Tremblay,
TCJ:—This
appeal
was
heard
in
common
evidence
with
the
case
of
Mrs
Iris
Steinhoff
in
London,
Ontario
on
September
27,
1984.
They
were
taken
under
advisement
on
reception
of
the
transcript
on
October
22,
1984.
1.
The
Point
at
Issue
The
point
is
whether
the
two
appellants
may
consider
as
capital
gain
the
compensation
received
from
Hydro
Ontario
in
1978
and
1979
a
piece
of
land
where
there
was
granular
deposits.
The
compensation
followed
an
expropriation
which
took
place
in
October
1974.
The
respondent
contends
that
the
gain
is
a
business
income
on
the
basis
that
since
1969
the
appellants
have
been
in
the
business
of
extracting
and
selling
gravel
and
that
the
compensation
was
mainly
computed
by
Hydro
Ontario
from
the
value
of
the
granular
deposits.
2.
The
Burden
of
Proof
2.01
The
burden
is
on
the
appellant
to
show
that
the
respondent's
assessment
is
incorrect.
This
burden
of
proof
results
particularly
from
several
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
In
the
same
judgment,
the
Court
decided
that
the
assumed
facts
on
which
the
respondent
based
his
assessment
or
reassessment
are
also
deemed
to
be
correct.
In
the
present
case,
the
assumed
facts
are
described
in
the
reply
to
notice
of
appeal
as
follows:
4.
In
so
reassessing
the
appellant
(Mr
Farrell)
for
the
1978
and
1979
taxation
years,
the
respondent
assumed
the
following:
(a)
the
appellant
owned
property
known
as
Lot
E,
Concession
4,
Township
of
Bruce
(“Lot
E’’)
from
1938
and
at
all
material
times
thereafter;
(b)
the
appellant
entered
into
a
gravel
removal
contract
with
respect
to
Lot
E
in
1969
(“the
first
contract")
with
one
Fred
Tout
and
Kincardine
Construction
Co.
(“Tout”)
which
paid
the
appellant
$.20
per
yard
of
gravel
removed
for
a
five
year
term;
(c)
the
said
contract
constituted
an
adventure
in
the
nature
of
trade
to
the
appellant
and
he
accordingly
reported
income
from
the
first
contract
as
part
of
farm
income
for
the
years
1969
to
1974
inclusive;
(d)
in
November
of
1974,
the
appellant
entered
into
a
contract,
(“the
second
contract”)
similar
to
the
first
with
the
same
Fred
Tout
and
Tout
Sand
and
Gravel
Limited
(“Tout”)
with
respect
to
gravel
rights
in
Lot
E
with
the
exception
that
the
second
contract
paid
$0.09
per
ton
of
gravel
removed
from
the
property
and
was
for
a
term
of
10
years.
Such
income
was
reported
as
part
of
farm
income
in
material
years
through
1977,
and
such
contract
constituted
an
adventure
in
the
nature
of
trade
to
the
appellant;
(e)
in
September
of
1974,
Ontario
Hydro
expropriated
a
900
ft
strip
across
Lot
E
(“the
property”)
compensation
for
which
was
not
settled
upon
and
paid
until
1978
and
1979:
(f)
the
compensation
paid
by
Ontario
Hydro
was
in
the
total
amount
of
$112,514.17,
which
amount
consisted
of
payments
in
respect
of:
|
(i)
interest
|
$
23,219.17
|
|
(ii)
granular
deposits
|
71,665.00
|
|
(iii)
timber
allowance
and
injurious
affection
|
9,825.00
|
|
(iv)
market
value
of
land
|
7,805.00
|
|
$112,514.17
|
(g)
all
of
the
amounts
paid
as
compensation
as
described
above
were
paid
in
1979,
except
for
$36,756,
which
was
paid
in
1978
in
respect
of
granular
deposits;
(h)
all
the
amount
paid
in
respect
of
granular
deposits
was
paid
on
the
basis
of
projected
production
of
gravel
from
the
property
and
profit
therefrom
from
October
1
1974
to
the
end
of
1999
pursuant
to
the
said
contracts
and
renewals
thereof;
(i)
the
adjusted
cost
base
of
the
property
was
$3,987.20;
(j)
the
appellant
included
no
amount
in
computing
his
income
for
the
1976,
1977
or
1978
taxation
years
in
respect
of
the
compensation
received
from
Ontario
Hydro;
(k)
no
binding
agreement
between
the
appellant
and
Ontario
Hydro
fixing
an
amount
of
compensation
to
be
paid
to
the
appellant
by
Ontario
Hydro
existed
until
1978,
and
no
agreement
as
to
final
amount
existed
until
1979.
3.
The
Facts
3.01
Most
of
the
facts
are
not
in
dispute.
On
the
one
hand,
the
appellants
admitted
most
of
the
assumptions
of
facts
made
by
the
respondent
in
paragraph
4
of
the
reply
to
notice
of
appeal
and
quoted
above
(except
part
of
subparagraph
(c)
and
(d)
where
it
is
stated
that
there
is
adventure
of
the
nature
of
trade).
On
the
other
hand,
the
respondent
admitted
paragraphs
1,
2,
3
and
4
of
Mr
Farrell's
notice
of
appeal.
They
read
as
follows:
1.
The
taxpayer
was
reassessed
by
the
Honourable
the
Minister
of
Revenue,
as
follows:
|
Year
|
Date
of
Reassessment
|
Additional
Amount
Assessed
|
|
1978
|
May
21,
1982
|
$14,042.00
|
|
1979
|
May
21,
1982
|
$16,934.40
|
2.
The
taxpayer
filed
Notices
of
Objection
with
respect
to
these
reassessments.
3.
On
29th
March,
1983,
the
Honourable
the
Minister
of
National
Revenue
confirmed
the
reassessments,
the
details
of
which
are
set
out
in
1.
above.
4.
The
following
is
a
statement
of
facts
relevant
to
the
reassessments
for
the
years
1978
and
1979:
(i)
28.48
acres
of
the
taxpayer’s
property
was
expropriated
on
September
12,
1974;
(ii)
The
compensation
offerd
the
taxpayer
was
unsatisfactory
because
it
failed
to
properly
compensate
the
taxpayer
for
the
value
of
gravel
deposits
on
the
property.
Negotiations
with
respect
to
the
ultimate
price
to
be
paid
by
the
expropriating
authority
were
commenced
and
were
not
completed
until
1979;
(iii)
At
the
time
of
expropriation
(1974),
the
right
to
extract
the
gravel
had
been
assigned
to
a
local
corporation;
(iv)
On
June
20,
1978,
Ontario
Hydro
paid
to
the
taxpayer
an
advance
of
$36,756;
(v)
Negotiations
were
completed
in
1979
and
the
taxpayer
executed
a
release
in
favour
of
Ontario
Hydro
in
which
the
total
consideration
for
the
“interests
of
the
Grantor
in
the
land
expropriated
or
injuriously
affected
by
the
said
expropriation
and
for
all
damages
resulting
therefrom’’
was
stated
to
$89,295;
(vi)
On
July
13,
1979,
the
taxpayer
received
cheques
from
Ontario
Hydro,
totalling
$75,758.17.
This
amount
represented
the
following:
|
Agreed
compensation
|
$
89,295.00
|
|
Plus:
Interest
|
$
23,219.17
|
|
$112,514.17
|
|
Less:
Advance
received
in
1978
|
$
36,756.00
|
|
$
75,758.17
|
(vii)
In
the
taxpayer’s
1979
return,
he
reported
the
interest
received
of
$23,219.17
and
the
disposition
of
the
property
expropriated.
This
disposition
was
reported
as
a
capital
gain
calculated
as
follows:
|
Proceeds
of
disposition
|
$87,452
|
|
Less:
Adjusted
cost
base
|
$75,330
|
|
Capital
gain
|
$12,122
|
|
Taxable
capital
gain
|
$
6,061
|
The
difference
between
the
proceeds
of
disposition
of
$87,452
and
the
agreed
compensation
of
$89,295
represents
reimbursement
by
Ontario
Hydro
of
expenses
incurred
by
the
taxpayer
in
connection
with
the
expropriation.
