McNair,
J.:
—This
action
is
an
appeal
by
the
plaintiffs
as
personal
representatives
of
the
deceased
taxpayer,
Evan
Wesley
George
Bodrug,
from
an
income
tax
reassessment
for
the
1980
taxation
year,
whereby
the
Minister
of
National
Revenue
determined
that
damages
awards
of
$2,247,500
and
$200,000
for
which
the
deceased
was
adjudged
liable
in
a
lawsuit
did
not
form
part
of
the
adjusted
cost
base
of
certain
shares
of
stock.
No
evidence
was
adduced
at
trial.
Counsel
for
the
parties
went
to
some
pains
to
prepare
and
submit
an
agreed
statement
of
facts
which,
despite
its
length,
I
deem
advisable
to
reproduce
hereunder:
Agreed
Statement
of
Facts
The
parties
hereto
by
their
respective
solicitors
hereby
admit
the
documents
contained
in
the
Book
of
Documents
which
is
filed
herewith
and
also
admit
the
following
facts,
provided
that
such
admissions
are
made
for
the
purpose
of
this
action
only
and
may
not
be
used
against
either
party
on
any
other
occasion
or
by
any
other
person:
A.
Statement
of
Facts
1.
The
Plaintiffs
are
the
legal
representatives
of
one
Evan
Wesley
George
Bodrug,
(hereinafter
referred
to
as
"the
Deceased")
who
was
killed
in
a
plane
crash
on
January
10,
1980.
2.
At
all
material
times
and
before
his
death,
the
Deceased
was
an
individual
resident
in
Canada
who
owned
the
control
block
of
shares
in
Canadian
Hidrogas
Resources
Ltd.
(hereinafter
referred
to
as
"Hidrogas").
3.
In
1973
Mr.
Noah
Cohen
(hereinafter
referred
to
as
"Cohen")
entered
into
an
employment
contract
with
Hidrogas;
and
in
connection
therewith,
Cohen's
company,
NIR
Oil
Ltd.
(hereinafter
referred
to
as
"NIR"),
was
granted
the
option
to
purchase
340,000
shares
of
Hidrogas
from
the
Deceased
at
a
price
of
65
cents
per
share.
True
copies
of
the
aforesaid
Employment
Contract
and
Option
Agreement
appear
in
the
Book
of
Documents
at
tabs
1
and
2
respectively.
4.
In
1975,
due
to
unhappy
differences
between
the
Deceased
and
Cohen,
the
latter
terminated
his
employment
with
Hidrogas.
5.
In
December
1976,
after
30,000
of
the
aforesaid
shares
had
been
acquired
by
NIR
from
the
Deceased
at
the
price
of
65
cents
per
share,
the
Deceased
delivered
a
letter
to
Cohen
which
purported
to
cancel
his
agreement
for
the
sale
of
the
remaining
310,000
Hidrogas
shares
to
NIR.
6.
In
response
to
such
purported
cancellation,
legal
action
was
commenced
against
the
Deceased
in
the
Supreme
Court
of
Alberta,
Trial
Division
whereby
NIR
sought
specific
performance
of
the
aforesaid
option
agreement
pursuant
to
which
NIR
claimed
the
right
to
purchase
a
further
310,000
Hidrogas
shares
from
the
Deceased
at
the
price
of
65
cents
per
share.
In
that
action
NIR
obtained
a
court
order
pursuant
to
which
certificates
for
the
310,000
shares
in
question
were
deposited
with
the
Court
by
the
Deceased
pending
the
outcome
of
the
litigation.
Copies
of
the
Statement
of
Claim
and
Statement
of
Defence
in
such
action
appear
in
the
Book
of
Documents
at
tabs
3
and
4
respectively.
7.
In
August,
1979
when
Hidrogas
shares
were
trading
on
the
Toronto
Stock
Exchange
at
approximately
$7
per
share,
the
parties
to
the
aforesaid
litigation
settled
their
claims
and
executed
Minutes
of
Settlement
dated
August
21,
1979
(hereinafter
referred
to
as
the
"Settlement
Agreement")
pursuant
to
which,
inter
alia
:
(a)
the
Deceased
agreed
to
pay
NIR
the
sum
of
$1,320,000
in
consideration
for
the
latter
releasing
and
surrendering
all
rights
it
had
by
virtue
of
the
aforesaid
option
agreement.
