REASONS
FOR JUDGMENT
C. Miller J.
[1]
This is a story of a developer, Henco Industries
Limited (“Henco”), who could not develop – through
no fault of its own. Thwarted by a volatile situation in Caledonia, Ontario in 2006, including blockades by protesters from Six Nations (the “Occupation”), the Ontario Provincial Police (“OPP”) reluctance to remove the blockades and the Government
of Ontario’s action rezoning certain Henco property, Henco was precluded from
developing that property known as Douglas Creek Estates (“DCE”).
Henco ultimately accepted $15,800,000 from the Government of Ontario to
dispose of all its right and interest in the DCE property. It is the
taxation of that amount that is primarily in dispute.
[2]
The Respondent says the $15,800,000 was consideration
either for Henco’s interest in the DCE property which was inventory, or for the
business of Henco, and is in either case fully taxable as income. Henco says
the DCE land was worthless and the $15,800,000 was a payment by the Government
of Ontario to relieve a potentially catastrophic situation by eliminating
lawlessness occasioned by the Occupation: a payment on capital account to
compensate Henco for the destruction of its business. The payment being on
capital account, the Appellant then argues that it could only be caught by the
eligible capital property rules in section 14 of the Income Tax Act
(the “Act”). Yet, the application of that
section does not capture the amount and consequently it is a taxable nothing.
The major issue is the characterization of the $15,800,000 payment as income or
capital, and if it is capital, as an eligible capital amount or a non-taxable
capital receipt.
[3]
There are three other issues between the
Parties:
i. whether a payment by the Government of Ontario to Henco of $650,000 is
income pursuant to s. 12(1)(x) of the Act or a non-taxable windfall;
ii. the nature of a payment as capital or income on the disposition by
Henco to a related company of property known as the Seneca property, which was
close to the DCE property, and further, whether the fair market value of that
property at the time was $800,000 or $850,000;
iii. the fair market value of another nearby property, the Morrison
property, on its disposition by Henco, again to a related company. Henco says
the fair market value was $1,000,000 while the Minister of National Revenue
(the “Minister”) says the fair market value
was $1,400,000.
I. Facts
[4]
Having received my ruling on certain evidentiary
and procedural motions, which I address in paragraphs 79 to 117 of these
Reasons, the Parties were able to prepare an Agreed Statement of Facts, making
it clear, however, that additional evidence would be necessary to supplement
the Agreed Statement of Facts. I saw video recordings of events during the
Occupation, as well as read news releases from the OPP, the Ontario Government,
the Federal Government and Haldimand County. I heard testimony from Mr. Don Henning,
Inspector Haggith of the OPP, Michael Bruder, Henco’s lawyer during the
relevant period, Doug Carr, Assistant Deputy of Negotiations and
Reconciliation in the Ontario Ministry and Reconciliation of Aboriginal Affairs,
and Tiffany Ivey, a Canada Revenue Agency (“CRA”)
auditor.
[5]
I intend to go through events chronologically,
indicating what has been agreed to through the Agreed Statement of Facts and
then expanding through the evidence of the above. I will address the Seneca and
Morrison properties separately.
Prior to
February 2006
[6]
Agreed Statement of Facts
2.
Henco Industries Limited (“Henco”)
is a taxable Canadian corporation for the purposes of the Income Tax Act,
RSC 1985, c 1, with a taxation year end of April 29 in each year.
3.
The principals of Henco are Donald (“Don”) and John Henning.
4.
For many years prior to February 2006, Henco
carried on the business of land development exclusively in the area of Caledonia, Ontario.
5.
As of the beginning of February 2006, Henco
owned three parcels of land in the Caledonia Area, known as: (i) the Douglas
Creek Estates (“DCE”), (ii) the Seneca property (“Seneca”), and (iii) the Morrison property (“Morrison”).
6.
At all relevant times, Henco was the legal and
beneficial owner of title to the DCE property.
7.
The DCE property was originally acquired by a
predecessor of Henco in 1991 for the purpose of development.
8.
By the beginning of 2006, Henco had performed
all relevant procedures for development of the DCE property, including zoning,
plan of subdivision, engineering, obtaining approvals, installation of
municipal services and the construction of a model home.
9.
Prior to the Occupation (defined below), Henco
entered into agreements of purchase and sale for some of the lots on the DCE
property.
[7]
With respect to the DCE property, Henco also
obtained an archaeological assessment. As well as having taken all steps
necessary for the development of the property, Henco had entered purchase and
sale agreements with several builders. The DCE property was ready for
development. Henco also had a model home built on one lot of the first phase of
65 lots (there were 600 lots in total), and it had started to frame on another
lot. Henco had incurred costs of approximately $6,000,000 and had received
deposits from builders of over $1,000,000. The Six Nations were aware of the
plans and to that point there had been no objections.
[8]
Henco anticipated revenues of $45,000,000 from
the DCE development, with profits of $30,000,000, but as of February 2006
Henco’s financial position was, as Don Henning put it, vulnerable, with little
cash and considerable debt.
February 28,
2006
[9]
Agreed Statement of Facts
11. On February 28, 2006, certain individuals who were members
of, or affiliated with, First Nations groups in the Caledonia area (the “Protestors”) occupied the DCE property (the “Occupation”).
12. The Protestors held the Occupation “to
try to stop, or at least disrupt, further development of the subdivision”.
13. The Occupation included the
placement of barricades on roadway entrances to the DCE property.
14. The Occupation and the blockades
were followed by acts of civil disobedience, vandalism, thefts and assaults in
and around the DCE property.
15. The Occupation caused all
development and construction activity on the DCE property to cease.
[10]
Don Henning contacted the police to remove the
blockades barring entry to Henco’s property. Inspector Haggith spoke to the
protestors, realized they were not going to leave and advised Mr. Henning to
obtain an injunction. Mr. Henning contacted his lawyer, Mr. Bruder.
March 3, 2006
[11]
Agreed Statement of Facts
16.
On March 3, 2006, Justice Matheson, of the
Ontario Superior Court of Justice, issued an interim injunction (the “Interim Injunction”) requiring the Protestors to vacate the
DCE property, remove the barricades, and cease from interfering with
Henco’s development of the DCE property.
March 9, 2006
[12]
Agreed Statement of Facts
17.
On March 9, 2006, Justice Marshall, of the
Ontario Superior Court of Justice, issued an order making the Interim
Injunction permanent (the “Permanent Injunction”).
…
18.
Following the granting of the Permanent
Injunction, the number of Protestors occupying the DCE property increased and
included natives and their supporters from communities outside of the Caledonia area.
[13]
Inspector Haggith indicated that the OPP set up
communications with the protestors, seeking a peaceful permanent resolution, though
the OPP did not act until March 22, 2006.
March 13, 2006
[14]
Henco received a notice of international
commercial claim from trustees of the Mohawk Nation Grand River for $110,000,000.
Mr. Henning was shocked. He was concerned for the safety of Henco’s property.
March 17, 2006
[15]
Agreed Statement of Facts
19.
On March 17, 2006, Justice Marshall issued a
contempt order against the Protestors occupying the DCE property and ordering
that arrest warrants be executed on March 22, 2006. …
20.
Justice Marshall amended his March 17, 2006
order on March 28, 2006 to specify that the Protestors occupying the DCE
property were in civil and criminal contempt. …
March 22, 2006
[16]
Inspector Haggith met with protestors and was
advised they would leave if Henco stopped all work until the land claims issues
had been resolved. The OPP made no arrests or attempts to enforce the
injunctions.
April 12, 2006
[17]
The Hennings, Mr. Bruder, two Haldimand County council members, two provincial representatives, including Mr. Carr, two
federal representatives and about 100 protestors, including Mohawk Warriors,
met at a Brantford hotel. Inspector Haggith advised the Hennings to stay calm
as they could face accusations, which they did, to the point of threats against
their well-being. Don Henning had never before heard that this situation was
Henco’s fault: he was angry and afraid. He suggested to the provincial
representatives they should get their cheque book ready.
[18]
Mr. Bruder described April 12, 2006 as when the
tone changed from the Government as enemy to animosity towards the Hennings and
Henco.
April 15, 2006
[19]
Doug Carr wrote to Henco indicating that Ontario would appoint a representative to “discuss with you the
provision of grant monies to assist in offsetting the impacts of the Occupation”.
Mr. Carr testified that he felt that at that time interim
relief would be fair. Mr. Chadwick, from the Goodman law firm, was appointed as
the Ontario representative.
April 17, 2006
[20]
Doug Carr again writes to Henco: “The Government will name a representative on Wednesday, April
17, 2006 to discuss the question of the financial circumstances you currently
face, with a view to engaging in discussions this week. Any information, documentation
or assessments of such circumstances you have ready will assist us in
expeditiously undertaking these discussions with you and the builders. I
recognize that your current access to documents is limited.”
[21]
Henco provided what it could, being bank
statements and an inventory list, but could not get access to its office to
provide more.
April 20, 2006
[22]
Agreed Statement of Facts
22. On April 20, 2006, the Ontario Provincial Police (the “OPP”) moved onto the DCE property to enforce the Court orders
(the “OPP Raid”).
23. During the OPP Raid, Protestors
occupied the DCE property; the occupation expanded to include the surrounding
roads; an OPP officer was hit by a bag of rocks; the Sterling Street bridge was
burned to the ground; fires were set near railway tracks at Sixth Line; and
supporters of Six Nations protestors blocked railway tracks at Marysville.
24. As a result, the OPP withdrew from the DCE.
25. Following the OPP Raid, Henco’s
model home and office on the DCE Property was looted. The identity of the
persons who looted the model home and office is unknown.
[23]
Inspector Haggith testified that although the
OPP attempted to execute the warrants, they were anxious not to have a repeat
of Ipperwash. The OPP deployed 100 officers plus a tactical team and
helicopter. There were 15 to 20 protestors arrested. Inspector Haggith
described the situation as sickening as hundreds of protestors with bats and
clubs confronted his officers. His view was that if the OPP remained there
would be serious injuries. He acknowledged there was huge concern in the
community. The OPP was demoralized.
[24]
Mr. Henning felt intimidated by these events,
including protestors driving down his dead-end street, especially as, unlike on
other days, the OPP were not there to offer protection. He felt he had to get
his family away from Caledonia. He described the situation as anarchy, with his
town under siege and the reputation of his community destroyed.
April 21, 2006
[25]
On behalf of Ontario, Mr. Carr signed a “Points of Agreement Reached Between Haudenosaunee Six Nations,
Canada and Ontario” which called for a detailed work plan to address “the various outstanding issues”.
[26]
Mr. Henning was invited to a meeting in Burlington to meet with Six Nations. He felt threatened so declined. Mr. Carr advised
Mr. Henning by phone that Ontario was looking into financial help.
April 24, 2006
[27]
The community of Caledonia organized a meeting
at Caledonia’s Fairgrounds: between 1,500 and 2,000 people attended. While
Inspector Haggith attempted to maintain calm, he agreed that he was not
successful. Many, he believed, wanted to vent. Some marched to the Occupation
site, which concerned Inspector Haggith. He sent officers to intercept them,
issuing several breach of peace arrests.
April 26, 2006
[28]
A “Joint
Statement of Accomplishments by Haudenosaunee Six
Nations, Canada and Ontario” was issued,
indicating a “main table” had been established to resolve the DCE issues. Mr.
Carr acknowledged Henco was not part of such process.
April 27, 2006
[29]
Mr. Chadwick writes to Henco offering financial
assistance on a without prejudice basis. A Schedule A is attached to Mr.
Chadwick’s letter. It indicates the funding assistance as being $650,000 “to mitigate impact of continued occupation of DCE”. It
also states: “The Douglas Creek Estates Funding Assistance
is in respect of development, building and other related costs and expenses
that have been incurred by Henco in connection with the Douglas Creek Estates
because of the occupation”.
[30]
Mr. Henning testified these terms were not
negotiated nor agreed to by Henco. Nothing was signed.
April 29, 2006
[31]
Agreed Statement of Facts
36.
Henco claimed a write-down in the value of its
land inventory, in respect of the DCE property, to seven dollars on its T2
return for the taxation year ended April 29, 2006.
37.
The Minister of National Revenue issued a notice
of assessment for 2006 on May 18, 2006, recognizing the write-down in the value
of the DCE property.
38.
A real estate appraisal prepared by Ron Duda for
the Canada Revenue Agency (the “Duda Appraisal”) determined
that the Occupation had rendered the DCE land undevelopable and concluded that
the DCE property had no value as at May 1, 2006.
