Foulds v. R., [1997] 2 CTC 2660

Léger DJ.T.C.:

This appeal was heard in Sydney, Nova Scotia, on October 9, 1996, at which time briefs on law were requested from the parties and were received by me on November 24, 1996.

Joella Foulds (the “Appellant”) during the 1991 and 1992 taxation years operated a music management business known as Real World Productions (the “Business”). The principal function of the Business was to manage a band known as “Real World” (the “Band”). The Appellant was involved in all aspects of the operation of the Business.

In 1992, the Band was the recipient of two music prizes referred to as the Music Spirit East Award and the Ultimate Deal Award (the “Prizes”); both were awarded to the Band for outstanding achievement in the music field. The total prize money of $31,000 was not included in the Appellant’s income on the basis that these amounts fell within the meaning of Pre- scribed Prize set out in Regulation 7700 of the Regulations to the Income Tax Act.

One of the above prizes was for the sum of $6,600 and the other for $25,000. During the hearing, counsel for the Respondent agreed that the two contests were similar and what would be decided in reference to one event would apply to the other. I will therefore be analyzing the “Ultimate Deal 1992” award which carried a reward of $25,000 and apply the result to both episodes.

The question to be resolved in this appeal is whether or not the Appellant is required by law to include the said $31,000 in prizes received by her as part of her taxable income in the 1992 taxation year.

Section 3 of the Income Tax Act sets out the basic inclusionary rule for determining income to be taxed pursuant to the Act. Section 3 states:

The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:

(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including without restricting the generality of the foregoing, the taxpayer’s income for the year from each office, employment, business and property.

The Minister has submitted inter alia, that the prize proceeds are properly taxable based on section 3 and more particularly under section 9 being the basic rules for income or loss from a business or property. The Minister has submitted that the prize proceeds constitute a basic income from the Business and therefore are included under subsection 9(1). This subsection states:

Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit thereform for the year.

Reference as well will be made to subsection 248(1) which provides for the following definition of “business”:

“Business” - “business” - includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2 and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment,

The Appellant proposes that subparagraph 56(l)(n)(i) and Regulation 7700 of the Act operate to exempt the prize from inclusion in her income for the 1992 taxation year.

Section 56 is entitled, “Amounts to be included in income for year”. This section lists a number of “other” sources of income which are to be in- eluded in the taxpayer’s income for the year including paragraph 56(l)(n) entitled, “Scholarships, bursaries, etc. . Subparagraph 56(l)(n)(i) states:

(/) The aggregate of all amounts (other than amounts described in paragraph q), amounts received in the course of business, and amounts received in respect of, in the course of or by virtue of an office or employment) received by him in the year, each of which is an amount received by the taxpayer as or on account of a scholarship, fellowship or bursary, or a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer other than a prescribed prize), ... [emphasis added].

Reference will also be made to Regulation 7700 entitled, “Prescribed Prizes”, which reads:

For the purposes of subparagraph 56(l)(«)(i) of the Act, a prescribed prize is any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered, [emphasis added].

The Minister has argued, inter alia, that the prize proceeds fall within the wording of section 9 and therefore should be included in the Appellant’s income for the 1992 taxation year notwithstanding the more particular wording of paragraph 56(l)(n).

In the case of R. v. Savage, [1983] 2 S.C.R. 428 (S.C.C.), the Supreme Court of Canada was called to determine whether a sum paid by an employer to the taxpayer for successful completion of an examination constituted a benefit in respect of “office or employment” or if it was a “prize for achievement in a field of endeavour ordinarily carried on by the taxpayer”. In speaking for the majority of the Court, Dickson, J. held that paragraph 56(l)(n) could serve to relieve a taxpayer from the inclusion of an amount in income notwithstanding the fact that it may fall within section 3 of the Act as well.

Speaking for the Court on this issue at pages 441-2, Dickson, J. stated:

I would hold that the payments received by Mrs. Savage were in respect of employment. That, of itself, makes them income from a source under s. 3 of the Act.

I conclude on this point that, unless s. 56(1)(n) of the Income Tax Act relieves, Mrs. Savage is subject to income tax in respect of the $300 which she received from her employer.