(b)
the
said
sum
of
$1,320,000
was
required
to
be
paid
by
the
Deceased
as
follows:
(i)
$660,000
on
or
before
August
31,1979
(ii)
$660,000
on
or
before
February
29,
1980
(c)
upon
payment
of
the
first
$660,000
instalment
as
aforesaid,
the
Deceased
became
entitled
to
receive
110,000
of
the
Hidrogas
shares
which
had
been
deposited
with
the
Court.
(d)
the
certificates
for
the
remaining
200,000
Hidrogas
shares
which
had
been
deposited
with
the
Court
were
endorsed
in
blank
and
delivered
to
NIR's
solicitors
to
be
held
in
trust
for
delivery
to
the
Deceased
upon
payment
of
the
second
$660,000
instalment
as
aforesaid.
(e)
the
Deceased
had
the
right
to
accelerate
delivery
to
him
of
the
remaining
200,000
Hidrogas
shares
by
paying
NIR's
solicitors
the
sum
of
$165,000
or
multiples
thereof
prior
to
February
29,
1980
in
which
case
NIR's
solicitors
were
required
to
deliver
50,000
shares
to
the
Deceased
or
multiples
thereof
depending
upon
the
amount
so
paid.
(f)
in
the
event
of
the
failure
by
the
Deceased
to
pay
all
or
any
portion
of
the
second
$660,000
instalment
on
or
before
February
29,
1980,
NIR's
solicitors
were
required
to
deliver
all
the
Hidrogas
shares
remaining
in
their
possession
to
NIR
or
its
nominee.
(g)
Cohen
and
NIR
agreed
to
sell
all
their
previously
acquired
shares
of
Hidrogas;
being
approximately
25,000
in
number,
to
the
Deceased
for
the
price
of
$7
per
share,
which
amount
was
paid
on
or
before
August
31,
1979.
A
true
copy
of
the
Settlement
Agreement
appears
in
the
Book
of
Documents
at
Tab
5.
8.
At
the
time
the
Settlement
Agreement
was
executed,
Cohen
was
unaware
that
there
was
an
impending
takeover
bid
with
respect
to
the
shares
of
Hidrogas.
In
connection
with
such
takeover
bid,
the
Deceased
entered
into
an
agreement
on
August
23,
1979
with
the
offeror,
Stratfield
Investments
Ltd.
(hereinafter
referred
to
as
"Stratfield"),
a
subsidiary
of
Norcen
Energy
Resources
Ltd.,
pursuant
to
which
the
Deceased
agreed
to
sell
all
of
his
shares
in
Hidrogas
to
Stratfield
at
a
price
of
$15.50
per
share,
the
same
price
at
which
Stratfield
agreed
to
make
the
tender
offer
to
all
the
other
shareholders
of
Hidrogas.
The
closing
of
such
purchase
and
sale
of
the
Deceased's
shares
in
Hidrogas
occurred
after
the
Deceased's
death
on
January
18,
1980
in
accordance
with
the
provisions
of
the
aforesaid
agreement.
9.
Cohen
became
aware
of
the
Stratfield
tender
offer
for
the
shares
of
Hidrogas
shortly
after
the
execution
of
the
Settlement
Agreement
but
nevertheless
proceeded
to
complete
the
settlement
arrangements
embodied
therein.
Such
arrangements
were
completed
in
early
1980
when
payment
of
the
second
$660,000
instalment
referred
to
in
subparagraph
7(b)
above
was
made.
10.
In
December
of
1979,
Cohen
and
NIR
brought
an
action
against
the
Deceased
for
damages
and
alleged
that
they
would
not
have
executed
the
Settlement
Agreement
had
they
known,
as
did
the
Deceased,
that
at
the
time
of
such
execution
there
was
an
impending
takeover
bid
with
respect
to
the
shares
of
Hidrogas.
In
this
regard,
Cohen
and
NIR
based
their
cause
of
action
at
common
law,
alleging
active
concealment
of
the
material
fact
amounting
to
fraudulent
misrepresentation.
Moreover,
Cohen
and
NIR
also
asserted
that
the
Deceased
was
liable
pursuant
to
the
insider
trading
provisions
of
the
Companies
Act
of
Alberta
and
the
Securities
Act
of
Alberta.
True
copies
of
the
Amended
Statement
of
Claim
and
Statement
of
Defence
in
such
action
appear
in
the
Book
of
Documents
at
Tab
6
and
7
respectively.
11.
The
aforesaid
action
came
to
trial
before
the
Court
of
Queen's
Bench
of
Alberta
in
May
of
1983,
and
NIR
and
Cohen
were
awarded
damages
in
the
amount
of
$2,247,500
and
$200,000
respectively.
In
his
reasons
for
judgment
dated
June
22,
1983,
a
true
copy
of
which
appears
in
the
Book
of
Documents
at
Tab
8,
Mr.
