Garon, J.T.C.C.:—This is an appeal under the informal procedure from an assessment of the Minister of National Revenue dated August 9, 1991 for the appellant’s 1988 taxation year. By that assessment the Minister of National Revenue included in the appellant’s income $75,000 received from Métro- Richelieu Inc. ("Métro"), whereas the appellant had considered that the amount was the proceeds of disposition of eligible capital property and as such had included the sum of $36,560 in its income. According to the Minister of National Revenue's confirmation notice, this addition to the appellant’s income was made pursuant to the provisions of paragraph 12(1)(x) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
There is no dispute as to the facts concerned in this appeal.
Jean-Claude Dubuc was the only person to testify for the appellant, while the respondent called Claude Brunetta, Vice-President, Expansion and Banner Development, for Métro.
Mr. Dubuc stated that he began operating a grocery business on July 1, 1973 under the trade name Dubuc & Frères Enr. A joint stock company was subsequently established to continue operating this business. The grocery business was first operated under the Trans-Québec banner and from 1977 or 1978 onwards under the Métro banner. Neither Mr. Dubuc during the period prior to the creation of the appellant nor the latter thereafter was required to purchase fruit, vegetables and meat from Métro. There was no agreement, even oral, between them and Métro.
On June 30, 1988 an important change occurred in the business relations between the appellant and Métro. On that day the appellant on the one hand, and Métro-Richelieu Inc. and Épiciers Unis Métro-Richelieu Inc. ("Épiciers") on the other, entered into an agreement in the form of a letter which covered several aspects of the appellant's business. This letter, from which I omit the introductory part and the final portion where the signatures of the parties to the agreement appear, is set out below:
For good and valid consideration and as a 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. ("Métro") or Épiciers Unis Métro-Richelieu Inc. ("Épiciers"), we hereby undertake jointly and severally to continue firmly and irrevocably our membership of Métro and Épiciers for a minimum period of 20 years ending on June 29, 2008 ("the period”). It is agreed that during the period we shall operate the food business located at 887 Marie-Victorin, Deschaillons ("the business") under the Métro banner or any other banner acceptable to Métro and Épiciers.
We further hereby agree that during the period Métro and Épiciers shall have a right of first refusal over the business or any other food business at present operated or to be operated by ourselves, directly or indirectly, under one of the Métro or Épiciers banners during the period, in the event of receipt of a purchase or sale offer for the said business(es) or for 20 per cent or more (in one or more transactions) of the issued shares of the capital stock of the company operating the said business(es), so that Métro and Épiciers shall have a priority right to purchase the said businesses) or the said shares over any other purchaser.
In this regard, before accepting any purchase or sale offer pursuant to the aforementioned right of first refusal, we shall send Métro and Épiciers a copy of the said offer and Métro or Épiciers shall have a priority right to purchase the said business(es) or shares on the same terms and conditions as specified in the said offer, within 30 days of receipt of a copy of the offer.
If Métro or Épiciers does not exercise its priority purchase option within this 30- day deadline, we shall then proceed within the next six months to the sale contemplated by the offer received on the terms and conditions initially stated in the said offer, failing which Métro and Épiciers shall retain their priority purchase right.
We further agree that in the event that Métro or Épiciers does not exercise their priority purchase right as stated above, any purchaser, successor or assignee of our rights in the said business(es) and any shareholders of such purchaser, successor and assignee shall sign with Métro and Épiciers, before any such assignment, an agreement making them members of Métro or Épiciers and shall similarly give an undertaking to Métro and Épiciers to observe the rights herein conferred for the unexpired portion of the period, failing which any such assignment shall be null and void.
We further agree to obtain our supplies of all goods and products required from Métro or Épiciers or from suppliers designated by either one, so that the sum of our purchases^ from the Épiciers warehouses and by direct deliveries authorized and billed by Épiciers during its fiscal year shall be at least 68 per cent of our retail sales of grocery products, 68 per cent of our retail sales of meat and 56 per cent of our retail sales of fruit and vegetables.
Métro and Épiciers shall at the end of their fiscal year determine whether we have observed the required minimum fidelity ratios and we undertake to repay to Métro or Épiciers on demand an amount equivalent to five per cent of the difference between the amount of actual purchases and the minimum purchases required under the above rule if the amount of actual purchases is less than the amount of deemed purchases in each of the aforementioned categories of product.
We further undertake to use the supplier designated by Métro for purchasing, renting and laundering uniforms.