[32]
Henco also obtained an evaluation from Re/Max to
support its write-down of the land. Re/Max verified the DCE property had no
market value.
May 3, 2006
[33]
Agreed Statement of Facts
26. On May 3,
2006, Ontario made a payment of $650,000 to Henco.
27. Ontario did not require Henco to take any particular
action or do any particular thing in respect of Henco’s use of the $650,000.
28. Ontario did not seek anything in return from Henco in
exchange for the payment of $650,000.
May 8, 2006
[34]
Zoning regulations were made on May 8, 2006
under the Ontario Planning Act. Mr. Carr acknowledged there had
been discussions leading up to this, but Henco had not been involved in such
discussions.
[35]
The zoning regulations were in connection with
the DCE property and stipulated:
2(1) Every use of land and the erection, location and use of
any building or structure is prohibited on land described in section 1.
(2) Additions to any building or structure or the extension
or enlargement of any building or structure is prohibited.
May 16, 17 and
18, 2006
[36]
Agreed Statement of Facts
34.
On May 16, 2006, representatives of the
Protestors, Ontario and Canada reached a three-party agreement immediately
halting any development on the DCE property for an undetermined period of time
(the “Moratorium”).
35.
On May 17, 2006, Ontario Regulation 2006/06
under the Planning Act, RSO 1990, c P. 13, entitled “Zoning Area – Haldimand County” (the “Zoning Order”) came into force.
[37]
Mr. Bruder found out about the moratorium
through the Six Nations website. He also found out that Ontario had agreed with
Six Nations that it would fund an archaeological assessment, notwithstanding
Henco had already previously obtained one. Ontario did not provide a copy of
the zoning order to Henco until June 7, 2006.
[38]
Mr. Bruder claims to have contacted Mr. Carr,
when he discovered the moratorium, to ask if the Government of Ontario would
ever consider such an action without Henco’s input. According to Mr. Bruder,
Mr. Carr denied the Government would do that. While Mr. Carr recalled the
conversation with Mr. Bruder, he did not recall that detail.
[39]
On May 18, 2006 Mr. Bruder and the Hennings met
with Ontario officials, indicating that the Hennings wanted to be bought out.
The Hennings and Mr. Bruder felt that Ontario had gone behind Henco’s
back. To that point, Henco had been lying low, but it now perceived that Ontario was not acting in good faith. After the meeting, Mr. Bruder wrote to Mr. Carr, Mr.
John Burke with the Ministry of Municipal Affairs, Mr. Neil Smith with the
Ministry of Economic Development and Trade, Mr. Chadwick with Goodmans and
Brian Dominique with Cassels Brock and Blackwell:
At a meeting earlier
this morning between John Burke, Neil Smith, John Henning, Don Henning and
myself, Don Henning advised the Government officials that he expected to
receive a written commitment from Minister Ramsay confirming the Government’s
intention to purchase the Douglas Creek Estates at fair market value.
…
We are not interested
in receiving “without prejudice” correspondence
and require a firm and binding written commitment from the Province, to
purchase the lands at fair market value, no later than noon on Friday, May 19,
2006.
The Governments’
actions have placed Henco in an untenable position. …
…
Our clients have
been patient and respectful of the process up until now. Our clients have clear
title to the land yet, for whatever reasons, a Minister has unilaterally
elected to impose this moratorium on them.
My clients advise
that unless the Government begins to negotiate in good faith, they will use all
of their resources to address this matter.
[40]
Mr. Henning explained that reference to fair
market value was really the starting point for what Henco had lost, being its
right to do business. Mr. Bruder described his position as simply trying to get
the most for his clients: the only tangible was the land.
May 19, 2006
[41]
Mr. Bruder conducted a media blitz sending out a
release with respect to the moratorium and doing several radio interviews. He
quickly received a call from Mr. Burke with the Ontario Ministry of Municipal
Affairs suggesting that he stop, and that they should get together to discuss
buying Henco out.
May 20, 2006
[42]
The Hennings and Mr. Bruder met with Mr. Burke
and Mr. Smith. It was clear to Mr. Bruder that Ontario was now considering
buying Henco out. Mr. Bruder suggested that Ontario buy the shares of
Henco, but Ontario was not interested. Mr. Bruder believed Ontario wanted to
control the injunction process. It was agreed the land would be appraised to
determine its value at a time prior to the Occupation: there was discussion
regarding appraisers.
May 22 and 23,
2006
[43]
Agreed Statement of Facts
29. In the months following the failed OPP Raid, numerous
confrontations occurred between the Protestors, on the one side, and other
residents of Caledonia and individuals opposed to the Occupation, on the other
side.
30. On May 22, 2006, the Caledonia electrical transfer station
was damaged resulting in a major power outage in parts of Norfolk and Haldimand Counties.
31. Damage to the transfer station was estimated at
approximately $300,000, while collateral damage to Hydro One customers was
estimated in the millions of dollars. The final figures of damages are not
known. …
32. On May 22,
2006, Haldimand County declared a state of emergency. …
[44]
More unrest in Caledonia. Ontario offered a
$50,000 reward for any information leading to an arrest in connection with the transformer
damage.
May 26, 2006
[45]
Henco sells its equipment to a related company,
819820 Ontario Inc., for $187,360. Mr. Henning indicates he was concerned about
more lawsuits.
May 29, 2006
[46]
According to Mr. Bruder, Justice Marshall of the
Ontario Superior Court sought an explanation, including from the OPP, why court
orders were not being enforced, and why the community was exploding.
June 5, 2006
[47]
OPP officers inadvertently go on reserve land
and are swarmed and charged by First Nations police. More fires are reported.
June 6 and 7,
2006
[48]
There are emails between Mr. Henning and Mr.
Burke to set up a meeting of appraisers. Mr. Henning was left with the
impression from his communications with Ontario representatives that one minute
they were serious and the next minute not so much. The more tense the
Occupation situation became, the more interested the Government of Ontario
appeared to be in dealing with Mr. Henning and Henco.
June 9, 2006
[49]
Inspector Haggith refers to June 9, 2006 as the
day of lawlessness. There are numerous clashes with protestors, injuries to
member of the news media and a car theft. Inspector Haggith realized the
injunctions were still in effect and that Justice Marshall’s inquiries
would stir up the protestors. To handle the situation generally, Inspector
Haggith required assistance of hundreds of officers from across Ontario as well as from the RCMP.
[50]
Mr. Carr acknowledged he was made aware of the
events on the day of lawlessness.
June 10, 2006
[51]
Mr. Carr received an email from Jane Stewart, negotiator
for Ontario with First Nations, emphasizing how critical de-escalation was. She
also emphasized how much easier it would be for the “important
work at the table” without the barricades. She also indicated the
moratorium would remain.
[52]
Mr. Carr explained that Six Nations remained
concerned about the possible enforcement of the injunctions. He described the
injunctions as constant irritants. He connected buying the DCE land with
getting rid of the injunctions. He believed having Ontario buy the land would
relieve the infringement on a private property owner’s right to property as
well as simplify a complex situation, leaving the dispute between Six Nations
and the Crown.
June 11 and 12,
2006
[53]
John Burke reaffirms in an email to Henco the
Government of Ontario’s desire to complete a deal as soon as possible. Don
Henning confirms the process should be that their respective appraisers meet to
come up with a number representing the property’s worth as being“at least this much”. A balance would be determined by
consultants.
June 13 to 16,
2006
[54]
Mr. Chadwick sends a “framework
outline” of an agreement to Henco. The Hennings sign off on it on June
15, 2006, though Mr. Bruder described there not being a lot of give and take.
Some key elements of the framework are:
▪
Henco is to transfer all DCE land and all
related rights and interests in the land to Ontario (or a trust) and Ontario agrees to pay Henco the fair market value as at February 27, 2006 with respect to
Henco’s rights, title and interest in the property rights.
▪
There will be an initial payment of $12,300,000
but with a reservation to negotiate a final compensation amount.
▪
Henco agrees to cease all actions regarding the
development of the DCE land, including the construction and improvements of
buildings or structures on such land pending the completion of the transfer of
the DCE land and the payment of the initial payment amount ($12,300,000).
▪
Upon the final determination and payment of any
final compensation amount, Henco shall have no further rights or claims as
against the DCE purchaser, the province or its agents relating to the DCE land
or the circumstances or events relating to the DCE land except as may be set
out in the Agreement between the Parties.
▪
The province shall agree to pay the reasonable
costs of the developer with respect to the final compensation amount relating
to the retention of consultants, legal advisers, appraisers, experts, advisers
or other third parties, subject to a maximum amount of $300,000.
June 23, 2006
[55]
Mr. Henning indicated there were drafts of a
final agreement going back and forth for the last two weeks of June, though it
did not start well as Ontario had hired a real estate lawyer to draft the first
attempt at an agreement. Mr. Henning’s response to such early draft was
addressed to Mr. Burke, for the Government of Ontario, in a June 23, 2006
email:
John, I’ve read this
and it’s very apparent that whoever wrote this had no idea what is going on in
our situation. Half of what is written doesn’t apply. We’ll go through it but it’s
going to take a lot of work. It’s too bad Rob’s firm didn’t do it as he’s
familiar with what’s going on.
Clearly he
expected the Agreement to reflect the framework – it did not. Mr. Burke
agreed.
June 30, 2006
[56]
Ultimately an agreement dated June 30, 2006 was
signed, covering the disposition of “Purchase Assets”,
defined to include the Henco land, the buildings, the contracts, the warranties
and the chattels. Attached as Schedule “A”
are some excerpts from the Agreement.
[57]
Mr. Carr, though not involved directly in the
negotiation of the Agreement, testified that the Government’s decision to
acquire the DCE property was made by elected officials and was based on a
number of considerations including:
a)
Fairness to the developers, who are unable to
complete their development project within the foreseeable future;
b) Public safety concerns if ongoing attempts to develop the property
were made;
c)
A commitment on the part of the Government to
effect a peaceful resolution of the issues between the local community and Six Nations’
interests; and
d) An assertion by Six Nations that a burial ground existed on the DCE
site.
[58]
There were several closing documents as well,
one of which was a Bill of Sale for the chattels which read:
In consideration of
other good and valuable consideration and the sum of Two Dollars ($2.00), the
receipt and sufficiency of which is hereby acknowledged, the Vendor does hereby
sell, transfer and convey to the Purchaser the Chattels.
There is no clear
indication what constitutes the chattels, other than the definition stated in
the definition section of the Agreement. (see Schedule “A”).
[59]
Henco signed a release which read in part as
follows:
AND WHEREAS it is
intended that, in exchange for the payment by the Purchaser to the Vendor of
the Final Compensation Amount, the Vendor would release the Purchaser
(including Ontario Realty Corporation and the Provincial Crown or its agents)
from all actions and claims whatsoever in respect of the Property, the Purchase
Assets and the Purchase Agreement;
…
3. The Vendor further releases, remises and forever
discharges the Purchaser from all actions, causes of action, suits, debts,
dues, accounts, bonds, covenants, contracts, claims or demands whatsoever which
the Vendor ever had or now has or may hereafter have against the Purchaser
(including Ontario Realty Corporation and the Provincial Crown or its agents),
for or by reason of, or in any way arising out of any cause, matter or thing
relating to, or arising directly or indirectly by reason of, or as a
consequence of circumstances or events relating to the Property, the Purchase
Assets or the Purchase Agreement, save and except for any liability of the
Purchaser that might arise out of sections 9.11 and 9.12 of the Purchase
Agreement.
4. The Vendor further agrees that it will not make any claim
or commence any proceeding against any third party, including without
limitation the Purchaser (including Ontario Realty Corporation and the Provincial
Crown or its agents) for compensation or recovery in respect of the Purchase Assets
and/or the Property.
[60]
A Statement of Adjustments provided for three
adjustments, one for the $300,000 contribution for Henco’s costs from Ontario,
another of approximately $256,000 for Henco’s costs for oversizing (water,
sanitary and storm systems) and a third adjustment of a $109,000 credit to
Ontario for grade elevation deposits from the builders.
[61]
There was no non-compete provision in the
Agreement.
July 4, 2006
[62]
The DCE land was conveyed to Ontario, the
transfer value shown being of $12,300,000.
[63]
Henco passed Directors’ Resolutions to pay out
most of the funds to the shareholders.
[64]
Henco went to court to get an order setting
aside the injunction; Justice Marshall reserved.