(viii)
The
Honourable
the
Minister
of
National
Revenue
reassessed
the
taxpayer,
on
the
dates
and
in
the
amounts
set
out
in
1
above,
adding
to
his
income
for
1978,
$36,756
and
for
1979,
$34,909,
as
income
from
a
business.
3.02
The
appellants
filed
the
following
documents:
Exhibit
A-1:
A
sand
and
gravel
lease
between
W.
Fraser
et
al
and
Tout
Sand
and
Gravel
Limited.
It
is
dated
November
1980.
It
is
for
a
period
of
10
years
from
the
13th
day
of
August
1974.
The
lessee
must
pay
nine
cents
per
ton.
Exhibit
A-2:
The
release
of
W
F
Farrell
and
Ontario
Hydro,
dated
July
5,
1959
for
the
amount
of
$89,295.
Exhibit
A-3:
A
sand
and
gravel
lease
dated
December
23,
1969
between
John
H
Steinhoff
and
Fred
Tout.
It
was
for
a
period
of
five
years.
The
rate
was
20
cents
per
yard.
Exhibit
A-4:
A
lease
between
Iris
Steinhoff,
widow
of
John
H
Steinhoff,
and
Tout
Sand
and
Gravel
Limited.
It
is
dated
November
22,
1974.
It
is
for
10
years
from
December
23,
1974.
The
rate
is
20
cents
per
ton.
Exhibit
A-5:
Farmer's
and
Fisherman’s
Income
Tax
Guide.
3.03
The
respondent
filed
the
following
documents:
Exhibit
R-1:
Agreement
for
compensation
dated
April
23,
1979
between
W
F
Farrell
and
Hydro
Ontario
of
a
property
known
as
Lot
E,
Concession
4,
Township
of
Bruce,
Ontario.
The
date
of
possession
is
October
1,
1974.
The
figures
are
the
same
as
shown
in
alinea
(f)
of
paragraph
4
of
the
reply
to
notice
of
appeal
quoted
above.
Exhibit
R-2:
Agreement
for
compensation
dated
July
24,
1978
between
Hydro
Ontario
and
the
Estate
of
John
Steinhoff
of
a
property
known
as
Lot
F,
Concession
4,
Township
of
Bruce,
Ontario.
The
date
of
possession
is
October
1,
1974.
The
compensation
is
$155,716.82.
|
Interest
|
$
31,446.82
|
|
Granular
deposits
|
$105,517.00
|
|
Timber
allowance
|
$
10,228.00
|
|
Market
value
of
land
|
$
|
7,700.00
|
|
Injurious
affection
|
$
|
825.00
|
|
$155,716.82
|
3.04
In
1974,
the
farming
operation,
in
the
case
of
Mrs
Steinhoff,
30
head
of
cattle
grazed
on
her
land
but
were
boarded
and
fed
elsewhere.
There
was
no
farm
house.
It
burnt
in
1953
and
Mr
and
Mrs
Steinhoff
then
went
to
live
in
town
but
continued
to
farm
the
property.
However,
there
were
farm
buildings
on
the
land.
3.05
In
the
case
of
Mr
Farrell,
there
was
some
mixed
farming
in
1974
but
a
substantial
amount
of
the
income
came
from
the
moneys
received
from
Kincardin
Construction
Limited.
3.06
It
was
admitted
that
because
of
the
age
of
Mr
Farrell
(he
was
born
in
1905)
and
the
sickness
and
decease
of
Mr
Steinhoff
in
1973,
the
farming
had
been
reduced
a
few
years
before
the
expropriation.
3.07
The
appellants
continued
the
farming
operation
on
the
part
not
sold
of
the
farm
after
1974.
4.
Law
—
Cases
at
law
—
Analysis
4.01
Law
The
main
provisions
of
the
Income
Tax
Act
involved
in
this
case
are
12(1)(g),
40(1)(a)(ii),
(iii)
and
44(1),
(2).
12.
(1)
Amounts
to
be
included
as
income
from
business
or
property.
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
(g)
Payments
based
on
production
or
use.—any
amount
received
by
the
taxpayer
in
the
year
that
was
dependent
upon
the
use
of
or
production
from
property
whether
or
not
that
amount
was
an
instalment
of
the
sale
price
of
the
property
(except
that
an
instalment
of
the
sale
price
of
agricultural
land
is
not
included
by
virtue
of
this
paragraph);
40.
(1)
General
rules
Except
as
otherwise
expressly
provided
in
this
Part
(a)
a
taxpayer’s
gain
for
a
taxation
year
from
the
disposition
of
any
property
is
the
amount,
if
any,
by
which
(ii)
if
the
property
was
disposed
of
before
the
year,
the
amount,
if
any,
claimed
by
him
under
subparagraph
(iii)
in
computing
his
gain
for
the
immediately
preceding
year
from
the
disposition
of
the
property,
exceeds
(iii)
subject
to
subsection
(1.1),
such
amount
as
he
may
claim
as
a
deduction,
not
exceeding
the
lesser
of
(A)
a
reasonable
amount
as
a
reserve
in
respect
of
such
of
the:
proceeds
of
disposition
of
the
property
that
are
not
due
to
him
until
after
the
end
of
the
year
as
may
reasonably
be
regarded
as
a
portion
of
the
amount
determined
under
subparagraph
(i)
in
respect
of
the
property’,
and
(B)
an
amount
equal
to
the
product
obtained
when
1/5
of
the
amount
determined
under
subparagraph
(i)
in
respect
of
the
property
is
multiplied
by
the
amount,
if
any,
by
which
4
exceeds
the
number
of
preceding
taxation
years
of
the
taxpayer
ending
after
the
disposition
of
the
property;
44.
(1)
Deferral
of
gain
on
involuntary
dispositions.
Where
in
a
taxation
year
an
amount
has
become
receivable,
as
described
in
subsection
(2),
by
a
taxpayer
as
proceeds
of
disposition
described
in
subparagraph
13(21)(d)(iii)
or
(iv)
or
54(h)(iii)
or
(iv)
of
any
capital
property
(in
this
section
referred
to
as
his
“former
property”)
and,
before
the
end
of
the
second
taxation
year
following
the
taxation
year
in
which
such
amount
became
receivable,
the
taxpayer
has
acquired
a
capital
property
(in
this
section
referred
to
as
his
“replacement
property”)
as
a
replacement
for
his
former
property
and
his
replacement
property
has
not
been
disposed
of
by
him
prior
to
the
time
he
disposed
of
his
former
property,
notwithstanding
subsection
40(1)
(a)
the
gain,
if
any,
from
the
disposition
of
his
former
property
is
the
lesser
of
(i)
the
gain
therefrom
otherwise
determined,
and
(ii)
the
amount,
if
any,
by
which
the
proceeds
of
disposition
of
his
former
property
exceed
the
cost,
or
in
the
case
of
depreciable
property
the
capital
cost
to
him,
determined
without
reference
to
paragraph
(b),
of
his
replacement
property,
(b)
the
cost,
or
in
the
case
of
depreciable
property
the
capital
cost
to
him
of
his
replacement
property,
at
any
time
after
the
time
he
disposed
of
his
former
property,
shall
be
deemed
to
be
the
cost,
or
in
the
case
of
depreciable
property
the
capital
cost
to
him
of
his
replacement
property
otherwise
determined,
minus
the
amount,
if
any,
by
which
the
gain
described
in
subparagraph
(a)(i)
exceeds
the
amount,
if
any,
determined
under
subparagraph
(a)(ii),
and
(c)
where
his
replacement
property
was
depreciable
property
of
a
prescribed
class
and
that
property
was
acquired
by
him
prior
to
the
time
he
disposed
of
his
former
property,
the
amount,
if
any,
by
which
(i)
the
reduction
in
the
capital
cost
to
him
of
his
replacement
property
by
virtue
of
paragraph
(b)
exceeds
(ii)
the
undepreciated
capital
cost
to
him
of
depreciable
property
of
the
class
to
which
his
replacement
property
belongs,
immediately
before
the
reduction
in
the
capital
cost
referred
to
in
subparagraph
(i),
shall
be
included
in
computing
his
income
for
his
taxation
year
in
which
his
former
property
was
disposed
of
and
shall,
for
the
purposes
of
subsection
13(2),
be
deemed
to
have
been
so
included
by
virtue
of
subsection
13(1)
in
respect
of
a
disposition
of
depreciable
property
of
the
class
to
which
his
replacement
property
belongs.