We further hereby agree that Métro and Épiciers shall have a priority right to purchase our rights in the lease held by us for operation of the aforementioned businesses in the event that the premises so occupied are relinquished. In this regard we shall inform Métro and Epiciers in writing before notifying our lessor of such relinquishment. Métro and Épiciers shall then have a priority option to purchase our rights and interest in one or more of the said leases within 30 days following receipt of the aforementioned notice. If Métro or Épiciers then decides to purchase our rights, a fair and equitable determination of the consideration to be paid for assignment of the said lease or leases shall then be made by the partie within the next 30 days.
Please take note that in the event of your acceptance hereof the undertakings given herein shall be considered an integral part of other undertakings already given or to be given in accordance with the policies of Métro or Épiciers. However, the termination of the undertakings given herein shall not have the effect of terminating all other undertakings, contracts or agreements which may then exist between Métro, Épiciers and the undersigned.
It is agreed that we may not assign or transfer the rights and obligations conferred on us hereunder without the prior written consent of Métro and Épiciers. Further, all costs, charges and expenses incurred by Métro and Épiciers as a consequence of acts or omissions of the undersigned and, without limiting the generality of the foregoing, all costs accruing to Métro or Épiciers as the result of any legal proceeding of any kind whatever brought by them to assert their rights and remedies or to collect money owed hereunder and interest thereon shall be assumed by us.
Without prejudice to the other rights and remedies of Métro and Épiciers in the circumstances, we jointly and severally agree that in the event of our default hereunder we shall pay Métro and Épiciers, and for each such default as a penalty and in addition to any other amount which may then be owed to them, the sum of $400,000 for the first ten-year term and the sum of $700,000 for the second ten- year term, the said money to be payable when such default occurs, without prejudice to the other rights of Métro and Épiciers resulting from law or from other agreements.
It is hereby agreed that any notice, demand or communication to be given or made hereunder shall be given or made in person or sent by registered mail to the following address:
(a) Métro or Épiciers:
11 011, boulevard Maurice Duplessis MONTREAL, Québec
H1C 1V6
Attention: Vice-President, Administration
(b) to ourselves:
SUPERMARCHÉ DUBUC & FRERE INC. (M0577) 887, Marie-Victorin
DESCHAILLONS, Québec GOS 1GO
Attention: Messrs. Jacques and Jean-Claude Dubuc
or to any other address that one or other of the parties shall from time to time indicate to the other party in writing. Any such notice, demand, acceptance or other communication shall be deemed to have been received when delivered in person or, if sent by registered mail, on the fifth day after mailing. In the event of a postal strike or disruption any notice, demand or communication shall be given in person or by telegram.
These presents and the guarantees given therein by ourselves to Métro and Épiciers shall not constitute a novation or derogation from our existing obligations to Métro and Épiciers.
[Translation.]
This agreement was signed in the atmosphere of goodwill that had existed for many years between Mr. Dubuc and the appellant on the one hand and Métro on the other. The agreement was also signed at a time of keen competition between Québec food wholesalers. These wholesalers were seeking, by means of agreements concluded by them with grocers, to establish permanent links with the latter so they could rely on having a definite volume of sales. The agreement was described as a purchasing fidelity agreement.
However, so far as Mr. Dubuc was concerned the appellant’s purpose was to operate a food business. The appellant was quite satisfied to operate this business under the Métro banner. Mr. Dubuc saw concrete advantages to be gained from his association with Métro. In this connection he mentioned in particular the Métro name, the prestige connected with this banner and the advertising done by Métro. He explained that he signed this agreement on the appellant's behalf because he had confidence in Métro. In this regard the Court learned that another Métro competitor had had preliminary discussions with Mr. Dubuc. However, no amount was offered to the appellant by this competitor during these initial negotiations.
Mr. Dubuc recognized that the payment of $75,000 by Métro, repayment of which could not be required, was an important if not conclusive factor leading him to sign the agreement at issue here. This sum of $75,000 was paid to the appellant by Métro immediately after the agreement of June 30, 1988 was entered into. The payment of this money was not covered by any clause in the agreement. This failure to mention the payment in the agreement was not explained either by Mr. Dubuc or by Mr. Brunetta.
