Teitelbaum,
J.:—The
plaintiff,
Mohawk
Oil
Co.
Ltd.
(Mohawk)
carries
on
the
business
of
distributing
and
marketing
automotive
fuels
and
convenience
goods
and
oil
and
gas
exploration.
On
November
27,
1978,
Mohawk
entered
into
a
purchase
agreement
with
Phillips
Petroleum
Company
(Phillips)
pursuant
to
which
Phillips
was
to
supply
and
install
a
waste
oil
reprocessing
plant
for
the
purpose
of
extracting
high
quality
lubricating
fluids
from
waste
oil
(Exhibit
P-1).
Pursuant
to
this
agreement,
Mohawk
incurred
expenses
in
obtaining
and
preparing
the
site
for
the
proposed
plant
and
in
providing
support
facilities
for
its
operation.
The
plant
was
installed
at
Mohawk's
premises
in
North
Vancouver
in
January
1980
but
never
worked
satisfactorily.
In
1981,
Mohawk
ordered
cessation
of
the
operation
of
the
plant
because
the
plant
failed
to
operate
satisfactorily
and
up
until
that
time
Mohawk
incurred
expenses
in
attempting
to
operate
the
plant.
Phillips
offered
to
redesign
the
plant
it
had
installed
on
Mohawk's
premises
but
this
was
rejected
by
Mohawk
on
the
basis
that
Phillips
had
misrepresented
to
Mohawk
the
capability
of
the
plant
and
the
necessary
costs
to
operate
the
plant
and
was
in
breach
of
the
agreement,
Exhibit
P-1.
By
letter
dated
January
8,
1982,
Exhibit
P-2,
Phillips
offered
the
sum
of
US$6,000,000
in
settlement
of
the
claims
of
Mohawk
against
Phillips
for
breach
of
the
agreement,
Exhibit
P-1,
which
offer
was
accepted
by
Mohawk
and
which,
by
its
acceptance,
released
Phillips
and
all
of
its
officers,
directors
and
employees
from
liability
for
all
claims
arising
out
of
the
termination
of
the
agreement,
Exhibit
P-1.
The
Canadian
currency
equivalent
of
the
US$6,000,000
settlement
payment
was
C$7,162,138.
The
settlement
agreement,
Exhibit
P-2,
also
provided
for
a
payment
by
Phillips
of
US$100,000
relating
to
the
refund
of
a
deposit
on
a
second
plant,
but
no
issue
arises
with
respect
to
this
said
amount.
For
income
tax
purposes,
Mohawk
treated
all
but
the
sum
of
C$100,000
of
the
C$7,162,138
settlement
payment
as
a
non-income
receipt
and
did
not
include
the
difference
of
C$7,062,138
in
its
taxable
income.
In
Exhibit
D-1,
a
grey
book
containing
various
documents
is
found
Mohawk's
T-2
corporation
income
tax
return
in
respect
of
the
1982
year
with
relevant
statements.
On
page
7
of
Exhibit
D-1,
is
found,
as
part
of
the
income
tax
return,
a
statement
on
income
in
which
it
is
noted
Extraordinary
Item
(Note
13)
|
Settlement
on
lubricant
plant
contract
|
$4,746,720
|
The
explanation
of
"Note
13"
is
found
on
page
19
of
Exhibit
D-1
and
it
states:
During
the
year
the
company
accepted
a
settlement
with
the
original
lubricant
plant
supplier,
terminating
the
original
purchase
agreement
of
January
27,
1978
and
a
damage
payment
of
$7,062,187
($6,000,000
U.S.)
was
received
as
a
consequence.
The
major
part
of
the
original
plant
was
scrapped
and
the
transaction
has
been
accounted
for
as
follows:
|
Damage
proceeds
|
|
$
7,062,187
|
|
Less:
|
|
|
Write-down
of
lubricant
plant
|
$2,086,873
|
|
|
Write-off
of
deferred
development
costs
|
2,640,614
|
(4,727,487)
|
|
Deferred
income
tax
recovery
|
|
2,412,020
|
|
Net
extraordinary
item
|
|
$
4,746,720
|
A
notice
of
reassessment
dated
August
6,
1987
purported
to
allocate
the
net
settlement
amount
of
C$7,062,138
between
income
and
capital
and
include
the
former
in
Mohawk's
1982
income
and
treat
the
latter
portion
as
recovery
of
capitalized
development
costs
and
as
proceeds
of
disposition
of
depreciable
property
resulting
in
a
small
capital
gain.
The
amounts
of
those
portions
of
themselves
are
not
in
issue
(Exhibit
D-1,
pages
38
to
55).
Mohawk
filed
a
notice
of
objection
on
August
6,
1987,
alleging,
in
its
memorandum
attached
to
its
notice
of
objection,the
following:
Memorandum
Attached
to
and
Forming
Part
of
Notice
of
Objection
of
Mohawk
Oil
Co.
Ltd.
for
the
1982
Taxation
Year
A.
FACTS
1.
On
November
27,
1978,
Mohawk
Oil
Co.
Ltd.
(the
"Taxpayer")
entered
into
a
Purchase
Agreement
(the
"Agreement")
with
Phillips
Petroleum
Company
("Phillips")
for
the
purchase
of
a
moveable
plant
for
the
reprocessing
of
waste
oil
(the
"Plant")
for
a
price
of
U.S.
$2,850,000.
2.