(2)
Idem.
For
the
purposes
of
this
Act,
the
day
on
which
a
taxpayer
has
disposed
of
a
property,
the
proceeds
of
disposition
from
which
are
described
in
subparagraph
13(21
)(d)(iii)
or
(iv)
or
54(h)(iii)
or
(iv),
and
the
day
on
which
an
amount
has
become
receivable
by
that
taxpayer
as
proceeds
of
disposition
of
such
a
property
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,
(b)
where
a
claim,
suit,
appeal
or
other
proceeding
has
been
taken
before
one
or
more
tribunals
or
courts
of
competent
jurisdiction,
the
day
on
which
the
taxpayer's
compensation
for
the
property
is
finally
determined
by
such
tribunals
or
courts,
(c)
where
a
claim,
suit,
appeal
or
other
proceeding,
referred
to
in
paragraph
(b),
has
not
been
taken
before
a
tribunal
or
court
of
competent
jurisdiction
within
two
years
of
the
loss,
destruction
or
taking
of
the
property,
the
day
that
is
two
years
following
the
day
of
the
loss,
destruction
or
taking,
(d)
the
day
on
which
the
taxpayer
is
deemed
by
section
48
or
70
to
have
disposed
of
the
property,
and
(e)
where
the
taxpayer
is
a
corporation
other
than
a
subsidiary
corporation
referred
to
in
subsection
88(1),
the
day
imemdiately
before
the
winding-up
of
the:
corporation,
and
he
shall
be
deemed
to
have
owned
the
property
continuously
until
the
day
so
determined.
4.02
Cases
at
Law
The
counsel
for
the
parties
referred
the
Court
to
the
following
cases
at
aw:
1.
Robert
G
Finley
v
MNR,
[1984]
CTC
2636;
84
DTC
1536:
2.
Myril
S
Gee
v
MNR,
[1971]
Tax
ABC
354;
71
DTC
260;
3.
Mary
Orlando
v
MNR,
[1962]
CTC
108;
62
DTC
1064:
4.
G
E
Lackie
v
The
Queen,
FCTD
[1978]
CTC
157;
78
DTC
6128
FCA
[1979]
CTC
389;
79
DTC
5309;
3.
MNR
v
D
Morrison,
[1966]
CTC
558;
65
DTC
25;
6.
Maison
de
Choix
Inc
v
MNR,
[1983]
CTC
2241;
83
DTC
204;
7.
Rokoss
et
al
v
Minister
of
Transportation
and
Communication,
8
LCR
346;
8.
Dietrich
et
al
v
Cataraqui
Region
Conservation
Authority,
6
LCR
p
278;
9.
Robert
A
Elliott
v
MNR,
[1984]
CTC
2373;
84
DTC
1325;
10.
J
Wm
Fryer
v
MNR,
25
Tax
ABC
356;
60
DTC
656;
11.
MNR
v
G
L
Lamon,
[1963]
CTC
68;
63
DTC
1039;
12.
London
and
Thames
Haven
Oil
Wharves
Ltd
v
Attwooll
(Inspector
of
Taxes),
[1967]
2
All
ER
124;
13.
Raja's
Commercial
College
v
Gian
Singh
and
Co
Ltd,
[1976]
2
All
ER
801;
14.
The
King
v
BC
Fir
and
Cedar
Lumber
Company,
[1932]
AC
441;
15.
MNR
v
Benaby
Realties
Limited,
[1967]
CTC
418;
67
DTC
5275;
16.
Eaurentide
Rendering
Inc
v
The
Queen,
[1982]
CTC
400;
83
DTC
5066;
17.
Vaughan
Construction
Ltd
v
MNR,
[1970]
CTC
350;
70
DTC
6288;
18.
M
L
Dubois
v
MNR,
41
Tax
ABC
351;
66
DTC
512;
19.
B
Wideman
v
MNR,
[1983]
CTC
2589;
83
DTC
531;
20.
Perini
Estate
v
The
Queen,
FCA
[1982]
CTC
74;82
DTC
6080.
4.03.
Analysis
A.
Appellants'
Contention
4.03.1
The
first
contention
of
counsel
for
the
appellants
is
that
the
portion
of
compensation
for
land
calculated
with
reference
to
granular
deposits
received
by
the
appellants
is
not
a
business
income.
Indeed
according
to
him,
the
appellants
inherited
the
pieces
of
land
that
were
in
their
families
for
many
generations
as
farm
land.
Therefore,
there
was
no
question
of
intention,
the
main
badge
of
trade,
entering
into
acquisition
itself
that
could
give
the
activity
the
character
of
business.
Moreover
there
is
no
application
of
another
important
badge
of
trade:
addition
of
some
value
with
the
substance
matter;
“the
gravel
was
there,
put
‘there
by
nature”.
By
agreement,
(Exhibits
A-1,
A-3)
the
appellants
sold
gravel
before
expropriations.
This
was
included
in
their
income.
However,
they
themselves
had
taken
"no
part,
not
even
so
far
as
weighing
the
gravel
or
keeping
track
of
the
quantities
that
went
out,
no
activities
whatever”.
They
had
no
machinery
available,
they
did
nothing
themselves
to
assist
the
removal
It
is
because
of
the
development
of
the
Bruce
Nuclear
Station
that
the
gravel
became
valuable.
4.03.2
Counsel
for
the
appellants
referred
to
the
Finley
case
(4.02(1))
and
Myril
S
Gee
case
(4.02(2)
).
They
are
summarized
as
follows:
Finley
Case
—
153
DTC
at
536,
537:
The
taxpayer
purchased
about
500
acres
of
farmland
suitable
for
the
raising
of
cattle
in
1964
and
early
1965.
The
taxpayer
knew
prior
to
purchase
that
the
vendor
had
granted
to
L
the
right
to
remove
stone
and
gravel
from
the
land.
However,
because
L
had
not
registered
a
caveat
on
title
with
respect
to
this
interest
the
taxpayer
refused
to
recognize
it.
Nothing
further
happened
for
about
ten
years
when
L
again
tried
to
assert
his
right
to
remove
the
stone
and
gravel.
Negotiations
ensued
and
it
was
agreed
that
the
taxpayer
and
L
would
share
equally
the
stone
and
gravel
rights.
In
the
meantime
the
taxpayer
had
farmed
the
land.
In
1976,
the
taxpayer
sold
all
of
his
rights
and
interest
in
the
stone
and
gravel
to
a
corporation,
the
voting
shares
of
which
were
held
by
a
trustee
in
trust
for
the
taxpayers
children.
The
taxpayer
could
not
require
the
resignation
of
the
trustee.
The
sale
price
of
$100,000
was
payable
one
year
after
demand
but,
in
any
event,
not
at
‘least
two
years
plus
one
day.
The
company
and
L
then
began
excavation.
The
taxpayer
reported
the
sale
of
his
sand
and
gravel
rights
as
a
disposition
of
capital
property
and
claimed
a
reserve
in
respect
of
the
sale
proceeds
not
yet
due
to
lhim.
The
Minister
assessed
the
taxpayer's
profit
as
income
and
the
taxpayer
appealed
to
the
Tax
Court
of
Canada.
The
Minister
contended
that
if
the
gain
was
on
account
of
capital
then
no
reserve
could
be
claimed
because
the
sand
and
gravel
rights
had
been
sold
to
a
corporation
controlled
by
the
taxpayer.
Held:
The
taxpayer’s
appeal
was
allowed.
The
Court
found
that
the
taxpayer’s
gain
was
on
capital
account.
At
no
time
did
he
act
as
a
trader
when
he
acquired
or
sold
the
gravel
rights
and
his
conduct
at
all
times
was
that
of
an
owner
of
an
asset.
With
respect
to
the
reserve
issue,
the
Court
found
that
the
taxpayer
did
not
control
the
purchaser
corporation.
The
voting
shares
were
held
by
a
trustee
and
the
taxpayer
could
do
nothing
to
remove
that
person
as
trustee.
