Supermarché Ste-Croix Inc. v. R., [1996] 1 CTC 2506, 95 DTC 871

Lamarre Proulx J.T.C.C.: — The appellant instituted an appeal from the reassessment by the Minister of National Revenue (the “Minister”) for the 1988 taxation year.

The point at issue is whether the sum of $150,000 paid to the appellant was a sum paid to induce it to sign a purchasing loyalty agreement and, if that was the case, can that sum reasonably be considered to be a payment made in respect of the acquisition by the payor of an interest in the appellant, its business or its property within the meaning of subparagraph 12(2)(x)(viii) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”).

The appellant claimed that the sum was not an inducement payment, but that, if such was the case, the exception provided at subparagraph 12(l)(x)(viii) of the Act applied. It claimed that the amount was the proceeds of disposition of an eligible capital property and that, in this case, only half of the amount must be included in computing the appellant’s income. The appellant relied on subparagraphs 14(l)(a)(i) and 12(l)(x)(viii) and paragraph 54(d) of the Act.

During the filing of the evidence and the arguments, however, counsel for the appellant emphasized the application of subparagraph 12(l)(x)(viii) of the Act and only briefly mentioned the application of paragraph 14(l)(a) of the Act. The respondent contended that it was an inducement payment and that the exception of subparagraph 12(l)(x)(viii) of the Act did not apply.

Paragraph 12(1 )(x) of the Act 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:

(x) any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

(i) a person who pays the amount (in this paragraph referred to as the “payor”) in the course of earning income from a business or property or in order to achieve a benefit or advantage for himself or for persons with whom he does not deal at arm’s length, or

(ii) a government, municipality or other public authority

where the amount can reasonably be considered to have been received

(iii) as an inducement, whether as a grant, subsidy, forgivable loan,

deduction from tax, allowance or any other form of inducement, or

(iv) as a reimbursement, contribution, allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an expense

to the extent that the amount

(v) was not otherwise included in computing the taxpayer’s income for the year or a preceding taxation year,

(vi) except as provided by subsection 127(11.1), does not reduce, for the purposes of this Act, the cost or capital cost of the property or the amount of the expenses, as the case may be,

(vii) does not reduce, pursuant to subsection 13(7.4) or paragraph

53(2)(s), the cost or capital cost of the property, as the case may be, or

(viii) may not reasonably be considered to be a payment made in respect of the acquisition by the payor or the public authority of an interest in the taxpayer, his business or his property; ...

The issue in this appeal turns more particularly on the meaning to be given to these terms from subparagraph 12(l)(x)(viii): an interest in the taxpayer, his business or his property.

Facts

Jean-Claude Dubuc, owner of 50 per cent of the appellant’s shares, and Gilles Gagnon, an executive with Métro-Richelieu Inc. “Métro”), testified at the appellant’s request. Gilles Gagnon had also been summoned by the respondent.

The witness Mr. Dubuc explained to the Court that the appellant had operated a grocery business under the Métro name in Ste-Croix-de- Lotbiniére since 1982 without having a purchasing loyalty agreement with that business. There had indeed been an agreement between the parties since 1982, but it was not an agreement that bound the parties as to the duration of their business relationship. He said that the appellant had had to give a certain sum of money as a guarantee. In exchange, Métro provided it with technical and supply services. However, it had no obligation to purchase from Métro, except, according to the appellant, perhaps a moral obligation. No penalty was incurred if there was a drop in purchasing from Métro.

In 1988, the witness Mr. Dubuc had plans to purchase a third supermarket. It must be stated that Mr. Dubuc was also half-owner of another supermarket, Supermarché Dubuc et Frère Inc. That supermarket was also the signatory of a purchasing loyalty agreement with Métro and the inducement payment, as we shall see below, formed the subject of a decision by our Court. Mr. Dubuc thus met with Métro’s representatives respecting his third project. They apparently told him that Métro was prepared to take part in the third project, but Métro viewed its participation in conjunction with the signing of a purchasing loyalty agreement with those super- markets. At the time, these loyalty agreements had become a sought-after practice. There was no further increase in overall sales volume. The business practice was thus to ensure that retail sales outlets would not change hands.

The plan for the third supermarket was not carried out, but the loyalty agreements were nevertheless signed. As Mr. Dubuc was a shareholder, as mentioned above, in two supermarkets with two different partners, he left it to Métro to determine the share of each in the payment made to ensure purchasing loyalty agreements were signed. Supermarché Dubuc was paid $75,000 and the appellant $150,000.

On June 30, 1988, an agreement was entered into between Métro and the appellant entitled “Purchasing Loyalty Agreement” (Exhibit 1-1, Tab 4). The appellant received $150,000 for signing the loyalty agreement, although the agreement did not mention that amount.

