James M. Shaw v. Her Majesty the Queen, [1992] 1 CTC 204, 92 DTC 6145

Strayer, J.:—

Relief Requested

The plaintiff appeals the second reassessment by the Minister of National Revenue in respect of his 1986 income tax on the ground that the Minister wrongly treated the amount of $1,020,368 as interest income rather than as proceeds of disposition of property. He also seeks recovery of income tax paid in accordance with that reassessment together with interest thereon.

Facts

The plaintiff was owner of farm lands near Calgary when on July 20, 1977 Her Majesty the Queen in Right of Alberta served a notice of intention to expropriate certain of those lands for the purposes of a provincial park. He was subsequently sent a notice on September 30,1977 that effective that day the land had been expropriated. The Province acquired title that day and took possession on January 31,1978. On November 6,1977 the Province served the plaintiff with a notice of proposed payment for the expropriated lands together with actual payments in accordance therewith of $719,400, the amount which the province thought appropriate as compensation.

In 1978 the plaintiff and adjacent land owners similarly affected commenced an action against the province seeking higher compensation. The plaintiff's claim against the province included an enhanced amount for market value, a further amount for loss of special economic advantage attributable to these lands, a sum representing the cost of locating replacement land, a sum for injurous affection, and interest on the total of the foregoing for the period from February 1, 1978 (when the plaintiff lost possession of the land) to judgment. This action was settled. While there is no single document incorporating the settlement agreement, the parties accept that the terms are adequately set out in a letter from counsel for the Province dated January 9, 1986 (Exhibit 4), a letter from the provincial department of public works dated April 8,1986 (Exhibit 5), and a release signed by the plaintiff in this action and his co-plaintiffs in the action in the Court of Queen's Bench of Alberta (Exhibit 6). It is further agreed that the agreement was effective February 28, 1986 and that under that agreement James M. Shaw, the taxpayer in this action, would receive a further $566,100 representing the value of his expropriated property in excess of the amount already paid by the province, together with interest on that excess amount at 13 per cent compounded annually from September 30, 1977 (the date of taking of ownership) to February 28, 1986, which interest amounted to $1,020,368, the amount in issue in the present case.

The plaintiff had in 1977 reported the initial sum of $719,400 received by him at that time from the province as proceeds of disposition and this was accepted by the Minister. In respect of his 1986 taxation year the plaintiff reported all these further sums as proceeds of disposition of the expropriated lands. As I understand it, in both his first reassessment and his second reassessment the Minister of National Revenue declined to treat the sum of $1,020,368 described above as proceeds of disposition but instead treated it as interest income. The plaintiff paid the additional tax assessed but filed an objection and, after the second reassessment which was unchanged in respect of the issues in question here, he brought this appeal.

In essence the Minister contends that the sum in question should be treated as income pursuant to subsection 12(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") which provides that there shall be included in computing the income of a taxpayer any amount received on account of interest. On the other hand the taxpayer relies on paragraph 44(2)(a) and subparagraph 54(h)(iv) of that Act. These provide as follows:

44.(2) For the purposes of this Act, the time at which a taxpayer has disposed of a property for which there are proceeds of disposition as described in subparagraph 13(2)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv), and the time at which an amount, in respect of those proceeds of disposition has become receivable by the taxpayer shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation to him for the property lost, destroyed, taken or sold

54.(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

The plaintiff contends that by paragraph 44(2)(a) he must be deemed to have disposed of his property on February 28, 1986, the date of the settlement. Therefore, he argues, there could not have been interest payable on the agreed value of the property prior to that time in terms of the Income Tax Act because by the terms of that Act he was still the owner of the property until the date of settlement. Further he argues that the language of subparagraph 54(h)(iv) is broad enough to include as proceeds of disposition all forms of compensation agreed upon in the settlement of February 28, 1986 as owing on that date. He says that the only interest income, whose taxability is not in dispute, was a small amount of interest owing to him due to the delay from February 28 to March 26, 1986 in the actual making of the compensation payment.