Pursuant
to
the
Agreement
the
Taxpayer
incurred
expenses
in
obtaining
and
preparing
the
site
for
the
Plant
and
in
providing
support
facilities
for
the
operation
of
the
Plant.
3.
The
Plant
was
installed
at
the
Taxpayer's
facilities
in
North
Vancouver
in
January,
1980.
4.
Phillips’
technicians
attempted
unsuccessfully
to
make
the
Plant
operational
after
its
installation.
They
continued
to
work
at
the
Plant
until
October
1981
when
Mohawk
ordered
that
the
Plant
cease
operation
because
of
the
emission
of
noxious
fumes.
During
this
time
the
Taxpayer
incurred
significant
expenses
in
attempting
to
operate
the
Plant.
5.
Phillips’
offer
to
re-design
the
Plant
was
rejected
by
the
Taxpayer
whose
position
was
that
Phillips
had
misrepresented
the
capability
of
the
Plant
and
had
breached
the
Agreement.
6.
The
Taxpayer
accepted
an
offer
made
by
Phillips
on
January
8,
1982
for
U.S.
$6,000,000
as
full
settlement
for
the
termination
of
the
Agreement
and
of
its
claim
against
Phillips.
Certain
of
the
Plant
equipment
was
returned
to
Phillips
as
part
of
the
settlement.
7.
The
Taxpayer
treated
this
settlement
amount
as
an
extraordinary
item
in
its
financial
statement
and
did
not
include
it
in
its
taxable
income
in
its
tax
return
for
the
1982
taxation
year.
8.
The
Taxpayer
valued
the
equipment
returned
to
Phillips
at
$100,000
and
credited
this
amount
to
the
appropriate
capital
cost
allowance
pools.
9.
By
Notice
of
Reassessment
dated
August
6,
1987,
the
Minister
reassessed
the
Taxpayer
by
allocating
the
payment
received
from
Phillips
between
capital
and
income
in
the
following
manner:
|
Tax
Treatment
|
|
Income
|
Capital
|
|
Deferred
Development
Costs
|
$1,427,203
|
$1,213,411
|
|
Recovery
of
'81
Operating
Loss
|
1,184,235
|
|
|
Loss
for
the
'82
Year
to
December
31,
1981
|
|
|
Demand
Loan
Interest
|
289,966
|
|
|
Operating
Loss
|
542,304
|
|
|
PROP
Plant
|
|
2,505,069
|
|
Total
|
$3,443,708
|
$3,718,430
|
The
compensation
allocated
to
income
account
was
included
in
calculating
the
Taxpayer's
1982
income.
The
compensation
allocated
to
capital
account
was
used
to
reduce
the
Taxpayer's
Class
29
undepreciated
capital
cost.
The
balance
remaining
was
treated
as
a
capital
gain.
The
calculation
of
the
capital
gain
was
as
follows:
|
Proceeds
|
|
$3,718,480
|
|
Capital
Cost
of
Equipment
disposed
of
|
$2,186,874
|
|
|
Interest
Capitalized
for
Tax
Purposes
|
1,180,762
|
3,367
,636
|
|
Capital
Gain
|
|
$
350,844
|
|
B.
Reasons
for
Objection
|
|
10.
The
Taxpayer
says
that
the
amount
received
from
Phillips
is
a
non-taxable
receipt
received
as
compensation
for
the
termination
of
the
Agreement
and
the
settlement
of
its
rights
against
Phillips
for
breach
of
the
Agreement.
(Exhibit
D-1,
pages
56
and
57)
A
notice
of
confirmation
was
sent
by
the
Minister
of
National
Revenue
to
Mohawk
on
July
27,
1989
(Exhibit
D-1,
page
58).
Mohawk
called
one
witness,
Mr.
Frederick
Gingell,
its
vice-chairman
of
the
Board.
He
is
a
director
and
secretary-treasurer
of
Mohawk.
In
1978,
he
was
executive
vice-president
and
senior
officer
on
lubricant
projects.
He
was
also
senior
financial
officer
of
Mohawk.
Mr.
Gingell
states
that
pursuant
to
Exhibit
P-1,
the
purchase
agreement,
signed
on
January
27,
1978,
Phillips
Petroleum
Company
of
Bartlesville,
Oklahoma,
U.S.A.
agreed
to
supply
Mohawk
a
“turn
key"
plant
to
recycle
used
oil.
Phillips
was
a
major
multinational
corporation
with
a
reputation
of
being
very
involved
in
research
technology
in
the
petroleum
field.
This
caused
Mohawk
to
purchase
from
Phillips
the
recycling
used
oil
plant.
It
was
Mohawk's
intention,
if
this
plant
was
successful,
to
have
a
second
plant
built.
The
"plant"
was
built
by
Phillips,
in
the
most
part,
in
Tulsa,
Oklahoma
on
“skids”
that
is,
on
steel
girders,
thus
allowing
the
“plant”
to
be
transported
to
North
Vancouver,
B.C.
where
Mohawk
had
purchased
land
for
the
“plant”.
When
the
"plant"
had
arrived
in
North
Vancouver,
Phillips
brought
up
their
own
crew
and
put
the
"plant"
together
to
operate.
Unfortunately,
the
"plant"
could
never
function
properly,
there
were
problems
with
clogging
and
there
were
severe
"smell"
problems
which
could
never
be
overcome.
"The
'plant'
could
not
operate
for
a
substantial
time
and
could
not
produce
a
clear
and
useable
product."
