Robert a Elliott v. Minister of National Revenue, [1984] CTC 2373, 84 DTC 1325

Tremblay, TCJ:—This case was heard on May 27, 1983, at the City of Ottawa, Ontario.

1. The Point at Issue

The point at issue is whether the appellant, a farmer, is correct in considering as farming income the amount of $13,757.74 received by him in 1980 from Ontario Hydro as compensation for the sale of an easement through his farmland. Against this income the appellant applied restricted farm losses.

The respondent contends that the said amount is interest and cannot be considered as farming income.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment the Court decided that the assumed facts on which the respondent based the assessment or reassessment are also deemed to be correct. In the present case the assumed facts are described in the reply to notice of appeal as follows:

4. In so re-assessing the Appellant for the 1980 taxation year the Minister of National Revenue proceeded on the basis that:

(a) The Appellant is a farmer who owns land located at Lot 30, Concession 6, in the township of Brighton, Ontario.

(b) In 1978, Ontario Hydro offered to purchase a portion of property from the Appellant to be used as an easement for a hydro line.

(c) Under statutory authority of the Province of Ontario, Ontario Hydro expropriated

a portion of the property of the Appellant as of August 16, 1978.

(d) As of August 16, 1978, the amount of $44,425.00 became due and payable from Ontario Hydro to the Appellant.

(e) In the Appellant’s 1980 taxation year, the Appellant received the amount of $13,757.74 as, on account or in lieu of payment of, or in satisfaction of interest from Ontario Hydro calculated from August 16, 1978 as follows:

Time Period	Interest Rate	Interest Paid
August 16, 1978 to	1816% on
December 31, 1979	$44,425.00	$11,303.42
January 1, 1980 to	1816% on
April 18, 1980	$44,425.00	$ 2,454.32
Total Interest:		$13,757.74

(f) On April 18, 1980, the Appellant and Ontario Hydro agreed to a final property

settlement of $47,000.00. This amount was paid to the Appellant in 1980.

3. The Facts

3.01 The appellant testified that before expropriation in 1978 he owned a 600- acre farm in the Township of Brighton, Ontario. Approximately 350 acres were under cultivation.

3.02 In August 1978 Ontario Hydro approached him to buy a portion of his property to be used as an easement. In fact, Ontario Hydro was to “put a 500,000 volt transmission line over it” for hydro. This portion would be approximately 13.75 acres. He refused.

3.03 In November 1978 Ontario Hydro, under statutory authority, initiated legal proceedings for expropriation of the said 13.75 acres for $19,500.

3.04 After long discussions the whole matter was settled in March 1980 for approximately $60,000. In April 1979 an offer of $30,000 by Ontario Hydro was refused.

3.05 The agreement for compensation was filed as Exhibit A-l. In this document one can read, concerning interest:

AND THE OWNER further agrees that Ontario Hydro may enter into possession of the said land or interests in land on or after the 16th day of August 1978. Ontario Hydro shall pay interest at the rate of 16% per annum on the amount of $44,425.00 from the 16th day of August 1978.

The additional compensation is detailed as follows:

3.06 The statement of adjustments as of April 18, 1980, was filed as Exhibit A-2. It reads as follows:

STATEMENT OF ADJUSTMENTS

Ontario Hydro expropriation from VLA and Elliott — Part Lot 30, Concession 6, Brighton

Adjusted as of April 18, 1980
Settlement Price		$47,000.00
Plus 18/2% interest on $44,425.00 from August 16, 1978 to
December 31, 1979		$11,303.42
Plus 18/2% interest on $44,425.00 from January 1, 1980 to
April 18, 1980		$ 2,454.00
Balance due on closing
(a) Receiver General of Canada	$ 8,900.00
(b) Receiver General of Canada	$ 3,273.00
(c) Robert Aikenhead Elliott	$48,584.44
	$60,757.74	$60,757.74

In fact the amount of $47,000 was computed as follows: $37,850 + $9,150. The $44,425 comes from $47,000 less $2,575. The latter amount, indeed for health reasons during the negotiated settlement, cannot bear interest from August 16, 1978.