Justice
D.C.
McDonald
held
that
the
action
of
NIR
and
Cohen
failed
in
so
far
as
it
was
based
on
common
law
fraudulent
misrepresentation.
However,
his
Lordship
held
that
the
action
succeeded
on
the
basis
of
s.
112(1)
of
the
Securities
Act
of
Alberta
which
provided
as
follows:
Every
insider
of
a
corporation
or
associate
or
affiliate
of
such
insider,
who,
in
connection
with
a
transaction
relating
to
the
capital
securities
of
the
corporation,
makes
use
of
any
specific
confidential
information
for
his
own
benefit
or
advantage
that,
if
generally
known,
might
reasonably
be
expected
to
affect
materially
the
value
of
such
securities,
is
liable
to
compensate
any
person
or
company
for
any
direct
loss
suffered
by
such
person
or
company
as
a
result
of
such
transaction,
unless
such
information
was
known
or
ought
reasonably
to
have
been
known
to
such
person
or
company
at
the
time
of
such
transaction
and
is
also
accountable
to
the
corporation
for
any
direct
benefit
or
advantage
received
or
receivable
by
such
insider,
associate
or
affiliate,
as
the
case
may
be,
as
a
result
of
such
transaction.
It
was
argued
on
behalf
of
the
Deceased's
Estate
that
the
settlement
embodied
in
the
Settlement
Agreement
was
not
a
“transaction
relating
to
the
capital
securities”
of
Hidrogas
within
the
meaning
of
this
provision.
In
this
regard,
it
was
argued
that
neither
NIR
or
Cohen
owned
the
310,000
Hidrogas
shares
in
question
and
that
at
best
NIR
only
had
the
right
to
purchase
such
shares
from
the
Deceased
at
a
price
of
65
cents
per
share.
Even
that
right
had
been
in
dispute
by
the
Deceased
and
accordingly
it
was
argued
that
the
$1,320,000
paid
by
the
Deceased
to
NIR
pursuant
to
the
aforesaid
Settlement
Agreement
should
be
regarded
as
a
payment
made
to
settle
a
law
suit
rather
than
a
payment
in
connection
with
a
“transaction”
relating
to
Hidrogas
shares.
Such
argument
was
unsuccessful
at
trial.
12.
The
Plaintiffs
appealed
to
the
Court
of
Appeal
of
Alberta
from
the
aforesaid
decision
of
Mr.
Justice
McDonald
which
appeal
was
unanimously
dismissed.
A
true
copy
of
the
reasons
for
judgment
delivered
by
Mr.
Justice
McDermid
in
this
matter
appear
in
the
Book
of
Documents
at
Tab
9.
13.
In
filing
the
Deceased's
terminal
tax
return
for
the
1980
taxation
year,
the
Plaintiffs
reported
a
deemed
disposition
of
1,075,787
Hidrogas
shares
which
resulted
in
a
capital
gain
of
$13,991,742
calculated
as
follows:
capital
gain
in
respect
of
968,600
Hidrogas
shares
owned
by
the
Deceased
at
the
date
of
death
which
were
acquired
prior
to
December
31,1971
proceeds
of
disposition
(i.e.
$14.25
per
share
which
was
a
bid
price
on
the
Toronto
Stock
|
Exchange
on
the
date
of
death)
|
$13,802,550.00
|
|
less
adjusted
cost
base
of
such
shares
|
|
|
determined
in
accordance
with
subsection
|
|
|
26(7)
of
the
Income
Tax
Application
Rules,
|
|
|
1971,
(i.e.
$1.25
per
share
was
used
as
the
|
|
|
valuation
day
value)
|
$
1,210,750.00
|
|
valuation
day
value)
|
|
|
$12,591,800.00
$12,591,800.00
|
|
capital
gain
in
respect
of
107,187
Hidrogas
|
|
|
shares
owned
by
the
Deceased
at
the
date
of
|
|
|
death
which
were
acquired
after
December
31,
|
|
|
1971.
|
|
|
proceeds
of
disposition
(i.e.
$14.25
per
|
|
|
share)
|
$1,527,414.75
|
|
less
adjusted
cost
base
of
such
shares
|
$
|
127,472.74
|
|
1,399,942.01
$
1,399,942.01
|
|
$
1,399,942.01
|
|
$13,991,742.01
|
Included
in
the
968,600
"pre-1972"
Hidrogas
shares
owned
by
the
Deceased
at
the
date
of
death
were
the
310,000
shares
which
were
the
subject
of
the
Settlement
Agreement
and
no
recognition,
for
capital
gains
purposes,
was
given
to
the
$1,320,000
paid
by
the
Deceased
to
NIR
with
respect
to
such
shares.