July 26, 2006
[65]
Mr. Chadwick from Goodmans writes to Mr. Bruder
confirming agreement on the final compensation amount of $3,500,000 and
enclosing the release “to be executed at the time of the
Final Compensation Amount being paid to Henco.” There was little
evidence of how Henco and Ontario came to this $3,500,000 amount. Mr. Bruder
suggested that in discussing compensation his starting point was the
$45,000,000 in revenue that Henco might have anticipated from the DCE
development.
August 8, 2006
[66]
Justice Marshall released his ruling on the
application to have the injunctions removed. Emphasizing the import of the rule
of law in his decision, Justice Marshall dissolved the injunction effective only
once “the court’s order for criminal contempt has been
disposed of.” He also stated that “negotiations
should cease until the Rule of Law returns and the barricades come down.”
In his Reasons he also stated:
However, it is
common knowledge that the people of Caledonia, after five months of occupation,
have seen security in their town replaced by lawlessness; protestors in battle
fatigues, police officers in riot gear and uncertainty of their future. Their
property values reduced, racial relations with the neighbouring native people
destroyed after many years of peaceful coexistence.
It is a sad, sad
result on both sides but one that might be avoided in future by proactive,
quick settlement of land claims and, as well, by the Crown and the police
responding quickly to this court’s reasoned orders.
[67]
Mr. Carr confirmed that Ontario took over the
appeal of this decision, indicating the decision frustrated the intent of the
decision to acquire the DCE property.
October 31,
2006
[68]
Agreed Statement of Facts
39.
As at October 31, 2006, Ontario had incurred
approximately $15.0 million in policing costs in respect of the occupation.
March 2007
[69]
Agreed Statement of Facts
40.
In March 2007, the federal government made an ex
gratia payment to Ontario in the amount of $26.4 million dollars, of which
$10.6 million was specifically designated to reimburse Ontario for the policing
costs it incurred due to the Occupation and $15.8 million toward Ontario’s
acquisition of the Douglas Creek Estates.
SENECA PROPERTY
[70]
Agreed Statement of Facts
41.
The previous owner of the Seneca property (“Old Henco”), had carried out preliminary planning for
the construction of a golf course.
42.
This primary purpose was maintained by Old Henco,
through Jack Henning, its shareholder.
43.
On October 27, 1997, the Corporation of the Town
of Haldimand passed by-law number 42-H-97 to amend zoning by-law 1-H-86 to
permit a golf course.
44.
The purpose and effect of by law number 42-H-97
was to rezone the Seneca property to permit the development of a public golf
course.
45.
Further progress on the development of the golf
course on the Seneca property was halted following the death of Jack Henning.
46.
According to the official plan for the County of Haldimand, as approved by Municipal Council on June 26, 2006, the Seneca property
is “part of a larger land assembly that has been approved
for golf course development”.
47.
As at June 15, 2006, the zone classification of
the Seneca property permitted the property to be used as a golf course and a
golf driving range.
48.
As at June 15, 2006, the Seneca property was not
zoned for residential use. Rezoning of the Seneca property would have been
necessary prior to any development for residential use.
49.
As at June 15, 2006, the Seneca property was un-serviced for residential development.
50.
At all relevant times, Henco’s internal general
ledgers have recorded the Seneca property as “Seneca
Golf”.
[71]
Mr. Don Henning testified that, after his
father’s death in 2000, Henco focused on the DCE and Morrison properties,
effectively parking the Seneca golf course project. He also indicated the Seneca
property was unsuitable for residential development for a number of reasons.
[72]
Until the transfer of the Seneca property to its
related company, 819820 Ontario Inc., in 2006, Henco had made no effort to
attempt to sell the property, though in November 2005 it had received an offer
out of the blue from Camplor Property Inc. (“Camplor”)
of $3,200,000 for the Seneca property. The deal was to close in July 2006,
conditional though, until April 28, 2006, upon Camplor assuring itself the
lands could be developed according to its expectation. The deal never closed.
[73]
Based on the proximity of the Seneca property to
the DCE property, and given all the circumstances surrounding the DCE property,
Henco established a value of $800,000 for the purposes of the non-arm’s length
transfer to 819820 Ontario Inc. Mr. Henning stated he felt even the
$800,000 was too high as the property values in Caledonia had been devastated.
[74]
Due to the CRA reassessment, Henco got an
appraisal of the Seneca property from Jacob Ellens & Associates, Real
Estate Appraisers, which concluded: “the market value
estimate range for the subject was between $786,590 and $898,960, rounded to:
$850,000.”
MORRISON
PROPERTY
[75]
The Morrison property was listed as inventory on
Henco’s books with a book value of $1,000,000. The Morrison property was closer
to the DCE property than the Seneca property. Mr. Henning felt even the $1,000,000
was too high in the circumstances.
[76]
Mr. Henning described his view of the property
value in this manner:
… I may not be an
appraiser, but as a developer, when I look at something I’m looking at it that
I have to put my money into it. So I’m not looking at it as a professional
that’s putting a value on something. I’m looking at it as somebody that’s going
to put their money in there and is taking the risk.
And when I see on TV
every day fires, people fighting, and day after day after day, I’m not going to
go in there and ask for a discount. I’m going to go in there – I’m not going to
go there at all. I’m going to walk away. I want nothing to do with it. And
that’s my opinion of what our property was like. …
[77]
Due to the CRA assessment, Henco obtained an appraisal
from Jacob Ellens & Associates Inc., which appraised the property at
$1,400,000.
Returns and
Assessments
[78]
Agreed Statement of Facts
52. On October 26, 2007, Henco filed an election to defer
application of changes to variable “E” of the
definition of “cumulative eligible capital” under
subsection 14(5) of the Income Tax Act.
53. On its income tax return for the year ending April 29,
2007, Henco treated:
a. the $15,800,000 received from the Province of Ontario pursuant to the DCE agreement as proceeds of disposition of eligible capital property;
b. proceeds from the transfer of the Morrison property as
inventory;
c. proceeds from the transfer of the Seneca property as
capital; and
d. the $650,000 received from the Province of Ontario as a non-taxable receipt.
54. The Minister initially assessed Henco as filed for the
taxation year ending April 29, 2007, notice thereof dated September 17, 2007.
The Minister reassessed Henco by notice thereof dated September 10, 2010 and
made the following adjustments:
a. the $15,800,000 received from the Province of Ontario pursuant to the DCE Agreement was treated as net profit;
b. the fair market value of the Morrison property was
increased from $1,000,000 to $1,400,000 at the time of transfer;
c. the fair market value of the Seneca property was
increased from $800,000 to $850,000 at the time of transfer;
d. proceeds from the transfer of the Seneca property was
treated as income; and
e. the $650,000 received from the Province of Ontario was treated as income.
II. Motions
[79]
At the outset of the trial the Respondent
brought a Motion for a direction from the Court:
a)
Ruling that the written Agreement of Purchase
and Sale (the “Agreement”) between Henco and Her
Majesty the Queen in Right of Ontario (“Ontario”),
with respect to the DCE property, is unambiguous and that no parol evidence may
be admitted to interpret that contract;
b) Excluding any evidence of an inflammatory or prejudicial nature
regarding the Crown’s involvement in the Occupation of Henco’s property;
c)
And if the Court does not issue such a direction,
that it be without prejudice to the right of the Respondent to make a further
motion for the same relief, if necessary, during the trial.
[80]
I dismissed the Motion at the hearing with brief
reasons and now wish to expand on those reasons.
[81]
The Respondent identified the extrinsic evidence
that it anticipated Henco intended to call as follows:
As is abundantly
clear from paragraph 67 of its Notice of Appeal, the appellant intends to
introduce extrinsic evidence. The respondent states the voluminous documentary
evidence and viva voce evidence is unnecessary to resolve the issues in
this appeal. The extrinsic documentary evidence generally falls into one of six
categories: (1) documents relating to the Superior Court Orders; (2) news/media
clippings and editorials, (3) press releases by the various levels of
government (municipal, provincial and federal), (4) internal e-mails from [the]
province of Ontario, (5) opinion letter to the various levels of government
and, (6) internal documents from the Department of Indian and Northern Affairs
Canada.
(I will have more
to say on some of these documents in my ruling with respect to the public
documents exception.)
The appellant has
stated that it intends to call Mr. Mike Katrycz, Vice‑President, CHCH
news, Mr. Brian Haggith of the Ontario Provincial Police and Mr. Les Edwards,
from Edwards Custom Homes. Lately, the appellant also served notice that it
intends to call evidence from the Haldimand County Clerk, the Province of Ontario’s negotiators and even Hansard transcripts. All such evidence is either
admitted or irrelevant. None of these individuals was involved in the valuation
of the appellant’s properties, the determination of the funding assistance, and
the formulation and implementation of the Agreement.
As it turns out,
Henco did not call Mr. Mike Katrycz or Mr. Les Edwards.
[82]
The Respondent moved to exclude the extrinsic
evidence, relying on the parol evidence rule, which she describes as follows:
By the general rules
of the common law, if there be a contract which has been reduced into writing,
verbal evidence is not allowed to be given of what passed between the parties,
either before the instrument was made, or during the time that it was in a
state of preparation, so as to add to, or subtract from, or in any manner to
vary or qualify the written contract.
[83]
The Respondent argues that parol evidence may
only be admitted if there is either a patent or a latent ambiguity in the
contract, acknowledging that extrinsic evidence may be introduced to explain a
latent ambiguity. The Respondent relied on the Tax Court of Canada case of On-Line
Financing & Leasing Corp. v The Queen.
In On-Line, counsel for the Department of Justice was asked to
address the timing of the parol evidence objection, as well as whether or not
the contract was ambiguous. This presupposed that the parol evidence rule was
in play. Justice Campbell relied on the Federal Court of Appeal’s decision in General
Motors of Canada v The Queen
where Justice Nadon quoted from Justice Saunders in Gilchrist v Western
Star Trucks Inc.:
The goal in
interpreting an agreement is to discover, objectively, the parties’ intentions
at the time the contract was made. The most significant tool is the language of
the agreement itself. The language must be read in the context of the
surrounding circumstances prevalent at the time of contracting. Only when the
words, viewed objectively, bear two or more reasonable interpretations may the
Court consider other matters such as the post-contracting conduct of the
parties.
[84]
The Respondent did go on to acknowledge that
courts have accepted extrinsic evidence to establish what has come to be called
the “factual matrix” underpinning a contract. The
Respondent referred me to the 2012 Alberta case of Nexxtep Resources Ltd. v
Talisman Energy Inc.,
which provides a good summary in this regard:
5.
The objective of contractual interpretation is
to ascertain what the parties objectively intended by their bargain, when they
made it. Primacy is given to the parties’ words, particularly in a written
contract, because it is presumed that the parties chose words that embodied
their intentions.
6.
However, the objective remains the
determination of the parties’ intention, not the meaning of words in a
document. Thus, the authorities give guidelines for the consideration of the “factual matrix” or “surrounding circumstances” to help
determine the parties’ contractual intention as would be determined by a
reasonable person so situated. In other words, extra-textual evidence is used
to help understand what the parties meant by the words they used.
7.
The concern here is
only with determining the parties’ intention, objectively understood. If after
that process it is found that there is ambiguity about what was intended, parol
evidence may be considered. That is a different stage of analysis, and the
facts to be considered when resolving ambiguity about the parties’ intention
may be different from those admissible on the question of interpreting their
words.
8.
Finally, where the
evidence clearly demonstrates that the parties’ objective contractual intention
is not correctly embodied in their words, the court may use its equitable
jurisdiction to correct or “rectify” the words of the contract. A plea of
rectification involves yet another stage of analysis and different categories
of evidence and standards of proof.
[85]
The Appellant takes this factual matrix approach
further, relying on the recent Tax Court of Canada case of River Hills Ranch
Ltd. v R.
in which Justice Hogan in turn refers to the Ontario Court of Appeal decision
in Dumbrell v Regional Group of Companies Inc. where it is stated:
53. The text
of the written agreement must be read as a whole and in the context of the
circumstances as they existed when the agreement was created. The circumstances
include facts that were known or reasonably capable of being known by the
parties when they entered into the written agreement:
54. A
consideration of the context in which the written agreement was made is an
integral part of the interpretative process and is not something that is
resorted to only where the words viewed in isolation suggest some ambiguity. To
find ambiguity, one must come to certain conclusions as to the meaning of the
words used. A conclusion as to the meaning of words used in a written contract
can only be properly reached if the contract is considered in the context in
which it was made: see McCamus, The Law of Contracts (Toronto: Irwin Law, 2005)
at 710-11.