Dickson, J. further addresses this point at page 445 where the Crown’s position is put forward.

The decision states:

For the foregoing reasons the Crown’s contention, that the word “prize” in s. 56(l)(n) has application only in a contest or competition with others, in my opinion, fails.

The further submission on the part of the Crown is that, in any event, the $500 exclusion in s. 56(l)(n) is not an exemption, and does not affect payments which fall within other taxing provisions of the statute.

Justice Dickson refused to accept the reasoning of the Crown and held that where an amount falls within the wording of paragraph 56(1)(n), it would thereby be taxable based upon the specific wording of that paragraph notwithstanding that the amount arguably was covered under a more general section of the Act. Dickson, J. on this point stated at pages 445-6:

I agree with counsel for Mrs. Savage that the opening words, “Without restricting the generality of section 3”, in subs. 56(1) would seem to have been inserted to defeat an argument of “expressio unius est exclusio alterius”, in order to relate income items contained in subs. 56(1) to the arithmetical calculation set out in s. 3. Income can still be income from a source if it does not fall within s. 56. Moreover, s. 56 does not enlarge what is taxable under s. 3, it simply specifies.

When s. 56 is seen in this context, it is clear the Crown’s submission cannot be sustained. The Crown’s position, to repeat, is that a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer, if less than $500, and if obtained in respect of, in the course of, or by reason of an office or employment, is taxable under ss. 5 and 6, notwithstanding s. 56(l)(n). Section 56(l)(n) makes it clear that a prize for achievement is income from a source under s. 3 just as income from an office or employment is income from a source under s. 3. If a prize under $500 would still be taxable under ss. 5 and 6, it would have to follow on the Crown’s argument that a prize under $500 would equally be taxable under s. 3. That cannot be right. That would mean that a prize over $500 would be taxable under s. 56(l)(/z) and a prize up to $500 would be taxable under s. 3. The $500 exclusion in s.56(l)(n) would never have any effect. It seems clear that the first $500 of income received during the year falling within the terms of s. 56(1)(n) is exempt from tax. Any amount in excess of $500 falls under s. 56(1)(h) and is taxable accordingly. If that is not the effect, what purpose is served by the subsection?

I find that the reasoning adopted by Dickson, J., as he then was, in the Savage (supra) decision is applicable to the case at bar. Section 56 of the Act clearly deals with prizes. I find that any amount received by a taxpayer in a taxation year that carries the particular requirements set out in section 56 must be taxed pursuant to that section notwithstanding the submission that such an amount may well fall within another more general section of the Act. By affording unique rules for the taxation of “scholarship, bursaries, prizes, etc.” the clear intent of the legislators to afford these particular categories of income, special treatment, is obvious.

The Savage decision (supra) was decided prior to a legislative change to the wording of paragraph 56(1)(m) which occurred in 1986. At that time, paragraph 56(l)(n) was amended to exclude from inclusion under subparagraph 56(l)(/t)(i), “amounts received in the course of business, and amounts received in respect of, in the course of, or by virtue of an office or employment”.

The evidence in this appeal discloses the type and character of the business carried on by the Appellant. She has a company called Rave Entertainment which does artist management and program management for the entertainment business. She managed the Real World Band, a musical ensemble, which was her main source of income. The Band’s musical performance consisted of giving live renditions of what is called “Cover Music” which is the playing of well-known popular works of other artists. The Band’s sole source of revenue was received by playing music in mostly licensed clubs, bars and universities. During the taxation year 1992, they did sometimes earn $4,000 for a six-night booking and sometimes earned $2,500 for a single night’s performance. The evidence is also clear that the band’s participation in musical competition was not an integral part of the Appellant’s business. There is also proof that the performance of originally composed music of members of the band was strictly frowned upon by booking agents and individuals who retained their services. The evidence also discloses that in the competition the prizes were not awarded as remuneration; they were awarded for excellence in this field of endeavour. Only the band judged to be deserving of special recognition for outstanding achievement received a prize. The prize, money actually, received did not approximate the remuneration that the band would have otherwise received for a similar type of performance in its otherwise every day business.

