[1] The Crown is appealing the judgment of a Tax Court Judge rendered on August 23, 2001, now reported as Toronto Refiners & Smelters Ltd. v. Canada, 2001 D.T.C. 876, [2001] 4 C.T.C. 2818 (T.C.C.). The issue is whether $9 million received by Toronto Refiners from the City of Toronto in 1992 as damages caused by the inability of Toronto Refiners to relocate its business is an "eligible capital amount" as defined in paragraph 14(5)(a) of the Income Tax Act, R.S.C. 1985 (5^th supp), c. 1 (as it read in 1992). The Crown contends that the $9 million payment is an eligible capital amount. Toronto Refiners contends that it is a non-taxable capital receipt. The Tax Court Judge agreed with Toronto Refiners.

[2] If the Crown is correct, then the $9 million payment would be treated as though it were a capital gain, so that the 1992 taxable income of Toronto Refiners would be increased by $6,471,277 (three-quarters of $9 million less certain outlays and expenses). There is no debate about the quantum of the income inclusion if the Crown's legal theory is correct.

[3] The facts are well stated in paragraphs 4 to 13 of the Tax Court judgment. I repeat them for ease of reference:

4. The Appellant carried on the business of secondary lead refining ("Business") on its land and buildings ("Real Property") located in the City of Toronto.

5. In the early 1980's Toronto expressed interest in purchasing the Real Property from the Appellant. From that time until July 11, 1988 the Appellant and Toronto negotiated for the sale of the Real Property conditional upon the Appellant finding a suitable nearby location for the relocation of its Business. On July 11, 1988 the Appellant and Toronto entered into a written agreement ("1988 Agreement") to transfer the real property to Toronto. That agreement was made pursuant to section 31 of the Expropriations Act [R.S.O. 1980, c. 148]. Section 31 of that Act provided:

Where the owner of land consents to the acquisition of the land by a statutory authority, the statutory authority or the owner, with the consent of the other, may apply to the Board for the determination of the compensation to which the owner would be entitled by this Act if the land were expropriated, and the Board may determine the compensation and the provisions of this Act and the regulations respecting the determination of the compensation, hearings and procedures, including costs and appeals, apply thereto in the same manner as if the land had been expropriated and for the purpose, subject to any agreement of the parties, the compensation shall be assessed as of the date on which the assent to the acquisition is given.

6. That agreement provided that the Appellant and Toronto each consented to the other applying to the Ontario Municipal Board ("OMB") for determination of the compensation to which the Appellant would have been entitled under the Expropriations Act had the Real Property been expropriated. In 1988 Toronto did not carry on the business of secondary lead refining. The 1988 Agreement was not conditional on the Appellant finding a suitable nearby site for the relocation of its Business. However, it provided that in the event that the Appellant did not relocate its business, Toronto would acknowledge in all future proceedings that it was not feasible for the Appellant to relocate the business.

7. The 1988 Agreement permitted the Appellant to recover its inventory, equipment and chattels located on the Real Property and to dispose of them for its own account. The Appellant agreed that receipts from the disposition of those assets would be disclosed to Toronto if it claimed compensation on the basis of existing use or if it claimed disturbance damages. The Appellant also agreed that the amount of such receipts could be taken into account in calculating market value or disturbance damages if the OMB deemed it relevant.

8. On July 15, 1988 the Appellant, pursuant to the 1988 Agreement, transferred the Real Property to Toronto. Toronto paid the Appellant $1,000,000 as an initial payment and $60,000 for legal, appraisal and other costs incurred by the Appellant. The $1,000,000 payment was received by the Appellant without prejudice to its right to seek additional compensation based on a July 15, 1988 valuation date.

9. The Appellant ceased carrying on its Business and disposed of substantially all of its remaining business assets prior to 1989. The Appellant gave Toronto vacant possession of the Real Property on February 20, 1989. The Appellant never relocated the business.

10. On October 13, 1989 the Appellant applied to the OMB for the determination of the compensation to which it was entitled pursuant to the 1988 Agreement and section 31 of the Expropriations Act. Valuators, retained by the Appellant and Toronto for the purposes of the hearing before the OMB, valued the goodwill of the Business as being between $3,850,000 and $8,000,000. They valued the Real Property, based on existing use, as being between $1,000,000 and $6,800,000. These valuations were made as of July 15, 1988.

11. The hearing commenced before the OMB for compensation determination in January, 1992. On January 27, 1992 the Appellant and Toronto entered into a Minute of Settlement approved by an Order of the OMB under which Toronto agreed to pay the Appellant as compensation:

(a) $2,900,000 in respect of the land,

(b) $100,000 in respect of the buildings; and

(c) $9,000,000 "in respect of damages occasioned as a result of the inability of" the Appellant "to relocate its Business".

