Violette Motors Limited and W. H. Violette Limited v. Minister of National Revenue, [1987] 1 CTC 2205, 87 DTC 136

Taylor, T.C.J.:—These are appeals against income tax assessments for the years 1980 and 1982, heard on common evidence in Fredericton, New Brunswick, on August 13 and 14, 1986 and continued on January 8, 1987. I will use the 1980 notice of appeal for W. H. Violette Limited as basic information to set out the situation which is typical of the issue brought before the Court and for all general purposes is consistent with the appeals for both years for both parties:

Facts

1. The Taxpayer is a body corporate, duly incorporated under and by virtue of the laws of the Province of New Brunswick.

2. The Taxpayer carried on business as a Ford Automobile Dealership in the Town of Grand Falls, in the County of Victoria and Province of New Brunswick from 1955 until March 1980.

3. The Taxpayer and another automobile dealership, Violette Motors Limited (hereinafter referred to as “V.M. Limited’’) enjoyed a special contractual relationship with their supplier, Ford Motor Company of Canada (hereinafter called “Ford”). By the terms of this special contractual relationship the Taxpayer and V.M. Limited had the right to pick up new automobiles directly from the Ford Assembly Plant in Oakville, Ontario. The Taxpayer and V.M. Limited were the only Ford dealerships in Canada which possessed this pick-up right.

4. In order to perform the pick-up at Oakville, Ontario the Taxpayer purchased and maintained transport trucks and trailers specially suited for this purpose.

5. The effect of the pick-up rights enjoyed by the Taxpayer was that the Taxpayer could provide its customers with the new Ford vehicles of their choice within days of the placement of the order. The Taxpayer’s competitors did enjoy similar rights with their suppliers; customers of these other automobile dealers were forced to wait weeks or even months before receipt of the vehicles of their choice.

6. The Taxpayer and V.M. Limited were the most successful Ford Dealerships in Eastern Canada notwithstanding the fact that they were operating in a largely rural area. The crucial factor in the Taxpayer’s success was its right to pick up vehicles directly from the Assembly Plant and thereby provide customers with quick service. The pick-up right was a capital asset, central to the profit-making structure of the Taxpayer’s business.

7. In 1968 Ford unilaterally purported to alter the aforesaid special contractual relationship with the Taxpayer. Ford began to include pick-up and delivery charges on its invoices to the Taxpayer and demand payment of these charges even though no pick-up and delivery services were ever performed.

8. The Taxpayer vigorously protested this unilateral action on the part of Ford but the charges were paid by Ford Motor Credit Corporation pursuant to the wholesale financing plan in existence at the time. Ultimately the Court found that in fact the Taxpayer had no alternative as refusal to pay the amounts which Ford billed would have resulted in termination of the Taxpayer’s dealership franchise. The monies were paid in order to maintain the continued existence of the Taxpayer’s profit-making apparatus and under a practical compulsion.

9. These extra costs which the Taxpayer was compelled to pay to Ford were included in the Taxpayer’s accounting records as operating expenses and passed on to the Taxpayer’s customers in the form of higher automobile prices and of course formed part of the Taxpayer’s revenue and, ultimately, taxable income.

10. On March 29, 1977, the Taxpayer commenced legal proceedings against Ford in the Court of Queen’s Bench of New Brunswick. The action was for a declaration of the Taxpayer’s rights and for an order for repayment of the amounts Ford had compelled the Taxpayer to pay over the years. The Court of Queen’s Bench in a decision dated September 16, 1980 granted the Taxpayer the relief which was sought. The New Brunswick Court of Appeal upheld the decision at trial in a judgment dated April 16, 1981. (Ford’s request for leave to appeal to the Supreme Court of Canada was refused on October 19, 1981.) See W. H. Violette Ltd. and Violette Motors Ltd. v. Ford Motor Company of Canada Ltd., 31 N.B.R. (2d) 394, (N.B.Q.B.T.D.); and 34 N.B.R. (2d) 238 (N.B.C.A.) and36 N.B.R. (2d) 360 (S.C.C.)

11. The Taxpayer commenced a second action against Ford on July 16, 1981 for damages for continuing breach of contract from December 15, 1978 to March 21, 1980. December 15, 1978 was the date on which the trial of the original action commenced and March 21, 1980 was the date on which the Taxpayer ceased to carry on business. This second action was discontinued upon the execution of a Release by the Taxpayer and Ford, the terms of this Release are set out below.

12. Ultimately in February 1982 the parties executed a Release whereby their respective legal obligations were settled. By the terms of the release Ford paid the damages as ordered by the Court of Appeal in the first action plus damages for continuing breach of contract in the second action. In consideration for the payment of the damage awards the Taxpayer relinquished the right to pursue any future claims against Ford for their wrongful conduct.

13. On September 16, 1983 the Minister of National Revenue reassessed the Taxpayer in respect of the 1981 taxation year and added $404,086.50 to the Active Business Income and added $217,738.67 to Income of the Taxpayer for that year.

14. By Notice of Objection dated December 12, 1983 the Taxpayer disputed the aforesaid assessment for the 1981 taxation year.

15. On January 8, 1985 the Minister rejected the aforesaid Notice of Objection. The Assessment was revised, however, to add a total of $436,759.44 to the Taxpayer’s income for the 1981 taxation year.

16. The Taxpayer filed a Notice of Appeal with the Tax Court of Canada on February 26, 1985.

17. By letter dated May 14, 1985 Revenue Canada indicated that the aforesaid sum of $436,759.44 would be removed from the 1981 taxation year and assessed in 1980 and 1982.

