Akman Management Limited v. Minister of National Revenue, [1984] CTC 3072, 85 DTC 7

Brulé, TCJ:—This is an appeal to this Court by the taxpayer in which it becomes necessary to characterize a payment made on the termination of a management agreement as either capital or income.

The facts are well set forth in the notice of appeal and in part are as follows:

1. The Appellant is a corporation incorporated pursuant to the laws of Manitoba.

2. The Appellant was the manager of an apartment building known as Hampton Green and located at 323 Wellington Crescent in the City of Winnipeg by virtue of being the assignee of Abram Akman of his interest in a management agreement dated July 28, 1969, which management agreement was made between Abram Akman and Hampton Green Ltd.

3. In 1979 Hampton Green Ltd. determined that it wished to convert the Hampton Green Apartment building into a condominium and to sell the condominium apartments therein contained.

4. In order to convert the apartment building to a condominium and to sell the condominium apartments therein it was necessary for Hampton Green Ltd. to terminate its management agreement with Akman Management Limited.

5. As a result of negotiations between Hampton Green Ltd. and Akman Management Limited the said management agreement was terminated upon payment by Hampton Green Ltd. to Akman Management Limited of the sum of $300,000 as compensation to Akman Management for the loss of the said management agreement, one of its most significant capital assets.

6. In reporting its income for its 1980 taxation year the Appellant treated the receipt of the $300,000 as a payment on account of capital.

7. In reassessing the Appellant for its 1980 taxation year the Minister of National Revenue included the amount of $300,000 in computing the income of Akman Management Limited as active business income.

As a result of the reassessment a notice of objection was filed and the Minister subsequently confirmed its reassessment.

There was no serious dispute with the facts as set out above. The Minister’s counsel questioned some aspects of the transaction, but the only material determination needed to be made is the nature of the payment. Both the appellant and the respondent relied heavily on cases cited with similar facts. There are, however, certain distinctions which must be taken into consideration.

Minister's Position

He referred to the necessity of having a business virtually destroyed to have a compensation payment qualify as capital and referred to the case of Inland Revenue v Fleming and Co (Machinery) Ltd, 33 TC 57 at 63 wherein Lord Russell said:

The sum received by a commercial firm as compensation for the loss sustained by the cancellation of a trading contract or the premature termination of an agency agreement may in the recipient’s hands be regarded either as a capital receipt or as a trading receipt forming part of the trading profit. It may be difficult to formulate a general principle by reference to which in all cases the correct decision will be arrived at since in each case the question comes to be one of circumstance and degree. When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient’s profit-making apparatus, involving the serious dislocation of the normal commercial organization and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilization of a capital asset and is therefore a capital and not a revenue receipt.

Counsel for the Minister argued that in the present case the cancellation of the management agreement did not destroy or materially cripple the whole structure of the appellant’s company and that such was a necessary ingredient to qualify the payment as capital. In support of this argument he brought to the Court’s attention other authorities.

In HA Roberts Ltd v MNR, [1969] CTC 369; 69 DTC 5249, in MNR v Import Motors Limited, [1973] CTC 719; 73 DTC 5530 and in Courrier MH Inc v The Queen, [1976] CTC 567; 76 DTC 6331, judgment was granted in each case in favour of the taxpayer on the basis that similar payments were capital in nature because a vital income-producing segment of a business had been terminated.

Where an agency which was one of the incidents of a taxpayer’s business was lost and the business was not destroyed the payment received for breach of contract was classified as income. This was held in Wiseburgh v Domville (Inspector of Taxes), [1956] 1 All ER 754. Counsel for the Minister put forward that the loss of an agency to a manufacturer’s agent was not unlike the loss of a management contract to a company such as the appellant.

Similar determinations were made in Fleming (Inspector of Taxes) v Bellow Machine Co Ltd, [1965] 2 All ER 513, in Bayker Construction Ltd v MNR, [1974] CTC 2318; 74 DTC 1236 and in Packer Floor Coverings Ltd v The Queen, [1981] CTC 506; 82 DTC 6027.

The respondent has pleaded that in the alternative if the payment was not income then it must be a taxable capital gain. No authority was cited but this conclusion was reached as a result of a series of interpretations of various sections of the Income Tax Act.

Appellant’s Position

The appellant has argued that it is not important that a separate business be destroyed in order to classify the payment as capital. The Court must look to the reason payment was made, whether or not such was for damages, and the time payment was made is vital. In the present case he argued that the payment was for loss of a capital asset and therefore for damages and perceived damages.

In support of his arguments counsel for the appellant referred to certain authorities. The case of Edgerton Fuels Limited v MNR, [1970] CTC 202; 70 DTC 6158, dealt with the object of the payment and held that if the payment was for the termination of a contract that was a capital asset the compensation was likewise capital and cannot be assigned to income.

As to the payment not being for the business as a whole the appellant referred to Léopold Lague Inc v MNR, [1980] CTC 2451; 80 DTC 1384, which was later upheld in the Federal Court in The Queen v Léopold Lague Inc, [1981] CTC 348; 81 DTC 5254. This case refuted the principle expressed earlier that the loss of a contract can be capital in nature only where the contract in question is the very foundation of a business and its loss would ruin the business. The Court held that what constitutes or creates permanence in a business ts not necessarily in the business as a whole.