3.07 The appellant’s income tax return for the 1980 taxation year was filed as Exhibit A-3 and a survey map of a portion of the expropriated farms, including the appellant’s farm, was filed as Exhibit A-4.

3.08 The appellant purchased another farm with the amount he received. The appellant now owns 1,000 acres of farming land, 600 acres of which are under cultivation.

3.09 In cross-examination the appellant admitted that Ontario Hydro took possession of the piece of land on August 16, 1978, when it initiated legal action (notice of expropriation, registration of the plan). The first offer of $19,500 was made only in November 1978.

3.10 In computing his income for the 1980 taxation year the appellant:

(a) sought to include in his farming income the amount of $13,757.74 on account of an interest payment received by him in the 1980 taxation year from Ontario Hydro resulting from the expropriation by Ontario Hydro on August 16, 1978, of a portion of the property owned by the appellant in the Township of Brighton, Ontario;

(b) then sought to deduct in the 1980 taxation year restricted farm losses for preceding taxation years calculated as follows:

3.11 The Minister of National Revenue reassessed the appellant for the 1980 taxation year, notice of which was dated May 6, 1982, so as to exclude from the farming income of the appellant for the 1980 taxation year the amount of $13,757.74 and to reduce the restricted farm losses for the preceding taxation years which might be deducted by the appellant in the 1980 taxation year to $5,964.89. The Minister of National Revenue further included in the appellant’s income for the 1980 taxation year the amount of $13,757.74 as interest income.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act involved in this case are sections 12(l)(c), 44(1 )(a), (b) and (c), 44(2)(a) and (b), 54(c)(i) and 54(h)(iv). They read as follows:

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:

(c) any amount received by the taxpayer in the year or receivable by him in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as, on account or in lieu of payment of, or in satisfaction of, interest;

44 (l)Where at any time in a taxation year (in this subsection referred to as the “initial year”) an amount has become receivable by a taxpayer as proceeds of disposition of a capital property (in this section referred to as his “former property”) that is either

(a) property the proceeds of disposition of which are described in subparagraph 13(21)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv), or

(b) a property that was, immediately before the disposition, a former business property of the taxpayer,

and the taxpayer has

(c) where the former property is described in paragraph (a), before the end of the second taxation year following the initial year, and

acquired a capital property (in this section referred to as his “replacement property”)

44(2) For the purposes of this Act, the day on which a taxpayer has disposed of a property, the proceeds of disposition from which are described in subparagraph 13(21)(d)(iii) or (iv) or 54(h)(iii) or (iv), and the day on which an amount has become receivable by that taxpayer as proceeds of disposition of such a property shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation to him for the property lost, destroyed, taken or sold,

(b) where a claim, suit, appeal or other proceeding has been taken before one or more tribunals or courts of competent jursidiction the day on which the taxpayer’s compensation for the property is finally determined by such tribunals or courts,

and he shall be deemed to have owned the property continously until the day so determined.

54. In this subdivision,

(c) “disposition” of any property, except as expressly otherwise provided, includes

(i) any transaction or event entitling a taxpayer to proceeds of disposition of property,

(h) “proceeds of disposition” of property includes,

(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of intention to take it under statutory authority was given,

The main sections of the Expropriations Act of Ontario involved in this case are 13(1) and 34(1). They 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.

34 (1) Subject to subsection 4 of section 25, the owner of lands expropriated is entitled to be paid interest on the portion of the market value of his interest in the land and on the portion of any allowance for injurious affection to which he is entitled, outstanding from time to time, at the rate of 6 per cent a year calculated from the date the owner ceases to reside on or make productive use of the lands.