In
the
present
case,
the
counsel
says
“the
land
was
expropriated,
an
act
totally
beyond
the
control
or
perhaps
even
beyond
the
desires
of
the
individual
taxpayers”.
The
Gee
case
is
summarized
as
follows
in
[1971]
Tax
ABC
at
364:
The
appellant,
a
farmer,
began
selling
gravel
from
a
pit
in
his
farm
and
ky
1962
was
in
the
gravel
business
in
a
moderately
substantial
way.
During
the
coinstruction
of
a
highway
in
1963
the
government
offered
to
pay
him
10¢
per
yard
of
gravel
it
would
remove
from
his
land
but
he
refused
this
offer.
Instead,
negotiations
culminated
in
the
sale
of
14
acres
of
land
to
the
government
at
$1,500
per
acre
and
the
Minister
sought
to
tax
the
profit
as
equivalent
to
the
sale
of
the
gravel
on
the
land.
Other
land
in
the
area
was
selling
at
$150
per
acre
and
it
was
brought
out
that
the
govenment's
offer
was
made
after
it
had
examined
the
land
to
ascertain
its
gravel
content.
Held:
The
appellant’s
land
had
been
acquired
for
farming
and
there
was
no
evidence
to
show
that
the
part
sold
could
be
regarded
as
stock-in-trade
of
his
gravel
operation.
Appeal
allowed.
According
to
the
counsel,
considering
the
principles
involved
in
the
two
above
cases
".
..
there
are
none
of
the
characteristics”
in
the
instant
case
"present
in
this
operation
to
give
gravel
removal
activities
the
characteristics
of
a
business”.
The
appellants
only
disposed
a
part
of
their
capital
property,
each
one
being
a
farm
land.
4.03.3
Moreover
to
confirm
this
thesis,
Counsel
for
the
appellant
referred
to
the
Ontario
Expropriation
Handbook
published
by
Mr
John
A
Coates.
On
page
36
under
the
paragraph
1.3
heading
“Land”,
one
may
read:
1.3
“Land”
“Land”
includes
any
estate,
term,
easement,
right
or
interest
in,
to,
over
or
affecting
land:
clause
1(1)(g).
Speaking
generally,
land
includes
land,
improvements
and
anything
affixed
to,
or
growing
on
the
land.
Except
in
“exceptional
circumstances”
the
value
of
topsoil,
sand
and
gravel,
standing
timber
or
growing
crops
will
be
taken
into
consideration
in
determining
market
value,
and
there
can
be
no
recovery
for
them
valued
separately
as
a
merchantable
product
and
in
addition
to
the
value
of
the
land.
See
Dietrich
v
Cataraqui
Region
Conservation
Authority
(1974),
6
LCR
278
at
285-88;
Rokoss
v
MT
&
C
(1975),
8
CLR
346
at
351;
Farmer
v
Grand
River
Conservation
Authority
(1977),
11
LCR
166
at
178.
Moreover,
the
payment
that
was
made
by
Hydro
Ontario
was
made
under
section
25
of
the
Ontario
Expropriations
Act
and
this
section
refers
only
to
the
land.
25.
Offer.—(1)
Where
no
agreement
as
to
compensation
has
been
made
with
the
owner,
the
expropriating
authority
shall,
within
three
months
after
the
registration
of
a
plan
under
section
9
and
before
taking
possession
of
the
land,
(a)
serve
upon
the
registered
owner,
(i)
an
offer
of
an
amount
in
full
compensation
for
his
interest,
and
(ii)
where
the
registered
owner
is
not
a
tenant,
a
statement
of
the
total
compensation
being
offered
for
all
interests
in
the
land,
excepting
compensation
for
business
loss
for
which
the
determination
is
postponed
under
subsection
(1)
of
section
19;
and
(b)
offer
the
registered
owner
immediate
payment
of
100
per
cent
of
the
amount
of
the
market
value
of
the
owner's
land
as
estimated
by
the
expropriating
authority,
and
the
payment
and
receipt
of
that
sum
is
without
prejudice
to
the
rights
conferred
by
this
Act
in
respect
of
the
determination
of
compensation
and
is
subject
to
adjustment
in
accordance
with
any
compensation
that
may
subsequently
be
determined
in
accordance
with
this
Act
or
agreed
upon.
4.03.4
Also
the
appellants’
contention
is
that
the
disposition
of
the
property
should
be
considered
to
be
1976,
in
applying
provision
44(2),
paragraphs
(a)
to
(e)
of
the
Income
Tax
Act.
Paragraphs
(d)
and
(e)
have
no
application
in
the
circumstances
because
they
would
apply
in
the
case
of
giving
up
Canadian
residence,
death,
or
a
wind-up
of
a
subsidiary
corporation.
In
paragraph
(a)
the
date
is
described
as
the
day
the
taxpayer
agreed
to
an
amount
as
full
compensation
to
him
for
property
lost,
taken
or
sold.
The
instant
cases,
it
is
1978
for
Mrs
Iris
Steinhoff
and
1979
for
Mr
Farrell.
Paragraph
(b)
is
irrelevant
because
no
claim,
suit,
appeal
or
other
proceedings
have
been
taken
before
one
or
more
tribunals.
Paragraph
(c)
seems
to
have
application,
because
when
paragraph
(b)
has
no
application,
the
date
at
which
the
deemed
disposition
is
set
is
the
day
that
is
two
years
following
the
day
of
the
taking
possession
which
was
in
fall
1974,
in
both
cases.
Therefore,
1976
should
be
considered
as
the
year
of
the
disposition
of
the
properties.
4.03.5
Finally,
counsel
for
the
appellants
submitted
that
the
interest
received
by
the
appellants
be
excluded
from
the
income.
His
argument
is
based
on
the
Elliott
case
(4.02(9))
—
the
facts
of
this
case
and
the
decisions
are
well
summarized
[1984]
CTC
2373.
This
summary
reads
as
follows:
The
taxpayer
owned
a
600-acre
farm
in
the
township
of
Brighton,
Ontario.
In
August
1978
Ontario
Hydro
attempted
to
purchase
a
portion
of
his
land
for
the
purpose
of
erecting
a
transmission
line
over
it.
The
taxpayer
refused
to
sell.
In
November
1978
Ontario
Hydro
initiated
legal
proceedings
for
expropriation
of
the
land
in
question.
Negotiations
between
the
parties
ensued
and
resulted
in
a
settlement
in
March
1980
under
which
the
taxpayer
was
to
receive
approximately
$60,000
by
way
of
compensation.
Of
the
total
amount
of
compensation,
$13,757.74
was
on
account
of
interest
payable
under
the
Expropriations
Act.
That
Act
requires
that
interest
be
paid
an
expropriated
owner
from
the
date
at
which
he
ceases
to
make
productive
use
of
the
land
to
be
expropriated
to
the
date
of
expropriation.
Hydro
took
possession
of
the
land
in
question
on
August
16,
1978,
though
due
to
the
protracted
negotiations,
the
statement
of
adjustments
bore
the
date
April
18,
1980.
The
taxpayer
purchased
another
farm
with
the
expropriation
proceeds.
In
computing
his
income
for
the
1980
taxation
year,
the
taxpayer
sought
to
include
the
$13,757.75
interest
payment
in
his
farming
income,
and
further
to
deduct
farming
losses
for
the
1975
to
1978
taxation
years
against
his
net
1980
farming
income.
The
Minister
reassessed
the
taxpayer
for
the
1980
taxation
year,
excluding
the
interest
income
from
the
farm
income
and
including
it
as
interest
income.
The
taxpayer
argued
that
the
interest
payment
was
part
of
the
total
compensation,
which
amount,
because
it
had
been
spent
on
new
property,
was
not
income.
Further,
the
amount
of
interest,
as
part
of
the
full
compensation,
was
not
determined
or
fixed
until
April
of
1980,
which
date
was
therefore
the
"earliest
time”
at
which
the
taxpayer
had
“disposed
of”
the
land
in
question
within
the
meaning
of
subsection
44(2)
of
the
Act,
notwithstanding
the
fact
that
Hydro
had
taken
possession
of
the
land
at
an
earlier
point
in
time.