Mr. Dubuc also noted that the agreement required the appellant to inform Métro if it wished to sell its business, in view of the right of first refusal given to the latter by the appellant in the aforementioned agreement. Furthermore, if it sold to anyone else but Métro, the appellant undertook that the purchaser would sign an agreement to become a member of Métro and would also observe the rights conferred on Métro for the unexpired period. In passing, as it was established that the appellant was owner of the real property where it operated its business, I note that the clause regarding Métro's right in the event of a lease could not be applied in the present situation.
Special reference was also made to the various ratios which the appellant had to observe in obtaining supplies of fruit and vegetables, meat and grocery products. In the case of grocery and meat products the percentage of the appellant’s purchases had to be at least 68 per cent of its retail sales for each of these two categories, whereas for fruit and vegetables the appellant’s purchases were to be 56 per cent of its retail sales. Mr. Dubuc fully understood that if the appellant, for example, were to purchase food products elsewhere it would be required to pay a penalty. That penalty would consist of repayment of five per cent of the difference between the actual purchases and purchases not made, pursuant to the agreement at issue in the instant appeal.
In his testimony Mr. Dubuc also noted that the agreement provides for a penalty of $400,000 for the first ten-year term and $700,000 for the second ten-year term for each failure by the appellant to perform the obligations stated in the agreement. From a practical standpoint there was no possibility of the appellant, for example, offering to do business with IGA or Provigo unless a wholesaler was prepared to pay the amount of the penalty in question. Mr. Dubuc also added that if the appellant sold its business it would be obliged to sell it at a price below what it could have obtained if it had not signed the agreement at issue here. He stated that if the business was sold to someone already associated with Métro the latter would receive no benefit and would accordingly offer no incentive payment, since no sales volume increase would necessarily result for Métro. If on the other hand the business was sold to a Métro competitor a substantial penalty would have to be paid, as already indicated.
Mr. Dubuc further stated that it is in practice almost impossible for a retailer to do business without being associated with a wholesaler by a fidelity agreement. He also added that he could not do business under another banner or by associating with another wholesaler as a result of the obligation imposed on the appellant to pay a very high penalty.
The Court learned from Mr. Brunetta’s testimony that Métro has been a public joint stock company since about 1985. Merchants are required to hold a number of class B shares. These shares are given as security to ensure Métro that the retailers would pay for their food product purchases from Métro. A personal undertaking is also signed by the shareholders themselves of the joint stock companies operating a business. This commercial practice on the part of wholesalers to require undertakings from most food retailers began somewhere around 1985. As a result of the policy adopted by one of the three large food chains in Québec to give monetary incentives to certain merchants to induce them to join a particular banner, Mr. Brunetta indicated that Métro decided to do likewise and establish ties with retail merchants, either by a “fidelity agreement" or by a lease under which the merchant agreed to assign his principal lease to Métro, which in turn made a sublease to the merchant for 10, 15 or 20 years, as the case might be. Under a fidelity agreement Mr. Brunetta noted that Métro secured two important benefits: a long-term connection with a food merchant and a better concentration of purchasing of its products.
The Court further learned that Métro had established a program known as "corvée-rénovation" (required renovation). Under this program Métro made available to its merchants amounts of money varying from $15,000 to $35,000, which were given to them to expand or renovate their premises. Other commercial agreements could also be entered into by Métro and merchants covering, for example, rebates, transportation costs and observance of advertising standards.
Mr. Brunetta also mentioned in his testimony that although the amount of $75,000 paid to the appellant was not under any circumstances repayable, the Métro management required that the amount oe invested in the business. He also stated that the fidelity agreement was connected to the operation of a business on a given site. The Court learned that only 10 to 12 per cent of merchants buying goods from Métro have not signed fidelity agreements with the wholesaler. Mr. Brunetta stated that the fidelity agreement was not equivalent to a franchise, it was a form of affiliation: Métro did not interfere in the running of a business. Mr. Brunetta also mentioned certain internal regulations of Métro which prohibit a shareholder from doing business under any other banner. Mr. Brunetta also noted that as regards the five per cent penalty mentioned above on purchases not made, Métro itself made a kind of adjustment if the merchant did not pay this penalty by exercising its rights under the security it had over the shares held by the merchant in question. There were also other internal procedures for penalizing a merchant who obtained supplies from other wholesalers: for example, the retailer would receive a lower rebate at the end of the year.