Such
filing
position
was
taken
so
as
not
to
prejudice
the
Plaintiff's
argument
in
the
Cohen
law
suit
to
the
effect
that
the
arrangements
embodied
in
the
Settlement
Agreement
did
not
constitute
a
“transaction
relating
to
the
capital
securities"
of
Hidrogas
within
the
meaning
of
s.
112(1)
of
the
Securities
Act
but
rather
should
be
regarded
as
arrangements
implemented
to
settle
a
law
suit.
Similarly,
the
25,000
Hidrogas
shares
acquired
by
the
Deceased
from
Cohen
pursuant
to
the
Settlement
Agreement
were
not
included
in
the
"post-1972
pool”
of
Hidrogas
shares
owned
by
the
Deceased
at
the
date
of
his
death.
14.
As
indicated
in
paragraph
13
above,
a
valuation
day
value
of
$1.25
per
share
was
utilized
for
the
purposes
of
determining
the
capital
gain
realized
by
the
Deceased
in
connection
with
the
deemed
disposition
of
the
"pre-1972
pool”
of
Hidrogas
shares
owned
by
him
at
the
date
of
his
death.
The
question
of
the
appropriate
valuation
day
value
of
the
Hidrogas
shares
arose
in
an
appeal
by
the
Deceased
in
connection
with
his
1972
and
1973
taxation
years.
The
Tax
Appeal
Board
dismissed
the
Deceased's
appeal
by
the
Deceased
in
connection
with
his
1972
and
1973
taxation
years.
The
Tax
Appeal
Board
dismissed
the
Deceased's
appeal
and
held
that
the
valuation
day
value
of
72
cents
per
share
utilized
by
the
Minister
in
his
assessment
was
appropriate
(see
[1979]
C.T.C.
2593;
79
D.T.C.
551).
The
Deceased
commenced
an
appeal
to
the
Federal
Court
from
this
decision,
which
appeal
was
allowed
with
assessments
for
the
taxation
years
in
question
being
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
adjusted
cost
base
of
all
shares
of
Hidrogas
disposed
of
by
the
Deceased
in
such
taxation
years,
being
the
fair
market
value
thereof
as
at
Valuation
Day,
December
22,
1971,
was
an
amount
of
97
cents
per
share.
16.
In
reassessing
the
Plaintiffs
in
respect
of
the
Deceased's
1980
taxation
year,
notice
of
which
is
dated
January
31,
1985,
the
Minister
of
National
Revenue
assessed
additional
tax
in
the
amount
of
$1,463.15
together
with
interest
in
the
amount
of
$677.78.
A
true
copy
of
the
said
Notice
of
Reassessment
appears
in
the
Book
of
Documents
at
Tab
10.
17.
The
Plaintiffs
duly
filed
a
Notice
of
Objection
to
the
said
reassessment
for
the
purposes
of
recalculating
the
capital
gain
originally
reported
by
them
in
respect
of
the
deemed
disposition
by
the
Deceased
of
the
Hidrogas
shares
owned
by
him
immediately
prior
to
his
death
so
as
to
reflect:
(a)
the
payment
by
the
Deceased
of
$1,320,000
to
NIR
pursuant
to
the
Settlement
Agreement
in
respect
of
310,000
Hidrogas
shares
which
were
included
in
the
deemed
disposition;
(b)
the
failure
to
report
in
the
deemed
disposition
the
25,000
Hidrogas
shares
which
the
Deceased
acquired
from
Cohen
for
an
aggregate
purchase
price
of
$175,000
pursuant
to
the
Settlement
Agreement;
(c)
the
resolution
of
the
issue
as
to
the
valuation
day
value
of
the
Hidrogas
shares
in
question
owned
by
the
Deceased
on
December
31,
1971;
and
(d)
the
liability
for
damages
to
NIR
and
Cohen
incurred
by
the
Deceased
in
the
amounts
of
$2,247,500
and
$200,000
respectively
by
virtue
of
the
Deceased's
use
of
specific
confidential
information
for
his
own
benefit
in
connection
with
the
negotiation
of
the
Settlement
Agreement.
A
true
copy
of
the
said
Notice
of
Objection
appears
in
the
Book
of
Documents
at
Tab
11.
18.
