Anthony J. De Luca v. Her Majesty the Queen and the Estate of Vans H. Hulbert (Deceased) v. Her Majesty the Queen, [1991] 2 CTC 243, 91 DTC 5540

Linden, J:—These are appeals from two judgments of the Trial Division of this Court, dated March 27, 1987 dismissing appeals from decisions of the Tax Court of Canada dated October 30, 1984, which dealt with the taxes payable by the appellants in the 1977 taxation year. The appeals were heard together. Both the Tax Court of Canada and Mr. Justice Rouleau were of the view that income tax was payable on an amount of $600,000 received bythe appellants as part payment for the sale of certain coal licences that had been acquired from the Province of British Columbia.

The appellants, who were prospectors, agreed to sell their rights to Crow's Nest Industries Ltd., on May 16, 1969, for $800,000, $200,000 payable immediately, the balance of $600,000 to be paid out of its first revenues from the sale of coal from the property or out of the proceeds of any sale of the licences. The respective shares were De Luca 40 per cent and Hulbert 60 per cent (now deceased). Nearly seven years later, on January 19, 1976, Crow's Nest Industries Ltd. sold the licences to its wholly owned subsidiary, The Crow's Nest Pass Oil and Gas Company, Ltd. More than one year later, on September 19, 1977, the appellants entered into an agreement with The Crow's Nest Pass Oil and Gas Company, Ltd. which provided for the payment of $500,000 to the appellants, which amount was paid in 1977.

It is this amount, received in 1977, that the Minister of National Revenue seeks to tax in the 1977 taxation year by virtue of a notice of reassessment dated October 29, 1981. The appellants objected to this reassessment, and appeals were launched to the Tax Court of Canada, and later to the Trial Division of this Court. The appellants were unsuccessful in both levels below and now appeal to this Court.

In a powerful and thoughtful argument, Mr. Frank D. Jones, Q.C. contended that the appellants' licences were disposed of in 1969 when they sold their interest to Crow's Nest Industries Ltd. and that the total amount paid for their interest was exempt from tax. He contended that this disposition was not caught by subsection 59(3.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72) (the "Act"), because the balance of the money owed was receivable at the time of the original agreement, May 16, 1969, and, hence, was exempt from tax.

Subsection 59(3.1) reads:

Where a taxpayer has made a disposition of property owned, or deemed to have been owned, by him on December 31, 1971 and thereafter without interruption until the date of disposition that is property described in any of subparagraphs 66(15)(c)(i) to (vi) and is not property described in paragraph (1.1)(b), the following rules apply:

(a) the relevant percentage of the taxpayer's proceeds of disposition therefrom shall be included in the amount referred to in subparagraph 66.2(5)(b)(v) to the extent that the proceeds become receivable; and . . .

[Emphasis added.]

Mr. C.R. McNary, counsel for the respondent, agreed that, if the disposition was made prior to December 31, 1971, it was exempt, but he urged that the disposition was not completed until 1977, when the $600,000 was actually paid to the appellants. He relied on the wording of the original agreement of sale which included, inter alia, this language:

5. Likewise, if C.N.I. disposes of the licences or leases other than by surrender to the government of British Columbia, then any proceeds of sale or disposal received by C.N.I. up to $600,000 shall be paid to the Vendors as the same are received.

7. This agreement shall be deemed to be concluded and fully satisfied at any time that the $600,000 has been paid to the Vendors out of revenues or proceeds by C.N.I.

Thus, he argued, the $600,000 was not "receivable" at the time of the original agreement, but was only payable out of amounts that would be received from coal sales or from the sale of the licence. No coal was ever mined, but the licences were sold to the subsidiary on January 19, 1976 for a consideration of $1. Following this sale, a letter dated November 2, 1976 was written by Crow's Nest Industries Ltd. to the appellants, indicating that the agreement was "binding upon the successors and assignees of C.N.I.”, and assuring them that the terms of the agreement would be "honoured by The Crow's Nest Pass Oil and Gas Company Limited”. Subsequent to this, an assignment of contract dated September 9, 1977 was entered into between the appellants and The Crow's Nest Pass Oil and Gas Company, Ltd., which stipulated, inter alia, as follows:

1. In consideration of the sum of SIX HUNDRED THOUSAND DOLLARS ($600,000) in Canadian Funds by certified cheques payable to each of Hulbert and Deluca respectively as follows:

HULBERT—THREE HUNDRED AND SIXTY THOUSAND DOLLARS ($360,000.00)

DELUCA—TWO HUNDRED AND FORTY THOUSAND DOLLARS ($240,000.00)

the receipt whereof Hulbert and Deluca respectively hereby acknowledge, the Assignors hereby assign to the Assignee all of the rights, title and interest in and to the May 1969 Agreement, including all rights of action or other rights accruing to them, or which might hereafter accrue to them under the said May, 1969 Agreement.

The amount of $600,000 was paid to the appellants around the time the assignment was executed. Hence, it is suggested, the appellants retained their interest on the licences until they assigned their rights to The Crow's Nest Pass Oil and Gas Company, Ltd. on September 19, 1977, and the proceeds paid in 1977 were subject to tax in 1977.

Mr. Justice Rouleau's reasons on this point were as follows:

The agreement entered into between the plaintiff [De Luca] and Mr. Hulbert and Crow's Nest Industries Limited in 1969 was a two-pronged arrangement whereby the plaintiff and Mr. Hulbert received a $200,000 downpayment and which also contained a provision that they were to receive the balance of $600,000 to be paid from revenues from the sale of coal or coal products from the operations of the licences of from the proceeds of sale or disposal of the licences. It was not until September 1977 that the plaintiff and Mr. Hulbert received the remainder of the sale price. I am in full agreement with the Tax Court of Canada that the plaintiff retained the right to receive proceeds of disposition from 1969 to 1977 when he actually received his share of the $600,000 on disposition and sale of the licences by Crow's Nest Industries Limited to its wholly owned subsidiary The Crow's Nest Pass Oil and Gas Company, Limited. I am convinced that the Minister of National Revenue was correct in his determination that the plaintiff fell within the provisions of paragraph 66(15)(c) and subsection 59(3.1) of the Income Tax Act.

I agree with this analysis. Although Mr. Jones sharpened the argument that was before the trial judge to an extent, by focusing on the word "receivable" in subsection 59(3.1), it makes no difference, because the money was not only "received" in 1977, it did not become “receivable” until 1977 either. For proceeds to become receivable, they had to be legally owing, which they were not, because neither of the two alternative conditions had been met. The proceeds were not receivable in 1969 because there was no right to receive them at that time. The appellants, therefore, retained their claim to the proceeds from the sale of the coal licences until September 19, 1977 when they assigned them to The Crow's Nest Pass Oil and Gas Company Limited. The money they received in 1977 was pursuant to the assignment in 1977 of their continuing claim, which was based on the earlier contract of 1969.

An alternative argument was advanced by Mr. Jones to the effect that the money received by the appellants was for giving up their legal rights as a result of the breach of the 1969 agreement by Crow's Nest Industries Ltd. It was also contended that this was in reality a settlement of a legal claim. Relying on a list of cases stemming from Van den Berghs v. Clark (1935), 153 L.T. 171 (H.L.), he further suggested that the $600,000 received was not income but a capital gain since these rights were fundamental to the structure of their “profit-making apparatus". By giving up their entire capacity to earn profits from the mining of coal, he urged, they sold their fundamental rights.

I am not persuaded by these arguments. There was no settlement of a legal claim here but, rather, it is plain that there was a payment made in return for an assignment of their rights under the original contract. Further, even if it was a payment by way of settlement, such a payment takes on the character of the claim. As Mr. Justice Strayer has written in Zygocki v. The Queen, [1984] C.T.C. 280; 84 D.T.C. 6283, ”. . . if a trader receives from another person compensation because this failure to receive another sum of money which, had it been received, would have been credited to profits, then the compensation should be regarded as income." (See page 282 (D.T.C. 6285).) I am also not persuaded that the Clark line of cases would be applicable to resource property dispositions which are governed by a detailed legislative regime, in the Income Tax Act which would apply to a situation such as this, rather than the old common law. (See 66(15)(c), 66.2 etc.)

These two appeals will, therefore, both be dismissed with costs.

Appeals dismissed.