Appellant’s arguments
The appellant argued that as a result of the fidelity agreement of June 30, 1988 between the appellant and Métro, the latter had acquired rights over the appellant in accordance with subparagraph 12(1 )(x)(viii) of the Act. These rights are summarized by counsel for the appellant as follows in a submission attached to the notice of objection referred to in the notice of appeal. Part of that submission reads as follows:
The taxpayer considers that at the time the company signed the fidelity agreement with Métro-Richelieu (the debtor), the latter had acquired rights over the taxpayer. These rights may be summarized as follows:
— The company had for a given period alienated its freedom to change its banner by adopting another which might possibly be in competition with Métro- Richelieu.
—— The debtor thus acquired a right over the company, so much so that in order to buy back this right and terminate its agreement to the debtor it would have to pay $1,100,000, namely $400,000 for the first ten-year term and $700,000 for the second, also of ten years.
—— The debtor also acquired a right over the company's purchasing policy for the next twenty years, as the company had to maintain a fixed ratio of purchases from Métro-Richelieu.
-— With respect to this clause, the debtor also joins [sic] a right of supervision of the company's affairs and continuance of the right so acquired is protected by a five per cent penalty on the difference between the agreed ratio and the results actually obtained. That penalty and the ratios required however have no connection with the volume discount or other discounts currently in use.
-— Right of first refusal over the sale of the business or shares of the company, right to a possible lease of the premises of the food market.
The taxpayer considers that the sale of these rights constitutes the sale of eligible capital property because it is specifically excluded from the definition given to inducements in subparagraph 12(1)(x)(viii) and that this treatment corresponds to the economic substance of this transaction.
The purpose of paragraph 12(1)(x) is to include in the taxpayer’s income any amount received (as a reimbursement, contribution, allowance or assistance) in the ordinary course of its business, which has not reduced the cost or capital cost of the property related to the amount received (related property) or which has not reduced the amount of the expense related to the amount received (related expense).
In the instant case the payment made by Métro-Richelieu was made to induce the taxpayer to conclude the fidelity agreement:
— This payment was not associated with the purchase of property, whether equipment, rental improvements or otherwise.
— This payment was not associated with expenses incurred or to be incurred by the taxpayer.
— The taxpayer had absolute control over the amount received.
— The taxpayer was not required to use the said amount for specific purposes.
This is accordingly not a case of the kind contemplated by the legislature when it introduced paragraph 12(1)(x).
The taxpayer accordingly considers that the Department erred in making the reassessment which is the subject of this objection and asks the Department to consider the amount of $75,000 received from Métro-Richelieu as the proceeds of an eligible capital property and reassess it accordingly.
[Translation.]
Respondent's arguments
It was argued on behalf of the respondent that the amount received from Métro-Richelieu is an inducement pursuant to paragraph 12(1 )(x) of the Act. Counsel for the respondent added that all the conditions for application of that paragraph are present. In particular, she noted that the exception mentioned in subparagraph 12(1 )(x)(viii) does not apply here as Métro-Richelieu did not acquire any right over the appellant or the way in which the latter’s business was conducted.
Counsel for the respondent argued that it is 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(1 )(x)(viii) cannot be applied to each undertaking and each right as otherwise paragraph 12(1 )(x) would be devoid of all practical meaning. She also put forward the proposition that the appellant did not dispose of anything whatsoever in the instant case and the payment in question is not the proceeds of disposition of an eligible capital property.
Alternatively, the respondent argued that the amount of $75,000 should be included in the appellant’s income for 1988 "as business income pursuant to subsections 9(1) and 248(1)".
Analysis
It became clear in the course of the argument by counsel for the parties to this case that the issue turned on the meaning to be given to subparagraph 12(1 )(x)(viii) of the Act. It was not disputed by counsel for the appellant that the payment of $75,000 received by the appellant should be included in the appellant’s income were it not for the existence of subparagraph 12 (1 )(x)(viii). To further clarify the specific question involved in this appeal, it is worth reproducing below the text of paragraph 12(1 )(x) in its version applicable to 1988:
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 be 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 expense, 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. . . . .
As can be seen, paragraph 12(1)(x) requires notably that there be included in a taxpayer's income from a business or property any amount received in a given year from a person, government or public authority if the amount may reasonably be considered to have been received as an inducement of any kind. This is the gist of the general rule stated in subparagraph 12(1 )(x)(iii). Subparagraph 12(1)(x)(iv), for its part, also requires the inclusion of an amount which it is reasonable to consider was received "as a reimbursement, contribution, allowance or as assistance" in various forms "in respect of the cost of property or in respect of an expense".