In
late
1981,
Mohawk
became
very
concerned
about
the
consequences
of
the
non-operating
plant
and
what
could
happen
to
Mohawk
as
Mohawk
saw
“its
capital
bleeding
out".
As
a
result
of
the
"plant"
being
unable
to
operate
and
perform
as
promised,
negotiations
began
between
Mohawk
and
Phillips
to
try
to
arrive
at
a
settlement.
Phillips
at
first
made
reference
to
Exhibit
P-1,
the
sales
agreement,
as
to
what
it
is
responsible
for
in
the
event
of
non-performance.
This
clause
is
found
on
page
13
of
Exhibit
P-1,
under
the
title
Limitation
of
Damages
and
states
:
Seller
shall
not
be
liable
for
incidental
or
consequential
damages,
losses
or
expenses,
directly
or
indirectly
arising
from
the
sale,
delivery,
transportation,
installation,
handling
or
use
of
the
plant,
the
parts
or
components
of
the
plant,
and
the
plant
site,
or
from
any
other
cause
relating
thereto,
and
seller's
liability
hereunder
shall
in
no
event
exceed
the
purchase
price
or
cost
of
the
affected
materials
or
parts
or
the
cost
of
installing
the
plant,
as
the
case
might
be,
whether
or
not
the
claims
be
based
on
breach
of
contract
or
tort,
including
without
limitation
negligence
or
strict
liability.
It
would
seem
that
Mohawk
would
get
its
money
back
and
nothing
else,
that
is
US$2,850,000,
the
purchase
price.
Mohawk
refused
this
offer
and
after
making
a
list
of
every
possible
expense
“one
can
think
of"
claimed
approximately
US$15,000,000
which
included
money
spent
by
Mohawk
for
land,
tanks,
roadway,
water
supply
and
other
"offsite"
items.
On
January
8,
1982,
after
lengthy
negotiations,
Phillips,
in
order
to
preserve
its
reputation
in
the
oil
technology
field
made
a
settlement
with
Mohawk.
According
to
Mr.
Gingell,
the
settlement
made
by
Phillips
was
made
in
order
"to
get
rid
of
Mohawk"
and
that
the
settlement
figure
was
more
than
the
amount
provided
in
Exhibit
P-1
“because
Phillips
recognized
the
tremendous
damage
caused
to
Mohawk
and
the
question
of
Phillips
reputation
was
at
stake".
Exhibit
P-2,
dated
January
8,
1982,
is
the
settlement
agreement.
Mohawk
received
as
a
settlement
US$6,000,000
and
a
hydrotreater.
The
relevant
paragraphs
of
the
settlement
agreement
are:
(2)
Within
two
days
of
the
Effective
Date
of
this
Agreement
(the
Effective
Date)
Seller
will
pay
Buyer
Six
Million
One
Hundred
Thousand
($6,100,000)
U.S.
dollars,
payment
to
be
made
by
wire
transfer
to
a
bank
account
to
be
designated
by
Buyer.
Of
the
above
amount,
$6,000,000
represents
a
payment
related
to
the
termination
of
the
Purchase
Agreement
and
$100,000
a
return
of
the
payment
for
the
abovereferenced
Option.
(3)
Thereafter
within
forty-five
(45)
days
of
the
Effective
Date,
Seller
may
identify
for
Buyer
any
parts
or
components
of
the
Plant
which
Seller
wishes
to
reclaim
or
have
disposed
of
for
its
account,
provided
however,
this
may
not
include
any
portion
of
the
hydrotreater
section
of
the
plant
or
any
parts
or
components
required
for
the
operation
of
the
hydrotreater.
If
Seller
so
requests,
Buyer
will
provide
services
to
Seller
in
dismantling,
packing
and
shipping
any
parts
or
components
so
identified
by
Seller
and
will
bill
Seller
at
its
cost
for
such
services.
All
parts
and
components
selected
by
Seller
shall
be
transferred
to
Seller
or
pursuant
to
seller's
instructions
free
and
clear
of
all
liens
and
encumbrances.
Title
to
all
other
parts
and
components
of
the
plant
shall
remain
with
Buyer.
(4)
Buyer
will
return
to
Seller
the
inventory
of
catalyst
for
the
hydrotreater.
Notwithstanding
any
other
terms
of
this
letter,
the
obligations
of
Buyer
under
Paragraph
7
"Secrecy"
of
the
Purchase
Agreement
shall
remain
in
full
force
and
effect.
(6)
In
consideration
of
the
foregoing
and
except
as
herein
otherwise
provided,
Buyer
and
Seller
hereby
release
one
another
and
all
of
their
respective
officers,
directors,
and
employees,
from
liability
for
all
claims
of
any
nature
whatsoever
whether,
contract
or
tort,
arising
out
of
or
related
in
any
way
to
the
Purchase
Agreement,
the
Option
Agreement,
or
the
negotiations
leading
up
to
the
execution
of
either
of
the
above
Agreements
or
this
Agreement.
(Pages
1
&
2,
Exhibit
P-2)
I
am
satisfied
that
the
US$6,000,000
settlement
is
not
a
settlement
based
on
any
of
the
paragraphs
to
be
found
in
the
purchase
agreement
of
January
27,
1978.