18. On June 19, 1985 the Minister of National Revenue reassessed the Taxpayer in respect of the 1980 taxation year by adding $357,997.84 to the Taxpayer’s income. The 1982 taxation year was also reassessed on that date to add a further $78,761.60 to the Taxpayer’s income for that year.

Law

19. The Taxpayer submits that the taxability of Court-awarded damages depends upon the characterization of such award. There is no basis upon which to characterize the damages in this matter as income.

20. The Taxpayer submits that the damages awarded do not relate in any way to the business income or profit of the Taxpayer within the meaning of those terms in section 9(1) of the Income Tax Act. The fact is that the pick-up and delivery charges were passed on to the Taxpayer’s customers. The Taxpayer’s profits, therefore, remained constant and tax has been paid on these receipts as part of the Taxpayer’s taxable income.

21. Further, the Taxpayer submits that the Minister has failed to act with all due dispatch in making assessments in this matter and is therefore in violation of section 152(1) of the Income Tax Act. Accordingly, the present assessment for 1980 should be declared null and void.

22. The Taxpayer further submits that any reassessment for the 1980 taxation year is made beyond the limitations period prescribed by section 152(4) of the Income Tax Act and is therefore null and void.

23. In the alternative, the Taxpayer submits that the damages for breach of contract received by the Taxpayer were not in the nature of income or income replacement. Rather the sums were the return of monies originally paid in order to prevent the loss or sterilization of an income producing asset. Therefore the aforesaid sums are in the nature of capital receipts not income receipts. See Commissioner of Inland Revenue v. Fleming and Co. (Machinery) Ltd. 33 T.C. 57 (H.L.); Glenboig Union Fireclay Co. Ltd. v. Commissioner of Inland Revenue 12 T.C. 427 (H.L.).

24. Further the Taxpayer submits that the method of calculation of a Court ordered damage award has no effect on the nature and quality of that award. See Glenboig Union Fireclay v. Commissioner of Inland Revenue supra; The Queen v. Atkins 76 D.T.C. 6258 (Federal Court of Appeal).

25. Further the Taxpayer submits that the taxability of an amount labelled as interest depends upon the nature and quality of the sum upon which the alleged interest is calculated. The amounts received by the Taxpayer in this case do not constitute interest within the meaning of Section 12(1)(c) of the Income Tax Act. See Puder v. M.N.R. 63 D.T.C. 1282 (Exchequer Court of Canada); Huston v. M.N.R. 61 D.T.C. 1233 (Exchequer Court of Canada).

26. The Taxpayer further submits in the alternative that if the amount presently under assessment does constitute income in the hands of the Taxpayer, which is not admitted but strictly denied, there is no basis upon which the Minister can include that amount in income for the year 1980.

27. The Taxpayer submits the assessment should be vacated with costs awarded to the Taxpayer.

In response thereto, the Minister of National Revenue contended:

A. Statement of Facts

1. He admits paragraph 1 of the allegations of fact.

2. He admits paragraph 2 of the allegations of fact except that he denies that the Appellant ceased carrying on business in March 1980 and states that it continued carrying on business in the 1981 and 1982 taxation years.

3. He admits paragraph 3 of the allegations of fact except for the term “special” in the first and second sentences which he does not admit.

4. He admits paragraph 4 and the first sentence of paragraph 5 of the allegations of fact, and denies the second sentence of paragraph 5.

5. He admits the first sentence of paragraph 6 of the allegations of fact and denies the second and third sentences.

6. He admits paragraph 7 of the allegations of fact except for the term “special” which he does not admit.

7. He admits the first sentence of paragraph 8 of the allegations of fact but denies the second and third sentences.

8. In answer to paragraph 9 of the Notice of Appeal, he admits only that the extra pick-up and delivery charges were included in the Appellant’s accounting records as operating expenses.

9. With respect to paragraph 10 of the allegations of fact he states as follows:

(a) he admits the first sentence;

(b) he does not admit the second sentence;

(c) with respect to the third and fourth sentences he only admits the dates of the decisions;

(d) he admits the fifth sentence and the citations.

10. With respect to paragraph 11 of the allegations of fact he admits that the Appellant commenced a second action against Ford which was discontinued upon execution of a Release but otherwise he does not admit the allegations of fact contained in paragraph 11.

11. With respect to paragraph 12 of the allegations of fact he admits the first sentence and does not admit the second and third sentences saying that the Release document speaks for itself.

12. He admits paragraphs 13, 14, 15, 16, 17, and 18 of the allegations of fact.

13. The Appellant’s return of income for the 1980 taxation year was received on June 10, 1981 and assessed pursuant to subsection 152(1) of the Income Tax Act on December 10, 1981. The Appellant’s return of income for the 1982 taxation year was received on June 24, 1983 and assessed pursuant to subsection 152(1) of the Act on July 28, 1983.

14. Notices of Reassessment dated June 19, 1985 were issued to the Appellant informing it that the Respondent had reassessed its income tax liability for its 1980 and 1982 taxation years by including in income from business the following amounts:

1980 — $357,997.84

1982 — $ 78,761.60

15. In so reassessing the Appellant’s income tax liability for its 1980 and 1982 taxation years the Respondent made, inter alia, the following assumptions of fact:

(a) On September 16, 1980 the New Brunswick Court of Queen’s Bench Trial Division issued a Judgment fixing the damages of the Appellant and Violette Motors Limited for money had and received by Ford Motor Company of Canada Limited hereinafter referred to as “Ford” during the period from January 1, 1972 to December 15, 1978 to be in the amount of $310,442.50 plus interest thereon;

(b) The interest referred to in paragraph 15(a) was calculated to be in the amount of $286,997.35;

(c) The Appellant's share of the damages and interest was in the amounts of $232,641.32 and $125,356.52 respectively;