It seems clear in the instant case that the $75,000 payment received by the appellant does not fall into this latter category established by subparagraph 12(1 )(x)(iv), but rather into the first category covered by subparagraph 12(1 )(x)(iii), the so-called inducements category.
The Court must therefore determine whether the $75,000 payment received by the appellant from Métro during its 1988 taxation year can reasonably be regarded, on the facts of the instant case, as a payment made for the acquisition by Métro "of an interest in" the appellant, "in [its] business" or "in [its] property".
The first question is as to the rights acquired by Métro from the appellant when the agreement of June 30, 1988 was concluded.
Analysis of this agreement indicates that the most important rights acquired by Métro were of four types.
1. A priority right to purchase before any other purchaser the appellant's business or any other business it might operate in the future or the shares of the company operating that business “in the event of receipt of a purchase or sale offer for the said business(es) or for 20 per cent or more (in one or more transactions) of the issued shares of the capital stock of the company operating the said business(es), so that Métro and Épiciers shall have a priority right to purchase the said business(es) or the said shares over any other purchaser". It is a first refusal option.
It was further stated in the agreement as regards this right of purchasing the business or shares of the company operating the business that Métro “shall have a priority right to purchase the said business(es) or shares on the same terms and conditions as specified in the said offer, within 30 days of receipt of a copy of the offer". It was further added:
If Métro or Épiciers does not exercise its priority purchase option within th is 30- day deadline, we shall then proceed within the next six months to ‘ne sale contemplated by the offer received on the terms and conditions initially stated in the said offer, failing which Métro and Épiciers shall retain their priority purchase right.
[Translation.]
2. In the event that Métro does not exercise its right to purchase the business or shares in the situation mentioned in paragraph 1 above, Métro is the beneficiary of the appellant’s promise that the purchaser of the business or shares in question will have to sign an agreement to be a member of Métro and give an undertaking to Métro to observe the rights conferred on it by the agreement for the unexpired portion of the 20-year period specified by that agreement, ending on June 29, 2008.
3. Métro is the beneficiary of the appellant’s obligation to obtain supplies from Métro or from suppliers appointed by the latter for grocery products, fruit and vegetables and meat, in proportions indicated in the agreement of the retail sales made by the appellant for each class of product. This right of Métro to "fidelity ratios" to be observed by the appellant is subject to a penalty clause requiring the appellant to repay "on demand an amount equivalent to five per cent of the difference between the amount of actual purchases and the minimum purchases required under the above rule if the amount of actual purchases is less than the amount of deemed purchases in each of the aforementioned categories of product". The agreement provides in this regard that Métro “shall determine at the end of its fiscal year whether we have observed the required minimum fidelity ratios".
4. Finally, Métro was given the benefit of a general penalty clause with regard to each failure of the appellant to perform the obligations stated in this agreement of June 30, 1988. This clause is again reproduced for convenience' sake:
Without prejudice to the other rights and remedies of Métro and Épiciers in the circumstances, we jointly and severally agree that in the event of our default hereunder we shall pay Métro and Épiciers, and for each such default as a penalty and in addition to any other amount which may then be owed to them, the sum of $400,000 for the first ten-year term and the sum of $700,000 for the second ten- year term, the said money to be payable when such default occurs, without prejudice to other rights of Métro and Épiciers resulting from law or from other agreements.
[Translation.] I have not mentioned in this list of the most important rights conferred on Métro by this agreement the ''priority right to purchase our rights in the lease held by us for operation of the aforementioned businesses in the event that the premises so occupied are relinquished", as according to the evidence this right had no consequences, at least until the date of the hearing of this appeal, since the appellant was owner of the premises where the business is operated. I have also made no mention of the fact that Métro was the beneficiary of the appellant’s obligation to "use the supplier designated by Métro for purchasing, renting and laundering uniforms". This right seems to me to be a secondary aspect of the instant case.
The question is whether these rights conferred on the appellant by the agreement of June 30, 1988 represent the acquisition by Métro of rights over the appellant, in its business or in its property.