55. There is
some controversy as to how expansively context should be examined for the
purposes of contractual interpretation: see Geoff R. Hall, "A Curious
Incident in the Law of Contract: The Impact of 22 Words from the House of
Lords" (2004) 40 Can. Bus. L.J. 20. Insofar as written agreements are
concerned, the context, or as it is sometimes called the "factual
matrix", clearly extends to the genesis of the agreement, its purpose, and
the commercial context in which the agreement was made: Kentucky Fried Chicken
Canada, a Division of Pepsi-Cola Canada Ltd. v. Scott's Food Services Inc.,
[1998] O.J. No. 4368, 114 O.A.C. 357 (C.A.), at p. 363 O.A.C.
56. I would
adopt the description of the interpretative process provided by Lord Justice
Steyn, "The Intractable Problem of the Interpretation of Legal
Texts", supra, at 8:
In sharp contrast with civil legal
systems the common law adopts a largely objective theory to the interpretation
of contracts. The purpose of the interpretation of a contract is not to
discover how the parties understood the language of the text, which they adopted.
The aim is to determine the meaning of the contract against its objective
contextual scene. By and large the objective approach to the question of
construction serves the needs of commerce.
[86]
In the River Hills case, Justice Hogan
stated:
42. More recent
court decisions have clarified the relevancy of “surrounding circumstances” and
suggested an approach different than that outlined in GM. For instance,
in Dumbrell v. Regional Group of Companies Inc. (“Dumbrell”),
Doherty J.A. of the Ontario Court of Appeal, having referred to Lord Hoffmann’s
opinion in Investors Compensation Scheme Ltd v. West Bromwich Building
Society, noted that the “meaning of [a] written agreement must be
distinguished from the dictionary and syntactical meaning of the words used in
the agreement”. According to Doherty J.A., while the plain meaning of the words
“will be important and often decisive in determining the meaning of the
document”, a “consideration of the [“objective contextual scene”] in which
the written agreement was made is an integral part of the interpretative
process and is not something that is resorted to only where the words viewed in
isolation suggest some ambiguity.
43. Prior to Dumbrell,
Goudge J.A. of the Ontario Court of Appeal had also noted that courts can use
extrinsic evidence in taking into account the “factual matrix” of an agreement
in cases where there is no ambiguity. He indicated that the factual matrix of
an agreement includes the genesis of the agreement, its purpose, and the
commercial context in which it was made. In so doing, he relied on the
following observations by Lord Wilberforce of the House of Lords in Reardon
Smith Line Ltd. v. Yngvar Hansen-Tangen:[16]
No contracts are made in a vacuum: there
is always a setting in which they have to be placed. The nature of what is
legitimate to have regard to is usually described as “the surrounding
circumstances” but this phrase is imprecise: it can be illustrated but hardly
defined. In a commercial contract it is certainly right that the court should
know the commercial purpose of the contract and this in turn presupposes
knowledge of the genesis of the transaction, the background, the context, the
market in which the parties are operating.
44.
These two decisions (Dumbrell and KFC)
suggest that a distinction must be made between the case where extrinsic
evidence is admissible for the purpose of resolving an ambiguity - a notable
exception to the parol evidence rule - and the case in which such evidence is
considered for the purpose of giving meaning to the terms and conditions of an
agreement in light of the “surrounding circumstances” or the factual matrix of
the agreement. In the latter case, no ambiguity need exist. …
[87]
With respect to extrinsic evidence of subjective
intention, the Appellant also brought to my attention the following statement by
the Ontario Superior Court in the case of Misfud v Owens Corning Canada Inc.:
14.
I must conclude, therefore, that the position of
the Respondent is correct, that the only exception to the well established principle
that evidence of subjective intention of the parties to a written contract is
not admissible is where the contract is not ambiguous on its face but, when the
court considers the surrounding circumstances or factual matrix, it becomes
apparent that there is a latent ambiguity and accordingly, the court may admit
evidence of the parties’ intention as to which of two or more alternative
subjects the parties intended to refer to. …
[88]
As I indicated at trial, there is no discernible
bright line between evidence establishing a factual matrix (clearly admissible)
and evidence of subjective attention (perhaps inadmissible). I believe that, in
the context of a Tax Court of Canada case where the Court is not faced with the
two parties to the contract arguing about possible unwritten contractual rights
or obligations, but is faced with making a determination of the correctness of
the characterization of the nature of a payment by a third party (Government of
Canada), the factual matrix is essential in helping the Court. The Court is not
being asked to alter the contract vis-à-vis the respective rights and
obligations between the parties. It is for the Court to determine, for the
purposes of tax liability, the true nature of the payment. It is impossible, I
would suggest, to do so without knowledge of the surrounding circumstances, especially
where those surrounding circumstances so clearly play into the ultimate agreement.
[89]
I have some reservations about the universal
application of the parol evidence rule in this Court, where the objective of
contract interpretation is to determine a taxpayer’s liability for tax. To make
that determination this Court often has to resolve the capital versus income
dilemma. It is the very nature of the deal at issue, presumably represented by
the words of the contract; but often those words are inexact and, indeed, the
Parties may have chosen them mistakenly, inappropriately, poorly, at times even
misleadingly and often without due thought to the tax implications.
[90]
An obvious example where this Court is called
upon to look past the words of an agreement is the independent contractor
versus employee issue. The Supreme Court of Canada has mandated that the Court
consider the parties’ actions more so than their words. This only makes sense
considering the objective of this Court – the correctness of the CRA’s
assessment of the taxpayer’s tax liability.
[91]
Another example where the Court is
invited to look past the words of a contract is section 68 of the Act, a
section that empowers the Court to look beyond what parties may have explicitly
allocated as consideration in a sale of assets to determine what is reasonable.
How does one possibly determine reasonableness in a vacuum? The Act is
replete with such “reasonableness” inquiries.
[92]
In this case, the Respondent argues that the
OPP, the journalists and the negotiators can shed no more material light on the
exceptional circumstances that could in any way help me determine the nature of
the payment Ontario made to Henco. I disagree. There were not market
forces at work here, where two arm’s‑length parties, driven by a land
development market, reached a reasonable commercial decision and put it in
writing. Far from it. It would be putting blinders on to ignore the exceptional
circumstances. It is imperative to delve into how those surrounding
circumstances or factual matrix impacted on the Agreement, and ultimately on the
determination of the nature of the payment.
[93]
I need to know what drove this deal to know
exactly what the deal is to enable me to determine the tax consequences.
[94]
I concluded at trial that the evidence intended
to be called by Henco was in the nature of a factual matrix. While I recognize
that such evidence may spill into the subjective intention of the Parties, if the
purpose of that evidence is to establish a latent ambiguity in the contract,
that too is admissible. I did leave the door open for the Respondent to object
at the time evidence was going in, if the Respondent believed it went beyond the
scope of my ruling. It was also open to the Respondent to argue that little or
no weight should be attached to such extrinsic evidence on whatever basis the
Respondent would deem appropriate.
[95]
I am reinforced in my view that extrinsic
evidence is admissible by reviewing the contract itself. Even in the preamble
of the contract it is stated:
Whereas based on
circumstances relating to the use and development of the property.
[96]
This invites scrutiny. What were those
circumstances?
[97]
I will not invoke the parol evidence rule
against one party to a contract where it is clear there are exceptional
circumstances beyond that party’s control that drove that very contract with a
third party, the third party not being a party to this action. As I said
at trial, that would handcuff me as trial judge in determining the true nature
of the payment. I accept that the Appellant can call extrinsic evidence.
[98]
I made this ruling before I heard the evidence. Having
heard the evidence, I can now address some elements of the parol evidence
arguments that were not as apparent at the time I originally made my ruling.
Subsequent evidence has confirmed my initial view that extrinsic evidence is
not only admissible, it is critical to the proper characterization of the
$15,800,000 payment. What is clear to me now, after completion of the trial, is
that even if I accepted the parol evidence rule comes into play, the exception
to address ambiguity in the Agreement also comes into play. The Agreement needs
to be interpreted such that I can determine, for tax purposes, the character of
the payment. The Agreement could have explicitly indicated an allocation
amongst the assets being sold. It did not do that. Without making possibly
unfounded assumptions about the value of the land, the character of the land
(inventory or capital), the value of the right to the injunctions (which, as
was clear from the evidence, did not simply disappear on transfer), and what “intangibles” were being sold, it would be impossible to
make a reasoned, sensible determination of the true nature of the payment. The Agreement simply was not
sufficiently clear. It included provisions (for example paragraphs 3.1 and
4.1(w) – see Schedule “A”) that invited further
scrutiny. To impose the parol evidence rule in these circumstances would thwart
the goal of determining the correctness of the assessment.
[99]
While I have concluded the Agreement is not
sufficiently clear, opening the door to admitting extrinsic evidence, I am not convinced
that ambiguity is even necessary in certain cases before our Court in order for
such evidence to be admitted. The evidence is necessary to achieve a correct,
just result. This is one of these cases.
[100] The Parties raised another preliminary matter, the admissibility of
certain documentary evidence. For completeness of the record, I will repeat here
my ruling on that issue.
[101] The Appellant asked the Court to admit into evidence certain
documents which it described as follows:
a)
Certain affidavits sworn by public officials,
such as the Deputy Minister of the Ontario Secretariat for Aboriginal Affairs,
in relation to events that are directly related and relevant to the issues in
the Appeal;
b) Certain press releases issued by Ministries of the Provincial and
Federal Governments that are also directly related and relevant to the issues
in this Appeal, including the factual matrix surrounding the Agreement in
question. The authenticity of the press releases in question has been accepted
by the Respondent.
[102] The Appellant relied on the public documents exception to the
hearsay rule for the admission of the affidavits. That exception was described
as follows: a statement made out of court by a public official in the discharge
of a public duty that is intended to serve as a permanent record ought to be
accepted as truthful without calling the public official as a witness.
[103] The affidavits of Doug Carr, the Assistant Deputy Minister of the
Ontario Secretariat for Aboriginal Affairs, Jane Stewart, the Chief Negotiator
for Ontario with respect to the Occupation of the DCE property, Ronald Doering,
Senior Negotiator for Canada, and John Cain, Director of Operations,
Western Region, of the OPP, were filed with the Ontario Court of Appeal in
support of a motion to stay a decision of the Ontario Superior Court of
Justice, which refused to set aside the injunctions against the Occupation. I
was advised by Appellant’s counsel that this type of motion for an interlocutory
order at the Court of Appeal is heard on affidavit evidence. There is no
dispute that the actual Court of Appeal decision can be, and has been, provided
to me.
[104] The press releases in issue were released by the Ontario Secretariat
for Aboriginal Affairs, the OPP and Haldimand County. Relying on the 1996
Ontario Court of Appeal case of R. v P.(A.), the Appellant identified four
criteria to be met for the public documents exception to apply:
1) The document must have been made by a public official;
2) The public official must have made the document in the discharge of
a public duty or function;
3) The document was made with the intention that it be a permanent
record; and
4) The document must be available for public inspection.
[105] The Respondent relied on Sopinka, Lederman & Bryant: The
Law of Evidence In Canada
to describe the four-pronged test somewhat differently, requiring:
1) The subject matter of the statement must be of a public nature;
2) The statement was prepared with a view to being retained as a public
record;
3) It was made for a public purpose and available for inspection by the
public at all times; and
4) It was prepared by the public officer in pursuance of his duty.
[106] The Appellant also addressed the principled approach to hearsay
evidence, requiring a determination of reliability and necessity. Mr. Shaw
quoted Sopinka in addressing a principled approach to the public
documents exception:
As with some of the
other exceptions to the hearsay rule, necessity is a further justification for
admissibility of public documents, but it is necessity of a different kind. It
has never been a precondition to admissibility that the maker of the public
document be dead. The special necessity, therefore, for this type of hearsay
evidence is not so much the unavailability of alternative modes of proof;
rather, it is based upon expediency, for, without such an exception, many
public officials would have to be taken away from necessary governmental tasks
in order to testify in court. Therefore, the work of the Government and the
needs of the public are given priority, and the law, accordingly, has not
insisted upon court attendance of public officials. Moreover, little would be
accomplished by demanding the viva voce testimony of the public officer,
since he or she probably would possess no recollection of the event independent
of the document itself.