(d) In February 1982 the Appellant and Ford settled a second action involving the same legal dispute, but relating to the period subsequent to December 15, 1978;

(e) The Appellant received the amount of $78,761.00 in settlement of the second action, including interest in the amount of $27,579.16;

(f) The following amounts received or receivable by the Appellant in its 1980 and 1982 taxation years were compensation for loss of business income and hence income of the Appellant from business:

1980 — $232,641.32;

1982 — $ 51,182.44;

(g) The said amounts of $232,641.32 and $51,182.44 had been deducted as current operating expenses in the computation of the Appellant’s income during the years that the extra pick-up and delivery charges were paid to Ford;

(h) The following amounts of interest were received or receivable by the Appellant in its 1980 and 1982 taxation years and constituted income from business:

1980 — $125,356.52

1982 — $ 27,579.16; and

(i) The Appellant carried on business in 1980, 1981 and 1982

B. Statutory Provisions Upon Which the Repondent Relies and the Reasons He Intends to Submit.

16. He relies, inter alia, upon sections 3, 4, 9(1), 12(1)(c), 18(1)(a), 152(4) and 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, c. 63, section 1 and upon S.C. 1984, c. 45, section 59.

17. He submits that the Respondent reassessed the Appellant's income tax liability for the 1980 taxation year within the four year time limit in accordance with section 152(4) of the Income Tax Act and that the amendment of section 152(4) of the Act by S.C. 1984, c. 45, section 59 reducing to three years the time limit during which the Respondent may reassess is not applicable to the 1980 taxation year in accordance with subclause 59(5) of the amending Act.

18. He submits that the amounts of $232,641.32 and $51,182.44 were income from business within the meaning of sections 9(1) and 248(1) of the Income Tax Act and properly included in computing the Appellant's income tax liability for its 1980 and 1982 taxation years respectively.

19. He further submits that the amounts of $125,356.52 and $27,579.16 were properly included in the Appellant’s income from business for the 1980 and 1982 taxation years respectively as interest within the meaning of paragraph 12(1)(c) of the Act.

20. He submits that the Minister assessed the Appellant’s returns of income for the 1980 and 1982 taxation years with all due dispatch within the meaning of subsection 152(1) of the Income Tax Act.

The amounts at issue (and the years in which they are presently taxed in the assessments at issue) were:

The first part of this decision will deal with the total principal amount of $435,516.59 ($283,823.76 + $151,692.83), and its characterization as “income” by the Minister.

First, we turn to the assessment notice for W.H. Violette Limited for the year 1980, which is typical of the others involved:

Before detailing the evidence and testimony which I considered particularly relevant I would simply note the following:

(1) Some effort was made by the appellants at the hearing to identify the transportation of vehicles from Oakville to New Brunswick as a separate “business” of the taxpayers. It is quite clear that it was not such a “business” in itself. There were accounting records kept — as part of the regular accounting records — which did show the direct cost of this transportation activity (wages, gas, oil, repairs, etc.) and the relevant direct charges made to customers of the appellants, creating thereby a “book” profit. But it was not a separate business.

(2) The total “charges for transportation” passed on to the customers of the appellants included any charge made by Ford, plus the additional charges, which included the direct cost noted above, on the actual transportation activity. An example was given on the one invoice (Exhibit A-9)* [1] which showed a $40 charge by Ford, directly on that Ford invoice for a Car; and a further $138 amount written on the invoice and calculated by the appellant to represent the direct transportation cost plus some amount for profit. Ford had performed no services for the $138, nor had Ford charged the $138 — this represented an internal accounting procedure with the appellants. I understand the argument made by the appellants in an attempt to divorce the actual charges made by Ford (i.e. $40 on Exhibit A-9) from the calculated amounts (above) also added by the appellants. But it is quite obvious that at least in total the amount at issue in this appeal is that calculated by adding up all the "$40" amounts and similar amounts from all the Ford invoices for the years in question.

A basic point put forward in the notice of appeal (supra), regarding the accounting and financial statement treatment of the amount at issue in this appeal, as referenced in the reply to notice of appeal (supra), was confirmed in the testimony. The entire amount was expensed, and therefore deducted before arriving at a net profit each year, just as the corresponding, but larger, amount charged out to the appellants' customers, was included as income (part of the total selling price of a car) in each fiscal period. The net result of that, is — (1) it could be asserted (as the appellants did) that they made a "profit" on their own transportation endeavour; (2) it could be asserted, that they at least "broke even" on the endeavour; (3) but it cannot be asserted that they "lost money" on the endeavour. Ford would not have delivered the cars to New Brunswick simply for the $40 charge noted above (Exhibit A-9) and it was suggested by the appellants that Ford really did nothing for even this $40 charge. In reality the appellants simply took the position that they were going to “‘pass on to their customers" an amount for each car sold, roughly equivalent to that which they concluded Ford would have charged them, if Ford had been permitted to take over the transportation responsibilities, in addition to the charge Ford did make (i.e. $40 on Exhibit A-9).