I am inclined to believe that the acquisition of a right “in [its] property" mentioned in subparagraph 12(1 )(x)(viii) implies the acquisition of real rights over the property of a taxpayer. First, the use of the preposition "in" seems to me unsuited to describing personal rights or the rights of a creditor in legal terminology. Second, in the context of a right pertaining to property the preposition "in" designates a close relationship to that property, a jus in rea. I consider that when associated with the word "property" the preposition "in" is equivalent to the preposition "on". In this regard it is worth looking at the terminology used by Article 405 of the Civil Code of Lower Canada —— the Code now in effect — which reads as follows:
On peut avoir, sur les biens, ou un droit de propriété, ou un simple droit de jouissance, ou seulement des servitudes a prétendre.
A person may have on property either a right of ownership, or a simple right of enjoyment, or a servitude to exercise.
[Emphasis added.] For example, Article 2016 of the Civil Code of Lower Canada defines hypothec in part as “a real right upon immoveables made liable for the fulfilment of an obligation" [emphasis added].
Similarly, in the new Code , it is stated that ‘’a hypothec is a real right on a movable or immovable property" [emphasis added].
In the second edition of his text Vocabulaire juridique the writer Gérard Cornu discusses the word "réel" [real] as follows:
Relating to a thing (corporeal) or a right over a thing. E.g. real action, real subrogation. Ant. personal.
[Translation.] The same writer goes on to discuss the word "réel" [real] in the phrase "droit réel" [real right] as follows:
Right bearing directly on a thing (jus in re) and procuring for its holder all or part of the economic utility of that thing. E.g. ownership is the most complete real right. V. usufruct, servitude, use, right to follow, right of first refusal, collateral right, estovers. Cf. right to claim.
[Translation.]
In the instant case it is clear that Métro did not acquire any real rights over the appellant’s property. It only acquired a personal right or right to claim. A first refusal option in particular is clearly not a real right.
As to the part of subparagraph 12(1)(x)(viii) which mentions the acquisition "of an interest in the taxpayer", it seems to me that this part of the subparagraph cannot apply if the taxpayer is an individual. This kind of language can only be understood if it applies to a joint stock company. In civil law terminology, at least, there can be no question of a right "in" a natural person. In the case of an artificial person the subparagraph can be applied to a person owning shares in a joint stock company. If in the instant case Métro had by this agreement acquired the appellant’s shares it could be said that Métro had acquired rights in the artificial person represented by the appellant. However, that is not the situation in the facts at issue here.
It remains to consider the part of subparagraph 12(1 )(x)(viii) which refers to the acquisition “of an interest in [the] business". The concept of a business involves the activities themselves, the operations associated with the management and functioning of an economic entity. Further, subsection 248(1) describes the word "business" in part as follows:
"business" includes a profession, calling, trade, manufacture or undertaking of any kind. . . .
This word "business" does not include the property used in operating the business: see e.g., subsection 22(1) of the Act.
In view of the nature of the concept of a business, I think it is beyond question that Métro 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. In other words, the appellant had to meet certain quotas or "fidelity ratios" in purchasing the classes of product covered by the agreement. This undertaking by the appellant is accompanied specifically by a penalty clause in Métro's favour. 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 that agreement. Métro thus held rights regarding how the appellant would cease operating its business in the circumstances I have just indicated.
Moreover, compliance with all the obligations imposed on the appellant by the agreement of June 30, 1988 —— and not only those I have just mentioned -—- is guaranteed by a very severe penalty clause applying to each failure to perform any of those obligations.
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 subparagraph 12(1 )(x)(viii) of the Act.
Counsel for the respondent did not discuss at any great length the alternative argument that the payment to the appellant of the $75,000 constituted income within the meaning of subsection 9(1) of the Income Tax Act. It seems clear to me that this $75,000 payment was a payment on a Capital account. In consideration for this payment the appellant undertook by an agreement which was to last twenty last years to operate its business under the Métro banner, and in particular undertook to observe certain quotas in Métro's favour for the purchasing of various categories of food products. The appellant also gave Métro a first refusal option to purchase the appellant’s business and the snares of a company operating that business. Other obligations were imposed on the appellant by this agreement. Thus, the agreement substantially altered the conditions under which the appellant would be operating its business. The association between the appellant and Métro created by this agreement was something fundamental and permanent.
Although I do not have to decide this point, I am inclined to think that the expense represented by this $75,000 payment is an eligible capital expense within the meaning of paragraph 14(5)(b) of the Act.
For these reasons the appeal is allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that paragraph 12(1)(x) does not apply to the $75,000 payment received by the appellant from Métro during its 1988 taxation year. Neither is this payment income within the meaning of subsection 9(1) of the Act.
Appeal allowed.
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