In
the
alternative,
the
taxpayer
argued
that
the
interest
was
farming
income;
it
was
compensation
for
the
loss
of
the
capacity
to
generate
farming
income.
The
Minister
argued
that
it
was
settled
law
that
interest
paid
a
vendor
between
the
date
a
purchaser
or
expropriating
entity
took
possession
of
land
and
a
later
date
when
agreement
as
to
sale
price
or
compensation
due,
was
arrived
at,
was
on
account
of
interest
income.
Held:
Strictly
construed,
section
44
required
the
conclusion
that
the
property
in
question
was
disposed
of,
and
compensation
was
receivable
by
the
taxpayer,
on
April
18,
1980.
It
was
reasonable
to
conclude
that
the
interest
in
question
was
part
of
the
compensation
paid
and
should
not
be
considered
as
interest
income.
Previous
cases
containing
the
contrary
conclusion
were
decided
under
the
former
Act,
prior
to
the
present
form
of
section
44.
The
Court
was
now
bound
by
its
provisions.
Appeal
allowed.
If
the
same
principle
applies
in
the
instant
cases,
the
interest
computed
from
1974
to
fall
1976,
the
latter
being
the
deemed
time
of
the
disposition,
should
be
excluded
from
the
income.
However,
interest
computed
after
fall
1976
should
remain
in
the
income.
B.
Respondent's
Contention
Counsel
for
the
respondent
gave
arguments
concerning
the
following
points:
8.1
Capital
or
Income
Gain
B.1(a)
Business
Income
B.1(b)
Even
if
it
is
property
income,
it
must
be
included
|
B.2
|
Time
of
Disposition
|
|
B.3
|
Interest
|
|
B.4
|
Reserves
|
8.1
Capital
or
Income
Gain
4.03.6
Counsel
for
the
respondent
submitted
under
that
heading
the
two
following
arguments:
First,
in
both
cases,
the
contracts
cover
the
whole
property,
not
just
a
part
of
the
property.
Secondly,
the
amount
of
farming
that
was
done
by
the
time
the
expropriation
took
place
in
1974
was
on
a
small
scale.
The
major
business
was
the
letting
out
of
the
property
to
the
construction
company,
Kincardin
Construction
and
the
receipt
of
income
was
on
the
basis
of
the
amount
of
gravel
taken
from
that
property,
(par
3.04,
3.05).
Counsel
for
the
respondent
referred
the
Court
to
the
Fryer
case
given
by
the
Tax
Appeal
Board
in
1960
(4.02(10)).
the
facts
are
summarized
as
follows
by
DTC
at
656:
The
appellant,
a
farmer
who
was
also
engaged
in
the
business
of
selling
gravel
contained
on
his
farm
land,
sold
several
acres
of
land
to
a
gravel
company
for
$5,000.
From
the
time
that
he
had
discovered
the
gravel
on
his
farm
and
had
commenced
to
sell
it
on
a
tonnage
basis,
he
had
been
reporting
the
amounts
received
as
income
from
his
farm.
The
profit
on
the
sale
of
the
land,
however,
he
regarded
as
a
capital
gain.
The
Minister
maintained
that
the
transaction
was
of
an
income
nature.
Evidence
was
adduced
to
show
that
the
price
arrived
at
was
equivalent
to
the
amount
he
would
have
received
had
he
disposed
of
the
gravel
contained
in
the
land
at
so
much
a
ton.
Held:
The
appeal
was
dismissed.
The
profit
derived
from
the
sale
of
the
land
containing
gravel
was
income
to
the
appellant.
The
sale
constituted
an
adventure
or
concern
in
the
nature
of
trade.
The
Exchequer
Court’s
decision
in
MNR
v
Orlando
(60
DTC
1051)
was
followed
by
the
Board.
4.03.7
The
Mary
Orlando
decision
to
which
it
is
referred
in
the
Fryer
case
was
confirmed
by
the
Supreme
Court
of
Canada
(par
4.02(3)).
This
important
case
is
summarized
as
follows
by
DTC:
In
1944
the
appellant,
who
was
a
shareholder
in
her
husband’s
mushroom
farming
company,
purchased
a
farm
as
a
long-term
investment
and
with
the
thought
in
mind
that
the
mushroom
activities
might,
at
some
time
in
the
future,
have
to
be
removed
to
this
new
location.
During
the
next
few
years,
the
appellant
carried
on
minor
farming
operations
on
her
new
farm
and
regularly
sold
topsoil
to
her
husband’s
company,
the
soil
being
removed
by
the
purchaser.
In
1953
she
was
advised
by
the
provincial
government
that
part
of
her
farm
was
required
for
the
construction
of
a
new
highway.
Following
negotiations,
she
sold
37
acres,
reserving
to
herself
all
the
topsoil
from
the
acreage
sold.
This
topsoil
was
then
sold
to
her
husband’s
company
for
about
$20,000.
The
appellant
objected
when
the
Minister
ruled
that
the
amount
she
received
for
the
topsoil
was
income
subject
to
tax.
The
Appeal
Board
allowed
her
appeal
(58
DTC
534)
but
the
Exchequer
Court
reversed
this
decision
(60
DTC
1051).
The
appellant
brought
the
matter
before
the
Supreme
Court
of
Canada.
The
Minister
maintained
that
the
amount
received
for
the
topsoil
(which
he
admitted
was
about
$800
less
than
the
amount
originally
assessed)
was
taxable
as
income
from
a
business
or,
in
the
alternative,
was
taxable
under
section
6(1)(j)
as
a
payment
dependent
upon
use
of
or
production
from
property.
The
appellant
contended
that
her
topsoil
profit
was
a
capital
gain
from
the
partial
realization
of
an
investment.
She
also
argued
that,
if
the
proceeds
of
the
topsoil
sale
were
taxable,
she
was
entitled
(under
section
27(1)(e)
to
deduct
from
such
proceeds
the
losses
sustained
by
her
in
operating
the
farm
in
the
five
years
preceding
and
the
year
following
1953.
Held:
The
appeal
was
allowed
only
to
the
extent
necessary
to
permit
the
minor
adjustment
which
the
Minister
admitted
should
be
made
(one
dissenting).
The
amount
received
by
the
appellant
for
the
topsoil
was
income
subject
to
tax
and
not
a
capital
gain.
In
disposing
of
the
topsoil,
the
appellant
was
engaged
in
a
scheme
of
profit-making
or
an
adventure
in
the
nature
of
trade.
Her
dealings
in
topsoil
had
no
relation
to
any
farming
operations
she
carried
on.
Her
farming
losses
were
losses
which
were
not
incurred
from
the
business
of
selling
topsoil
and,
accordingly,
were
not
deductible
from
the
profits
arising
from
that
activity.
It
is
useful
to
quote
the
Supreme
Court
[1962]
CTC
108
on
page
109
(DTC
1064):
It
is
clear
I
think,
that
these
sales
of
topsoil
had
no
relation
to
any
farming
operations
which
appellant
may
have
been
conducting
on
her
property,
since
such
disposal
of
the
topsoil,
if
carried
to
its
ultimate
conclusion,
would
have
rendered
any
farming
operation
impossible.
The
learned
trial
judge
held
on
the
facts
that
in
disposing
of
topsoil,
appellant
was
engaged
in
a
scheme
of
profit-making
or
an
adventure
or
concern
in
the
nature
of
trade,
and
that
the
profits
derived
therefrom
were
income
within
the
meaning
of
sections
3,
4
and
139(1
)(e)
of
the
Income
Tax
Act
and
subject
to
tax.
In
my
opinion,
he
was
right
in
so
holding.
I
am
in
substantial
agreement
with
his
reasons
and
conclusions
on
this
point
and
there
is
little
I
can
usefully
add
to
them.
4.03.8
The
Federal
Court
of
Appeal
referred
to
the
Orlando
case
in
the
G
Lackie
decision
given
in
1979
(par
4.02(4)).
The
facts
in
the
Lackie
case
are
summarized
as
follows
in
DTC
5309:
The
taxpayer
transferred
a
farm
to
his
wife.
Thereafter,
she
sold
gravel
from
the
farm
at
a
stipulated
price
per
ton
under
an
agreement
calling
for
certain
minimum
payments.
She
in
fact
received
the
minimum
amounts
payable
under
the
agreement.