In the decision of the Supreme Court of Canada in Schwartz v. R., (1996), 96 D.T.C. 6103 (S.C.C.), the Court ruled on the inclusionary rules of section 3 and their application to “Other Income” under subsection 56(1). La Forest, J. spoke for the majority of the Court and reviewed the findings of the Tax Court who had held in favour of the taxpayer. The Court heard arguments of the Minister to the effect that section 3 covered damages as they were “income from a source”. At page 6108, the Court reviewed the decision of the Tax Court stating:

Finally, Rip, J.T.C.C. dealt with the respondent’s argument that the damages were taxable under s. 3 as being “income from a source”, the source being the employment contract. He found that the amount received by the Appellant could not be considered “income”, because the ordinary concept of income pertained to recurring receipts and did not extend to a lump sum received because a source of income had been taken away or destroyed.

This proposition was adopted by the majority of the Court in its decision. In the appeal before this Court the prize proceeds received by the Appellant did not have the character of “recurring receipts” and therefore did not fall within the ambit of the “ordinary concept of income”. The competi- tions were originally structured in response to directives issued by the Canadian Radio and Television Telecommunication Commission (CRTC) for the development of local, regional and national Canadian talent. Had the receipts been generated as regular business income, the funds would have been freely available for use by the Appellant in any manner deemed appropriate as would be the case with general commercial business receipts. The evidence discloses that the prize money awarded in the “Ultimate Deal Contest” in the amount of $25,000 was restricted solely for the use of the Band in the compilation and recording of an album of original music. After having considered all of the evidence the Court finds as a fact that the amount of the prize received did not constitute “business income”. Having reached this decision, I hereby declare that the amounts received were not regular business income and were not taxable under the provisions of subsection 9(1) of the Act.

Paragraph 56(1)(«) of the Act includes in income the amount of a “prize for achievement in a field of endeavour ordinarily carried on by the taxpayer”. The type of prize, however, as contemplated in 56(1)(h) is restricted. The criteria for awarding the prize must be such that a recipient is rewarded for success in an area in which the recipient regularly applies effort.

There is no evidence before the Court that the amounts were received in respect of, in the course of or by virtue of an office or employment. It was a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer. There was in this case no employer-employee relationship between the payer and the recipient. After considering all of the facts, I must conclude that the award should be exempted as it is included in income as provided for in subparagraph 51(1)(h).

Dickson, J. in the Savage decision (supra) cited with approval from the Tax Review Board at page 11 stating:

It has often been said by the courts that where no particular meaning has been attributed to a word or phrase in a taxing statute, it (the word or phrase) should be given its ordinary meaning, and courts have shown a great reluctance to distort that ordinary meaning. I can think of no more appropriate definition for the $300 amount in issue here than “a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer”.

The Court in Savage (supra) went on to conclude that the sum paid by the employer to the taxpayer for the successful completion of the examination constituted a “prize” within the meaning of subparagraph 56(l)(n) notwithstanding the argument raised by the Crown that the word “prize” represented a reward for superiority in a contest or competition with others. In rejecting this argument, Dickson, J. made reference to the need to interpret the language of the statute in its ordinary and everyday meaning. This point was re-emphasized at page 31 stating:

The word “prize”, in ordinary parlance is not limited to a reward for superiority in a contest with others. A “prize” for achievement is nothing more nor less than an award for something accomplished. There is no need to pluck the word “prize” out of context and subject it to minute philological examination, or to think of “prize” in the context of medal or book one may have won at an earlier date on a field day or at school or in a music competition.

The Courts have consistently held that specific wording within the Act must take precedence over general more inclusive language. It would be incorrect to allow the Minister to rely upon subsection 9(1) in arguing that such receipts were received by the Business and therefore constitute “income from a business”. It is clear that Parliament has developed particular rules governing the taxability of “prizes” and where such a “prize” falls within the governing section it should be taxed according to that section.

The reasoning adopted by the Court in Savage (supra) has application in this case. The interpretation of this section in Savage (supra) was adopted by the Supreme Court in the Schwartz (supra) decision.