In
Exhibit
P-1,
there
are
clauses
dealing
with
delay
and
what
is
to
be
paid
to
Mohawk
in
case
of
delay
and
a
clause,
above
stated,
dealing
with
what
is
to
be
paid
Mohawk
in
the
event
the
"plant"
does
not
function
properly.
According
to
Mr.
Gingell,
the
allocation
of
the
US$6,000,000
was
never
discussed
with
the
representatives
of
Phillips.
Mr.
Gingell
believes
the
money
paid
by
Phillips
was
not
to
pay
for
anything
specific.
As
Mr.
Gingell
states
"the
money
was
given
(for
us)
to
catch
the
next
airplane
out
of
Tulsa”.
After
Mohawk
received
the
US$6,000,000
(the
equivalent
Canadian
amount
being
C$7,162,138)
it
treated
the
funds
in
the
following
manner:
On
February
15,
1982
the
plaintiff's
Board
of
Directors
approved
the
following
accounting
treatment
of
the
payment
received
from
Phillips:
|
Proceeds
in
Canadian
funds
(U.S.
$6,100,000)
|
$7,277,906
|
|
Allocated
to:
|
|
|
Option
Agreement
Deposit
(U.S.
$100,000)
|
$
115,718
|
|
Deferred
Development
Costs
|
$2,640,614
|
|
1981
Operating
loss
|
$1,184,234
|
Loss,
October
1
to
December
31,
1981
|
Operating
expense
|
542,304
|
|
Demand
Loan
expense
|
289,966
|
|
Proceeds
of
disposal
of
lubricant
plant
|
2,505,069
|
|
(U.S.$6,000,000)
|
$7,162,187
|
|
Total
(U.S.$6,100,000)
|
$7,277,905
|
|
(Paragraph
(4f)
Statement
of
Defence)
|
|
Mr.
Gingell
states
that
the
moneys
received
were
so
allocated
as
he
wanted
"to
get
rid
of
these
above
items
from
the
books”.
Mohawk
wanted
to
make
its
financial
statement
“look
good”
for
its
banks.
He
states
that
what
was
left
over
from
the
US$6,000,000
he
allocated
to
the
hydrotreater.
Gingell
states
he
so
allocated
the
money
as
"it
would
make
the
current
operation
and
last
year's
operation
look
more
profitable”.
This
allocation
of
the
funds
received
could
not
be
allocated
in
the
same
way
on
Mohawk's
financial
statements.
When
Mohawk's
auditors
came
to
do
the
company
audit,
they
inquired
of
Gingell
on
what
basis
the
allocation
was
made
and
he
replied
"on
nothing,
it
seemed
to
me
to
be
the
easiest
way
of
handling
it".
The
auditors
did
not
agree
and
they
determined
that
the
funds
should
be
treated
differently
in
the
financial
statements.
They
were
of
the
opinion
that
the
company
had
to
leave
the
expenses
and
expenditures
as
they
occurred
and
the
US$6,000,000
received
by
Mohawk
had
to
be
shown
as
extraordinary
income.
The
tax
returns
were
filed
as
per
the
auditor's
instructions.
The
tax
returns
in
respect
of
the
1982
year
are
to
be
found
on
pages
2
to
37
of
Exhibit
D-1.
Exhibits
D-2,
3
and
4
are
two
letters
from
Mohawk
to
Phillips
and
one
from
Phillips
to
Mohawk.
These
three
letters
confirm
what
Mr.
Gingell
states
when
he
speaks
of
the
negotiations
leading
up
to
the
US$6,000,000
settlement.
The
settlement
with
Phillips
of
January
8,
1982
was
ratified
by
Mohawk's
Board
of
Directors
at
a
meeting
on
January
11,
1982
(Exhibit
D-5).
At
this
meeting,
a
proposal
was
made
to
increase
the
size
of
the
North
Vancouver
plant
which
clearly
indicates
that
Mohawk
intended
to
carry
on
in
the
"waste
oil
business”
as
in
1982,
new
processes
and
technology
had
come
forward
from
the
1978
original
dealing
with
Phillips.
In
fact,
using
a
KT1
process,
Mohawk
fitted
this
process
with
all
the
equipment
it
had
on
the
North
Vancouver
site
and
with
some
improvements
became
involved
in
the
business
to
recycle
waste
oil.
In
cross-examination
Mr.
Gingell
was
shown
page
7
of
Exhibit
D-1,
the
statement
of
income
year
ended
September
1982
for
Mohawk.
He
states
that
this
document
was
prepared
by
the
company's
auditors
and
shows,
at
the
bottom
of
the
page:
Extraordinary
Item
(Note
13)
|
Settlement
on
Lubricant
plant
contract
|
$4,746,720
|
and
that
this
is
to
indicate
that
this
sum
is
not
revenue
but
a
receipt
of
moneys
and
is
therefore
shown
on
the
income
statement
with
a
notation
(Note
13)
which
sets
out
how
the
sum
of
$4,746,720
was
arrived
at.
Mr.
Gingell,
who
is
a
chartered
accountant,
but
who
has
not
practised
this
profession
since
1972,
believes
that
what
Mohawk
did
in
the
filing
of
its
tax
return
is
in
accordance
with
generally
accepted
accounting
principles
(GAAP).
The
$4,746,720
is
the
net
sum
after
the
deduction
made
as
shown
in
Note
13
from
the
original
settlement
amount
of
C$7,062,187.