Issue

The issue is whether the sum of $1,020,368 paid pursuant to the settlement of February 28,1986 should be treated as proceeds of disposition or as interest income for the purposes of the Income Tax Act.

Conclusions

It is a difficult task indeed to characterize this sum for tax purposes. Counsel did not provide me with any clear and binding precedent on the matter. There are some decisions of the Tax Court of Canada and its predecessors supporting both sides of the issue. [1]

Counsel for the Minister has relied in part on the provincial Act under which the land was expropriated, namely the Expropriation Act, S.A. 1974, c. 27, to support his view that the payment in question was interest. In reviewing sections 39, 40, and 64 of that Act I believe that the provincial law treats such a payment not as "compensation" but as interest". Therefore if I could decide the matter solely on the basis of the Expropriation Act of Alberta I could probably characterize this payment as "interest".

I might similarly be driven to the conclusion that this payment was "interest" if I only had regard to the purpose for which it was paid to the taxpayer. That purpose appears to have been to provide him with the revenue that he would have had from the price of the land had that price been paid at the time of taking of title by the province. It is clear from the documents of settlement and from the agreed statement of facts filed by the parties in this case that the interest was calculated at the rate of 13 per cent on the increase in the capital sum determined by the settlement to represent a fair value for the property. The rate of 13 per cent was arrived at (in the words of the agreed statement of facts) "after the plaintiff reviewed the rate of return from his other investments during the time September 1977 to January, 1986”. Therefore in economic terms the interest payable was calculated so as to replace profits or interest lost by the plaintiff due to the fact that he did not have available to him thecapital sum representing the total value of the land as finally agreed upon.

I have concluded, however, that the sum of $1,020,386 in question should be characterized as part of the compensation for property taken under statutory authority and therefore as proceeds of disposition, within the definition in subparagraph 54(h)(iv) of the Income Tax Act.

I believe this conclusion is most consistent with the rationale of the Federal Court of Appeal in Sani Sport Inc. v. Canada, [1990] 2 C.T.C. 15, 90 D.T.C. 6230 (F.C.A.). In that case the appellant Sani Sport Inc. owned land upon which it operated a business. Part of the land was expropriated by Hydro-Québec. By the final settlement there was paid some $63,000 representing the value of the property expropriated and the decrease in value of the rest of the land, together with a sum of some $286,000 representing the appellant's "commercial loss", such loss resulting from the frustration of the appellant's plans to enlarge its business using some of the land expropriated. This amount was described by Marceau, J.A. as having been “calculated by capitalizing the income that the appellant would have earned if its plans for expansion had been carried out. . . .” At trial Pinard, J. had held this amount to be part of the proceeds of disposition and this conclusion was confirmed by the Court of Appeal. In certain ways the case is distinguishable from the present one. The Minister of National Revenue had not assessed the sum of $286,000 as income from the business, but only as proceeds of disposition. The taxpayer was not prepared to concede that it was proceeds of disposition of property but argued instead that it represented damage to the business. By contrast, in the present case the taxpayer is insisting the amount in question is part of the proceeds of disposition whereas the Minister insists that it is interest income. Further, it was easier in the Sani Sport case to connect the loss of business opportunity with the property because, as Marceau, J.A. pointed out, this amount represented the “ particular economic value that the land had for the expropriated party". Nevertheless I believe the rationale of the Sani Sport decision applies in the present case. In Sani Sport Marceau, J.A., writing for himself and MacGuigan, J.A., refers to the argument of the appellant to the effect that the sum of $286,000 was paid for the purpose of compensating for damages suffered by the business; and that the purpose was not to compensate for lost property, although the expropriation was the cause of that payment being made. It was argued by the appellant that the tax treatment of a sum must depend on the purpose for which it was paid, not the cause of the payment. Marceau, J.A. commented on this (at page 17 (D.T.C. 6232)):

I admit that I do not entirely understand where the appellant is going with its reasoning. If we were to apply its position here as a whole, we would have to ask what these damages were that were to be compensated for, and we might quickly

conclude that it was for the loss of operating profits requiring an appropriate and still more disadvantageous tax treatment.