4.02 Cases at law and jurisprudence

The following cases at law and jurisprudence were referred to the Court:

A. Cases at law

1. MNR v Benaby Realties Limited, [1967] CTC 418; 67 DTC 5275;

2. In the matter of a reference as to the validity of Section 6 of the Farm Security Act, 1944, of the Province of Saskatchewan, [1947] SCR 394;

3. Maurice L Dubois v MNR, 41 Tax ABC 351; 66 DTC 512;

4. Hallman & Sable Limited v MNR, [1969] Tax ABC 812; 69 DTC 551;

5. Samuel Breitman v MNR, [1971] Tax ABC 429; 71 DTC 315;

6. Morrey Solway, Executor of the Estate of Roy J Perini, deceased v The Queen, [1982] CTC 74; 82 DTC 6080.

B. Jurisprudence

7. The Law of Expropriation and Compensation in Canada, Eric C E Todd, The Carswell Company Limited, Toronto;

8. Interpretation Bulletin No. IT-467.

4.03 Analysis

A. Appellant's argumentation

4.03.1 The appellant’s contention is that the whole amount of $60,757.75 must be considered as compensation for the “disposition of property” within the meaning of sections 54(c)(i) and 54(h)(iv) quoted above. “Compensation” is not defined in the Income Tax Act. In the dictionary it is given a broader meaning than “sale price”. “Compensation” is a “payment for injury” for any loss — “The word ‘compensation’ to me takes in the global concept of the amount paid, be that interest or principal or payment for loss of trees or payment for loss of land or payment, as specified in this agreement, for loss of health, or injurious health affection.” (SN p 16)

The appellant also contended that the whole amount of $60,757.74 must be considered as compensation based on paragraphs 44(2)(a) and (b) quoted above. The said amount, being the full compensation, was finally fixed in April 1980 (Exhibit A-2) which is the “earliest time” at which the appellant “has disposed of’ his property within the meaning of that section. The section starts with the words “For the purposes of this Act,”. This includes “all purposes of the entire Income Tax Act” (SN p 18). At the conclusion of subsection 44(2) the appellant is “deemed to have owned the property continuously until the day so determined”, ie, April 1980. It is also at that time that the proceeds of disposition became receivable.

4.03.2 The agent for the appellant agreed that pursuant to the Expropriations Act of Ontario, Hydro was entitled to take possession of the property in August 1978, however, for income tax purposes “‘which is our only concern here, and for the purposes of computing his taxable income for 1980, we are only concerned with section 44(2) and the specified date that he is deemed to have disposed of the property and the day which he is deemed to have earned or been entitled to the amount of money.” (SN p 18).

Referring to the Dubois case (paragraphs 4.02-3) cited above, the appellant’s agent quoted Mr Justice Rand (in the case of Farm Security Act cited above in paragraph 4.02-2) in the Dubois judgment:

Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to another.

But the definition, as well as the obligation, assumes that interest is referable to a principal in money or an obligation to pay money. Without that relational structure in fact and whatever the basis of calculating or determining the amount, no obligation to pay money or property can be deemed an obligation to pay interest.

The appellant’s agent said he could not see a causal relationship for income tax purposes of the period from 1978 to 1980 because the disposition was in 1980 and not in 1978. He would agree with the respondent if, after the settlement in 1980, the appellant would have been paid later, for instance only in 1982.

The method of computing the compensation is of secondary importance and it is not overly relevant. (SN p 21)

4.03.3 The appellant’s agent also referred to Interpretation Bulletin No IT-467 at paragraph 11: “The interest element, if any, in an award for damages is considered to be a component of the damages.” He said he “would equate the word ‘damages’ with the word ‘compensation’”. (SN p 22)

4.03.4 In an ultimate and alternative argument the appellant’s agent contended that even if the interest is not accepted as principal of the entire compensation, it must be considered as farming income. The property disposed of was indeed clearly a farming asset — it was used for farming purposes. “The so-called interest paid thereon is the replacement in part of the loss of the farming income that has been taken . . . We are dealing strictly with farmland. Its use lies strictly in its farming capabilities and its farming capabilities were destroyed, ie, taken. I think, therefore, that it is fair to say that the interest is directly related to the farming activities.”

B. Respondent’s argumentation

4.03.5 The main contention of the agent for the respondent, Miss McCunn, was that the payment of $13,757.74 is interest income and should be taxed pursuant to paragraph 12(l)(c) quoted above, and that it is specifically provided in the agreement (Exhibit A-l) as quoted in paragraph 3.05 above and specifically computed in Exhibit A-2 (paragraph 3.06).