I would also refer to the judgment of Judge Léger, of the Court of Queen's Bench in New Brunswick dated September 16, 1980, (Exhibit A-14) and quote some particularly significant passages:

To recapitulate, the plaintiff W.H. Violette Ltd. entered into a dealership agreement to sell Ford Motor vehicles and proucts for the defendant on or about November, 1956. In 1963 the last mentioned parties orally amended the dealership agreement of November, 1956, whereby it was agreed that the plaintiffs could take delivery and pick up their vehicles at their own cost and expense at the plant of the defendant located at the City of Oakville, in the Province of Ontario. The plaintiffs equipped themselves with a motorized transport to carry out the new part of this agreement. The evidence disclosed out of about 570 Canadian Ford dealers this was a unique privilege enjoyed by the plaintiffs. This arrangement continued until the year 1967 when the defendant unilaterally began charging the plaintiffs a fee of $5.00 per vehicle for what it described in its invoice as a “Destination & Delivery’ charge. This was reluctantly accepted by the plaintiffs. In 1968 as a result of adoption of the Auto Pact convention entered into between Canada and the United States of America the Canadian producers of Motor Vehicles could approvision themselves with vehicles produced in plants located in the United States without the payment of a customs duty. The defendant thereupon adopted what it called its North American Billing System and at the same time invoiced all its dealers for an item labelled as a “Destination & Delivery” charge over and above the costs of the vehicles. This charge of “Destination & Delivery” was also labelled as “Freight and Delivery” and “Transportation and Handling” on different invoices from time to time. The new charges began at the amount of $20.50 per vehicle for the Oakville Dealers when introduced, and was increased gradually as the years went by until it reached an amount of $101.00 per vehicle at the time of the trial. The plaintiffs immediately protested these charges as being contrary to their agreement and unilaterally imposed. They never agreed to pay them. These charges as well as the amounts invoiced were nevertheless paid to the defendant by the Ford Motor Credit Corporation by virtue of an agreement and a Power of Attorney entered into by the plaintiffs with the last mentioned

Corporation. The purpose of this litigation is to recover these amounts allegedly improperly paid by the plaintiffs to the defendant for these ''Destination & Delivery” charges. [Emphasis mine.]

It is clear in the case at bar that the plaintiffs never made the payments with the intention of closing the matter. . .

The relationship between the plaintiffs and defendant was one of franchiser and franchisee. This has many complex provisions and is intended and designed to create a continuing business relationship. The manufacturer or producer is a corporation with vast resources and economic power which places it in a position greatly superior to any one of its dealers. The contract which existed was not one of simply one purchase of a simple chattel, or of a few; it was one of a continuing nature.

Because of the economic relationship which existed between the parties and because of the vast difference in bargaining power there was no practical alternative manner of dealing with this matter other than the one adopted by the plaintiffs. I find as a fact that the plaintiffs acted under a practical compulsion. The moneys paid are therefore clearly recoverable. [Emphasis mine.]

I therefore declare that the defendant is entitled to charge the plaintiffs $5.00 per vehicle, and no more, as a “Delivery and Destination” charge.

The plaintiffs have established damages for money had and received by the defendant as follows:

January 1st, 1972 to December 15th, 1978 Delivery
& Destination charges made by the defendant	$338,342.50
Less agreed charge of $5.00 per vehicle	27 ,900.00
	$310,442.50

The plaintiffs will have judgment against the defendant for the sum of $310,442.50.

The above sum will bear interest calculated as of the date when the amounts were paid to the defendant. The rate of interest to be used in this calculation will be the prime interest rate charged by the chartered bank of the plaintiffs in vogue from time to time during the duration of the events set out above. The plaintiffs will also have their costs to be taxed. [Emphasis mine.]

On appeal, to the Court of Appeal of New Brunswick: Richard, J.A. stated:

The present appeal is from a judgment of Léger, J., wherein he allowed a claim of W.H. Violette Ltd. and Violette Motors Ltd., (“Violette”) against the Ford Motor Company of Canada Limited (“the Ford Company”) in the amount of $310,442.50, together with interest and costs. The claim was for a refund of transportation and handling charges levied by the Ford Company against Violette for the period January 1, 1972 to December 15, 1978, during which time Violette was a dealer of vehicles manufactured by the Ford Company. The claim was formulated as “money had and received by the defendant (Ford) for the plaintiff’s (Violette's, use for which the defendant must re-imburse the plaintiff

The alleged perverse findings are all questions and findings of fact made by the trial Judge which necessitated a review of the transcript. I have carefully reviewed all the evidence that was pointed out to us as being pertinent and I am not persuaded that any of the trial Judge’s findings are perverse, as alleged, or that the trial Judge failed to understand and appreciate the evidence in general. The situation is simply and clearly one where the Ford Company attempted unilaterally to impose a “delivery and transportation” charge upon Violette when in fact no delivery or transportation services were being rendered by the Ford Company for Violette. The Ford Company pressured Violette to accept and pay its charges but Violette resisted to the limit that it was able without losing its franchise.

In my opinion, there was evidence upon which the trial Judge could reasonably base his conclusions.

I would accordingly dismiss the appeal with costs. [Emphasis mine.]

While there were certain technical differences in the second claim (see notice of appeal), in principle it was not distinguishable from the first claim (the judgments for which are quoted immediately above). The second claim however was settled by agreement, rather than by a decision of the Court.

The other major evidence came from the testimony of Mr. Roger Violette, nephew of Mr. W.H. Violette (now deceased). Mr. W.H. Violette was at the times material a shareholder in the two corporate appellants — effective “the guiding mind and will" of the corporations, although the major shareholder of Violette Motors Limited was the son of Mr. W.H. Violette — a Mr. Philip Violette. Mr. Roger Violette has a Bachelor of Arts degree and was comptroller of the corporations.

In general Mr. Roger Violette confirmed the basic assertions made by the appellants in the notice of appeal and enlarged upon in the reply to notice of appeal (supra). It was asserted that because the transport of the cars was controlled by Mr. Violette and handled by his own drivers and employees

— there was quicker response to an order (perhaps delivery in one or two days) and less damage and delay in receiving and delivery to the customers. Therefore customer satisfaction was higher — possibly resulting in repeat business. Having the facility, equipment, and right to transport its own cars gave the appellants a direct local advantage. The best estimate Mr. Violette could give regarding volume, was that when the appellants transported their own cars, they sold about 1,000 units per year, and after that privilege had been extinguished by Ford (as a result of the death of Mr. W.H. Violette himself, whom it was agreed by the parties, held the “right" personally) the volume was about 750 vehicles.