[107] The Respondent relied on Robb v St. Joseph’s Health Centre, in which it was determined
that the Krever Report, looking into the tainted blood issue, was not
admissible in the class action by families affected by the tainted blood. The
trial judge in that case wrote([1998] O.J. No. 5394(QL)):
19.
The Krever Report contains the opinion of
Commissioner Krever based on a record that is not before this court. The report
contains Commissioner Krever’s conclusions and opinions based upon what he
observed as having occurred, upon what he found to have been done correctly and
incorrectly, and upon what he found should have been done but was not done.
Commissioner Krever did not apply the standards of proof of evidence which are
applicable to the conduct of a civil trial. I accept the submission of Mr.
Morrison that Commissioner Krever’s conclusions and opinions are based on
evidence and opinions given at the hearings, much of which would not be
admissible in a civil or criminal trial. …
[108] I find the Robb case is distinguishable as in that case it
was the final product of the Inquiry, the Report, at issue. Before me, it is
not the final product, the decision of the Court of Appeal, but the evidence produced
on the motion in the Court of Appeal motion at issue. In Robb, the court
found the Report was based on evidence and opinions much of which would not be
admissible in a civil trial. Here, the affidavit evidence was acceptable in the
Court of Appeal, though, notably, that proceeding was not a trial, and
different rules regarding evidence appear to have been applicable.
[109] So, with respect to the public documents exception, it is elementary
that the document must be a public document. I do not accept the Appellant’s
view that, because the affidavits were made by public officers for use in a
court matter, it follows they are public documents subject to the public
documents’ exception to the hearsay rule. The contents of the affidavits are
presumably the affiants’ recollection of events in connection with the
Occupation. The contents are not, as suggested in Sopinka, contents of
which the affiants would otherwise have no recollection. The affidavits were
made by public officials, but as witnesses of events, not recorders of public
records. Their providing evidence of events requiring their recollection is no
different from the providing of evidence by any other witness. The contents of such
affidavits do not become public documents subject to the hearsay exception
simply by the filing of them in a motion before the Ontario Court of Appeal.
[110] The Respondent points out that Rule 144 of the Tax Court of
Canada Rules (General Procedure) requires oral testimony. This does not
override a principled approach to the hearsay rule whereby necessity and
reliability may render hearsay evidence admissible, left then to the judge’s
discretion to assign weight. But it does create a starting point. Witnesses’
evidence that constitutes their recollection of events is best provided orally,
thus permitting cross-examination to ensure the veracity of the testimony. Affidavits,
the contents of which I find do not constitute public documents, should
therefore be subjected to the normal tests of necessity and reliability. Here reliability
is not an issue; necessity is. The description of the special test of necessity
that Mr. Shaw provided from Sopinka related to public documents. These
affidavits, I find, are not public documents to which the exception applies, so
the usual approach to necessity is applicable. Why, in fact, can these four
people not appear before me? I heard nothing to convince me it is necessary to
have their evidence by affidavit. These four people’s credibility has not been
tested; they are not testifying on matters for which they have a public duty to
maintain a document. They simply are in no different position than any other
witness.
[111] If the Appellant wants this Court to accept the evidence of these
four potential witnesses about the events surrounding the Occupation that lead
to the Agreement between Ontario and Henco, then the Appellant is going to have
to call them.
[112] I do not view the affidavits either as a public documents exception
to the hearsay rule or as being admissible on the principled approach to the
hearsay rule. The best evidence from these four witnesses is their oral
testimony.
[113] Is the Appellant’s position saved by the Canada Evidence Act,
sections 23 and 24? No. Under section 23, I do not read “evidence
of any proceeding” to imply evidence from any proceeding. For this Court
to accept affidavit evidence holus-bolus in a proceeding that only accepts
affidavit evidence is too broad an interpretation of the Canada Evidence Act
provisions. If the parties in the Ontario Court of Appeal had been the same as those
before me, and if there had been an opportunity to cross-examine the affiants
in that proceeding then, perhaps, the Canada Evidence Act would come
into play and such evidence would be acceptable in this Court.
[114] I turn now to the Press Releases. I rely on the authority of R. v
McCormack
which dealt directly with police press releases, as well as the case of P.I.P.S.C.
v. Canada,
in which the court stated:
70. As to the
criterion of reliability, it is evident that these documents were prepared by
senior or knowledgeable officials within departments or agencies of the federal
government. They describe or explain the operation of the Superannuation Plans
and these accounts. In many cases, they were for the purpose of conveying
information to Ministers and senior government officials or other departments
or government. In my view, it is reasonable to expect that a high premium would
be placed on their accuracy. There is also the expectation of candor, given the
circumstances and the fact that there was no litigation existing at the time.
This evidence has the “circumstantial guarantee of
trustworthiness.”
[115] I accept the Appellant’s position that calling a witness to attest
to these press releases would be a waste of time. They fall within the four
criteria mentioned earlier. I reject the Respondent’s position that accepting
police press releases would obviate the need for criminal trials: some common
sense needs to be injected into these considerations. A press release is
certainly public and therefore accessible and could remain a permanent record
of an event.
[116] The press releases are in. The affidavits are out.
III. Analysis
$650,000 issue:
income or windfall?
[117] The Respondent argues that the $650,000 payment made on May 3, 2006 falls
squarely within the parameters of paragraph 12(1)(x) of the Act
which reads:
12(1) 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:
…
(x)
any particular amount (other than a
prescribed amount) received by the taxpayer in the year, in the course of
earning income from a business or property, from
…
(ii) a
government, municipality or other public authority,
where the
particular amount can reasonably be considered to have been received
…
(iv) as
a refund, reimbursement, contribution or allowance or as assistance, whether as
a grant, subsidy, forgivable loan, deduction from tax, allowance or any other
form of assistance, in respect of
(A) an amount
included in, or deducted as, the cost of property, or
(B) an outlay or
expense,
to the extent that
the particular amount
…
(viii) may
not reasonably be considered to be a payment made in respect of the acquisition
by the payer or the public authority of an interest in the taxpayer, an
interest in, or for civil law a right in, the taxpayer’s business or an
interest in, or for civil law a real right in, the taxpayer’s property;
[118] The Appellant argues that the payment does not fall within
paragraph 12(1)(x) of the Act, but that the $650,000 was a
windfall, citing the requirements for a finding of a windfall set out in the
case of R. v Cranswick.
I see no need to address the many factors in Cranswick or to go
into a detailed analysis of windfall. The question is – is the $650,000 payment
caught by paragraph 12(1)(x) of the Act? If it is, it is
income. If it is not, it is not taxable as income. The Respondent has not
presented any alternative to paragraph 12(1)(x) of the Act for
bringing such a payment into income – for good reason.
[119] So what conditions must be met for paragraph 12(1)(x) of the Act
to apply:
1)
The $650,000 must have been received by
Henco “in the course of earning income from a business or
property”;
2) The payment must have been from a government;
3) The payment can reasonably be considered to have been received as
assistance in respect of an outlay or expense;
4) The payment was not for the acquisition of Henco’s business or
property.
The Appellant argues that conditions 1 and 3 have not been met, or
in the alternative, that the payment was for the acquisition of the DCE
property.
[120] Was the payment received in the course of earning income from a
business?
[121] The payment was received in early May. At that stage, was Henco in
the course of earning income from a business? The Appellant points out that
this wording is unlike the wording in paragraph 12(1)(a) of the Act,
for example, which simply says “in the course of a
business”. Could Henco have still been in business yet not in the course
of earning income from a business? I believe it could have been. There
certainly came a point when Henco was no longer able to conduct the business it
was in – land development. There was no business and consequently no possible
earning income from a business: at some point there was no carrying on of a business,
simply a salvage strategy. But was that point in early May, at the time of the
receipt of the payment?
[122] The Respondent argues that paragraph 12(1)(x) of the Act
does not imply any particular moment in time, but that I must consider more
broadly the time spectrum to determine whether the amount was received in the
course of earning income from a business. These were exceptional and
unfortunate circumstances. There is no question Henco in 2005 and into 2006 was
in business, and certainly in the course of earning income from a business, but
the $650,000 clearly does not relate to that time period, the time period
before the Occupation. That is not the time period that should be considered in
answering the question of whether Henco received the $650,000 “in the course of earning income from a business.” The
time period is the time period to which the payment relates: late February to
early May.
[123] I agree with the Respondent that it would make no sense, when
considering government financial assistance to a struggling business, to say that
the struggling business was not receiving the payment in the course of earning
business income simply because it was, at the time it received the payment,
operating at a loss. But that is not the situation before me. At some point,
Henco was not simply operating at a loss, but was out of business altogether
and was no longer in the course of earning income from a business.
[124] I find that until Henco found out about the moratorium, and
ultimately the imposition of a rezoning by-law precluding further development,
Henco was still in business. That did not happen until later in May, after the
$650,000 payment had been received. But from late February to the time of the $650,000
payment, though still in business, was Henco in the course of earning income
from a business? I believe not. Though this may seem a fine distinction, it is
clearly a distinction that the legislation itself makes.
[125] The evidence was clear that after February 28, 2006, Henco could not
access the DCE property. It could not carry on a business earning income. As
the Appellant’s counsel put it, it had been materially crippled or sterilized.
That sterilization became permanent later in May, ending the business. But from
February 28 what Henco did was not in the course of earning income from a
business. What it did was attempt to preserve the business itself, with an
expectation, that clearly grew weaker as the Occupation went on, that blockades
would be lifted and it might return to earning income from the business. It did
this by taking the only step it could take, an attempt to legally have the
blockades removed. Throughout the period from February 28 to May 3 it was
physically impossible for Henco to do anything other than that. I conclude it
did not receive the payment in the course of earning income from a business. It
was not, for example, in the restart-up phase of a business after a
catastrophic event such as a flood or an earthquake.
[126] If I am wrong in my conclusion that the amount was not received “in the course of earning income from a business”, I find
the third condition has also not been met. Can the payment reasonably be
considered to have been received as assistance in respect of an outlay or
expense? There is no evidence from Henco as to what the $650,000 was used for.
There is evidence from Ontario in its letter of April 27 and the enclosed
Schedule A that the payment was to assist in respect of costs and expenses
incurred because of the Occupation, but that was Ontario’s view, not Henco’s.
There was no requirement for payment. There was no requirement for an
accounting.
[127] What is clear, however, is that $300,000 was paid by Ontario as part
of the Agreement and that, according to the Agreement, the $300,000 was
intended to cover “the reasonable costs of the Vendor
incurred since February 28, 2006 relating to the occupation of the DCE lands,
including all of the Vendor’s costs relating to the retention of consultants,
legal advisors, appraisers, experts and other third party advisors.”
[128] Mr. Henning testified that the $300,000 had nothing to do with the
$650,000. He confirmed that Henco did incur costs for those types of services and expenses that were slightly in excess of $300,000. So what outlay or expense was
the $650,000 meant to assist with? It is not reasonable, without evidence of
other “outlays or expenses”, to conclude the
payment was in respect of some conjectured expenses. As Mr. Carr suggested, it
was simply the fair thing to do.
[129] I conclude the $650,000 was effectively a no-strings-attached, to
use common vernacular, “freebie”, not swept into
income by the application of paragraph 12(1)(x) of the Act.
Seneca Property:
$800,000 or $850,000 - income or capital?
[130] There are two issues with respect to the Seneca property: was the
payment on income or capital account, and was the value $800,000 or $850,000?
[131] I can quickly dispose of the second issue. The appraiser’s valuation
of $850,000, relied upon by the Respondent, fell within an indicated range of $786,590
to $898,960. Anything, I would suggest, within that range would be a reasonable
fair market value determination. Real estate appraisals, especially where there
are exceptional non-market forces at work, cannot be precise. A range of value
makes eminent sense. And, where a taxpayer has designated a value that
ultimately is found to fall within the range of reasonable fair market value, I
see no reason to disturb that figure. $800,000 it is.
[132] Turning to the capital versus income issue, the case of Canada
Safeway Ltd. v R.
offers a good summary of what factors need to be addressed:
61. A number
of principles emerge from these decisions which I believe can be summarized as
follows. First, the boundary between income and capital gains cannot easily be
drawn and, as a consequence, consideration of various factors, including the
taxpayer's intent at the time of acquiring the property at issue, becomes
necessary for a proper determination. Second, for the transaction to constitute
an adventure in the nature of trade, the possibility of resale, as an operating
motivation for the purchase, must have been in the mind of the taxpayer. In
order to make that determination, inferences will have to be drawn from all of
the circumstances. In other words, the taxpayer's whole course of conduct has
to be assessed. Third, with respect to "secondary intention", it also
must also have existed at the time of acquisition of the property and it must
have been an operating motivation in the acquisition of the property. Fourth, the
fact that the taxpayer contemplated the possibility of resale of his or her
property is not, in itself, sufficient to conclude in the existence of an
adventure in the nature of trade. In Principles of Canadian Income Tax Law,
supra, the learned authors, in discussing the applicable test in relation to
the existence of a "secondary intention", opine that "the
secondary intention doctrine will not be satisfied unless the prospect of
resale at a profit was an important consideration in the decision to acquire
the property" (see page 337). I agree entirely with that proposition.