Counsel
for
Mohawk
read
into
the
record
of
the
trial
questions
6
to
21,
except
for
question
15,
of
an
examination
on
discovery
of
Stephen
Henry
Challen
dated
October
19,
1989.
Mr.
Challen
is
an
employee
of
Revenue
Canada
and
is
the
individual
who
prepared
the
assessment
in
this
case.
Mr.
Challen
gave
oral
evidence
for
the
defendant
herein
at
trial.
In
the
examination
on
discovery,
Mr.
Challen
states
that,
in
preparing
his
assessment,
he
identified
amounts
that
had
been
previously
deducted
by
Mohawk
and
seeing
that
Mohawk
was
being
reimbursed
for
those
previously
deducted
outlays,
by
Phillips,
in
the
settlement
of
US$6,000,000,
he
believed
the
sum
should
be
included
in
Mohawk's
income.
Mr.
Challen
also
states
that
his
analysis,
as
found
in
paragraph
3
of
the
statement
of
defence:
3.
The
Minister
of
National
Revenue
reassessed
the
Plaintiff
for
the
1982
taxation
year,
allocating
the
payment
received
from
Phillips
Petroleum
Company
("Phillips")
as
follows:
|
Income
|
Capital
|
|
Deferred
Development
Costs
|
$1,427,203
|
$1,213,411
|
|
Recovery
of
1981
Operating
Loss
|
$1,184,233
|
|
|
Loss
for
1982
year
to
December
31,1981
:
|
|
|
Demand
Loan
Interest
|
289
,966
|
|
|
Operating
Loss
|
542,304
|
|
|
PROP
plant
|
|
2,505,069
|
|
$3,443,708
|
$3,718,430
|
is
essentially
a
question
of
dividing
the
compensation
amount
into
components
that
looked
like
reimbursement
for
previously
deducted
expenses
and
some
assets.
When
asked
what
his
starting
point
was
in
making
the
assessment,
Mr.
Challen
replied
(answer
to
question
21):
The
financial
statements
showed
a
somewhat
different
presentation,
so
we
had
to
start
with
what
the
financial
statements
said.
And
the
financial
statements
showed
the
proceeds
from
Phillips
Petroleum
Company
as
a
one
line
item,
as
an
extraordinary
gain.
And
we
investigated
from
there,
and
we
then
found
out—we
then
made
our
inquiries.
We
determined
that,
and
we
determined
that
the
disclosure
which
had
been
done
in
the
tax
return
was
not
the
way
we
thought
it
should
have
been.
In
his
examination
in
chief
as
a
witness
for
the
defendant,
Mr.
Challen
states
that
when
he
was
in
possession
of
Mohawk's
tax
return
with
attached
schedules
and
a
set
of
financial
statements,
he
compared
the
net
income
reported
on
the
tax
return
with
that
on
the
statement
of
income,
the
net
income
shown
on
the
statement
of
income
is
$5,516,549
(Page
7
of
Exhibit
D-1)
and
the
net
income
shown
on
the
income
tax
return
is
$769,529
(Page
25
of
Exhibit
D-1),
he
noticed
the
difference
comprised
the
extraordinary
item
(Note
13)
shown
in
the
statement
of
income
(Page
7
of
Exhibit
D-1).
Mr.
Challen
then
decided
to
investigate
as
to
why
the
extraordinary
item
of
$4,746,720
was
not
shown
in
the
income
tax
return
reconciliation
of
net
income
per
financial
statements
with
net
income
for
federal
income
tax
purposes
found
on
page
25
of
Exhibit
D-1
as
he
believes
this
item
should
normally
be
shown.
After
starting
his
investigation
he
became
aware
of
how
the
Board
of
Directors
of
Mohawk
allocated
the
funds.
Plaintiffs
Submission
Counsel
for
Mohawk
submits
that
reimbursement
of
a
previously
deducted
outlay
is
not
income.
He
submits
that
in
Canada
there
is
no
statute
law
that
makes
reimbursement
of
a
previous
deducted
outlay
income.
He
submits
the
case
of
M.N.R.
v.
Eastern
Abattoirs
Ltd.,
[1963]
Ex.
C.R.
251;
[1963]
C.T.C.
19;
63
D.T.C.
1023.
The
facts
in
this
case
are
clearly
stated
in
the
[D.T.C.]
headnote:
In
its
1956
taxation
year,
the
respondent
company
received
some
$63,000
by
way
of
reimbursement
of
the
contributions
it
had
made
in
previous
years
to
a
pension
fund
for
the
benefit
of
its
employees.
From
1945
to
1955,
the
company
had
been
operated
by
the
C.P.R.,
and
the
employees
of
the
company
during
that
period
had
availed
themselves
of
the
C.P.R.
pension
fund.
In
1955
the
shares
of
the
company
were
sold.
Shortly
after
the
change
of
ownership,
the
employees
of
the
company
decided
not
to
have
a
pension
fund
any
longer
and
to
obtain
reimbursement
of
their
contributions
to
date.
The
company
received
the
$63,000
reserve
in
its
favour
in
the
C.P.R.'s
pension
fund.
The
Minister
taxed
this
amount
as
income
in
the
company's
hands,
relying
on
sections
3,
6(1)(a)(iv)
and
139(1)(ar).
The
respondent
company
maintained
that
the
$63,000
had
been
received
as
a
windfall—a
voluntary
reimbursement
of
an
amount
it
had
no
right
to
receive.
In
this
case
of
Eastern
Abattoirs,
Mr.