[Emphasis added.]

He went on to say that in any event the matter was clearly determined by subparagraph 54(h)(iv) of the Income Tax Act, as follows (at page 18 (D.T.C. 6232)):

It is clear that Parliament intended that compensation for expropriation be treated as a unitary whole for tax purposes and not be subject to "dissection" under the various headings of damages considered in order to establish the amount.

I infer from this decision that it does not matter if part of the compensation is calculated on the basis of lost income. The compensation must be treated as a unit and not "dissected" into various categories depending on the yardstick used to calculate any particular part of the compensation. [2] Although that calculation might be based on lost profits (i.e., interest on the capital sum ultimately paid for the property) and thus its purpose was to replace lost income, the Court should not use that as a basis for characterizing such component of the compensation package as other than proceeds of disposition. Desjardins, J.A. in a separate concurring decision in Sani Sport approached the matter with emphasis on the words "compensation for property taken” in subparagraph 54(h)(iv) when read in conjunction with the definition of" property" in subsection 248(1) which includes"a right of any kind whatever . . . ." She considered the payment of $286,000 to be compensation for the “loss of a source of income" which is loss of a“ right” and thus of property" capable of expropriation.

Applying the rationale of Sani Sport to the present case, even though the sum of $1,020,368 was calculated as a replacement of interest income which the plaintiff would have had if he had been paid the full price for his land at the time of taking, this does not make it other than "compensation for property taken”. The Court should not dissect the various "heads of damage" (per Marceau, J.A.) relied upon to calculate the total amount of payment to the property owner but should treat that amount as a whole. Also, by the analysis of Desjardins, J.A., the $1,020,368 was paid to the plaintiff for "loss of a source of income", the right to that source being a form of“ "property".

Also I believe that the characterization of the sum in question as proceeds of disposition is most consistent with paragraph 44(2)(a) of the Income Tax Act, quoted above, upon which the plaintiff relies. It will be noted that this paragraph provides:

44.(2) For the purposes of this Act, the time at which a taxpayer has disposed of a property . . . and the time at which an amount, in respect of . . . proceeds of disposition has become receivable by the taxpayer shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation . . . .

[Emphasis added.]

This subsection deems, for the purposes of the whole Income Tax Act, the time at which the compensation is receivable by the taxpayer. In the present case that time was February 28, 1986 when the settlement was finalized. Until that time, for the purposes of the entire Income Tax Act, no moneys were receivable by the plaintiff in respect of the disposition of the property and therefore no interest could be receivable by him in respect of the capital sum until the date of settlement. It is irrelevant that the compensation package included the equivalent of interest on the additional value of the property calculated from the time of taking of ownership until the date of settlement.

I recognize that this view of subsection 44(2) is the opposite of that expressed by Bonner, J. of the Tax Court of Canada in the Wride case, supra. In his view subsection 44(2) operates only to deem that ownership continues up to a certain ascertainable time but it cannot operate to impose upon a sum of money paid to the owner "a character which is at variance with reality”. This case was decided prior to the Court of Appeal decision in Sani Sport. With respect, it appears to me that the opening words of subsection 44(2), which state that the time at which the proceeds of disposition are receivable by the taxpayer are to be deemed "for the purposes of this Act" to be the date of, inter alia, settlement, give that deemed timing an impact affecting all other relevant parts of the Act. Part of that impact is as an aid to interpretation of what is meant by” compensation for property” in subparagraph 54(h)(iv) and means, inter alia, that amounts received under a settlement no matter how calculated cannot be treated as interest on money owed to the taxpayer prior to settlement.

The appeal is therefore allowed and the Minister of National Revenue is directed to reassess the plaintiffs income for the 1986 taxation year so as to treat the sum of $1,020,368 as proceeds of disposition and not as interest income. Any resulting excess of tax paid by the plaintiff in respect of the 1986 taxation year shall be refunded to him with interest where appropriate as prescribed by the Income Tax Act. The plaintiff is entitled to his costs in this action.

Appeal allowed.