Fifth, the viva voce evidence of the taxpayer with respect to his or her
intention is not conclusive and has to be tested in the light of all the
surrounding circumstances.
[133] I do not view this as a secondary intention analysis. The Respondent
argues the Seneca property was never intended by Henco to be developed by them
so that Henco could own and operate a golf course. It was always Henco’s
intention to hold the property as inventory for purposes of resale, either to a
golf course operator or for residential development. Henco argues that its only
intention at the time of acquisition of the property was to develop a golf
course. Indeed, the Agreed Statement of Facts stipulates:
41.
The previous owner of the Seneca property (“Old Henco”), had carried out preliminary planning for
the construction of a golf course.
42.
This primary purpose was maintained by Old
Henco, through Jack Henning, its shareholder.
[134] But was Henco going to construct the course and then sell it to a
golf course operator, or construct it to operate it itself? That is the
question. I accept Mr. Henning’s evidence that the property was unsuitable
for residential development: it was not zoned for such; it consisted of some
land designated as hazard land; it would be difficult to service; and it had
possible First Nations’ issues. That, however, as I have indicated, is not the
issue. The question is what evidence proves an intention to own and operate a
golf course versus an intention to develop the land for sale as a golf course:
capital versus income.
[135] Both Parties referred me to the books of Henco which, frankly, could
be interpreted either way. The Seneca property was shown in the books often
with a reference to “golf” yet did not appear as a
capital asset as such. Nothing can be drawn from the books.
[136] Both sides raised the Camplor offer. The Appellant suggested that as
it was an unsolicited offer it is no indication of an intention on the part of
Henco one way or the other. The Respondent suggested that although the Camplor
deal did not go ahead, Henco had accepted the offer and, indeed, did eventually
sell to another developer. With respect, none of these facts, long after the
acquisition of the property, go to prove an intention that at the time of
acquisition the property was inventory or capital.
[137] Also, the donation of part of the Seneca property to the County is
no indication one way or the other as Mr. Henning testified there was still
room for an 18-hole golf course.
[138] I am left with no evidence that favours one intention over the
other: developed for sale as a golf course versus developed to be owned and
operated by Henco as a golf course. One of the Minister’s assumptions was that “the Appellant made efforts to bring the property into a more
marketable condition in order to sell it at a profit by carrying out
preliminary planning to develop the Seneca property into a golf course”.
The onus is on the Appellant to demolish that assumption. I find there has been
no evidence presented to me that does so. All the evidence is just as
consistent with an intention to develop the property for sale as a golf course
as it is with an intention to develop the property to own and operate it as a
golf course. The Appellant has not met the onus. The $800,000 is on income
account.
Morrison
Property – Fair Market Value?
[139] The only issue with respect to the Morrison property is the
correctness of the Minister’s reliance on the fair market value of $1,400,000,
as opposed to Henco’s determination of the value of $1,000,000. Henco relies on
the fact that the Minister accepted its write-down of the property to
$1,000,000, as well as relying on Mr. Henning’s personal view of its value,
given the circumstances at the time. The Minister relies on the retrospective
appraisal obtained by Henco from Jacob Ellens & Associates Inc. that
appraised the Morrison property at $1,400,000. The appraisal report, while
included in the Appellant’s Book of Documents, was not put to Mr. Henning or
any of the witnesses. The appraiser was not called.
[140] Has Henco rebutted the Minister’s assumption of a fair market value
of $1,400,000?
[141] In the case of Gough Estate v Canada, Justice Campbell had this to
say about rebutting an expert report:
19. In many
cases where the taxpayer does not produce an expert report to rebut the
Minister's assessment respecting the fair market value, this Court is forced to
dismiss the appeal because the taxpayer has not met the onus which is upon him.
However, there are those few cases where a taxpayer has been able to meet the
onus where no expert is produced. The question of determining fair market value
where only one side presents an expert was considered by Bowman, A.C.J.T.C. in
Klotz v. Canada, [2004] T.C.J. No. 52 at para. 33 where he states:
...To call no expert
witnesses in a valuation case can be a risky manoeuvre. Nonetheless, the court
is not bound to accept any expert's opinion and ultimately the court must make
its own determination of value based on all of the evidence.
20. In the
present case, the Appellant did not engage an expert and chose to rely on Dr.
Gough's own valuations of the properties. Dr. Gough's primary expertise is in
the field of medicine, although he has had extensive real estate holdings. He
valued the properties primarily by reference to his experience with his own
rentals and to the assistance he provided his father with his seven rental
units over the years. Although recognition is given to the substantial
participation of Dr. Gough in the real estate market, I must reject his
approach to the valuation of these properties. The method to be employed in
determining fair market value of a property may vary with the circumstances of
a case, but the general practice is to evaluate using one or more of the three
recognized valuation methods. In initially filing the estate return, Dr. Gough
simply relied on his own knowledge and experience in the real estate field to
compile the valuations. After the assessment, he compiled data obtained from
the Registry office respecting other sales in this period and he also drafted a
graph-analysis. However, the graph does not represent a recognized method of
valuation. Even if I did accept the graph, the rates of appreciation were not
substantiated in any way and it was these rates upon which the graph was based.
…
24. The
Appellant has failed to discharge the onus which is upon him. He did not employ
objective data, use a recognized method of evaluation, offer an expert report
or opinion, or provide evidence as to how the discrepancies in the age and
location of the comparables could potentially affect the valuation conclusions
provided in the expert report. The best evidence before me is Mr. Bennett's
report and his testimony.
[142] I am faced with a similar situation. First though, I do not find that,
simply because the Minister did not reassess Henco in connection with the write-down
to $1,000,000, the Minister is somehow estopped from now maintaining the value
is $1,400,000. It is the correctness of this particular assessment that is
before me, and it is for me to determine the value, notwithstanding what the
CRA may or may not have previously found acceptable in a different context.
[143] Has Mr. Henning provided sufficient evidence to rebut the $1,400,000
value assessed by the Respondent? No, he has not.
[144] Knowing the Minister’s assumption was based on an appraisal that
Henco itself obtained, Mr. Henning has provided no evidence to attack or in any
way contradict that expert appraisal. He is simply suggesting in his oral
testimony that the Occupation and the damage to the Caledonia “brand” support the value he determined at the time and
nothing more. Indeed, he suggested at trial that the $1,000,000 was too high.
Mr. Henning acknowledged that he based the value on what the Morrison property was
on the books at.
[145] Mr. Henning has not provided a valuation based on any valuation
method. His valuation is in effect Henco’s book value. He acknowledged he is
not an appraiser, but said he was intimately familiar with the situation at the
time. That familiarity, however, does not translate into a reasoned, methodical
valuation.
[146] The explanation Mr. Henning gave (see paragraph 76 of these Reasons)
is just not enough to rebut a value based on an expert appraisal, especially
where that appraisal has not been subjected to any detailed review by another
appraiser or even by Mr. Henning.
[147] I conclude that the Minister’s assessment of a value of $1,400,000
is correct.
$15,800,000
issue: income or capital; if capital, taxable or non-taxable?
[148] I will analyze this issue by addressing the following questions:
1) Did Henco receive the $15,800,000 for the DCE land?
2) If the $15,800,000 was for the DCE land, was the receipt on account
of income, pursuant to sections 9 and 23 of the Act or on account of
capital?
3) If the $15,800,000 was for something other than land, was the
receipt of the $15,800,000 on account of income or capital, and if on capital
account did it result in a capital gain or was it an eligible capital amount or
a non-taxable capital receipt?
(1) Did Henco receive the $15,800,000 for
land?
[149] In answering this question, I will first consider the Agreement
itself and then consider the factual matrix.
[150] The starting point, and according to the Respondent the
determinative point, is the Agreement itself, and by Agreement I include all
documents required to close the transaction. The Respondent maintains the
Agreement is unequivocal in that it was for the sale of the DCE land for
$15,800,000. The Appellant maintains the Agreement is not reflective of the
true nature of the deal between the Parties, which was $15,800,000 for the
vaporisation of Henco’s business.
[151] What does the Agreement stipulate? First, and most significantly, it
does not explicitly state that the DCE land is being sold for a consideration
of $15,800,000. I note the Agreement does not talk in terms of
consideration but compensation (subparagraph 3.1(a) of the Agreement), a term
commonly associated with payment for services or payment for damages. The
compensation is to be determined according to the fair market value of the purchased
assets at February 27, 2006, that is, before the Occupation: an indication, I
would suggest, that it was considered difficult to value whatever was being
sold as at the time of sale. It implies this was solely a mechanism for the determination
of the compensation, a mechanism based on the only tangible asset but, by
necessity, at a time when that asset had value.
[152] The Agreement lists several assets in the sale including the land, the
contracts and the chattels, which in turn include intangibles.
[153] At the outset of the Agreement it is highlighted in the preamble
that there are circumstances relating to the use and development of the
property. Then, looking at the representations and warranties, we find a clue
as to what those circumstances are and how they might be affecting the deal.
Subparagraph 4.1(d) of the Agreement is an explicit reference to what is
driving the deal, as it requires Henco to “immediately
obtain an order setting aside the order of Justice Marshall …”. A
further explicit clue is found in subparagraph (w) of the representations and
warranties, which requires a cessation of the business of Henco. It is clear
from the document itself this is not a simple land deal – something else is
going on.
[154] The closing documents included a statement of adjustments which did
indicate that the adjustments were income-related adjustments. The Respondent
argues this suggests that the $15,800,000 was therefore on income account. It
does not prove, though, how much was paid for the land. Obviously, the disposition
of the land was part of this deal. It is not at all clear on the face of the
Agreement, though, that the $15,800,000 was paid for the land, notwithstanding
the adjustments. The adjustments would be made regardless of the consideration
attributable to land.
[155] The other document subsequent to the Agreement, which forms part of
the closing, was the full and final release. The preamble of the release states
that the vendor will release the purchaser from all actions in exchange for the
payment of $15,800,000. Am I to assume that the whole $15,800,000 was for the
release and not for the land?
[156] I conclude that, even before turning to the factual matrix, there is
support for a finding that this Agreement, while effecting a sale of land, is
doing something more. Why must Henco cease business? Why must Henco have an
order of Justice Marshall set aside? What is that order? Why was there no
current valuation of the purchased assets not valued currently? What is going
on? I reject outright that the Agreement reflects a clear-cut sale of land for
$15,800,000: there is clearly something else at play. I also find it is
impossible to discern the true nature of the agreement for the purposes of
assessing Henco’s tax liability without an understanding of all the
circumstances, the factual matrix.
[157] So what are those surrounding circumstances that might help me to
determine exactly what the $15,800,000 was paid for?
[158] Looking outside the Agreement for the purpose of proving that the $15,800,000,
or a good part of it, was paid for the DCE land, the only surrounding
circumstance that supports this proposition is the actual transfer of title
showing a transfer value of $12,300,000.
[159] Looking outside the agreement for the purpose of proving the
$15,800,000 was not for the land, I find the following surrounding
circumstances leading up to the Agreement:
•
Based on both Parties’ appraisals, the land had
no value: it was worthless;
•
There was no commercial market for the land;
•
Ontario was not
motivated by commercial needs;
•
Ontario faced lawlessness,
civil unrest and significant policing costs.
[160] I could go through a litany of the events demonstrating this fact,
but I have intentionally outlined in considerable detail such facts earlier in
these Reasons. They point overwhelmingly to an increasingly and alarmingly
dangerous situation in Caledonia demanding action from Ontario.
•
Ontario could not
resolve the Occupation nor could any treaty negotiations proceed as long as the
Six Nations were in fear of enforcement of the injunction: it was
imperative the injunction be removed and only then would the barricades come
down.
•
The OPP would not risk greater violence and
possible deaths. They were particularly concerned about a repeat of Ipperwash,
the inquiry into which was ongoing at this time. Justice Marshall would not tolerate
an abandonment of the rule of law.