Mr. Dubuc explained to the Court the effects that the signing of that agreement had on the appellant. The latter could not sell the business to a competitor of Métro because the penalties would be too high. It could sell to another person, but Métro had a right of first refusal. Moreover, if Métro did not exercise its right of purchase, the potential purchaser would have to comply with the appellant’s obligations to Métro. It was under the obligation to purchase from Métro. The agreement bound the appellant to purchase 90 per cent of its goods from Métro. The result was that the appellant never purchased elsewhere than from Métro. Prior to the agreement, the appellant was free to buy from Métro or from other wholesalers. If the appellant did not meet the supply quotas, it incurred penalties. Failure to comply with the obligations of the agreement would result in the payment of a $750,000 penalty for the first 10-year term and a sum of $1,000,000 for the second 10-year term.

The witness explained to the Court that the agreement was signed by the appellant in order to obtain the amount at issue in the instant case.

In cross-examination, the appellant’s witness confirmed the fact that the appellant had received discounts in proportion to its volume of purchases. Mr. Dubuc said that, for the moment, the appellant had lost nothing as a result of the agreement, but that it could lose if it decided to sell the business.

Gilles Gagnon had been summoned by the respondent, but testified at the appellant’s request. He was Métro’s regional director for the eastern part of the province.

The purpose of signing the purchasing loyalty agreements was to secure the sales outlets, that is to say to bind a sales outlet so that it would not go over to the competition. In this way, purchasing loyalty was guaranteed for a certain number of years. The interests acquired were in particular that the store was bound for a period of 20 years, that the store was required to comply with the purchase percentages relative to the sales volume or penalties would be incurred and that there was a right of first refusal, etc. The recipients of the sums could dispose of the money received as they wished.

Still according to the same witness, Métro did not purchase shares in Supermarché Ste-Croix Inc. Métro had no financial interest in the appellant. It could not require it to make administrative decisions such as fixing salaries and the manner of organizing the business. Métro had no right to sit on the appellant’s board of directors. It had no right to interfere in the manner of operating the business.

Mr. Gagnon also explained that in the cases where there was no loyalty agreement, there was nevertheless a basic agreement under which the parties had to meet certain purchase quotas, which in both cases entitled them to discounts. Under the loyalty agreement, however, if the supply quotas were not met, penalties were assessed.

One realizes from the documentary evidence that the amount of $150,000 which is in issue was not paid under the terms of the purchasing loyalty agreement (Exhibit I-1, Tab 4).

The only document that mentions the payment of $150,000 is a document entitled “Details of Payment” dated October 29, 1988 from Métro Richelieu Inc. to Supermarché Ste-Croix Inc. an amount of $150,000 (Exhibit 1-1, Tab 19). Supermarché Ste-Croix Inc.’s bank deposit of $150,000 appears at the same tab.

The loyalty agreement does not mention the payment of the $150,000.

It simply begins with the terms “For good and valid consideration and as further security beside the other securities and undertakings already given, and notwithstanding the terms and conditions of any agreement, contract, settlement or other transaction by which we may be bound to Métro-Richelieu Inc. ... we undertake ... to continue firmly ... our membership in Métro ... for a minimum period of 20 years ending on June 29, 2008” [TRANSLATION].

The same agreement granted a right of first refusal in case the appellant received an offer to purchase its business. Should Métro not exercise its priority right of purchase, every purchaser or successor would have to sign a membership agreement with Métro.

The agreement provided an undertaking to purchase from Métro. A priority right was granted to Métro in the acquisition of the lease in which the business was operated. In case of default in respect of each of the provisions of the undertaking, the aforementioned penalties could be assessed.

The amount of $150,000 was therefore not stated in the agreement. One can only think that it was implied in the expression “For good and valid consideration”at the start of it. The evidence showed that it was the payment of the amount of $150,000 that led to the signing of the loyalty agreement. It does not appear that this amount of $150,000 was an amount which had been determined upon discussion between the parties, but rather an amount that was proposed by Métro based on the appellant’s business volume and which was accepted by the appellant.

Analysis

The appellant argued that this payment of $150,000 was made in respect of the acquisition of an interest in the appellant’s business or property and was therefore excepted from the application of paragraph 12(l)(x) of the Act by virtue of subparagraph (viii). Counsel for the appellant referred to the decision of our Court rendered on October 8, 1993 in Supermarché Dubuc & Frère Inc. v. Canada, an appeal governed by the informal procedure.

That case was entirely identical to the instant case and our Court ruled that the exception of subparagraph 12(l)(x)(viii) applied. Jean-Claude Dubuc was also a 50 per cent owner of that supermarket.

He had received the sum of $75,000 from Métro. The purchasing loyalty agreement was identical.