There were also three expert witnesses provided at the hearing, all chartered accountants, two for the appellants — Mr. Stanley H. Allen, Mr. William J. Kai and one for the respondent Mr. Frederick Davis. All three witnesses were qualified as experts in the profession of accounting, and gave their views on the accounting treatment the amount in question had received or should have received, in the records and financial statements of the appellants. It had been described by the appellants as — “Capital receipt", “Payment by Ford Motor Company in settlement of breach of contract".

Mr. Allen, in support of this treatment stated:

. . . we looked at it in the accounting sense and realizing that the Action that they had been successful with against Ford Motor Company, that we treated it as a capital item or a capital receipt as we noted, simply because they had won this Action, the breach of contract and we felt that it had difficulty fitting any other normal accounting treatment that was in existence at the time.

Mr. Allen also answered some questions from counsel for the respondent regarding the appropriate method of dealing with “accounts receivable" and “prior years adjustments", but I do not regard them as relevant to the basic point before the Court at this time. Mr. Allen seemed to regard any distinctions between “capital" and “income" as primarily a factor to be considered from an income tax treatment viewpoint, rather than as a matter to be determined irrespective of such a basis.

From Mr. Kai, on the same point, the responses were:

... I would have treated it as a “capital receipt” . . . because as a result of the review of the documents and as a result of what I’ve heard here today, it seems to me that the amount, even though awarded with reference to so called “destination charges”, those payments were made to protect a right a valuable right, which was the right to haul and indeed they were made to indirectly protect the franchise with Ford. Ford’s actions threatened the existence of that franchise, and definitely threatened the right to haul and what Mr. Justice Léger, in my humble opinion, awarded, was damaged because of that continued threat by Ford Motor Company.

. . . this payment was related to a capital asset and to a payment that was paid out to protect that capital asset.

Mr. Kai based his “capital” opinion, to a major degree on the comments made by Judge Léger in the judgment (supra) particularly that the plaintiffs acted under a practical compulsion in making the payments, and that the judge had used the word “damages” in making the award.

The testimony of Mr. Davis concentrated in large measure on the view that the amount involved should properly be regarded as a “prior period adjustment”, but Mr. Davis had not so directly addressed his mind to the precise question of “capital or income” dealt with by the other two accountant witnesses. Mr. Davis however did recognize a basic distinction between capital and income items, and he did not disagree with the opinion of the respondent that the item in dispute would be an “income” item. A portion of Mr. Davis’ written report is quoted:

.' . . For accounting purposes, the amount returned to the company should have been treated as a prior period adjustment for financial statement purposes in accordance with the C.I.C.A. Handbook, section 3600. The requirement to treat the amounts received as a prior period adjustment does not alter the fact that the amounts are income but, rather, deals with the method in which such income should be reported. In my opinion, the recovery of the excess charges should be treated as a recovery of, and a reduction of, expenses previously deducted in computing income and thus should be included in the computation of profit. Furthermore, the fact that the recovery was dependent on the outcome of litigation does not, in my view, alter its status.

Because the recovery became available to the dealer only following the judgment and is applicable to the years in which the excess charges were paid, it follows that the accounting recognition given the recovery in the current year can only be affected as an adjustment to retained earnings which represents an accumulation of those prior years’ earnings.

I do not believe that it can be said that the extra charges were paid to prevent the loss of an income producing asset. Rather, the extra charges were paid for delivery and distribution charges levied by the manufacturer. The court case decided that the manufacturer erred in levying the charges and ordered their return.

The fact that the excess charges were passed on to the dealer’s customers causing constant profits on which tax was paid is irrelevant since the refund of the charges in question causes additional profits unless the excess charges are refunded to the customers.

In summary, it is my opinion that the recovery of the excess charges should be included in the computation of the dealer’s profit and in the year that it became receivable pursuant to the court judgment pursuant to generally accepted accounting principles.

Analysis

It is perhaps a simplification to break the issue down to whether the amount is “capital” or “income”, since counsel for the appellants had also introduced the prospect of the amount being a “windfall”. However when taken to its generic base, if the amount is not “income”, then it cannot be “business income” as asserted by the respondent. If not income, I would fail to see a reason for the Court to further delineate between “capital” or some kind of “windfall”, unless specifically called on so to do. Accordingly the Court will address the question of “capital”, or “income”, and determine only if the appellants have succeeded in dislodging or casting serious doubt on the basis for the Minister’s assessments — as “income from a business”, as noted on:

(1) Form T7WC accompanying the (notice of reassessment): “Adjustment to Active business income”

(2) (Notification of confirmation by the Minister):

“. . . in computing your income in accordance with the provisions of Section 3 and subsection 9(1) of the Act: . . .”

(3) (Reply to notice of appeal):

“. . . income from business within the meaning of sections 9(1) and 248(1) of the Income Tax Act . . .".

The main arguments (at least from the notice of appeal) are:

(A) 20. The Taxpayer submits that the damages awarded do not relate in any way to the business income or profit of the Taxpayer within the meaning of those terms in section 9(1) of the Income Tax Act. The fact is that the pick-up and delivery charges were passed on to the Taxpayer’s customers. The Taxpayer’s profits, therefore, remained constant and tax has been paid on these receipts as part of the Taxpayer’s taxable income.

(B) 23. . . . the damages for breach of contract received by the Taxpayer were not in the nature of income or income replacement. Rather the sums were the return of monies originally paid in order to prevent the loss or sterilization of an income producing asset. . .