Upon
considering
the
aforesaid
Notice
of
Objection,
the
Minister
of
National
Revenue
further
reassessed
the
Plaintiffs
in
respect
of
the
Deceased's
1980
taxation
year;
and
inter
alia,
made
the
following
adjustments
to
the
capital
gain
originally
reported
by
the
Plaintiffs
in
respect
of
the
Deceased's
deemed
disposition
of
the
Hidrogas
shares
owned
by
him
immediately
prior
to
his
death:
(a)
$356,250
was
added
to
the
proceeds
of
disposition
originally
reported
by
the
Plaintiff
which
amount
was
added
in
respect
of
Hidrogas
shares
acquired
by
the
Deceased
from
Cohen
pursuant
to
the
Settlement
Agreement
(i.e.
25,000
shares
at
$14.25
per
share);
(b)
$271,208
was
deducted
from
the
adjusted
cost
base
originally
reported
by
the
Plaintiffs
in
respect
of
the
968,600
Hidrogas
shares
owned
by
the
Deceased
prior
to
December
31,1971
in
order
to
reflect
the
revised
valuation
day
value
of
such
shares.
i.e.
Previous
V-Day
value
reported
968,600
shares
at
$1.25
|
per
share
|
$1,210,750.00
|
|
less
revised
V-Day
value
allowed
968,600
shares
at
.97
|
|
|
per
share
|
939,542.00
|
|
$
271,208.00
|
(c)
$175,000
was
added
to
the
adjusted
cost
base
originally
reported
by
the
Plaintiffs
to
reflect
the
amount
paid
by
the
Deceased
to
Cohen
pursuant
to
the
Settlement
Agreement
(i.e.
25,000
shares
at
$7.00
per
share);
(d)
$1,320,000
was
added
to
the
adjusted
cost
base
originally
reported
by
the
Plaintiffs
to
reflect
the
amount
paid
by
the
Deceased
to
NIR
pursuant
to
the
Settlement
Agreement.
19.
In
reassessing
the
Plaintiffs
in
the
manner
referred
to
in
paragraph
18
above,
notice
of
which
reassessment
is
dated
December
29,
1986,
the
Minister
of
National
Revenue
determined
that
the
amounts
of
$2,247,500
and
$2000,000
[sic]
paid
by
the
plaintiffs
as
damages
to
NIR
and
Cohen
respectively
as
a
result
of
the
decision
of
the
Alberta
Court
of
Queen's
Bench
was
not
a
cost
to
the
Deceased
of
acquiring
shares
and
therefore
did
not
form
part
of
the
adjusted
cost
base
of
Hidrogas
shares
to
the
Deceased.
A
true
copy
of
the
said
Notice
of
Reassessment
appears
in
the
Book
of
Documents
at
Tab
12.
The
only
issue
on
this
appeal
is
whether
the
Minister
was
correct
in
determining
that
the
damages
awards
paid
by
the
plaintiffs
to
NIR
and
Cohen
did
not
form
part
of
the
adjusted
cost
base
of
Hidrogas
shares
to
the
deceased.
Counsel
for
the
plaintiffs
advanced
a
number
of
arguments
challenging
the
Minister’s
reassessment.
Firstly,
he
concentrated
on
the
definition
of
the
terms
"cost"
and
"capital
cost",
which
he
submitted
were
synonymous,
and
urged
that
I
give
those
expressions
a
broad
interpretation.
He
cited
numerous
cases
and
referred
to
various
Revenue
Canada
publications
in
support
of
his
conten
tion
that
the
"cost"
or
“capital
cost"
of
an
asset
is
not
restricted
to
the
actual
purchase
price
paid
therefor.
In
counsel's
submission,
the
decision
of
the
Federal
Court
of
Appeal
in
The
Queen
v.
Stirling,
[1985]
1
C.T.C.
275;
85
D.T.C.
5199,
should
not
be
regarded
as
restricting
the
broad
ambit
otherwise
afforded
the
term
"cost",
inasmuch
as
the
observations
of
Pratte,
J.
have
to
be
viewed
in
light
of
the
particular
facts
of
that
case.
Plaintiffs’
counsel
referred
to
the
decisions
of
the
Supreme
Court
of
Canada
in
M.N.R.
v.
Dominion
Natural
Gas
Ltd.,
[1941]
S.C.R.
19;
[1940-41]
C.T.C.
155,
and
British
Columbia
Power
Corp.
v.
M.N.R.,
[1968]
S.C.R.
17;
[1967]
C.T.C.
406,
arguing
that
these
cases
stand
as
authority
for
the
proposition
that
expenses
incurred
to
"preserve"
or
"protect"
a
capital
asset
or
one's
legal
title
thereto
should
be
regarded
as
outlays
on
account
of
capital
rather
than
currently
deductible
expenses.