The
Minister
attributed
such
income
to
the
taxpayer,
who
then
appealed
unsuccessfully
to
the
Federal
Court
—
Trial
Division
(78
DTC
6128).
The
Court
found
attribution
to
be
proper,
since
the
anticipated
payments
depended
to
some
extent
on
use
of
the
land,
and
could
be
characterized
as
income
from
property.
The
taxpayer
appealed
to
the
Federal
Court
of
Appeal,
contending
that
attribution
was
not
proper
because
the
payments
represented
business
income
rather
than
property
income.
Held:
The
taxpayer’s
appeal
was
dismissed.
The
activity
permitted
on
the
land
over
several
years
by
the
taxpayer’s
wife
did
constitute
use
of
the
property
within
the
meaning
of
the
relevant
statutory
provision.
The
profits
were
dependent
on
that
use.
The
taxpayer’s
wife
did
not
sell
gravel
as
a
business
but
simply
granted
a
licence
to
work
a
gravel
pit
on
her
land.
The
payments
represented
income
from
property,
and
were
properly
considered
as
part
of
the
taxpayer’s
income.
His
appeal
was
therefore
dismissed.
On
page
393
(DTC
5312),
referring
to
the
Orlando
decision,
Mr
Justice
Urie
of
the
Federal
Court
of
Appeal
said:
The
majority
of
the
Supreme
Court
upheld
the
decision
of
the
Exchequer
Court
that
the
amount
received
for
the
topsoil
was
the
proceeds
from
a
scheme
of
profit
making
or
an
adventure
or
concern
in
the
nature
of
a
trade
so
that
the
profits
derived
therefrom
were
income
and
subject
to
tax.
Abbott,
J,
speaking
for
the
majority
held
that
the
sales
had
no
relation
to
any
farming
operations
since,
if
the
disposal
of
topsoil
was
taken
to
its
ultimate
conclusion,
farming
operations
would
have
been
rendered
impossible.
Moreover,
on
page
393
(DTC
5313),
the
Court
said:
The
key
to
the
reasoning
of
the
majority
in
the
Supreme
Court
seems
to
me
to
lie
in
the
fact
that
the
sale
of
topsoil
would
have
rendered
any
minimal
farming
operations
by
the
appellant
ultimately
impossible
and
thus
it
was
a
scheme
for
profit
making.
Such
does
not
appear
to
hold
in
the
case
at
bar
since
the
evidence
discloses
that
the
appellant,
his
wife
and
family
continued
to
reside
on
the
farm
and
presumably
to
have
farmed
it.
Certainly,
paragraph
8(a)
of
the
license
agreement
seems
to
indicate
that
some
portion
of
the
farm
was
to
continue
as
such
since
it
required
Blacktop
to
use
such
methods
in
its
operations
as
will
do
as
little
damage
as
reasonably
possible
to
the
unworked
portion
of
the
owners
(sic)
premises.
From
this
it
can
be
inferred,
I
think,
that
unlike
the
situation
in
the
Orlando
case,
the
removal
of
the
gravel
would
not
have
the
effect
of
ultimately
making
impossible
the
use
of
the
farm
for
purposes
of
farming
or
residence.
It
thus
seems
to
me
that
the
Orlando
case
can
and
must
be
distinguished
on
its
facts
and
that
the
reasoning
in
the
line
of
cases
typified
by
the
Smethurst
case,
supra,
that
the
removal
of
gravel
or
other
substances
from
property
pursuant
to
agreements
similar
in
form
to
that
in
issue
here,
constitutes
a
licence
analogous
to
a
profit
a
prendre
is
applicable
to
the
facts
here.
B.1(a)
Business
Income
4.03.9
In
the
instant
case,
counsel
for
the
respondent
submitted:
So
I
submit
that
it
is
still
open
to
Your
Honour
to
find
that
if
Mr
Justice
Urie
is
correct
in
saying
that
that
is
the
distinguishing
feature
of
the
Lackie
case
from
the
Orlando
case,
that
is
the
fact
that
the
inevitable
or
logical
consequence
of
carrying
on
of
the
excavation
would
render
the
farming
impossible,
then
I
submit
that
Orlando
is
still
good
law
with
the
result
that
the
income
received
by
Mrs
Steinhoff
and
Mr
Farrell
was
income
from
a
business,
notwithstanding
that,
they
themselves
did
nothing
in
relation
to
it
but
signed
the
licensing
agreement.
4.03.10
Counsel
for
the
respondent
in
contending
the
profit
was
a
“Busi-
ness
Income”,
referred
to
the
Lamon
case
(par
4.02(11)).
This
case
has
some
similarity
with
the
instant
case.
It
is
summarized
as
follows
in
DTC
at
1039-
40:
The
respondent
and
her
husband
had
operated
a
small
bakery
in
an
Ontario
city
for
many
years.
In
1937
she
used
her
savings
to
purchase
an
18-acre
rural
property
near
the
city,
hoping
to
establish
a
self-supporting
home
in
the
country.
She
occupied
the
small
house
on
the
property,
but
attempts
to
farm
the
land
met
with
no
success
because
of
the
poor
quality
of
the
soil,
and
severe
financial
losses
were
sustained.
Nearly
20
years
after
the
property
was
purchased,
she
learned
that
part
of
the
property
contained
large
deposits
of
gravel
in
which
local
construction
companies
were
interested.
Because
of
a
township
by-law
prohibiting
the
sale
of
a
parcel
of
land
of
less
than
ten
acres,
the
respondent
could
not
sell
the
small
acreage
on
which
the
gravel
was
located
and
she
did
not
want
to
sell
the
whole
property.
In
1957
she
agreed
to
permit
two
construction
companies
to
remove
the
gravel,
paying
for
it
at
so
much
per
yard.
The
amounts
received
by
the
respondent
for
gravel
removed
in
1957
and
1958
were
taxed
by
the
Minister
as
income.
The
respondent
contended
that
her
receipts
constituted
capital.
When
the
Appeal
Board
ruled
in
her
favour
(61
DTC
334),
the
Minister
appealed
to
the
Exchequer
Court.
He
argued
that
amounts
received
by
the
respondent
for
gravel
were
taxable
under
section
6(1)(j)
as
payments
dependent
upon
use
of
or
production
from
property
or,
alternatively,
were
taxable
as
income
from
a
business
or
as
rent
from
property.
Held:
The
Minister’s
appeal
was
allowed.
The
amounts
received
by
the
respondent
from
the
sale
of
gravel
were
taxable
under
the
provisions
of
section
6(1)(j).
No
sale
of
land,
agricultural
or
otherwise,
was
involved;
the
amounts
that
the
respondent
received
were
amounts
that
were
dependent
upon
use
of
property.
According
to
English
authorities,
the
digging
of
sand,
gravel,
clay
or
peat
are
and
have
been
from
time
immemorial
ordinary
and
well-known
use
of
land
(see
Smethurst
v
Davy,
37
TC
593).
The
right
the
respondent
granted
to
the
construction
companies
to
come
on
to
her
land
and
excavate
and
take
away
gravel
constituted
a
use
of
land.
Furthermore,
the
respondent's
receipts
were
taxable
as
income
from
a
business,
within
the
extended
meaning
of
“business"
as
defined
in
the
Act.
In
selling
gravel
as
she
did,
she
embarked
on
a
scheme
for
profit-making
and
engaged
in
an
adventure
in
the
nature
of
trade.
The
facts
in
the
present
case
could
not
be
distinguished
from
those
in
Orlando
v
MNR,
decided
by
the
Supreme
Court
of
Canada
(62
DTC
1064).
Having
so
concluded,
the
Court
found
it
unnecessary
to
consider
the
Minister's
final
submission
that
the
amounts
in
question
were
taxable
as
rent
from
property.
B.1(b)
Even
if
it
is
property
income,
it
must
be
included
on
income
account.
4.03.11
In
the
reply
to
notice
of
appeal,
paragraph
4(1)(g)
(Mrs
Steinhoff)
and
4(1)(h)
(Mr
Farrell),
it
is
assumed
that
it
is
income
from
property.