The case of Parsons-Steiner Ltd v MNR, [1962] CTC 231; 62 DTC 1148, later cited and approved by the Supreme Court of Canada in H A Roberts Ltd v MNR, [1969] CTC 369; 69 DTC 5249, involved the cancellation of an agency agreement. Various previous cases were cited in the Parsons case and Thurlow, J said at 238 [1151]:

What appears most clearly from these cases is that the question is largely one of degree and depends on the facts of the particular case and the inferences to be drawn therefrom. For the purposes of this case the distinction drawn in the cases appears to me to be summed up in the following passage from the judgment of Lord Evershed, M.R. in Wiseburgh v. Domville, [1956] 1 All E.R. 754 at 757:

Was this sum paid by way of damages in respect of this agency contract “profits or gains” arising from the trade of the taxpayer as a sales agent? The argument of counsel for the taxpayer had the attraction of simplicity. He said the £4,000 was paid to the taxpayer in exchange for a profit-earning asset which he had lost owing to the breach of the contract by the company, and it followed that it was a capital item.

Counsel pointed out that the facts in this case are much the same as in the Parsons-Steiner case and referred further in that case to the judgment of Thurlow, J at 244 [1154] where he said:

On the whole therefore having regard to the importance of the Doulton agency in the appellant’s business, the length of time the relationship had subsisted, the extent to which the appellant’s business was affected by its loss both in decreased sales and by reason of its inability to replace it with anything equivalent. . .

and further:

. . . the payment in question was not income from the appellant’s business, but was referable to the appellant’s claim for loss of what it and Doulton Co. Limited as well considered to be the appellant’s interest in the goodwill and business in Doulton products in Canada. In my view this was, to use Lord Evershed’s expression, “a capital asset of an enduring nature”. It was one which the appellant had built up over the years in which it had the Doulton agency and which on the termination of the agency the appellant was obliged to relinquish. The payment received in respect of its loss was accordingly a capital receipt.

The H A Roberts Ltd case, (supra), was cited by counsel for the Minister on the basis that the loss of a particular agency was sometimes similar to the loss of the whole business and therefore a capital payment interpretation was justified. The appellant claimed that such was the situation here. The management contract involved was “the flagship of the business’’ to quote the company’s spokesman and after its loss was not replaceable.

As a final proposition the appellant referred to the case of Maison de Choix Inc v MNR, [1983] CTC 2241; 83 DTC 204, wherein it was held that the method of computation of damages is no criterion of their character as capital or income and in support of this referred to The Glenboig Union Fireclay Co Ltd v CIR, 12 TC 427, wherein Lord Buckmaster stated commencing at 463:

It is unsound to consider the fact that the measure adopted for the purpose of seeing what the total amount should be was based on considering what are the profits that would have been earned . . . there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that it is arrived at by means of the application of that test.

Analysis

Here we have the termination of a management contract as a result of a most prestigious apartment block being converted into a condominium project. Where there remained only a short period left under the contract and while in the transition period it was to continue, there was no assurance for the future.

When the appellant first sought damages for the termination of the contract there was resistance on the part of certain shareholders of the apartment company. Subsequently when they were satisfied that the appellant was entitled to damages the sum of $300,000 was paid without argument.

There seems to be no doubt that if a business is destroyed then an amount received is of a capital nature. On the other hand if the business can continue the authorities set out that each case depends on its own facts and the loss involved vis-à-vis the company as a whole is one of degree.

In the Parsons-Steiner case, (supra), the loss of an agency to sell china and in the HA Roberts case, (supra), the loss of an agency to solicit and manage mortgages is not materially different from an* agency to manage an apartment building.

In each case, including the present one, the agency involved accounted for a large portion of the total business. This seemed sufficient for the Court in Parsons and Roberts to consider the payments received for loss of the agencies as capital.

It was offered in evidence that the goodwill of the appellant was affected by the termination of the management contract and this was a factor in determining damages. The Federal Court of Appeal in Pepsi-Cola Canada Ltd v The Queen, [1979] CTC 454; 79 DTC 5387, established that the goodwill of a business is capital.

I find little significance in the fact that the formal contract only had a short period to completion. Evidence by representatives of the shareholders of the apartment company offered that there was an oral agreement to continue management of the apartment building as long as a member of the Akman family was involved. This understanding could easily be upset and the contract discontinued after conversion to a condominium. In the Par sons-Steiner Ltd case (supra), there was a three-month notice of cancellation clause, seemingly far less permanence than in the present case.

It was obvious from the evidence tendered that the contract in question was the important profit-making area of the appellant’s business. Loss of this contract was in my opinion the loss of a capital asset and the payment made to compensate the appellant was of a capital nature and should not be assessed as income to him.

The alternative argument by the respondent as to the payment being a capital gain by the successive interpretation of certain sections of the Income Tax Act is to me a non sequitur and not necessary to deal with.

For the reasons given above this appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment accordingly.

Appeal allowed.