Justice
Noel
states
at
page
24
(D.T.C.
1026)
that:
[Translation]
It
is
fundamental
that
a
tax
can
only
be
imposed
by
clear
wording.
Now,
I
cannot
conclude
that
section
139(1)(ar)
would
allow
section
6(a)(iv)
of
the
Income
Tax
Act
to
include
in
the
taxable
income
an
amount
received
by
the
employer
in
the
circumstances
set
out
above
when
section
6(a)(iv)
only
envisages
amounts
received
by
an
employee.
Since
nothing
else
in
the
Act
allows
us
to
consider
the
amount
of
$63,605.15
as
income,
said
amount
is
not
taxable.
Counsel
for
Mohawk
thus
suggests
that
if
it
were
the
law
that
amounts
received
in
reimbursement
of
a
previously
deducted
outlay
was
taxable
income,
the
Court
could
not
have
arrived
at
the
conclusion
that
the
sum
repaid
was
not
an
income
receipt.
Counsel
for
Mohawk
also
submits
that
the
defendant
cannot
take
the
book
entry
of
Mohawk
as
evidence
of
a
profit.
He
submits
a
Privy
Council
decision
of
1927
in
the
case
of
Doughty
v.
Commissioner
of
Taxes,
[1927]
A.C.
327
for
the
above
submission.
The
facts
in
the
Doughty
case
are
very
different
from
the
present
one.
At
page
336
Lord
Phillimore
states:
The
other
ground
on
which
the
appellant's
case
may
rest
is
that
the
transaction
which
led
to
the
claim
for
tax
was
not
a
sale
whereby
any
profit
accrued
to
the
two
partners.
The
case
of
Craig
(Kilmarnock)
(1)
just
referred
to
is
an
authority
for
saying
that
the
Crown
is
not
entitled
to
take
a
mere
bookkeeping
entry
as
conclusive
evidence
of
the
existence
of
a
profit.
The
case
of
Gibraltar
Mines
Ltd.
v.
The
Queen,
[1983]
C.T.C.
261;
83
D.T.C.
5294
was
also
submitted.
In
the
[D.T.C.]
headnote
of
this
case
it
states:
Despite
the
manner
in
which
the
bookkeeping
was
done,
it
was
clear
from
the
agreement
that
the
taxpayer
was
conducting
the
mining
operations
on
the
Cuisson
claims
for
its
own
account
and
that
the
expenditures
were
those
of
the
taxpayer.
Counsel
submits
that
book
entries
cannot
be
determinative
of
what
is
the
true
nature
of
the
transaction.
He
submits
that
what
Mr.
Gingell
did
in
allocating
the
money
received
from
Phillips
or
the
fact
that
the
Board
of
Directors
approved
the
allocation
determines
nothing.
It
is
submitted
that
the
US$6,000,000
that
was
paid
to
Mohawk
by
Phillips
was
really
"hush
money"
in
order
to
save
its
reputation
and
thus
there
are
no
income
tax
consequences.
Counsel
further
submits
that
the
money
was
paid
without
allocation
and
none
of
the
money
was
paid
for
depreciable
property.
He
submits
it
was
“paid
to
get
lost".
Defendant's
Submission
Counsel
submits
that
in
this
case
the
starting
point
is
the
financial
statements
of
Mohawk.
Counsel
admits
that
a
book
entry
is
not
evidence
of
anything.
Counsel
submits
that
on
the
statement
of
income
there
appears
the
settlement
amount
of
$4,746,720
as
part
of
the
net
income
of
Mohawk
and
thus
the
amount
should
be
taxable.
Counsel
submits
as
authority
for
this
case
of
The
Queen
v.
Metropolitan
Properties
Co.
Ltd.,
[1985]
1
C.T.C.
169;
85
D.T.C.
5128.
Counsel
submits
that
this
case
dealt
with
generally
accepted
accounting
principles
(GAAP)
and
should
be
applied
in
the
case
before
me,
as
on
page
6
of
Exhibit
D-1,
Mohawk's
auditors
state
that
they
have
applied
general
accepted
accounting
principles
and
included
the
sum
of
$4,746,720
as
part
of
the
net
income
of
Mohawk.
I
was
referred
to
page
180-81
(D.T.C.
5137)
where
Mr.
Justice
Walsh
states:
On
the
facts
of
this
case
and
after
considering
the
foregoing
somewhat
confusing
jurisprudence
the
following
conclusions
can
be
reached.
1.
General
Accepted
Accounting
Principles
(GAAP)
should
normally
be
applied
for
taxation
purposes
also,
as
representing
a
true
picture
of
a
corporation's
profit
or
loss
for
a
given
year.
2.
By
exception
they
need
not
be
applied
for
income
tax
purposes
if
there
is
some
section
or
sections
in
the
Income
Tax
Act
which
justify
or
require
a
departure
from
them
or
do
not
correspond
with
what
are
commonly
accepted
business
and
commercial
practices.
5.
The
fact
that
there
is
nothing
in
the
Income
Tax
Act
to
prevent
such
deductions
from
being
treated
as
current
expenses
and
deducted
as
such
from
income
in
the
year
in
which
they
are
made
is
not
sufficient
justification
for
departing
from
GAAP
principles
in
dealing
with
them
in
this
way.
It
is
the
converse
argument
which
should
be
adopted
to
the
effect
that
these
principles
should
only
be
departed
from
if
something
in
the
Act
specifically
requires
or
authorizes
this.