While
those
decisions
make
no
specific
reference
to
the
expenses
in
question
as
comprising
part
of
the
cost
of
the
assets
which
the
taxpayer
was
attempting
to
preserve
or
protect,
it
was
his
contention
that
such
a
result
was
necessarily
implicit.
Plaintiffs'
counsel
further
contended
that
there
was
no
difference
for
tax
purposes
between
the
sum
of
$1,320,000
paid
by
the
deceased
to
NIR
pursuant
to
the
settlement
agreement
and
the
amounts
paid
by
the
plaintiffs
as
damages
to
NIR
and
Cohen.
In
his
submission,
the
Minister’s
determination
that
the
former
amount
formed
part
of
the
adjusted
cost
base
of
the
Hidrogas
shares
inevitably
led
to
the
conclusion
that
the
damages
awards
in
question
should
be
regarded
similarly
as
an
additional
component
of
that
adjusted
cost
base.
Plaintiffs’
counsel
also
made
the
point
that
the
provisions
of
the
Alberta
securities
legislation
under
which
the
deceased
was
found
liable
were
purely
compensatory
in
nature
with
the
result
that
the
damages
awards
were
not
tantamount
to
a
penalty
levied
against
the
deceased.
Hence,
it
would
be
unjustifiable
in
the
present
case
to
apply
that
line
of
judicial
authority
which
prohibits
the
deduction
of
penalties
from
income
on
the
grounds
of
public
policy.
He
cited
Imperial
Oil
Ltd.
v.
M.N.R.,
[1947]
C.T.C.
353;
47
D.T.C.
1090
(Ex.
Ct.),
as
a
case
which
precluded
any
argument
that
compensatory
damage
awards
and
settlement
payments
are
somehow
unique
in
the
sense
that
they
cannot
be
treated
as
legitimate
expenses
of
doing
business.
He
pointed
also
to
Sunshine
Mining
Co.
v.
The
Queen,
[1975]
C.T.C.
223;
75
D.T.C.
5126
(F.C.T.D.),
as
an
example
of
a
case
where
a
damage
award
was
characterized
as
a
capital
expenditure.
Referring
to
a
number
of
other
cases,
plaintiffs’
counsel
advanced
the
proposition
that
in
determining
whether
damages
awards
are
taxable
in
the
hands
of
recipients
the
courts
have
consistently
applied
the
principle
that
the
receipt
of
compensation
by
way
of
damages
is
a
neutral
matter
and
that
it
is
necessary
to
ascertain
the
true
nature
and
quality
of
the
awards
for
the
purpose
of
determining
the
appropriate
tax
treatment
applicable
thereto.
He
contended
that
in
the
circumstances
of
the
present
case
the
true
nature
and
quality
of
the
damages
awards
in
question
was:
the
additional
cost
of
obtaining
the
release
of
NIR's
rights
under
the
Option
Agreement
and
also
the
additional
cost
of
acquiring
approximately
25,000
Hidrogas
shares
from
NIR
and
Cohen.
Finally,
plaintiffs’
counsel
argued
that
the
liability
of
the
deceased
was
created
by
the
latter's
actions
in
1979,
and
that
the
absence
of
any
determination
of
the
quantum
of
liability
until
after
disposition
of
the
subject
shares
did
not
bar
that
liability
from
being
regarded
as
part
of
the
cost
of
the
shares.
Counsel
for
the
defendant
submitted
there
were
four
reasons
which
precluded
the
plaintiffs
from
claiming
the
damages
awards
as
part
of
the
adjusted
cost
base
of
the
Hidrogas
shares.
Firstly,
she
argued
that
the
damages
payments
were
made
subsequent
to
the
taxation
year
in
issue
and
could
not
be
deducted
in
1980,
in
accordance
with
the
matching
principles
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am
S.C.
1970-71-72,
c.
63)
(the
"Act").
Secondly,
counsel
referred
to
the
source
concept
of
income
and
submitted
that
by
reason
of
the
deemed
disposition
of
the
Hidrogas
shares
in
1980,
it
could
not
be
argued
plausibly
that
those
shares
provided
a
source
or
possibility
of
earning
income.
She
next
pointed
to
the
wording
of
subparagraph
40(1)(a)(i)
of
the
Act
for
the
proposition
that
the
adjusted
cost
base
to
a
taxpayer
must
be
determined
immediately
before
the
disposition
of
property,
and
that
such
disposition
occurred
in
1980
in
the
present
case.