4.03.6 Miss McCunn referred to the interest provision of the Expropriations Act of Ontario, subsection 34(1) quoted above (paragraph 4.01). Referring also to the publication of Mr Eric C E Todd (paragraph 4.02), Miss McCunn quoted under the title of “General Principles”:

In the law relating to vendor and purchaser, if the latter obtains possession before payment of the purchase price there is an implied contractual obligation to pay interest on the price from the date of possession to the date of payment. The rule is equitable in origin and is a corollary of the equitable doctrine of conversion based on the maxim that ‘‘Equity looks on that as done which ought to be done.” Therefore, although at common law the vendor still owns the land and the purchaser owns the purchase money, “they exchange characters in a court of equity, the seller becomes the owner of the money, and the purchaser becomes the owner of the estate.”

The English courts applied the equitable rule in cases of compulsory purchase, ie expropriation. If the expropriating authority required possession of the land it had to pay interest on the compensation (ie the purchase price) from the date of possession, even though the compensation might not be finally determined until some later date.

She also quoted page 364 of the same document:

By analogy to the equitable rule in the law of vendor and purchaser, the expropriating authority is usually obliged to pay interest on the compensation from the date it enters into possession , because it would be inequitable for the authority to have the benefits both of possession of the propery and of the purchase money. Interest may be allowed from the date of possession even though the expropriation is not formally completed until a later date. Where it is not possible to set a precise date when the expropriating authority entered into possession or exercised its right of entry, interest should be paid from the date on which the authority acquired the right to enter upon and taken possession.

4.03.7 Miss McCunn, quoting the same excerpts as those quoted by Mr Parker, the appellant’s agent, of Mr Justice Rand in the case of Farm Security Act (paragraph 4.03.2), pointed out that the definition of interest in that case applies in the instant case. The interest may occur in a situation wherein a person retains a sum of money owed to another. The obligation to pay interest can stem from an obligation to pay money. Ontario Hydro was obliged to pay compensation pursuant to section 13 of the Expropriations Act quoted above (paragraph 4.01) from the time of possession of the property. Therefore, it was obliged to pay interest as explained above (excerpt of Eric Todd — paragraph 4.03.6).

4.03.8 Miss McCunn also referred to the Dubois case (paragraph 4.2-3), to the Hallman case (paragraph 4.02-4) and to the Breitman case (paragraph 4.02-5). In these three cases the expropriating authority calculated interest retroactively from the date of expropriation until the date of settlement and the Court considered it as income. Mr Davis said in the Breitman case at 317: “. .. it was deemed to have been owing to the Appellant from the day of the expropriation.” All three cases involved the 1962, 1966 and 1965 taxation years. It was found that the payment in each case was in the nature of interest within the meaning of paragraph 12(l)(c) of the Income Tax Act. Miss McCunn argued that it is the same in the instant case.

4.03.9 In rebutting Mr Parker concerning compensation, Miss McCunn said that the actual settlement was on March 10, 1980, (Exhibit A-l) when the compensa- tion of $47,000 was agreed upon, plus interest on $44,425 ($47,000 - $2,575). The statement of adjustments (Exhibit A-2) was issued on the date of the payment, April 18, 1980.

4.03.10 In the Perini case referred to above (paragraph 4.02-6) Miss McCunn quoted an argumentation similar to the one of Mr Parker. First the facts and then the decision in this case are summarized as follows:

In 1968 the appellant sold all the issued shares of ARS Ltd for $660,000 paid on closing, plus an amount dependent on the profits of ARS Ltd for each year ending April 30, 1969, 1970 and 1971. The right to receive these latter payments was non- transferable and would terminate upon the apppellant’s death. The agreement provided also for the payment of “interest” in the annual amounts calculated from the closing date in 1968. The appellant contended that the so-called interest payments were not interest but were part of the purchase price because the “interest” did not accrue from day to day on an existing principal amount.

HELD:

The obligation to pay additional sums on account of the purchase price was conditional on there being profits and the seller had to be living. It was open to the parties to the agreement of sale to treat the fulfillment of the conditions as having retroactive effect. The seller was obliged to wait for payment of the balance and interest was the compensation for the delay. The payments in question were interest. Appeal dismissed.