•
Elected officials were involved in finding a
resolution.
•
Media coverage was extensive.
•
With the rezoning by Ontario of the land to
prevent development, Henco’s business was effectively over.
•
The moratorium and rezoning were not sufficient
to end the Occupation.
•
According to Mr. Henning, Ontario was more
active in dealing with Henco to buy them out in times of greater violence, when
there was an upcoming court hearing or when there was media coverage.
•
Mr. Carr, as a representative of Ontario, acknowledged “removing the barricades and ending the
occupation was central to all the discussions we were having”.
•
Mr. Carr further indicated removing Henco would
leave the dispute between Ontario and Canada on the one hand and Six Nations on
the other.
•
Mr. Henning was afraid for his and his family’s
personal safety as Six Nations targeted Henco as a source of their
problems, even to the extent of accusing the Hennings of starting a war.
[161] Subsequent to the Agreement there was an event that also supports
the view that Ontario was paying for something other than the land. That event
was Henco’s immediate attempt to have the injunction removed; that attempt was
unsuccessful. Justice Marshall did not remove the injunction. Ontario
immediately took over the handling of the matter which ultimately resulted in
the Court of Appeal decision lifting the injunction.
[162] There was an extremely dangerous situation evolving in Caledonia. Ontario had to do something. Henco was caught in the middle and ultimately paid
a price. Ontario removed Henco as a stumbling block. The only conclusion that
can be drawn is that Ontario paid Henco to go away and in doing so enable Ontario to get rid of the injunction, acquire control of the volatile situation and restore
peace. The effect was to destroy Henco’s business.
[163] Given the extraordinary surrounding circumstances, I cannot conclude
Henco received $15,800,000 for the sale of worthless land. That captures
neither the essence of the Agreement itself nor the intent of the Parties; from
Henco’s perspective, to salvage what it could from the destruction of its
business, and from Ontario’s perspective, to defuse a volatile situation and
perhaps do the right thing by Henco. Although land was transferred as part of
the deal, this was not a land deal.
(2) If the $15,800,000 was for the DCE
land, was the receipt thereof on account of income or capital?
[164] Although I have determined that the receipt by Henco of the
$15,800,000 was not for the DCE land, I still wish to address the Respondent’s
argument that if it was for the land, the amount is income by virtue of section
23 of the Act.
Section 23 of the Act reads as follows:
(1) Where, on or after disposing of or ceasing to carry on a
business or a part of a business, a taxpayer has sold all or any part of the
property that was included in the inventory of the business, the property so
sold shall, for the purposes of this Part, be deemed to have been sold by the
taxpayer in the course of carrying on the business.
(2) [Repealed
under former Act]
(3) A reference in this section to property that was included
in the inventory of a business shall be deemed to include a reference to
property that would have been so included if the income from the business had
not been computed in accordance with the method authorized by subsection 28(1)
or paragraph 34(a).
[165] The Appellant argues that the land was effectively moved from
inventory to capital before its disposition to Ontario and therefore section 23
of the Act is not applicable. The Respondent argues that only if there
has been a clear and unequivocal positive act converting a property from
inventory to capital, property held as inventory remains inventory and, upon
disposition of the business or upon the cessation of the carrying on of a business,
it is sold as inventory and brought into income. In the recent Tax Court of
Canada case of Peluso v The Queen,
Justice Jorré, while acknowledging it is possible to convert vacant land from
inventory to a use which will give rise to a capital gain, found that there was
not enough done to show such conversion: at best there was a change of plan. He
quoted the Federal Court of Appeal in the Edmund Peachey Ltd. v The Queen decision, which in turn
affirmed a statement by President Jackett in Les Entreprises Chelsea Limitée
v MNR:
In my view, where one finds such a
business, as long as there continues to be land of the original inventory of
the business in the ownership of the company, it is reasonable to assume that
the business has not been brought to an end in the absence of some evidence
that something has been done to bring the business to an end, as, for example,
where the corporation takes the land out of the business and dedicates it to
the creation of some structure to be used as the capital asset of another
business.
[166] The Respondent suggests that Henco did nothing to demonstrate a
shift of use from inventory to capital. Yes, it wrote the DCE land down to zero
in its books, but that, the Respondent suggests, was simply a write-down of inventory.
It did nothing else. I asked Respondent’s counsel what positive steps Henco
should have taken to prove it no longer held the DCE land as inventory: not
surprisingly, there was no suggestion. This is not the same situation as in Peluso.
It cannot be assumed that Henco was still in business simply because it
continued to hold the DCE land. Nothing could be further from the truth. By Ontario’s actions, Henco was out of business. It had been in the land development business:
it held land to develop. The Occupation made that physically impossible, and
the Ontario Government, by rezoning the property, made it legally impossible.
This is abundant evidence, using President Jackett’s words, that something was
done to bring the business to an end.
[167] But, the Respondent argues, if it was not inventory, the land was
not held either as an investment or on capital account of a business, the
disposition of either yielding a capital gain. That, I suggest, is too narrow a
view of capital. I agree that at the time the land could no longer be
developed it was neither an investment (it was worthless) nor a capital asset
of a business (there was no business), but it certainly was not inventory. It
was a useless, worthless piece of land that had no market. It could not even be
said that it was held as an adventure in the nature of trade: there was no
adventure and its ultimate disposition to the Government of Ontario in such
unusual circumstances can in no way be viewed as being in the nature of trade
in any commercial sense.
[168] It is a misnomer to say there was a change of use, as the land went
from use as a trading asset to no use at all. There was a conversion,
certainly: a conversion in which the DCE land completely lost its character as
inventory. To be clear, the land did not lose its character as inventory
because Henco went out of business and the land was sold while Henco was no
longer carrying on a business (the very situation section 23 of the Act
was put in place to address). The land lost its character as inventory by being
made legally useless for development. It is something of a chicken and egg
scenario, but section 23 of the Act covers cessation of business
and attempts to change inventory to capital, while here the nature of the inventory
changed and then Henco went out of business, not the type of situation section
23 of the Act was designed to address.
[169] What then do we have as far as characterizing the DCE land; it seems
it is neither fish nor fowl. Is a tangible asset that is worth nothing a
taxable nothing, even if someone (Ontario) is prepared to pay something for it?
Or is an asset, such as land, which is found not to be a trading asset, by
default a capital asset? This becomes something of a circuitous debate, leading
to support for my earlier finding that in fact and in law Ontario could not
have paid and did not pay $15,800,000 for the land. However, if the $15,800,000
does attach to the land, and I conclude the land is not inventory, I then also
conclude it has to be on capital account and taxed as a capital gain.
(3) If the $15,800,000 was not for the
land, was the receipt of the $15,800,000 on account of income or capital, and
if on capital account, did it result in a capital gain or was it an eligible
capital amount or a non-taxable capital receipt?
[170] I have concluded the $15,800,000 received by Henco was primarily for
something other than the land. It was either to compensate Henco for the whole
loss of its business, or was paid as consideration for certain rights, or more
accurately the extinction of certain rights: the right to sue Ontario and the
right to takes steps to enforce the injunction it obtained. Henco argues it was
for the former and that compensation for such total loss can only be on capital
account and could only fall into eligible capital property, yet goes on to
argue that by electing to have the former rules under subsection 14(5) of the Act
apply (the mirror imaging test) it falls out of eligible capital property and
is simply therefore a taxable nothing.
[171] I will first address the Appellant’s argument that the $15,800,000
was on capital account. The Federal Court of Appeal in T. Eaton Co. v R. discussed the income versus
capital determination in the following way:
24. As Justice
Strayer so aptly noted in Canadian National Railway, there is considerable
jurisprudence on the question of whether compensation paid pursuant to the
termination of a trade contract is capital or income and, to a large extent,
each case turns on its own facts. I acknowledge that it would be much simpler
to adopt an inflexible rule deeming any compensation received for breach or
termination of any trade contract, or even a right thereunder, as business
income. But that is not the path chosen by the common law. Nor am I prepared
to jettison the existing jurisprudence solely to promote certainty in the law
at the expense of flexibility and rationality. This is an appropriate time to
turn to the taxpayer's alternative submission and the Minister's arguments.
[172] In the Eaton case, the famous retailer received a lump sum
payment to cancel a contract that afforded Eaton’s a share of the landlord’s
profits from all tenants in a particular shopping centre, in which Eaton’s was
the anchor. The court also stated that:
17. … if an
income-producing asset is partially damaged, then compensation for lost profits
is treated as a trading receipt. However, if the asset is completely destroyed,
then the entire compensation payment qualifies as a capital receipt since an
asset's profitability is one element to be considered in assessing the asset's
capital value. This latter point supports my view that the compensation in
question is on capital account. Finally, the Court of Appeal went on to clarify
that the entire business of the taxpayer did not have to be lost before
compensation for lost profits would be regarded as having been received on
capital account. It was deemed sufficient if the losses related to part of a
taxpayer's business, such as occurs with the loss of an income-producing asset.
18. In
summary, London and Thames Haven stands for the proposition that
compensation paid for the destruction of a capital asset will be on capital
account even if some of the compensation relates to lost profits. If
compensation flows from the partial destruction of that capital asset, then any
amount received in regard to lost profits is taxable as a trading receipt,
while compensation relating solely to the damaged property is a capital
receipt. At the end of the day, however, none of this is dispositive of the
present appeal.
[173] The difference between Eaton’s and Henco is that Eaton’s lost one
identifiable asset – the participation contract. Henco lost everything,
including all contracts. I see no difference in the application of the
principles.
[174] The Federal Court of Appeal went on to address the case of Pe Ben
Industries Co. v R.,
again a situation involving the cancellation of a contract that resulted in the
destruction of a distinct part of Pe Ben’s business. This was held to be on
capital account.
[175] Associate Chief Judge Bowman (as he then was) had an opportunity to
address the capital versus income debate in the case of BP Canada Energy
Resources Co. v. R.,
also in the context of a termination of certain contracts: “decontracting” was the unusual term used. The amount
in issue was determined by Associate Chief Judge Bowman as arbitrary. He did
not accept that the payment was simply compensation for the cancellation of a
contract. It was not for the loss of a stream of income. Associate Chief Judge
Bowman explored in some detail the leading cases with respect to the income
versus capital issue and cautioned, as only he could, to:
54. … avoid
the temptation to pluck felicitous phrases from the cases which can support
almost any conclusion, and thereby to lose sight of the real purpose of the
enquiry, that of determining whether the payment is made for the termination,
disposition or sterilization of a capital asset or is one of the ordinary
incidents of an ongoing business so that the receipt properly forms part of the
normal receipts of the trade.
[176] I pluck from Associate Chief Judge Bowman’s comment that at one end
of the income versus capital spectrum is a payment arising from the ordinary incident
of an ongoing business and at the other end is a payment for the sterilization
of a capital asset. In Henco’s case it is admittedly somewhat fuzzy as to
exactly what the sterilized capital asset is (the contracts, the business’
goodwill, the right to sue, the right to pursue injunctions…), but it is clear
that the payment was not an ordinary incident of an ongoing business. In
placing this payment on the income versus capital spectrum, I conclude it falls
well into the capital end of the spectrum.
[177] Justice Hogan relied on Associate Chief Judge Bowman’s sterilization
of capital assets’ analysis in concluding, in River Hills Ranch Ltd. v R. that cancellation of
agreements were exactly that, indicating: “the Appellants
were forced out of business” and further, “…the payments
were made to compensate the appellants for the loss of their PMU business
occasioned by Wyeth’s cancellation of the Collection Agreements.”
[178] I find Henco is in a similar situation. The evidence is so clear
that Henco, whether out of Ontario’s sense of fairness or out of Ontario’s motivation to end the Occupation, had its business destroyed. I conclude the
$15,800,000 was on account of capital.
[179] Was it, however, payment for the disposition of eligible capital
property?
[180] Both Parties agree that if I find the $15,800,000 is on account of
capital, which I have found, then I go to section 14 of the Act to determine
if it is an eligible capital amount, and if not, then it is not subject to tax.
[181] There were amendments to section 14 of the Act in 2006 that
altered the definition of cumulative eligible capital, effectively eliminating
what was previously referred to as the mirror-imaging test. There was a window
within which a taxpayer could elect to have the old provisions of section 14 of
the Act apply. Henco made such an election and, therefore, the
application of section 14 of the Act is to be determined under the old
rules.