12. The $12,000,000 was paid to the Appellant pursuant to sections 31, 13 and 18 and subsection 19(2) of the Expropriations Act. In computing its income for the 1992 taxation year for financial statement purposes, the Appellant included the receipt of $9,000,000 as damages. In computing its income for income tax purposes, it deducted $9,000,000 from income, claiming that that sum was a non-taxable capital receipt.

13. The Minister of National Revenue ("Minister") reassessed the Appellant for its 1992 taxation year on the basis that three-quarters of the $9,000,000 payment was an "eligible capital amount" within the meaning of subsection 14(1). This appeal is in respect of that assessment.

[4] The evidence before the Tax Court does not establish why the City of Toronto wanted to acquire the land of Toronto Refiners. According to the Reply filed by the Crown in the Tax Court proceedings, the assessment under appeal is based in part on the assumption that the acquisition was "due to concern regarding pollution and noxious use". That assumption was not challenged and therefore may be assumed to be true. At the hearing of the appeal, counsel for the Crown conceded that it would be appropriate to assume that the City of Toronto was acting for a civic purpose and not for a profit making purpose.

[5] The parts of sections 13, 18 and 19 of the Expropriations Act that are most relevant to this case read as follows:

13(1) Where land is expropriated, the expropriating authority shall pay the owner such compensation as is determined in accordance with this Act.

13 (1) Lorsqu'un bien-fonds est exproprié, l'autorité expropriante verse au propriétaire l'indemnité fixée conformément à la présente loi.

(2) Where the land of an owner is expropriated, the compensation payable to the owner shall be based upon,

(2) Lorsque le bien-fonds d'un propriétaire est exproprié, le montant de l'indemnité à verser au propriétaire se fonde sur :

(a) the market value of the land;

a) la valeur marchande du bien-fonds;

(b) the damages attributable to disturbance;

b) les dommages imputables à des troubles de jouissance;

c) les dommages causés par un effet préjudiciable;

(d) any special difficulties in relocation,

d) les difficultés particulières, le cas échéant, relatives à la réinstallation du propriétaire.

but, where the market value is based upon a use of the land other than the existing use, no compensation shall be paid under clause (b) for damages attributable to disturbance that would have been incurred by the owner in using the land for such other use.

Toutefois, si la valeur marchande est fondée sur une utilisation du bien-fonds autre que l'utilisation existante, aucune indemnité prévue à l'alinéa b) n'est versée en contrepartie des dommages imputables aux troubles de jouissance que le propriétaire aurait subis en utilisant son bien-fonds à cette autre fin.

. . .

18(1) The expropriating authority shall pay to an owner other than a tenant, in respect of disturbance, such reasonable costs as are the natural and reasonable consequences of the expropriation, including, . . .

18. (1) L'autorité expropriante rembourse au propriétaire autre qu'un locataire, à l'égard de troubles de jouissance, les frais raisonnables qui sont les résultats normaux de l'expropriation, notamment : . . .

(b) where the premises taken do not include the owner's residence, the owner's costs of finding premises to replace those expropriated, provided that the lands were not being offered for sale on the date of expropriation; and

b) si l'immeuble exproprié ne comprend pas le logement du propriétaire, les frais de recherche d'autres immeubles par celui-ci pour remplacer ceux qui ont été expropriés, à condition toutefois que le bien-fonds n'ait pas été en vente à la date de l'expropriation;

(i) the moving costs, and

(ii) the legal and survey costs and other non-recoverable expenditures incurred in acquiring other premises.

c) les frais de réinstallation, notamment :

(i) les frais de déménagement,

(ii) les honoraires d'avocat, frais d'arpentage et les autres dépenses non recouvrables engagés pour acquérir un autre immeuble.

. . .

19(1) Where a business is located on the land expropriated, the expropriating authority shall pay compensation for business loss resulting from the relocation of the business made necessary by the expropriation and, unless the owner and the expropriating authority otherwise agree, the business losses shall not be determined until the business has moved and been in operation for six months or until a three-year period has elapsed, whichever occurs first.

19(1) Si un commerce est situé sur le bien-fonds exproprié, l'autorité expropriante verse une indemnité pour la perte de revenus commerciaux résultant de la réinstallation du commerce qu'entraîne l'expropriation. À moins que le propriétaire et l'autorité expropriante n'en conviennent autrement, ces pertes ne sont pas fixées avant que le commerce n'ait déménagé et fait l'objet d'une exploitation pendant six mois ou qu'un délai de trois ans ne se soit écoulé, selon la première de ces éventualités à se réaliser.

(2) The Board may, in determining compensation on the application of the expropriating authority or an owner, include an amount not exceeding the value of the good will of a business where the land is valued on the basis of its existing use and, in the opinion of the Board, it is not feasible for the owner to relocate.