In the written submission (consistent with the oral argument presented at the close of the case) counsel for the appellants noted with regard to proposition (A) above:

Negative Characterization of the Amounts

At the outset it is noted here that the payments made by Ford were not made to replace payments that would otherwise have been received by the taxpayers. The illegal charges imposed by Ford were not receipts but outlays. These outlays would never have been receipts and these very outlays or expenses were replaced immediately by a charge to the customer. And while these outlays were deducted by the taxpayer as part of the cost of sales, the taxpayer also included their reimbursement as part of gross income. Roger Violette testified that if Ford had not imposed these charges then no such charge would have been made to the customer. Thus for tax purposes the charges have been dealt with annually by the taxpayers. It follows that the amounts in question are not a reimbursement of the destination and delivery charges imposed by Ford.

Profits Not Affected on Annual Basis

With reference to Exhibit A-9,* [2] the invoice, the “transportation and handling” charges, are the same in Column I as in Column II. Thus, the “wholesale” cost to the dealer was identical to the “manufacturer’s suggested maximum retail price”. Roger Violette testified that, in fact, the invoice cost of the transportation charges were passed directly on to the purchaser.

Roger Violette testified to the effect that had Ford not charged this transportation and delivery cost for which it provided no services, then no such charge would have been included in the purchase price of the vehicle.

Windfall Gain

Accordingly, the profit of the Appellants was not affected. The monies received by the Appellants from Ford, both principal and interest, are thus in the nature of a windfall, a non-taxable event. See Manley v. M.N.R., 83 D.T.C. 5440 F.C.T.D. reversed on appeal 85 D.T.C. 5150. The decision of the Federal Court of Appeal provides an example of the proper application of Lord Diplock’s test to a receipt.* [3]

There is no suggestion in the judgment of Mr. Justice Léger that the damage award was compensation for lost business income. There was no evidence placed before His Lordship or before this Honourable Court which would indicate that the Appellants’ business income suffered in an amount equal to the amount of the damage award during the years from 1968 to 1983.

As I follow this argument, counsel is saying that since the appellants charged to their customers the charges from Ford, in that way, the appellant corporations’ business affairs did not suffer — (essentially ending up at least even). Accordingly, so goes the appellants’ argument, the recovery from Ford (whatever it is called) should have no effect on the business operation of the appellants from a financial viewpoint. It appeared to me from the testimony, that the individual customers of the appellants were not aware that in the total of the invoices they (the customers) paid, there was included the alleged “illegal” charge from Ford. A customer simply paid an amount for a car, presumably, without such specific identification. If shown in any way separately, the amount on a customer's invoice for a car would indicate only a "transportation and handling" charge, which according to the testimony would include the “illegal” Ford charge, plus the routine internal charge put through the appellants records for its own actual hauling. These charges were obviously considered a legitimately deductible expense by the appellants — (even though disputed), and it is difficult to see how their recovery can be regarded as anything other than legitimately includable income. Looked at from the viewpoint now proposed by the appellants, it might be just as logical to regard the recovery of the charges from the appellants’ customers as “capital”, or a "windfall", as it is to so regard the recovery from Ford. That the amount has been recovered twice, effectively, is the good fortune of the appellants, but that does not make the recovery from Ford any the less income when received. I would note that when I use the term "received" in this judgment, it is not meant to preclude or predetermine in any way the possibility of a further point at issue, noted above, regarding the “‘timing’’ question — that is in which year or years should the amount be taxable, if taxable at all.

In summary, on this point of argument — it has not been shown to the Court, that “passing on” to the customers, the charges in question has any merit in an attempt to support the recovery at issue as a capital item. That part of the appellants’ argument must fail. The argument was not made to this Court that without the additional Ford charge at issue, the appellants might have sold their cars more cheaply, to their own customers, thereby being more competitive, and in some way thereby eventually better off through repeat business, goodwill, etc. Whether that would have been an argument worth noting at least, I do not know, but if it could have been proven that the business structure of the appellants had been adversely affected as a result of the added Ford charges, it might have been interesting — but it was not made.

Turning then to a second argument of counsel, — really put forward as an alternative in the written submission:

Positive Characterization

. .. the taxpayers say the amounts received are damages assessed in part by the Court and agreed in part by the parties, to compensate the taxpayers for the cost of preserving an income producing asset or protecting the entire profit making apparatus of the taxpayers. This cost was incurred on a vehicle by vehicle basis but each such payment was no less illegally imposed on or practically compelled from the taxpayers than if it had been estimated by Ford by reference to future purchases and globalized. Calculation after the fact by the Court of the global amount by reference to each charge does not alter the character of that global amount.

What the Minister has failed to take into account here is the fact that each charge imposed illegally by Ford was paid for from taxpayers cash prior to sale to a customer and thus reduced assets in that the charge was for no value, so there was no corresponding increase in assets. In effect, each such charge was eating away at the retained earnings of the taxpayer.

Ford expected the Appellants to eventually bow to the pressure and forego their privilege. This is evidenced by the various attempts referred to in Judge Léger’s decision, to have Fred Violette sign away the rights.

This right to pick up vehicles directly from the Oakville plant was therefore a capital asset, crucial to the successful operation of the Appellants’ business enterprise. The testimony of Roger Violette clearly indicated that the volume of sales and market penetration enjoyed by the Appellants during Fred Violette’s life time depended upon this right.

This pick-up right was not the only income producing asset jeopardized by Ford’s change in policy which required the Appellants to pay for a service which was never rendered. In the words of Mr. Justice Léger:

The Ford Company pressured Violette to accept and pay its charges, but Violette refused to the limit it was able without losing its franchise.