Finally,
defendant's
counsel
submitted
that
even
under
the
most
liberal
interpretation
of
the
word
"cost"
there
was
no
authority
for
extending
the
definition
of
that
term
to
cover
expenses
incurred
subsequent
to
the
date
of
disposition
of
property.
The
general
provision
governing
the
computation
of
capital
gains
is
subparagraph
40(1)(a)(i)
of
the
Act,
which
reads
as
follows:
40.(1)
Except
as
otherwise
expressly
provided
in
this
Part
(a)
a
taxpayer's
gain
for
a
taxation
year
from
the
disposition
of
any
property
is
the
amount,
if
any,
by
which
(i)
if
the
property
was
disposed
of
in
the
year,
the
amount,
if
any,
by
which
his
proceeds
of
disposition
exceeds
the
aggregate
of
the
adjusted
cost
base
to
him
of
the
property
immediately
before
the
disposition
and
any
outlays
and
expenses
to
the
extent
that
they
were
made
or
incurred
by
him
for
the
purpose
of
making
the
disposition,
.
.
.
There
is
no
suggestion
that
the
Hidrogas
shares
constituted
depreciable
property.
Thus,
their
adjusted
cost
base
to
the
deceased
falls
to
be
determined
under
subparagraph
54(a)(ii),
which
reads:
54.
In
this
subdivision,
(a)
"adjusted
cost
base"
to
a
taxpayer
of
any
property
at
any
time
means,
except
as
otherwise
provided,
.
.
.
(ii)
in
any
other
case,
the
cost
to
the
taxpayer
of
the
property
adjusted,
as
of
that
time,
in
accordance
with
section
53,
.
.
.
Counsel
were
agreed
that
none
of
the
provisions
of
section
53
of
the
Act
applied
in
the
circumstances
of
the
present
case.
The
question
therefore
is
simply
this:
Can
the
damages
awards
in
question
properly
be
considered
part
of
the
"cost
to
the
taxpayer"
of
the
Hidrogas
shares?
In
Stirling,
supra,
Pratte,
J.A.,
rendering
the
judgment
of
the
Federal
Court
of
Appeal
from
the
bench,
interpreted
the
word
"cost"
in
relation
to
the
computation
of
capital
gains
as
follows
at
page
276
(D.T.C.
5200):
The
only
issue
on
this
appeal
is
whether
the
Trial
Division
was
right
in
holding
that,
in
computing
his
capital
gain
from
the
disposition
of
gold
bullion,
the
respondent
could
deduct,
as
part
of
his
cost,
interest
on
the
unpaid
portion
of
the
price
of
the
bullion
and
safekeeping
charges
that
he
had
incurred
in
respect
of
the
period
during
which
he
had
held
the
bullion.
In
deciding
that
those
interest
and
charges
could
be
deducted,
the
learned
trial
judge
did
not
rely
on
any
provision
of
the
Income
Tax
Act
but,
rather,
on
what,
in
his
view,
would
have
been
the
intention
of
Parliament
had
it
given
consideration
to
that
question.
We
cannot
agree
with
that
approach.
In
trying
to
support
that
judgment,
counsel
for
the
respondent
argued
in
substance
that
capital
gain
should
be
computed
according
to
the
same
rules
as
income
from
a
business
or
property.
That
argument,
while
attractive,
does
not
find
any
support
in
the
Income
Tax
Act
which
provides
special
rules
for
the
computation
of
capital
gain.
Under
those
rules,
as
they
are
found
in
subparagraph
40(1)(c)(i)
and
section
54,
the
interest
and
safekeeping
charges
here
in
question
could
be
deductible
only
if
they
were
part
of
the
cost
of
the
bullion.
In
our
opinion,
they
were
not.
As
we
understand
it,
the
word
"cost"
in
those
sections
means
the
price
that
the
taxpayer
gave
up
in
order
to
get
the
asset;
it
does
not
include
any
expense
that
he
may
have
incurred
in
order
to
put
himself
in
a
position
to
pay
that
price
or
to
keep
the
property
afterwards.
[Emphasis
added.]
I
have
no
problem
with
the
submission
of
counsel
for
the
plaintiffs
that
the
cost
of
an
asset
is
not
restricted
to
the
actual
purchase
price
paid
therefor.
It
seems
clear
that
the
cost
of
property
may
include
brokerage
fees,
legal
fees,
commissions
and
other
expenses
incurred
in
connection
with
the
acquisition
of
the
property.
In
my
view,
the
decision
in
Stirling
does
not
necessarily
restrict
such
an
extended
definition
of
the
term
“cost”.