[182] The relevant provision under the old rules for the determination of
whether the $15,800,000 payment is an eligible capital amount is found in the
definition of cumulative eligible capital, specifically item E, which read at
the time:
E is the
total of all amounts each of which is ¾ of the amount, if any, by which
(a)
an amount which, as a result of a disposition occurring after the taxpayer’s
adjustment time and before that time, the taxpayer has or may become entitled
to receive, in respect of the business carried on or formerly carried on by the
taxpayer where the consideration given by the taxpayer therefor was such that,
if any payment had been made by the taxpayer after 1971 for that consideration,
the payment would have been an eligible capital expenditure of the taxpayer in
respect of the business
exceeds
(b)
all outlays and expenses to the extent that they were not otherwise deductible
in computing the taxpayer’s income and were made or incurred by the taxpayer
for the purpose of giving that consideration, and
...
[183] This provision, as I indicated earlier, is the mirror-imaging test.
I am not surprised in trying to work through this oblique provision, that it
has been amended.
[184] It must be determined whether, if Henco made the $15,800,000 payment
it would have been an eligible capital expenditure. Eligible capital
expenditure is defined in subsection 14(5) of the Act as:
“eligible capital
expenditure” of a taxpayer in respect of a business means the portion of any
outlay or expense made or incurred by the taxpayer, as a result of a
transaction occurring after 1971, on account of capital for the purpose of
gaining or producing income from the business, other than any such outlay or
expense
(a)
in respect of which any amount is or would be, but for any provision of this
Act limiting the quantum of any deduction, deductible (otherwise than under
paragraph 20(1)(b)) in computing the taxpayer’s income from the
business, or in respect of which any amount is, by virtue of any provision of
this Act other than paragraph 18(1)(b), not deductible in computing that
income,
(b)
made or incurred for the purpose of gaining or producing income that is exempt
income, or
(c)
that is the cost of, or any part of the cost of,
(i)
tangible property, or for civil law corporeal property, of the taxpayer,
(ii)
intangible property, or for civil law incorporeal property, that is depreciable
property of the taxpayer,
(iii)
property in respect of which any deduction (otherwise than under paragraph
20(1)(b)) is permitted in computing the taxpayer’s income from the
business or would be so permitted if the taxpayer’s income from the business
were sufficient for the purpose, or
(iv)
an interest in, or for civil law a right in, or a right to acquire any property
described in any of subparagraphs (i) to (iii) …
[185] The Appellant relies on Toronto Refiners & Smelters Ltd. v R (“Toronto
Refiners”) for the proposition that a payment made for a civic, non‑commercial
purpose would not be an eligible capital amount, as it could not meet the
requirement for a purpose of gaining income when the mirror‑imaging test
is applied. The Federal Court of Appeal asked four questions in Toronto
Refiners determining whether an amount is an eligible capital amount:
i.
Was the amount received as a result of a
disposition?
ii.
Was the amount received in respect of the
business carried on by the recipient of the payment?
iii.
What consideration did the recipient give for
the payment?
iv.
If the recipient had made the payment for the
same consideration that it had given to the payor (the mirror-imaging test), would
that have been an eligible capital expenditure of the recipient?
[186] In Toronto Refiners, the payment from the City of Toronto of $9 million was damages for the inability of the company to relocate its
business, and was specifically identified as representing goodwill.
[187] The Federal Court of Appeal answered yes to questions 1 and 2 in Toronto Refiners
and answered question 3 as follows:
14. In the
context of this case, it seems to me appropriate to extend this answer by one
further step. The statutory context of subsection 19(2) of the Expropriations
Act indicates that its objective is to authorize compensation for the
destruction of the goodwill of a business that is terminated as the result of
an expropriation and cannot be relocated. If that is so, then the consideration
given by Toronto Refiners for the $9 million payment is the release of any
claim of Toronto Refiners for compensation for the destruction of the goodwill
of its business.
[188] With respect to question 4 the Federal Court of Appeal stated:
22. I return
now to the hypothetical facts, to consider where they lead. The question at
this stage of the analysis is whether the hypothetical $9 million payment by
Toronto Refiners meets the definition of “eligible
capital expenditure” in paragraph 14(5)(b) (as it read in 1992).
23. There are
a number of conditions that must be met under that definition. The first
condition, found in the opening words of paragraph 14(5)(b), is that the
payment must have been an outlay or expense made or incurred on account of
capital for the purpose of gaining or producing income from a business. In my
view, that condition is not met. The hypothetical expropriation, like the real
expropriation, had a civic purpose. It had no income earning purpose, and
certainly no purpose of gaining or producing income from a business.
[189] This approach by the Federal Court of Appeal in Toronto Refiners
was addressed in the subsequent Federal Court of Appeal case of RCI
Environnement Inc. v R.
The RCI case did not deal with a payment from any Government authority,
but with a commercial settlement with respect to the termination of a
non-competition agreement. In commenting on Toronto Refiners the Federal
Court of Appeal stated:
46. Contrary
to the arguments of counsel for RCI (2006), I do not believe that that decision
means that the analysis should be made from the perspective of the payer in all
instances. In that case, the Court was dealing with an exceptional situation,
the payment in question having been made by a public authority under an
enactment, in a non-business context. In order to consider the actual context
of the payment, the Court had to keep in mind that the payment was issued by a
public authority, namely, the City of Toronto, exercising a power of
expropriation (Toronto Refiners, cited above (paragraph 18)). For all
intents and purposes, this made the question underlying item E inapplicable,
because no one would pay money to acquire the right to be expropriated.
[190] The Federal Court of Appeal went on to find that the hypothetical
question 4 (the mirror-imaging test) should be analyzed from the
perspective of the recipient and not the payor.
[191] I will address the four questions raised by the Federal Court of
Appeal in Toronto Refiners in light of its clarifying comments in RCI.
(i) Was the amount received a
result of a disposition?
[192] While there remains the thorny issue of how to exactly describe what
was disposed of, it is clear that after the closing of the agreement Henco had
nothing other than the monies it received from Ontario: before the Agreement
Henco had something, whether or not that something had value. There was a
disposition.
(ii) Was the amount received in
respect of the business carried on by Henco?
[193]
The Appellant maintains that the payment
was to effectively make the business go away. While it may be argued that, at
the time the deal was struck between Henco and Ontario, Henco was no longer
carrying on business, I find that the payment, especially given a provision in
the Agreement requiring that Henco cease its business, was nevertheless “in respect of” the business carried on by Henco. There
was a strong connection between the Occupation, which arose as a result of
Henco carrying on the land development business, and the urgent need for Ontario to remove the blockades by eviscerating the ability of Henco to carry on business.
I conclude, notwithstanding the timing of Henco ceasing to carry on
business, that the amount was received “in respect of”
the business carried on by Henco.
(iii) What consideration did Henco
give for the payment?
[194] The answer to this question is essential in figuring out how to
resolve the fourth question – the mirror-imaging test. During argument it was
clear the Respondent was of the view that the Appellant had not adequately
addressed this matter, professing to be in quandary as to exactly what was
disposed of, if not just the land. The Appellant would counter that the entire
business was lost: paraphrasing the wording from Toronto Refiners, the
Appellant argues that the payment was for the destruction of all of Henco’s
goodwill. Justice Sharlow described the consideration in Toronto Refiners
in the excerpt from paragraph 14 of her reasons, cited earlier. She also
went on to state at paragraph 19:
If goodwill were “capital property” as that term is used in the Income
Tax Act, the $9 million payment could be characterized as proceeds of
disposition of capital property giving rise to a capital gain. But goodwill is
not capital property. Compensation for the loss of goodwill fits nowhere in the
scheme of the Income Tax Act unless it fits within section 14. Specifically,
such compensation cannot be treated as proceeds of disposition of capital
property, or otherwise reflected in the computation of income for income tax
purposes, except as set out in section 14.
[195] The Respondent suggests that the distinction between Toronto
Refiners and Henco is that there was a finding in Toronto Refiners that the
consideration for the $9,000,000 paid by the public authority was the release –
that was the entire deal. I find that the release provided by Henco was a
significant part of what Ontario paid for and that that can be viewed in the
same way as the payment in Toronto Refiners. But in the circumstances
before me, I find equally as important as the promise not to sue was Henco’s
promise to cease business and Henco’s promise to get the injunctions removed. I
find the provision requiring the cessation of business is no different than the
release for purposes of categorizing the nature of the consideration, that nature
being in the loss of goodwill. With respect to the promise to have the
injunction removed, I find the Federal Court of Appeal’s approach to goodwill
in TransAlta Corp. v R.
helpful.
[196] The Court determined in TransAlta that goodwill is a residual
concept. Any consideration beyond what is allocable to the identifiable assets,
the plug if you will, must be goodwill, that intangible justifying the excess
payment. In this case, I conclude the full amount is the residual. Where a
company’s assets have been rendered worthless, and a payment is made, albeit
due to some exceptional circumstances, that payment can only be seen as the
residual.
[197] In TransAlta, the Federal Court of Appeal approached the
determination of goodwill for tax purposes in the following manner:
69. This is
why the residual approach to valuing goodwill is preferred. Under that
approach, the more easily valued assets (such as tangible assets) are first
given a fair market value, and any consideration paid in excess of this fair
market value is assigned to goodwill. …
70. The fact
that some intangible elements that do not constitute “goodwill” in the legal
sense may be captured through such a valuation method – such as the potential
tax allowance benefit – does not mean that the valuation method is wrong or
improper. The method simply reflects the fact that these types of intangibles
should be treated as goodwill for all practical purposes – including accounting
and taxation purposes - even though they may not squarely fall under the
legal concept of goodwill.
71. Consequently,
in accordance with the unanimous opinion of the experts who testified in this
case, goodwill should normally be valued as a residual whole. …
[198] Clearly, some rights one might not normally consider goodwill may
get swept into that category due to the residual approach. I find a promise to
lift injunctions falls into that catchall category.
[199] Where does all this lead? As Justice Sharlow stated in Toronto
Refiners, compensation for the loss of goodwill fits nowhere in the scheme
of the Act unless within section 14. Is that what Ontario paid for?
Compensation for the loss of goodwill? I believe it is. Ontario had to make
Henco go away: Henco could not own the land; it could not carry on business; Ontario needed to ensure Henco could not sue it; Henco could not enforce the injunction.
With all assets of its former business rendered valueless, the only possible
result, based on the residual approach with regard to goodwill as set out in TransAlta,
is that the $15,800,000 was for the loss of Henco’s goodwill. Viewing the
situation in this manner, I see no need to try and distinguish between the
whole loss of the business and disposition of particular rights: it falls into
this residual category.
(iv) If Henco had paid $15,800,000
for the loss of goodwill, would that payment have been an eligible capital
expenditure of Henco?
[200] By the very nature of the payment it could not possibly be for the
purpose of earning income – just the opposite. Certainly that is how the
Federal Court of Appeal rationalized the payment in Toronto Refiners
(see paragraph 23 from that case cited earlier).
[201]
In RCI, the Federal Court of
Appeal took a pragmatic approach to the mirror-imaging test in the context of a
public authority making a payment, writing this about the fourth question: “For all intents and purposes, this made the question
underlying item E inapplicable, because no one would pay money to acquire the
right to be expropriated.”
[202]
This sensible view
renders the discussion of whether one looks at the mirror‑imaging test
from the payor’s or the recipient’s perspective moot. There are some
situations, such as this, where the rather technical process for the
determination of consideration and the application of the mirror-imaging rule simply
does not work. This allows me to step back from such a technical analysis to
truly appreciate what has happened here. What has not happened is that
Henco sold land as part of its land development business, as the Respondent
would suggest. Nothing could be further from reality.
[203]
Henco’s business
was destroyed. By the time it struck an arrangement with Ontario, Henco had no
value as a business however one might try to slice the analysis: there could
not be and there was not a source of income. The capital receipt was
non-taxable.
IV. Summary
[204] I allow the Appeal and refer the matter back to the Minister for
reassessment and reconsideration on the following basis:
a)
the $15,800,000 received by Henco from Ontario was a non-taxable capital receipt;
b) the $650,000 received by Henco from Ontario was a non-taxable
windfall;
c)
the fair market value of the Seneca property was
$800,000 and the payment was on income account; and
d) the fair market value of the Morrison property was, as assessed,
$1,400,000.
If
the Parties wish to address costs they should do so in written submissions to
the Court filed within 30 days of the date of this Judgment, failing which
costs are awarded to the Appellant in accordance with the Court’s tariff.
Signed at Ottawa, Canada, this 9th day of June 2014.
“Campbell J. Miller”
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