Counsel for the respondent contended that it was clear that, in consideration of an inducement payment “made to a taxpayer the payer will ordinarily require the recipient of the payment to perform certain undertakings and obligations, but she added that subparagraph 12(l)(x)(viii) cannot be applied to each undertaking and each right as otherwise paragraph 12(l)(x) would be devoid of all practical meaning.” [1]

Our. Court took the approach of asking first what interests had been acquired from the appellant by Métro when the agreement was entered into on June 30, 1988. Analysis of the agreement had showed the Court that the most important interests acquired by Métro were:

1. a priority right to purchase the appellant’s business in case of receipt of an offer of purchase or of sale;

2. in case this priority right of purchase was not exercised, the appellant’s commitment that the purchaser of the business would have to sign a membership agreement;

3. the appellant’s obligation to purchase from Métro;

4. the benefit of a penalty clause in respect of each failure by the appellant to meet the obligations provided in the agreement of June 1988.

The judge was of the view that there could not have been an acquisition of an interest in the taxpayer within the meaning of paragraph 12(l)(x) of the Act because Parliament’s expression could only apply if the taxpayer was a business corporation and since there had been no purchase of shares, this was not the situation in that case. (On this subject, I believe that the case of a corporation in which there could be acquisition of a share should be added.) The judge was also of the view that the acquisition of an interest in its property within the meaning of the same provision could only mean the acquisition of a real interest in a taxpayer’s property.

Could there have been an acquisition of an interest in the business still within the meaning of the same provision? In the judge’s view, it was beyond question that Métro had acquired rights relating “... to the activities of the appellant connected with the operation of its business. The appellant’s hands were tied in several respects. In operating its business it was required, under the very wording of the agreement, to obtain supplies from Métro and from suppliers designated by Métro to a very large degree.”“The appellant also could not cease doing business by selling its operation without first giving Métro the right to purchase the latter within the stated deadline. It was also provided that in the event Métro did not exercise its right to purchase the latter the appellant, as we have seen, had to make sure that the purchaser of the business signed a contract to be a member of Métro and observe the rights conferred on Métro by the aforesaid agreement for the unexpired portion of the term of the agreement.” [2]

He concluded at page (C.T.C. 2225-26):

I therefore consider that the amount of $75,000 received by the appellant can reasonably be considered a payment made for the acquisition by Métro of rights in the appellant’s business within the meaning of s. 12(l)(x)(viii) of the Act.

In the judge’s mind, this payment of $75,000 was also clearly a payment on account of capital. Although he did not have to decide the matter, he would have been inclined to believe that the expense represented by this payment of $75,000 was an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Act.

I entirely agree with the interpretation given in the aforementioned judgment of the terms “acquisition of an interest in the taxpayer” and “acquisition of an interest in his property”. However, is the interpretation given in that same judgment of terms “acquisition of an interest in a business”, an interpretation which differs entirely from the two others, the right one?

The meaning to be attached to the terms acquisition “of an interest in the taxpayer, his business or his property”, in French “un droit sur le contribuable, dans son entreprise ou dans son bien”, was examined by Jean Delage in an article entitled “Autres mesures fiscales” published by A.Q.P.F.S., at page 21. There he explained how, in his view, these terms must be understood:

Consideration of Acquisition of an Interest

Paragraph 12(l)(x) moreover will not apply to sums that could reasonably be considered as the consideration of the acquisition of an interest in a business, a property or a taxpayer. Parliament thus wanted to take into account business practices in which a taxpayer is offered a benefit which could prove to be taxable under paragraph 12(1 )(x) in overall consideration of an interest in the form of subscription of shares or an option to purchase shares or some other consideration. There is every reason to believe that an inducement payment in the form of financial assistance through the subscription of special preferred shares or another form would not be taxable.

[Translation.]

The same argument which is raised in the instant case appears to have been raised in Everett’s Truck Stop Ltd. v. Canada, [1993] 2 C.T.C. 2658, 93 D.T.C. 965 (T.C.C.). This was a case in which the Court had to rule in circumstances fairly similar to those in issue in the instant appeal. In consideration for taking over a debt of Everett’s Truck Stop Ltd., the latter undertook for five years to use and sell only the gasoline and other petroleum products supplied by Polar Oils Ltd. (“Polar”) and to buy from no other supplier. For five years, Everett’s undertook to request Polar’s assistance in the management of the business and to provide it with a monthly statement of the service station’s sales and expenses. A right of first refusal was also granted to Polar. Everett’s also undertook to supply gasoline to users at the price which Polar charged all its customers, less $0.06 per unit.

The court ruled (at page 15) that the sum received was fully taxable in the hands of Everett’s. “It was an inducement received by the appellant and paid by Polar in the ordinary course of their respective businesses within the meaning of paragraph 12(l)(x) in 1987, the year in which it was recognized in the appellant’s books as a credit to the cumulative eligible capital and the year in which the appellant’s obligation to Mel’s Truck Stop Ltd. [the original lender] was terminated.”