However,
I
am
of
the
opinion
that
it
is
clear
authority
for
the
proposition
that
the
cost
of
an
asset
for
the
purposes
of
capital
gains
computation
is
limited
to
the
costs
of
acquisition
of
that
asset
or,
as
Pratte,
J.
put
it,
"the
price
that
the
taxpayer
gave
up
in
order
to
get
the
asset".
In
the
present
case,
I
am
unable
to
see
how
the
damages
awards
in
question
could
possibly
be
regarded
as
part
of
the
acquisition
costs
of
the
Hidrogas
shares
to
the
deceased.
The
deceased
was
found
liable
for
those
damages
as
a
result
of
his
use
of
confidential
information
relating
to
the
Hidrogas
shares.
His
title
to
those
shares
was
not
in
issue
in
the
action
brought
by
Cohen
and
NIR.
In
their
amended
statement
of
claim,
the
plaintiffs
sought
only
damages,
and
made
no
claim
for
specific
performance.
Whether
the
deceased's
liability
and
the
award
of
damages
were
fixed
in
1979,
or
in
1983
or
1985
when
the
judgments
of
the
Alberta
Court
of
Queen's
Bench
and
the
Court
of
Appeal
were
rendered,
is
immaterial.
The
entire
lawsuit
having
nothing
to
do
with
the
deceased's
title
to
the
shares
per
se,
it
is
my
opinion
that
the
damages
for
which
the
deceased
was
adjudged
liable
cannot
be
regarded
as
part
of
the
price
he
had
to
give
up
in
order
to
get
the
shares.
The
decisions
in
Dominion
Natural
Gas
and
British
Columbia
Power,
supra,
dealing
with
the
deduction
of
legal
expenses
incurred
in
preserving
capital
assets
or
title
thereto,
in
my
view,
have
no
bearing
in
the
circumstances
of
the
present
case.
It
follows,
therefore,
that
I
am
unable
to
accept
the
submission
of
plaintiffs’
counsel
that
the
sum
of
$1,320,000
paid
by
the
deceased
to
NIR
pursuant
to
the
settlement
agreement
and
the
damages
awards
should
be
treated
similarly
for
income
tax
purposes.
In
my
opinion,
these
two
payments
are
entirely
dissimilar
in
nature.
The
payment
of
$1,320,000
by
the
deceased
to
NIR
formed
one
of
the
conditions
of
the
settlement
agreement
dated
August
21,
1979
and
was
made
in
consideration
for
the
release
and
surrender
by
NIR
of
all
of
its
rights
under
the
option
agreement
of
1973.
In
essence,
the
deceased
paid
this
sum
to
regain
his
rights
to
the
Hidrogas
shares
and,
presumably
on
that
basis,
the
Minister
saw
fit
to
increase
the
latter's
adjusted
cost
base
accordingly.
The
damages,
on
the
other
hand,
were
paid
by
the
plaintiffs
to
satisfy
a
personal
judgment
against
the
deceased,
and
I
cannot
see
that
their
tax
treatment
is
in
any
way
affected
by
the
Minister's
addition
of
the
$1,320,000
to
the
adjusted
cost
base
of
the
shares.
In
light
of
my
findings,
it
is
unnecessary
for
me
to
consider
whether
the
damages
awards
could
be
regarded
as
a
penalty
levied
against
the
deceased
and
whether
their
addition
to
the
adjusted
cost
base
of
the
shares
might
perhaps
be
precluded
on
that
basis.
Nor
need
I
address
the
issue
of
the
date
on
which
the
deceased's
liability
and
the
quantum
thereof
were
determined.
I
am
inclined
to
the
view
that
the
liability
and
consequent
damages
were
not
established
definitively
until
the
judgment
of
the
Court
of
Appeal
of
Alberta
upholding
the
trial
judge's
decision
finding
the
deceased
guilty
of
insider
trading
and
awarding
damages
accordingly.
The
judgment
of
the
appellate
court
was
pronounced
on
May
1,
1985,
more
than
five
years
after
the
deemed
disposition
of
the
Hidrogas
shares
on
January
10,
1980.
As
I
see
it,
the
damages
awards
could
not
be
considered
part
of
the
price
the
deceased
had
to
pay
to
obtain
those
shares
by
any
stretch
of
the
imagination.
In
any
event,
my
finding
that
the
plaintiffs’
damages
payments
were
unrelated
to
the
deceased's
acquisition
of
the
shares
suffices
to
dispose
of
the
matter.
In
the
result,
the
plaintiffs’
appeal
must
be
dismissed
with
costs.
Appeal
dismissed.
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