Defendant
thus
states
that
what
it
had
are
financial
statements
prepared
in
accordance
with
GAAP
and
if
a
different
treatment
is
to
be
adopted
for
tax
purposes,
it
is
for
the
plaintiff
to
find
in
the
Income
Tax
Act
(“ITA”)
a
paragraph
which
authorizes
a
deviation
from
the
GAAP.
Defendant
submits
that
if
there
is
nothing
in
the
ITA,
then
the
payment
of
the
US$6,000,000
should
be
considered
taxable
income
as
being
income
derived
from
a
business.
Defendant
submits
that
sections
3,
4
and
9
of
the
ITA
taxes
income
from
a
business.
In
the
present
case,
the
plaintiff
has
shown
the
money
received
from
Phillips
as
income
and
thus
it
is
taxable
as
income
from
the
business
unless
Mohawk
can
show
why
it
should
not
be
taxed
in
accordance
with
the
ITA.
Defendant
states
that
the
principle
to
be
followed
is
found
in
the
case
of
Westcoast
Petroleum
Ltd
v.
Canada,
[1989]
1
C.T.C.
363;
89
D.T.C.
5153
at
379
(D.T.C.
5164)
where
counsel
for
the
plaintiff
Westcoast
submitted:
Counsel
submits
that
it
is
well
established
that
income
determination
starts
with
subsection
9(1)
of
the
Income
Tax
Act
(I.T.A.).
This
section
states:
9.(1)
Subject
to
this
Part,
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
According
to
plaintiff,
income
is
profit
and
that
the
Courts
have
held
that
since
there
is
no
definition
of
profit
in
the
I.T.A.,
general
accounting
principles
must
apply.
In
fact,
the
submission
of
defendant
is
that
since
Mohawk
received
US$6,000,000
it
must
be
considered
as
income
from
its
business
and
taxes
must
be
paid
on
this
amount
unless
there
is
a
special
provision
in
the
ITA
which
would
make
the
receipt
of
this
money
exempt
from
taxes.
Discussion
and
Conclusion
It
is
admitted
by
counsel
for
the
defendant
that
if
I
conclude
that
the
payment
of
the
US$6,000,000
is
“straight
damages"
this
amount
would
not
be
taxable.
The
issue
is
whether
the
settlement
made
by
Mohawk
with
Phillips
for
the
breach
of
contract,
the
failure
to
build
a
"plant"
in
accordance
with
the
provisions
of
Exhibit
P-1
that
could
produce
a
marketable
product
from
waste
oils
should
be
included
into
taxable
income
or
whether
the
money
received
is
akin
to
a
windfall.
I
am
of
the
view
that
in
order
to
make
such
a
determination,
it
is
necessary
to
examine
all
of
the
reasons
as
to
why
the
money
was
paid,
that
is,
why
did
Phillips
pay
Mohawk
the
US$6,000,000.
Was
this
sum
of
money
paid
in
respect
of
a
breach
of
contract
and
thus
cannot
be
categorized
either
as
income
from
office
or
employment
or
income
from
a
business
or
trade
or
must
I
look
beyond
the
damage
settlement
to
the
reasons
which
gave
rise
to
the
payment
and
determine
on
that
basis
whether
the
moneys
were
compensation
for
moneys
which
should
have
been
paid
pursuant
to
a
business
contract
and
if
so,
whether
any
or
all
moneys
paid
under
the
contract
would
have
been
considered
income
or
capital
receipts.
From
the
facts
in
this
case,
I
am
satisfied
that
the
moneys
received
by
Mohawk
were
not
paid
as
compensation
for
moneys
which
should
have
been
paid
pursuant
to
a
business
and
should
not
be
considered
as
income.
The
purchase
agreement,
Exhibit
P-1,
clearly
states
what
is
normally
to
take
place
in
the
event
that
Phillips
would
be
unable
to
fulfil
its
obligations
pursuant
to
the
agreement.
There
is
no
doubt
that
the
evidence
of
Mr.
Gingell
clearly
indicates
that
Phillips
was
unable
to
deliver
Mohawk
what
it
promised
to
deliver
as
per
the
agreement.
In
Exhibit
P-1,
Phillips
was
to
have
delivered
to
Mohawk
a
skid-mounted
waste
oil
processing
plant
with
a
design
feedstock
throughput
capacity
of
five
(5)
million
U.S,
gallons
annually
when
charged
with
waste
oil
feedstock
within
the
range
of
the
pre-plant
design
samples
submitted
by
Mohawk.
(For
a
more
detailed
description
of
what
the
“plant”
was
to
produce,
see
Exhibit
P-1,
paragraph
1(b).)
Because
Phillips
was
unable,
after
many
trials,
to
have
the
"plant"
produce
an
acceptable
product
as
stipulated
in
the
agreement,
Exhibit
P-1,
Phillips
would
normally
be
obligated
to
remove
the
"plant"
from
the
plant
site
and
refund
to
Mohawk
so
much
of
the
purchase
price
and
reimbursable
costs
as
Mohawk
shall
have
paid
to
Phillips.