In the case at bar, sums were expended in order to maintain the right to prevent the loss of income-producing assets and to “keep open’’ both their franchise agreement and the “pick-up rights”.

This proposition goes to the very heart of the issue before the Court, — that the reimbursed funds represented something arising out of a capital asset or a Capital transaction, as opposed to mere recovery of the "transportation charges” illegally imposed by Ford. The essence of this argument is that the recovery was:

. . . to compensate the taxpayers for the cost of preserving an income producing asset or protecting the entire profit making apparatus of the taxpayer.

That might be sustained if the payments (not merely the recovery) had been regarded and treated by the appellants as for that purpose — the preservation of a capital asset — essentially a capital expenditure. This was not done, of course, or there would be no appeal before the Court. While it may be convenient now, for the appellants to regard the amounts as “capital’’, they did not so regard it at the time of the transactions. There has been no suggestion from the appellants that the original view of the transactions — simply as added cost of the vehicles purchased by the appellants — was incorrect, or should somehow now be altered or reversed. In my view it is an incorrect assumption to say, as is noted in the quotation from the written submission above:

. . . What the Minister has failed to take into account here is the fact that each charge imposed illegally by Ford was paid for from taxpayers cash prior to sale to a customer and thus reduced assets in that the charge was for no value, so there was no corresponding increase in assets. In effect, each such charge was eating away at the retained earnings of the Taxpayer. [Emphasis mine.]

As I see, the appellants were “receiving value” to the extent that they were increasing the inventory account (itself a “current” not “capital” asset) each time the charges was paid to Ford. That charge was simply a part of the total invoice cost paid to Ford, and recorded by the appellants as “cost of sales”. In that sense of the word, the “illegal” charges which form the basis of this appeal were no different than any other charge added by Ford to the base cost of the automobile — such as “power windows”, “air conditioner”, etc.

I would note the following references made by counsel for the respondent in argument:

The Appellants were not at any time deprived of any capital assets, and hence the amounts were not in any way related to a hole in the capital assets of the Appellant's trade.

Burmah Steam Ship Company Limited v. C.I.R., Respondent's Books of Authorities, Tab 3, p. 71.

In determining whether an amount is income or capital, there is no authority for the proposition that damages or an amount paid to settle a claim for damages cannot be income for tax purposes.

The Queen v. Manley, Tab 6, p. 5154

Raja's Commercial College v. Gian Singh & Co. Ltd., Tab 5, pp. 284-85.

The Appellants' reliance upon the House of Lords decision in Glenboig Union Fireclay Co. v. Inland Revenue, is misplaced, since in Glenboig “the trader was irretrievably deprived of . . . one of the most important and essential capital assets . . .”, and the compensation was paid as a result of that deprivation. The compensation paid to the Appellants did not have such a character, as no asset deprivation occurred.

Burmah Steam Ship Company Limited v. C.I.R., supra, p. 72.

The Appellants’ reliance upon Maison du Choix Inc. v. M.N.R., 83 D.T.C. 204 is similarly misplaced, since the damages in that case were for the loss of capital assets.

In the written submission of counsel for the appellants, the following statements are made:

The charges were paid and treated by the Appellants as part of the cost per vehicle. This does not alter the fact that the sums were paid under protest and in order to preserve the Appellants’ franchise and hauling rights.

. . . to compensate the taxpayers for the cost of preserving an income producing asset or protecting the entire profit making apparatus of the taxpayers.

I am quite satisfied that had the appellants not paid the “illegal” Ford charges, their right to haul vehicles would have been curtailed, but also their right to buy vehicles would have been drastically impaired. I can also agree that payment of the “illegal” charges to Ford, and not treating it as a cost of sales (in order to pass it on to the customers), could have created a disbursement, possibly either capital or current, but I fail to see how it could be argued it could be both of these — capital and current — at the same time. The prospect of a difference of opinion whether a capital (nondeductible) item, or a current (deductible) item, might then arise, but even that choice was made unnecessary, since it was abrogated by the treatment accorded the charges by the appellants — as a cost of sales — an immediately deductible item. It appears to me that in making this choice the appellants determined that the purpose for which the payments were made was primarily to purchase automobiles, not to preserve an asset. The internal (appellants) accounting and income tax treatment of the amounts paid to Ford, was not of concern to Ford — that company simply wanted the money, and one can assume that the same prospect for a law suit against Ford, and the same results would have arisen therefrom whatever the internal treatment by the appellants. I readily admit that had the appellants not paid the amounts to Ford — perhaps they would have lost their businesses — but that would have arisen largely because they did not have automobiles to sell to their customers. A law suit against Ford which might have arisen from that set of circumstances — the loss of the appellants’ businesses — with a judgment that the loss of the businesses had come from Ford’s refusal to recognize the existing right of the appellants to haul vehicles, might provide quite a different perspective than that I see in this matter. But that theoretical situation is not before this Court — nor was it before the New Brunswick Court of Queen’s Bench. The only question before this Court, is a determination of the characteristics of the amount received by the appellants from Ford, the question of the specific characteristics of the payments made by the appellants does not arise now nor are we Called on to confirm or reject the treatment already accorded these amounts. The only connection is whether that which was sought from Ford in the law suit, is a reflection of the payments made to Ford — and it appears to be an identical amount. That amount at issue is quite clearly the recovery of a charge to which Ford had no right, but which was nevertheless, collected by Ford as a result of economic pressure exerted on the appellants.