Mr Justice Le Dain said, in the Perini case, at 76 of [1982] CTC 74:

Counsel for the appellant attached particular importance to this statement as expressing the essence of his contention. In the Barfried case, Judson, J, after referring to the definition of interest by Rand, J in the Saskatchewan Farm Security case, said at 575: “The day-to-day accrual of interest seems to me to be an essential characteristic.* In Tomell Investments Limited v East Marstock Lands Limited, [1978] 1 SCR 974, Pigeon, J referred at 982 and 983 to “‘interest’ properly so called” as ‘‘a charge for use of money accruing day by day.” Thus it is appellant’s contention that the amount paid pursuant to clause (v) of paragraph 1.3 of the agreement could not be said to have accrued day by day from the date of closing because there was no principal sum in existence on which it would accrue during the period between that date and the time the addition sum payable was determined by an audited financial statement.

Mr Justice Le Dain gave the essence of the basis of his conclusion when he said at 79 of [1982] CTC:

Because of the basis on which the balance of price, if any, was to be determined, the seller was obliged to wait for payment of the balance. Interest was the appropriate compensation for that delay. I think it is the existence on the closing date of a conditional obligation or contingent liability to pay the balance of price which the parties were entitled to treat as having become absolute with retroactive effect, for purposes of interest, that distinguishes the present case from Huston.

4.03.11 Finally, Miss McCunn contended that the interest income is clearly income from property and not from a farming business. She quoted from the Dubois case: “That interest represents the fruit of the debt owed him by the (expropriating) Authority.” Miss McCunn said, “It is referable to the obligation of that expropriating authority to compensate the owner.”

4.03.12 Ms Olsen, the other counsel for the respondent, gave her version of the interpretation of subsection 44(2) of the Act invoked by Mr Parker: “The Income Tax Act deals with three sources of income: income from office or employment, income from property and income from business (section 3 of the Act).” Subsection 44(2) is part of Subdivision c (sections 38 to 55) of Division B of Part I of the Income Tax Act which concerns “Taxable Capital Gains and Allowable Capital Losses”.

Section 44, in general, concerns the taxation of capital gains in exchanges of property. Subsection 44(1) allows a taxpayer to defer the recognition of a capital gain when capital property is disposed of in certain circumstances, for instance, where the proceeds arise as a result of certain involuntary dispositions such as stolen property, destroyed property or expropriated property. They are all deemed dispositions of property and the compensation received from insurance or expropriating authorities is the proceeds of disposition defined in paragraph 54(h) of the Act quoted above (paragraph 4.01). In order to qualify for the election to defer to a later date the taxation of the capital gain a replacement property must be acquired before the end of the second taxation year following the year in which the proceeds of disposition become receivable in the case of involuntary dispositions.

Therefore, in computing the delay it is important to determine the day of the disposition of the property and the day on which an amount has become receivable by the taxpayer. That is the object of subsection 44(2) quoted above (paragraph 4.01).

C. Court’s Decision

4.03.13 It is the Court’s opinion that in strictly interpreting subsections 44(1) and 44(2) of the Income Tax Act the day of the disposition of the property and the day on which the amount became receivable by the appellant is April 18, 1980. Moreover, he is deemed to have owned the property continuously until that day, April 18, 1980, (section 44(2) in fine).

Therefore, in the computation of the delay to acquire the replacement property and hence to defer the recognition of the capital gain the date of April 18, 1980, marks the initial year. The end of the second taxation year following 1980 (paragraph 44(1 )(c)) is December 31, 1982, for the purpose of the Income Tax Act.

Whereas the appellant, on April 18, 1980, ceased to own the subject property; whereas the disposition of the said property occurred on the said date; and whereas an amount became receivable as the proceeds of disposition on the said date, must the Court (applying strict interpretation of section 44) conclude with the appellant that the interest of $13,757.74 is deemed to be part of the compensation and should not be considered as interest pursuant to paragraph 12(l)(c) and, therefore, should not be included in income?

The Court thinks it is a fair construction and a reasonable conclusion. That conclusion, however, does not ignore the Court decisions quoted above by the learned counsel for the respondent. All those decisions indeed were given concerning reassessments issued under the former Income Tax Act.

The substance of section 44 did not exist then. The Court is now bound by this deeming section.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.