paid on the $44,425.00 compensation amount, to account for Ontario Hydro’s failure to promptly pay the balance of the value of the expropriated land. This interest payment was consistent with Ontario Hydro’s internal policy that favoured a payment of interest on compensation over a period extending from the time of expropriation until the time of payment in full. Because Ontario Hydro would have been required to borrow money in order to effect immediate and full payment at the time of expropriation, it would have been charged interest on that loan.
Accordingly, since Mr. Elliott would not receive full payment of his compensation on the date when the expropriating authority took actual possession of his land, Ontario Hydro agreed to pay interest on the compensation which it owed, until such time as the payment to Mr. Elliott was completed.
The interest owed to Mr. Elliott was calculated at a rate of 18 1/2% over the period from August 16, 1978, to April 18, 1980, and totalled $13,757.74. In 1980, Ontario Hydro paid to Mr. Elliott the full amount of compensation due, including the payment of interest. It then issued a TS slip to Mr. Elliott, showing the amount of $13,757.74 as interest income.
On his 1980 tax return, Mr. Elliott claimed the amount of $13,757.74 as farming income. Against a total claimed farming income of $19,722.63, he then deducted restricted farm losses, in the amount of $19,722.63, which had been carried forward from preceding taxation years. The Minister of National Revenue (the “Minister”) reassessed Mr. Elliott’s 1980 return, and recharacterized the interest payment of $13,757.74 as interest income. That amount was then deducted from Mr. Elliott’s claimed farming income and restricted farming losses, both of which were reduced to $5,964.89.
Mr. Elliott contested the reassessment, and filed a Notice of Objection, followed by a Notice of Appeal to the Tax Court of Canada. The matter was heard by the Tax Court on May 27, 1983, and the appeal was allowed in a judgment dated April 24, 1984. On August 22, 1984, the Minister appealed that decision.
The Minister submits that the amount of $13,757.74 received by Mr. Elliott from Ontario Hydro in 1980 should properly be characterized as interest income within the meaning of subsection 12(l)(c) of the Income Tax Act. That provision reads as follows:
12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
(c) any amount received by the taxpayer in the year...as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that such interest was not included in computing his income for a preceding taxation year.
The Minister further asserts that the amount of $13,757.74 did not form part of the proceeds of disposition or compensation received by the defendant for the expropriated property, and therefore does not come within the meaning of subsection 54(h) of the Income Tax Act. In addition, the Minister contends that the amount of $13,757.74 did not constitute income from farming. Thus, the Minister seeks to have restored the reassessment of the defendant’s 1980 tax return.
The defendant relies upon the provisions of the Ontario Expropriations Act, supra, pursuant to which he was entitled to compensation for Ontario Hydro’s use of his land. The defendant argues that the method of computing the compensation owed to him by Ontario Hydro entailed multiplying the prevailing market rate of interest by the agreed-upon price for the expropriated land. The defendant asserts that the application of interest to the agreed sale price was simply the manner of arriving at the compensation which he was to receive for loss of the use of his land between the time Ontario Hydro took possession of it and the time that the payment of compensation was completed.
Accordingly, the defendant argues that the sum of $13,757.74 formed part of the compensation or proceeds of disposition received from Ontario Hydro for the expropriation of his land, and is not properly considered to be interest income that falls within the meaning of subsection 12(1)(c) of the Income Tax Act. In the alternative, the defendant states that the sum in question, if found to be interest income, is income from farming, because it arose from the sale of lands used exclusively by the defendant for farming. Hence, the defendant asks that the appeal by the Minister from the judgment of the Tax Court of Canada, dated April 24, 1984, be dismissed.
The characterization, for income tax purposes, of interest paid by an expropriating authority on payment received as compensation for expropriated property was considered in a recent decision of the Federal Court of Appeal. In Shaw v. R. (sub nom. Shaw v. Canada), [1993] 1 C.T.C. 221, 93 D.T.C. 5121, Linden J.A. held that a payment of money described as “interest” on a delayed settlement of compensation for expropriated land should be characterized as interest, and taxed as income, according to subsection 12(l)(c) of the Income Tax Act. Such an interest payment on a compensation settlement should not be included as proceeds of disposition of expropriated property. It therefore does not come within the meaning of subsection 54(h)(iv) of the Income Tax Act, which states:
54. In this subdivision,
(h) “proceeds of disposition” of property includes,
(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given.
Accordingly, Linden J.A. concluded that the interest payment should be treated, not as capital, but as interest income.
The facts of the present case closely parallel those in Shaw, supra. Mr. Elliott received from Ontario Hydro the sum of $44,425.00 to compensate him for the loss of his expropriated property. The sum of $44,425.00 constituted the proceeds of disposition of the expropriated land, and represented a taxable capital gain from the disposition of property: See Shaw v. R., supra; Sani Sport Inc. v. R., (sub nom. Sani Sport Inc. v. The Queen), [1990] 2 C.T.C. 15, 90 D.T.C. 5253 (F.C.A.); and subsections 39(1 )(a) and 54(c) of the Income Tax Act. However, the same is not true of the interest which Ontario Hydro paid on the debt that it owed to Mr. Elliott. That interest was paid because of Ontario Hydro’s failure to immediately complete the transaction. The amount of interest was calculated as a discrete sum, after an agreement was reached as to the total compensation which was to be paid to Mr. Elliott. Thus, while the compensation payment resulted from the transfer of expropriated property from Mr. Elliott to Ontario Hydro, the interest on that compensation arose, not from the disposition of property, but from a delay in the payment of the capital sum. The defendant essentially conceded that the interest payment on the compensation settlement is interest income, as determined in Shaw, supra.
Accordingly, interest in the amount of $13,757.74 was not paid to Mr. Elliott as damages or compensation for the expropriation of property; rather, it was a payment of interest on the capital sum: Shaw, supra. It is therefore properly characterized as interest, and is taxable as interest income.
Despite the able submissions of the defendant’s counsel, I am also unable to accept the defendant’s alternative argument. The defendant argues that the interest payment made to him by Ontario Hydro should be characterized as income generated from his business of farming. In other words, he asserts that the interest is farming income. I do not agree that the interest paid on the compensation settlement can be characterized as income from the business of farming. There is no question that Mr. Elliott farmed the property, nor that the expropriated property lost its farming use. However, the interest was paid as a result of the delay in the payment of the capital sum. In this case, the circumstances which generated the capital sum upon which the interest was paid are not determinative of the issue. Thus, the interest payment of $13,757.74 cannot be considered to be income from a farming business within the meaning of section 28 of the Income Tax Act.
The appeal shall be allowed. The reassessments for the defendant’s 1980 taxation year shall be restored. Pursuant to subsection 178(2) of the Income Tax Act, costs shall be payable by the Minister.
Appeal allowed.
Email this Content