To find that the damages received by Mr. Schwartz are taxable under the general provision of section 3(a) of the Act would disregard the fact that Parliament has chosen to deal with the taxability of such amounts, in the provisions of the Act relating to retiring allowances.

In Savage (supra) the Court refused to accept the very limited interpretation of “prize” put forth by the Minister and opted for broader interpretation of the word.

All of the evidence adduced at the appeal clearly reveals that the award was received for an accomplishment in the arts in respect of a competition which was in no way similar to the regular business activity of the Appellant.

As set out above, subparagraph 56(l)(n)(i) includes as income all amounts received by the taxpayer which includes “a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer”. Subparagraph 56(l)(n)(i) also has specific exclusionary wording which exempts a “prize” from inclusion under this paragraph if it is determined to be a “prescribed prize”.

The definition of “prescribed prize” for the purposes of the Act is set out in Regulation 7700:

For the purposes of subparagraph 56(l)(«)(i) of the Act a prescribed prize is any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public but does not include any amount that can reasonably be regarded as having been received as compensation for services rendered or to be rendered.

Despite the unfortunate lack of judicial interpretation in this area, this Court cagn look to the decision of Proulx, T.C.C.J. in Labelle c. R, (1994), 96 D.T.C. 1115 (T.C.C.). In this case, the taxpayer, an accounting teacher, was the winner of an international case writing competition. The Minister assessed the taxpayer in 1990, and included the prize in income under paragraph 56(l)(n). The taxpayer appealed to the Tax Court of Canada alleging that the prize was a “Prescribed Prize” within the meaning of Regulation 7700. The taxpayer’s appeal was allowed and the Minister was ordered to reassess accordingly.

It is worthy to note that the Court specifically stated in its decision that the Appellant was assessed by the Minister because the prize was not one “recognized by the general public” and not because the “prize” was received as compensation for services rendered. The taxpayer received the prize for success in the accounting case writing competition when the taxpayer was also an accounting professor. The awarding university issued a T4A for the award; however, the Minister did not argue that the award was either a business or employment receipt.

In interpreting the wording of Regulation 7700, Proulx, T.C.C.J. stated:

Determining whether a prize is recognized by the general public requires an element of evaluation or appreciation. The Minister cannot arrive at two opposing conclusions. He must make only one determination, and the criteria on which he based his evaluation or judgment must be given. It is not sufficient for the Minister to say that the prize is not recognized by the general public. The taxpayer must know why the prize is not, in the Minister’s opinion, recognized by the general public.

In this appeal the Minister is impliedly denying that the prize received is a “prescribed prize” pursuant to subparagraph 56(l)(«)(i).

There is ample evidence before this Court that the prizes awarded were for “meritorious achievement in the arts”. In order to succeed in the contest in question members of the band had to compose the music, compose the lyrics, prepare the arrangement for orchestration and finally give a rendition which was melodious and pleasing to the public and the judges. In exhibit A-3 we find the following provision in the rules and regulations for the contest:

Judging at the live venue for the winner will be based on the following criteria and weighted as indicated:

Musicianship	20%
Commençai Appeal	20%

Originality	20%
Showmanship	20%
Audience Response	10%
X-Factor	10%

Based upon the evidence heard during the appeal the Court finds as a fact that the prizes awarded were “for meritorious achievement in the arts” as provided for in Regulation 7700 of the Income Tax Act.

The evidence also discloses that the contest was very well advertized in the press and on the radio over the various stations which were sponsors and this Court finds as a fact that the contest and the prizes were recognized by the general public as required by the Regulation 7700. I have perused Bulletin IT-75 R3 published by the Minister but found it to be of little assistance to me.

After having considered all of the evidence and the submissions of counsel, the Court finds and declares that the prizes received by the Appellant in the 1992 taxation year are not business income of the Appellant but fall within the taxing parameters of paragraph 56(1)(n) and further that such amounts are “prescribed prizes” within the meaning of Regulation 7700.

The Court therefore orders that the matter be returned to the Minister of National Revenue with the directive that the 1992 taxation year assessment be revised as provided for in the above. The appeal is therefore granted with costs on a solicitor and client basis.

Appeal allowed.