(2) Lorsque la Commission fixe l'indemnité, à la demande de l'autorité expropriante ou d'un propriétaire, elle peut y inclure un montant n'excédant pas la valeur de l'achalandage, si le bien-fonds est évalué en fonction de son utilisation existante et que, de l'avis de la Commission, il est très difficile pour le propriétaire de se réinstaller ailleurs.

[6] The payment in question is an eligible capital amount if it meets the test set out in what has been called the "mirror image" rule in clause 14(5)(a)(iv)(A) of the Income Tax Act (as it read in 1992). To paraphrase that provision in this factual context, the $9 million payment is an eligible capital amount if it is an amount which, as a result of a disposition, Toronto Refiners received in respect of the business it formerly carried on, where the consideration given by Toronto Refiners for that payment was such that, if any payment had been made by Toronto Refiners for that consideration, the payment would have been an eligible capital expenditure of Toronto Refiners.

[7] In the analysis below, I will deal which each of the questions that must be asked in determining whether an amount is an eligible capital amount.

Question 1: Was the amount received as the result of a disposition?

[8] The $9 million payment was received as the result of a disposition by Toronto Refiners of its land. The answer to the first question is yes.

Question 2: Was the amount received in respect of the business carried on or formerly carried on by Toronto Refiners?

[9] The $9 million payment was received in respect of the business that Toronto Refiners formerly carried on. The answer to the second question is yes.

Question 3: What consideration did Toronto Refiners give for the $9 million?

[10] "Consideration" is a legal term that may have different meanings in different contexts. In the context of section 14 it must be understood as the thing that the recipient of a payment gives in exchange for the payment. This is explained in the leading case on section 14, The Queen v. Goodwin Johnston (1960) Ltd., [1986] 1 C.T.C. 448, 86 D.T.C. 6185 (F.C.A.). The Court was required in that case to determine what consideration was given by the recipient of a payment made to settle the recipient's claim for damages for breach of contract. According to Justice Urie, writing for the majority, the consideration was "agreeing to settle the action for damages for breach of contract ... and, as a result, forgoing the benefits under that contract had it continued in existence".

[11] According to the agreed facts, the consideration for the entire $12 million paid pursuant to the settlement agreement was the release of the City of Toronto of any further claims that Toronto Refiners may have had under sections 13, 18 and 19 of the Expropriations Act. Of the $12 million, $2,900,000 was compensation for the land and $100,000 was compensation for the buildings. As to the remaining $9 million, counsel for the Crown argued that it represents damages payable under subsection 19(2), because it is stated to be damages resulting from the fact that Toronto Refiners was unable to relocate its business.

[12] Counsel for Toronto Refiners argued that the $9 million represents a combination of disturbance damages under paragraph 13(2)(b) and damages under subsection 19(2) of the Expropriations Act. He pointed out that, according to the agreed facts, a valuator retained by Toronto Refiners and the City of Toronto for the OMB hearing was of the opinion that the goodwill should be valued at between $3,850,000 and $8,000,000. Taking the highest valuation, it would follow that of the $9 million, no more than $8 million was payable under subsection 19(2). Counsel for Toronto Refiners also argued, on the basis of Schwartz v. Canada, [1996] 1 S.C.R. 254, [1996] 1 C.T.C. 303, 96 D.T.C. 6103 (at paragraph 43) and The Queen v. Farmparts Distributing Ltd., [1980] 2 F.C. 205, [1980] C.T.C. 205, 80 D.T.C. 6157 (F.C.A.), that in the circumstances of this case, the burden of proving the correct allocation is on the Crown.

[13] It is not necessary for me to consider the allocation debate, and I will not do so. For the purposes of this part of the analysis, I will assume, without deciding, that the $9 million payment is attributable entirely to subsection 19(2) of the Expropriations Act. Based on that assumption, the consideration that Toronto Refiners gave for the $9 million payment was its agreement to release the City of Toronto from any further claim for compensation under that provision.

[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.

Question 4 - the mirror image rule: If Toronto Refiners had paid $9 million for the same consideration that it gave the City of Toronto, would that payment have been an eligible capital expenditure of Toronto Refiners?

[15] As this Court said in Goodwin Johnson, supra, this question cannot be asked in a vacuum. Rather, it is necessary to assume that the circumstances of the hypothetical payment by Toronto Refiners are the same as the circumstances of the actual payment by the City of Toronto. In other words, Toronto Refiners must be placed notionally in the situation of the City of Toronto.