The
said
4(1)(h)
reads
as
follows:
All
the
amount
paid
in
respect
of
granular
deposits
was
paid
on
the
basis
of
projected
production
of
gravel
from
the
property
and
profit
therefrom
from
October
1,
1974
to
the
end
of
1999
pursuant
to
the
said
contracts
and
renewals
thereof;
Counsel
for
the
respondent
argued
that
the
basis
of
the
payment,
according
to.
the
contracts,
is
not
only
the
production
but
the
profit
from
that
production.
He
submitted
therefore
that
the
nature
and
the
substance
of
the
compensation,
which
is
referable
to
granular
resources
is
payment
for
loss
of
the
income
stream
for
the
approximately
20-
to
25-year
period
following
the
expropriation.
In
accountant
terms,
that
would
be
a
discounted
present
value
of
the
future
stream.
Counsel
then
referred
to
two
British
cases,
London
and
Thames
Haven
Oil
Wharves
Ltd
v
Attwooll
(4.02(12))
and
Raja's
Commercial
College
v
Gian
Singh
Co
Ltd
(4.02(13)).
4.03.12
London
and
Thames
Haven
Oil
Wharves
Ltd
Case
This
is
a
damage
case.
It
involves
the
physical
damage
to
a
jetty.
Damages
were
paid
by
the
party
responsible.
The
question
was
whether
the
payment
is
on
income
or
capital
account.
Even
if
the
jetty
was
a
capital
asset,
it
was
not
decisive
of
the
question.
The
crux
of
the
matter
in
this
decision
is
the
often
quoted
passage
of
Lord
Diplock
concerning
the
relevant
rule
in
case
of
compensation
received
by
a
trader.
On
page
134-35,
he
said:
I
start
by
formulating
what
I
believe
to
be
the
relevant
rule.
Where
pursuant
to
a
legal
right,
a
trader
receives
from
another
person
compensation
for
the
trader’s
failure
to
receive
a
sum
of
money
which,
if
it
had
been
received,
would
have
been
credited
to
the
amount
of
profits
(if
any)
arising
in
any
year
from
the
trade
carried
on
by
him
at
the
time
when
the
compensation
is
so
received,
the
compensation
is
to
be
treated
for
income
tax
purposes
in
the
same
way
as
the
sum
of
money
would
have
been
treated
if
it
had
been
received
instead
of
the
compensation.
The
rule
is
applicable
whatever
the
source
of
the
legal
right
of
the
trader
to
recover
the
compensation.
It
may
arise
from
a
primary
obligation
under
a
contract
such
as
a
contract
of
insurance;
from
a
secondary
obligation
arising
out
of
non-performance
of
a
contract
such
as
a
right
to
damages,
either
liquidated,
as
under
the
demurrage
clause
in
a
charterparty,
or
liquidated
from
an
obligation
to
pay
damages
for
tort,
as
in
the
present
case
or
from
a
statutory
obligation;
or
in
any
other
way
in
which
legal
obligations
arise.
The
source
of
a
legal
right
is
relevant,
however,
to
the
first
problem
involved
in
the
application
of
the
rule
to
the
particular
case,
viz,
to
identify
for
what
the
compensation
was
paid.
If
the
solution
to
the
first
problem
is
that
the
compensation
was
paid
for
the
failure
of
the
trader
to
receive
a
sum
of
money,
the
second
problem
involved
is
to
decide
whether,
if
that
sum
of
money
has
been
received
by
the
trader
it
would
have
been
credited
to
the
amount
of
profits
(if
any)
arising
in
any
year
from
the
trade
carried
on
by
him
at
the
date
of
receipt,
ie,
would
have
been
what
I
shall
call
for
brevity
an
income
receipt
of
that
trade.
The
source
of
the
legal
right
to
the
compensation
is
irrelevant
to
the
second
problem.
Counsel
for
the
respondent
submitted
that
in
the
case
at
bar,
the
source
of
the
right
is
statutory.
It
is
a
compensation
under
the
Expropriations
Act.
He
said
the
compensation
was
not
for
a
loss
of
this
farm
land,
even
though
on
their
own
release
documents,
they
called
it
“land”.
Whatever
they
called
it,
he
said,
in
substance,
the
payment
was
a
payment
to
the
appellants
for
the
loss
of
their
income
stream
over
the
20
to
25-year
period.
If
they
had
received
those
amounts
on
a
year-by-year
basis,
the
amounts
would
have
been
treated
as
income,
either
as
business
income
or
under
12(1)(g)
as
income
based
upon
production
or
use
of
property.
According
to
the
counsel,
that
rule
was
approved
by
the
House
of
Lords
in
the
following
case.
4.03.13
Raja's
Commercial
College
v
Gian
Singh
Co
Ltd.
The
facts
of
this
case
are
summarized
as
follows:
The
plaintiffs
were
the
owners
of
a
building
in
Singapore
of
which
the
defendants
were
tenants.
The
plaintiffs
served
the
defendants
with
a
notice
to
quit
terminating
their
tenancy
on
31st
December
1967.
The
defendants
disputed
the
plaintiff’s
right
to
possession
of
the
premises
and
the
plaintiffs
brought
an
action
against
the
defendants
claiming
possession
and
damages.
The
defendants
continued
to
occupy
the
premises
as
trespassers
for
nearly
six
years,
paying
the
same
rent.
On
22nd
November
1973
the
trial
judge
made
an
order
for
possession
and
awarded
the
plaintiffs
$187,242.23
damages,
calculated
as
the
difference
between
the
rent
paid
by
the
defendants
and
the
rent
the
plaintiffs
could
have
obtained.
On
30th
November
the
defendants
vacated
the
premises
but
appealed
against
the
award
of
damages
on
the
grounds
that
it
should
be
reduced
since
it
was
not
"the
income
of
any
person”
within
s
10(1)(a)
of
the
Income
Tax
Act
(Singapore)
and
the
plaintiffs
would
accordingly
not
be
liable
to
pay
income
tax
on
it,
although
the
rent
would
have
been
taxable,
and
that,
even
if
it
were
liable
to
tax,
an
award
of
damages
to
an
investor,
such
as
the
plaintiffs,
was
exempt
from
income
tax.
Held:
It
was
immaterial
that
the
plaintiffs
received
the
damages
as
investors
rather
than
traders.
Since
the
damages
awarded
to
the
plaintiffs
were
for
loss
of
income
they
fell
to
be
taken
into
account
as
income
when
assessing
the
plaintiffs’
liability
to
income
tax.
It
followed
that
the
damages
were
liable
to
income
tax
in
the
plaintiffs’
hands
and
there
was
therefore
no
ground
for
reducing
the
award.
Accordingly
the
appeal
would
be
dismissed
(see
p
805
h
to
p
806
b
and
p
807¢
to
p
808
b,
post).
After
quoting
the
passage
of
Diplock,
LJ
quoted
above,
Lord
Fraser
of
Tullybelton
said:
That
statement
of
the
relevant
rule
appears
to
their
Lordships
to
be
sound
in
principle
and
in
accordance
with
earlier
authorities.
Counsel
for
the
respondent
underlined
that
as
long
as
the
nature
of
the
compensation
is
a
replacement
of
income
that
would
have
been
received,
the
compensation
paid
for
the
failure
to
receive
that
income
is
on
income
account.
B.2
The
deemed
time
of
disposition
4.03.14
The
respondent's
contention
is
to
the
effect
that
the
deeming
provision
44(2)
exists
mainly
for
the
purpose
of
section
44
entitled
“Exchange
of
Property"
despite
the
fact
that
the
first
words
of
provision
44(2)
are
“For
the
purposes
of
this
Act
.
.
According
to
counsel
for
the
respondent,
the
deemed
time
of
disposition
provided
in
44(2)
exists
principally
in
view
of
the
computation
of
the
two-
year
delay
provided
in
44(1)
to
purchase
the
replacement
property.
As
“replacement
of
property”
is
also
involved
in
provisions
13(4),
13(4.1),
14(6),
14(7)
of
the
Act,
it
is
the
reason
why
provision
44(2)
also
applies
to
the
above
provisions
and
it
was
required
that
the
first
words
be
“For
the
purposes
of
this
Act".