I continue to cite the court’s remarks (at page 16) in the same judgment: “So far as subparagraph 12(l)(x)(viii) is concerned there is no basis upon which I could determine that any portion of the payment was attributable to an acquisition by Polar Oils Ltd. of an interest in the appellant. I should have thought that if anything was paid for the right of first refusal it would be nominal. The predominant objective was to bind the appellant’s petroleum supply to Polar Oils Ltd. and to obtain the enhanced price for the product.”

Counsel for the respondent drew the Court’s attention to the meaning of the word “interesf’in the various legal dictionaries and in particular in Canada Tax Words, Phrases and Rules, at pages I-34 and I-35, where reference is made to the citation of Judge Jackett in Minister of National Revenue v. Shaw Estate, [1971] C.T.C. 15, 71 D.T.C. 5041 (Ex. Ct.) to 22 (D.T.C. 5045):

I have only been referred to one sense that the English word “interest”has that is in any way appropriate. That sense appears in the Concise Oxford Dictionary, 5th Edition, at page 635, as follows:

1. Legal concern, title, right, (in property)...

Used in this sense, section 3(1)(j) refers to an “interesf’in something, which interest has been purchased or provided by the deceased. A common use of the word “interesf’in such a context is to refer to a life interest in property, a reversionary interest in property, or a leasehold interest in property. I have no doubt that the word can also be used to refer to the “interest” of an absolute owner of property but it would be a rare use. A much more common use of the word would be to refer to such interest as a beneficiary may have in trust property. The word “interest’’is not, however, according to my understanding of the ordinary use of English language, appropriate to refer to an obligation to pay money upon the happening of an event some time in the future or to the actual payment when made. Such an obligation is not an “interesf’in property. It is an obligation to find and transfer (pay) unascertained property (money) at some as yet undetermined time in the future. There is no interest in any property created by entering into the contract. The contract merely creates a conditional obligation to pay money. Finally, there is no sense of the word “interesf’that extends to a payment of money as such.

In Remington v. R. (sub nom. Remington v. The Queen), [1995] 1 C.T.C. 9, 94 D.T.C. 6549, the Federal Court of Appeal wrote as follows (C.T.C. 13, D.T.C. 6552):

The Tax Court judge erred in approaching the issue as though the inducement had. been received on disposition of the lease, a capital asset. Neither trading in leases nor secondary intention had anything to do with it. The inducement was paid to him for entering into the lease, in other words, as consideration to induce him to acquire a capital asset, and, since no strings were attached, for nothing else.

The Tax Court judge did not examine the facts from the point of view of their source possibly being a business. That failure was an error in law.

I am of the same view as our Court in Supermarché Dubuc as regards the meaning of the acquisition of an interest in the taxpayer and in his property. This means the acquisition of shares or of an interest in respect of shares or the acquisition of a share in a corporation and the acquisition of a real interest in respect of its property. Where my opinion differs is with respect to the meaning to be given to the words “acquisition of an interest in his business”. Like the judge in Shaw Estate cited above, I do not believe that the appellant’s contractual obligations granted in consideration of the inducement payment can, in current legal language, be understood as interests acquired in a business. An interest in a business might possibly be a sharing in the business’s profits or possibly a manage- ment interest. I will not attempt to give a descriptive and exhaustive definition of what an interest in a business would be, but I can say with certainty what it is not. It cannot be contractual obligations to which the recipient of the inducement payment has agreed. Here I wish to restate the Court’s words in Supermarché Dubuc, supra, with respect to the use of the proposition “in”with respect to the word “property”:

...the use of the preposition “in”seems to me unsuited to describing personal rights or the rights of a creditor in legal terminology.

If the terms “interest in a property”or “interest in the taxpayer” could not refer to personal interests or rights of claim, the same is true with respect to the terms “interest in the business”.

An inducement payment is always granted in consideration of an obligation on the recipient’s part. Thus, in IKEA Ltd. v. R. (sub nom. IKEA Ltd. v. Canada), [1994] 1 C.T.C. 2140, 94 D.T.C. 1112 (T.C.C.), the taxpayer had signed a 10-year lease. It was therefore bound for 10 years. In Polar, the taxpayer was also bound and had undertaken to act in a certain way. This was a contractual obligation on the part of the debtor which had no interest in its business. To interpret it otherwise would erase all effect of paragraph 12(l)(x) of the Act. This is what counsel for the respondent contended and I agree with that view.

Nor do I see, and no one explained it to me, how this payment could be the proceeds of disposition of intangible property and become a component of the eligible capital amount within the meaning of section 14 of the Act. The appellant disposed of nothing; it merely made a contractual undertaking.

I therefore conclude that the amount of $150,000 was an inducement payment which must be included in computing the appellant’s business income pursuant to the aforementioned paragraph 12( 1 )(x) of the Act.

The appeal is dismissed with costs.

Appeal dismissed.