It may be noted that in arriving at my conclusion to this point, I have made only passing reference to the testimony of the three expert witnesses

— Mr. Allen, C.A., Mr. Kai, C.A., and Mr. Davis, C.A. I have not relied in any major way on their views regarding the “capital” or “income” question based on “generally accepted accounting practice”, preferring instead to reach my conclusion from the relevant facts, law, and jurisprudence. Mr. Allen and Mr. Kai placed considerable weight on the use of the word “damages” by Judge Léger — but neither demonstrated to the Court that which had been “damaged”. I do not read the decision of Judge Léger to indicate that in addition to giving a declaration that the appellants had the right to haul the vehicles, (which right I accept could be a capital asset), he also decided that such a right had in any way been impaired by virtue of Ford’s refusal to recognize it during the relevant years when the charges were being paid under protest. That right, it appears to me, survived intact and unsullied right up to the time it was extinguished (as described to the Court) by the death of Mr. W.H. Violette. (I note that both parties accepted without challenge that the right to so haul from Ford did cease with the death of Mr. W.H. Violette and the Court makes no further comment on that situation.) It was not demonstrated to the Court that continuing to pay the charges from Ford (even though considered to be illegal by the appellants) was the factor in itself or indeed even one of the factors, that persuaded the Court of Queen’s Bench that the appellants had the right to haul the vehicles. Rather, it would seem to me that the position taken by Ford was that unless the charges were paid, the appellants could not buy automobiles, and that Ford simply rejected the assertions of the appellants regarding such right to haul the vehicles, until it was settled by the Court.

To characterize the “damages” referenced by the learned Judge Léger as on “capital” account — that is directly related to the right to haul — appears to me to be in conflict with the precise words used by the Judge:

The plaintiffs have established damages for money had and received by the defendant as follows: . . . [Emphasis mine.]

In my view to whatever degree the term “‘damages” from that judgment requires definition, that definition should relate to the source and application of the funds paid to Ford and recovered by the appellants, not to the right to do their own vehicle hauling. The source and application is demonstrated in the words of that judgment:

. . . The purpose of this litigation is to recover these amounts allegedly improperly paid by the plaintiffs to the defendant for these “Destination & Delivery” charges.

The plaintiffs were persistent in pressing the defendant to reimburse the various sums charged for “destination and delivery” . . .

. . . The invoices were paid out of economic necessity and not in order to settle the matter. The plaintiffs never indicated that they intended to give up their rights to the sums paid or to close the transaction.

. . . The moneys paid are therefore clearly recoverable.

A further important point to me is that the appellants had no difficulty, in the first instance, of crediting to gross income the amounts “passed on to their customers" from the "illegal" Ford charges, and l fail to see why there should be any difference in accounting and income tax treatment (other than the possible application of "prior period adjustments" as raised by Mr. Davis) when the same amount is recovered a second time. That it was recovered through Court action seems immaterial to me. It would appear quite clear to me that if the appellants had decided (for some reason) to double the “illegal” Ford charges to their own customers, (the appellants were already passing on to their own customers a charge greater than their own internal direct transportation costs), the gross amount would have been credited in that instance to "income".

In deference to Mr. Allen and Mr. Kai, it should be said that at this trial some other testimony and argument also leaned heavily toward an interpretation of the term "damages", as being synonymous with "capital". But those efforts were not persuasive in my opinion. I would note that to the degree Mr. Davis did deal with this point (see reference to his report above) he saw little confusion or ambiguity in the judgment of the Court of Queen's Bench of New Brunswick, and his comments are in concert with the opinions I have expressed in this decision. The characterization of the amount at issue as "income", seems to me quite obvious from the facts and background in the evidence alone, without resorting to the use of generally accepted accounting principles as a guide, which are evidently subject to rather wide and more varied interpretation even among professionals, particularly when the matter at issue is one of income tax. On that point of applicability, a recent judgment of the Federal Court of Canada — Trial Division, Newfoundland Light and Power Co. Limited v. The Queen, [1986] 2 C.T.C. 235 at 238; 86 D.T.C. 6373 at page 6375 could also be noted:

... As a result of his observations and opinions I am left with no doubt that Generally Accepted Accounting Principles permit or allow the amounts, the characterization of which are in issue, to be treated as actual rather than contingent liabilities.

However the fact that holdbacks can, or even should, be so characterized under Generally Accepted Accounting Principles does not determine whether the holdbacks are deductible of the purposes of calculating taxable income under the provisions of the Income Tax Act.

If these principles run contrary to the provisions of the Income Tax Act the provisions of the Act must prevail. In my view it also follows that the phrase “the provisions of the Income Tax Act” means the provisions of the Act as interpreted by court decisions which are binding on me.

The argument that the award by the Court at issue in this appeal was connected with the right to haul, and therefore capital, has not been supported.

Based on the two arms of the argument presented on behalf of the appellants, it has not been demonstrated that the principal amount at issue is on capital account, and I am unaware of any reason therefore to disturb the Minister's assessment treating it as on income account. It is therefore the determination of this Court that the amount of $435,516.59, was received by the appellants as “business income’’, and to that degree at least, the Minister's assessment remains intact.

Two other issues were dealt with by counsel for the appellants. First, whether the portion of that assessment which refers to W.H. Violette Limited had been struck by the Minister in the appropriate year or years; and second, whether the amount of $186,308.58 also received by the appellants has been properly characterized as “business income” by the respondent, but with the identification of “interest".

After a review of the various factors involved, including the dates and wording of court judgments, receipt of funds, settlement and release agreements, relevant jurisprudence, etc., I am unable to conclude that the Minister was in error on either point. For income tax purposes, the “interest” portion received by the appellants demonstrates characteristics no different than those of the “principal” amounts at issue. Equally, the factors which the Minister took into account in determining that the 1980 and 1982 taxation years were proper in th^ circumstances of this case have not been successfully challenged in my view.

The appeals are dismissed.

Appeals dismissed.