If
44(2)
is
for
all
purposes
of
the
Income
Tax
Act,
then
it
would
be
possible
according
to
counsel
for
the
respondent,
that
the
deemed
receipt
of
proceeds
(for
instance
in
1976,
as
in
the
case
at
bar)
be
in
a
year
which
may
be
statute-barred
by
the
time
the
Minister
comes
to
assess
the
amount
that
they
actually
received.
4.03.15
Counsel
for
the
respondent
contends
that
the
appellants’
interpretation
would
be
against
the
interpretation
given
by
the
Supreme
Court
in
Benaby
Realties
Limited
(case
4.02(15)).
In
this
case,
it
was
indeed
decided
that
.
.
.
at
the
moment
of
expropriation
the
taxpayer
acquired
a
right
to
receive
compensation
in
place
of
the
land
but
in
the
absence
of
a
binding
agreement
between
the
parties
or
of
a
judgment
fixing
the
compensation,
the
owner
had
no
more
right
to
claim
compensation
and
there
is
nothing
more
which
can
be
taken
into
account
as
an
amount
receivable
due
to
expropriation.
The
time
of
the
disposition
is
the
time
when
the
account
became
receivable
ie
when
a
judgment
is
given
or
when
an
agreement
occurred.
In
fact
nothing
can
be
declared
and
assessed
until
the
amount
is
ascertained.
This
point
was
also
decided
in
the
Laurentide
Rendering
Incorporated
case
(4.02(16))
and
in
the
Vaughan
Construction
case
(4.02(17)).
8.3
Interest
4.03.16
When
is
the
matter
of
interest
payable?
The
respondent's
position
is
that
the
disposition
of
the
land
took
place
in
1974
when
it
became
vested
in
Ontario
Hydro.
The
interest
payable
is
referable
back
to
1974
up
to
the
time
of
disposition.
Cases
at
law
under
the
Farmer
Act
confirm
this
practice
that
it
was
deemed
to
have
been
owing
to
the
appellants
from
the
day
of
the
expropriation.
Dubois
case
(4.02(18))
and
Perini
case
(4.02(20)).
However,
the
Elliott
case
(4.03(9))
involved
section
44
of
the
new
Act
(see
summary
in
paragraph
4.03.5).
Counsel
for
the
respondent
says
that
the
Elliott
case
must
be
distinguished
because
then
there
was
a
replacement
property.
It
deals
with
44(2)(c)
and
people
then
are
not
disadvantaged
or
disentitled
or
disqualified
from
purchasing
a
replacement
property
by
the
protracted
negotiation
regarding
compensation.
In
the
cases
at
bar,
there
is
no
replacement
property
and
the
general
principles
concerning
interest
must
apply.
B.4
Reserve
4.03.17
Counsel
for
the
respondent
submitted
that
if
the
Court
concludes
to
the
application
of
44(2)(c)
to
fix
the
deemed
time
of
disposition,
the
only
fair
disposition
of
this
matter
is
to
imply
a
reserve
taken
by
the
appellants
and
acceded
to
by
the
Minister
for
the
1976
and
1977
years.
C.
Decision
4.03.18
Capital
or
Income
Gain
The
key
point
is
whether
the
amount
paid
for
granular
deposits
is
really
representative
of
the
transaction
or
only
a
yardstick.
Paraphrasing
the
passage
of
Lord
Diplock
in
the
London
and
Thames
Haven
Oil
Wharves
case,
quoted
above
(4.03(12)),
it
can
be
said
that
on
the
one
hand
sometimes
the
method
by
which
the
compensation
has
been
assessed
identifies
for
what
it
was
paid,
then
it
is
significant
of
the
nature
of
the
transaction.
On
the
other
hand
sometimes
the
method
used
is
no
more
than
a
factor.
In
each
case,
circumstances,
joined
to
the
method
used
to
compute
the
compensation,
help
to
identify
the
nature
of
the
payment.
Thus,
in
the
Orlando
case,
the
fact
that
the
taxpayer
had
reserved
to
herself
all
the
topsoil
from
the
37
acres
of
her
farm
sold
to
the
government
and
the
fact
that
for
nearly
20
years
she
had
been
selling
topsoil
were
significant
for
the
Supreme
Court
of
Canada
to
determine
the
business
nature
of
the
payment
of
$20,000
she
received
from
her
husband's
company.
4.03.19
In
the
instant
case:
—
as
the
pieces
of
land
sold
were
part
of
farms
inherited
for
many
generations,
—
as
in
1974
when
Hydro
Ontario
expropriated
the
piece
of
land,
the
appellants
had
been
selling
gravel
since
1969,
—
as
they
did
not
participate
in
any
way
in
the
excavation
of
the
gravel;
they
had
only
sold
the
gravel
to
a
contractor,
—
as
payments
were
then
included
in
the
income
by
virtue
of
12(1)(g),
—
as
because
of
certain
circumstances
(the
age
of
Mr
Farrell,
the
decease
of
Mr
Steinhoff
in
1973)
the
farming
activities
had
been
reduced
for
a
few
years,
—
as
Hydro
Ontario
did
not
buy
the
piece
of
land
for
selling
the
gravel,
—
as
the
appellants
continued
their
farming
activities
on
the
property
not
expropriated,
—
as
Hydro
Ontario
is
bound
by
the
Expropriations
Act
to
include
the
value
of
the
topsoil
in
the
compensation;
paragraph
1.3
quoted
above,
—
as
under
the
Expropriations
Act,
Ontario
Hydro
only
paid
for
the
land,
—
as
at
the
time
of
the
expropriation
the
underlying
granular
resources
formed
part
of
the
real
estate,
and
therefore
part
of
the
farm,
—
as
the
farm
was
capital
of
the
farming
operation,
the
Court
concludes
that
the
reference
to
the
underlying
granular
resources
in
the
computation
of
the
compensation
is
not
more
than
a
factor
or
a
yardstick.
Therefore
the
amount
received
in
this
respect
must
be
considered
as
capital
gain.
4.03.20
Time
of
disposition
The
difficult
point
in
this
matter
with
subsection
44(2)
is
the
interpretation
of
the
words
“for
the
purpose
of
this
Act”
at
the
beginning
of
this
provision.
On
the
one
hand,
the
Act
must
be
strictly
interpreted.
On
the
other
hand
it
must
be
interpreted,
so
that
effect
may
be
given
to
the
enactment
and
every
part
thereof
according
to
its
true
spirit,
intent
and
meaning.
It
seems
to
me
that
if
this
provision
44(2)
applies
to
all
sections
of
the
Act,
we
arrive
at
an
absurdity
when
assessment
is
involved.
How
can
the
taxpayer
assess
himself
ie
how
can
he
declare
his
income
if
he
does
not
know
it?
He
shall
know
it
only
when
a
settlement
shall
occur
and
this
can
take
many
years.
How,
in
the
same
circumstances,
can
the
Minister
assess
the
taxpayer
when
the
settlement
shall
occur
if
he
is
statute-barred
to
reassess
the
taxpayer?
Is
it
useful
to
say
that
assessment
is
the
key
of
the
Act?
I
think
that
the
Court
must
apply
the
interpretation
principle
that
when
the
words
of
an
Act
lead
to
a
senseless
meaning,
the
Court
must
give
the
interpretation
which
leads
to
the
most
appropriate
meaning
considering
the
general
sense
of
the
Act.
Therefore,
the
Court
concludes
on
this
point
that
“for
the
purpose
of
this
Act”
in
44(2)
means
that
it
applies
to
all
sections
in
the
Act
which
concern
replacement
property
mainly
provided
in
44(1).
Practically,
the
appellants’
argument
being
not
retained
and
the
amount
involved
becoming
receivable
in
1978
and
1979,
the
reassessments
must
be
maintained
on
this
point.
4.03.21
Interest
Because
of
the
above
decision
concerning
the
time
of
disposition,
the
Court
arrives
at
the
conclusion
that
as
there
is
no
replacement
property
in
the
cases
at
bar,
the
deemed
time
of
disposition
provided
in
44(2)
does
not
apply
and
therefore
the
reasessments
must
be
maintained
concerning
interest.
5.
Conclusion
The
appeal
is
allowed
in
part
and
the
matter
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
reasons
for
judgment.
Appeal
allowed
in
part.
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