[16] I would state the hypothetical facts as follows. Toronto Refiners is an expropriating authority that wishes to acquire certain land for a civic purpose. There is no actual expropriation but the land is transferred to Toronto Refiners by agreement, with the landowner reserving its right of recourse to the OMB. The business of the landowner terminates and cannot be relocated, and thus the goodwill of the business is destroyed. It is finally agreed that the appropriate compensation under subsection 19(2) of the Expropriations Act, in effect the value of the goodwill of the business, is $9 million. Accordingly, in 1992, $9 million is paid as compensation under subsection 19(2). Given those hypothetical facts, would the $9 million payment have been an "eligible capital expenditure" of Toronto Refiners?

[17] Counsel for the Crown argued that the hypothetical facts should not be stated in this way. Rather, he argued that it is necessary to hypothesize simply that Toronto Refiners pays a sum of money to another person for giving up its business, and that $9 million of the payment is allocated to goodwill. He suggested that such a scenario might occur if Toronto Refiners were acquiring a competitor, or simply causing another business to terminate for some other business reason.

[18] In my view there are two problems with the approach suggested by counsel for the Crown. One is that it is not consistent with the decision of this Court in Goodwin Johnson. The Court in that case said that the hypothetical circumstances of the payment must be the same as the actual circumstances of the payment. Counsel for the Crown wishes to hypothesize a commercial, profit motivated transaction where there is none. In this case, there was a termination of a business for a civic purpose, with statutory compensation being payable as a result. Those real circumstances must form the basis of the hypothetical questions asked by the mirror image rule.

[19] The second problem with the approach suggested by counsel for the Crown is that it is fundamentally result driven. 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 or capital property, or otherwise reflected in the computation of income for income tax purposes, except as set out in section 14. Counsel for the Crown may well be correct when he says that if his approach is not adopted, amounts may escape the section 14 net that are, in economic or functional terms, analogous to proceeds of disposition of goodwill. But that result flows from the words of section 14, as interpreted pursuant to the long standing authority of Goodwin Johnson. If section 14 is underinclusive because its drafters did not contemplate that the destruction of goodwill might be the subject of compensation by an expropriating authority, the remedy lies with Parliament.

[20] In his written argument, but not in his oral submissions, counsel for the Crown cited Samoth Financial Corporation v. Canada, [1986] 2 C.T.C. 107, 86 D.T.C. 6335 (F.C.A.) in support of his approach. In my view, Samoth does not assist the Crown. The issue in Samoth was whether a taxpayer that was in the business of selling franchises for a profit could treat the proceeds of sale of its franchises as "eligible capital amounts" on the basis that, to someone acquiring a franchise, the cost would be an "eligible capital expenditure". Mahoney J., speaking for this Court in a short oral judgment, said this (emphasis added):

... where the business of a taxpayer is the sale of franchises to others, the proceeds of those sales are not receipts on account of capital and section 14 of the Income Tax Act is not in play.

In applying the so-called "mirror image rule" in the circumstances, the face to be seen in the mirror ... is not that of the actual purchaser of one of its franchises acquiring a capital asset, but its own face, that of a trader in franchises. Section 14 does not conclusively deem certain types of receipts and expenditures to be on account of capital. It merely provides for their treatment under the Act if they are on account of capital.

[21] The key conclusion in Samoth is that a payment received on income account can never be an eligible capital amount. Thus, Samoth has no application if, as in this case, the receipt in issue is a capital receipt.

[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 Refining 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.

[24] That is a sufficient ground for concluding that the hypothetical $9 million payment would not be an eligible capital expenditure of Toronto Refiners. It follows that the Tax Court Judge was correct to find that the real $9 million payment is a non-taxable capital receipt.

[25] For these reasons, this appeal should be dismissed with costs.

"K. Sharlow"

J.A.

"I agree

A.M. Linden"

"I agree

J. Edgar Sexton J.A."

FEDERAL COURT OF CANADA

Names of Counsel and Solicitors of Record

DOCKET: A-593-01

STYLE OF CAUSE: The Queen v. Toronto Refiners and Smelters Limited

DATE OF HEARING: November 21, 2002

PLACE OF HEARING: Toronto, Ontario.

REASONS FOR JUDGMENT BY: SHARLOW J.A.

CONCURRED IN BY LINDEN, SEXTON J.J.A

DATED: November 28, 2002

APPEARANCES BY:

Mr. Harry Erlichman For the Appellant

Mr. Brian D. Segal

Mr. James R. Sennema For the Respondent

SOLICITORS OF RECORD:

Morris Rosenberg

Deputy Attorney General of Canada

Ottawa, Ontario For the Appellant

Baker & McKenzie

Barristers and Solicitors

Toronto, Ontario For the Respondent

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital

The taxpayer received pursuant to the Expropriation Act (Ontario) $3 million in respect of the acquisition of its land and building by the City of...

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Canada v. Toronto Refiners and Smelters Ltd., 2003 DTC 5002, 2002 FCA 476

Citations2003 DTC 5002, 2002 FCA 476

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2003 DTC 5002, 2002 FCA 476