If,
through
no
fault
of
Buyer,
a
successful
acceptance
test
shall
not
be
conducted
on
or
before
the
date
forty-five
(45)
days
after
delivery
of
the
Plant
to
the
Plant
Site
the
purchase
price
set
forth
in
paragraph
(a)
of
Article
6
shall
be
reduced
at
the
rate
of
the
Canadian
prime
interest
rate
as
determined
by
the
Royal
Bank
of
Canada,
Vancouver
main
branch
at
the
time
in
question
plus
one
(1)
percent,
calculated
on
a
daily
basis
but
not
to
exceed
One
Thousand
United
States
Dollars
(U.S.
$1,000)
per
day,
from
said
date
forty-five
(45)
days
after
said
delivery
to
the
date
one
hundred
eighty
(180)
days
after
said
delivery.
If
after
three
attempts
the
tests
still
prove
unsuccessful,
Buyer
shall
have
the
option
to
reject
the
Plant
where
is,
as
is,
or
to
negotiate
an
equitable
adjustment
in
the
price
and
if
the
former,
Seller
will
promptly
remove
the
same
from
the
Plant
Site,
refund
so
much
of
the
purchase
price
and
reimbursable
costs
as
Buyer
shall
have
paid
to
seller,
and
Seller
shall
submit
no
further
invoices
to
Buyer.
(Exhibit
P-1,
paragraph
4(g))
This
did
not
take
place.
The
evidence
is
that
Phillips
paid
to
Mohawk
US$6,000,000
when,
according
to
paragraph
6
of
Exhibit
P-1
the
price
for
the
"plant"
was
US$2,850,000.
If
the
conditions
of
the
purchase
agreement
were
to
have
been
followed,
Mohawk
should
only
receive
the
money
it
paid
to
Phillips.
The
uncontradicted
evidence
of
Gingell
is
that
when
Mohawk
first
submitted
its
claim
to
Phillips,
it
included
moneys
paid
to
Phillips,
it
included
all
costs
for
what
was
spent
for
"on
site”
work,
such
as
tanks
and
roadways
and
it
included
what
was
calculated
to
be
lost
profits.
This
first
claim
made
by
Mohawk
to
Phillips
was
for
the
sum
of
approximately
US$15,000,000.
I
was
not
given
a
breakdown
for
this
sum
of
US$15,000,000
but
it
included
a
sum
for
loss
of
future
profits.
The
evidence
is
that
this
original
claim
was
not
accepted
and
after
a
number
of
days
of
negotiation
a
settlement
was
reached
for
US$6,000,000.
Gingell
states
he
does
not
know
why
Phillips
offered
US$6,000,000
but
after
receiving
the
offer
he
and
his
associates
discussed
the
offer
and
accepted
the
offer
of
US$6,000,000
provided
a
hydrotreater
would
be
included.
The
evidence
is
that
this
was
agreed
to
by
Phillips
in
order
to
"get
rid”
of
the
claim
of
Mohawk.
I
am
satisfied
that
the
offer
made
by
Phillips
was
made,
not
based
on
Mohawk's
loss
of
future
profits
nor
on
anything
other
than
to
rid
themselves
of
a
serious
embarrassment
as
Phillips
had
and
may
still
have
an
excellent
reputation
in
the
field
of
oil
technology.
Had
I
been
given
any
evidence
that
part
of
the
US$6,000,000
was
to
compensate
Mohawk
for
loss
of
profit,
I
would
have
concluded
that
that
part
of
the
settlement
should
be
considered
income
from
a
business
as
it
would
have
been
paid
as
a
loss
of
a
profit
that
Mohawk
would
have
made.
The
facts
only
indicate
that
the
money
was
paid
as
damages
to
prevent
a
lawsuit
that
could
have
been
considered
an
embarrassment
to
Phillips
and
nothing
more.
I
accept
the
submission
of
counsel
for
Mohawk
that
the
reimbursement
of
moneys
previously
deducted
as
an
expense
does
not
make
this
reimbursement
taxable
income.
The
moneys
received
by
Mohawk
is
income
and
must
be
shown
as
such.
The
fact
that
the
sum
of
US$6,000,000
was
shown
as
income,
does
not
make
that
income
taxable.
The
income
of
US$6,000,000
had
to
be
shown
in
the
tax
return
of
the
plaintiff
Mohawk
in
accordance
with
generally
accepted
accounting
principles
but
I
am
satisfied
from
all
of
the
evidence
it
is
not
income
to
be
counted
for
income
tax
purposes
as
the
income
is
not
income
as
contemplated
in
sections
3,
4
or
9
of
the
ITA.
I
have
not
discussed
the
fact
of
Mohawk's
Board
of
Directors
(Gingell)
allocating
the
funds
in
a
specific
manner.
Both
counsel
agree
that
what
was
put
into
the
books
of
the
company
does
not,
by
itself,
make
the
sum
received
from
Phillips
taxable
income
and,
therefore,
nothing
more
need
be
said.
I
am
therefore
satisfied
that
the
sum
of
US$6,000,000
(C$7,162,138)
is
not
taxable
income
but
income
as
damages
as
a
result
of
a
breach
of
contract
paid
not
to
compensate
loss
of
profits
but
paid
to
prevent
a
lawsuit
and
loss
of
reputation.
The
claim
of
Mohawk
is
allowed.
The
assessment
of
the
plaintiff's
income
tax
for
the
year
1982
is
referred
back
to
the
Minister
of
Revenue
with
the
direction
that
the
plaintiff's
income
for
the
year
be
reduced
in
accordance
with
the
reasons
herein
contained.
The
plaintiff
is
entitled
to
its
costs.
Appeal
allowed.
Email this Content