19 November 1987 Income Tax Severed Letter 7-1084 - [871119]

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Mary Evans Tel. (613) 957-2133

November 19, 1987

XXX

We refer to your letters of May 28, September 3 and October 5, 1987 requesting that;

XXX

In our telephone conversation of July 22, 1987, we advised that we had considered the Robertson case as well as Canadian Fruit Distributors Limited v. M.N.R., 54 D.T.C. 1145 (Ex. Ct.) and Bouck v. M.N.R., 52 D.T.C. 1090 (S.C.C.). It is our opinion that a number of such cases can be generally distinguished on the basis that they involve contingent payments designed to be paid back if a particular event happens. In other cases, it was clear prior to the receipt of income that part of the income was devoted to another use, and was not the property of the immediate recipient. In the present situation, the parties clearly desired that a full salary payment be received, and the required payment to the University was not conditional upon the happening of some other event.

Although it seems to be the case that XXX had a contractual right to recover the amount owing by XXX the existence of a right to recover (in other circumstance) of in and of itself precluded the characterization of the gross amount as income: see The Queen v. Poynton, 72 D.T.C. 6329 (Ont. C.A.) and Lennox Industries (Canada) Ltd. v. The Queen (Jan. 5 1987, F.C.T.D.).

We further suggested that the principle enunciated in Mersey Docks and Harbour Board v. Lucas, (1883-90) 2 T.C. 25 (H.L.) appears to apply to the case at hand. Said principle is that "The mode of application makes no difference whatever to the question of what is "profit" and what is "gain". In New Continental Oil Co. of Canada Ltd. v. The Queen, 77 D.T.C. 5202 (F.C.A.), the appellant agreed to pay two others $50,000 at the rate of 10% of the proceeds of net production of each well drilled on certain lands. The appellant never actually received the $50,000 in question since it was paid directly through a trustee. Nevertheless, citing Mersey Docks, the court held that the arounts in issue formed part of the appellant's income. At page 5212 the court conclude

The application of part of the production proceeds to satisfy the contractual obligation of the Appellant does not change the character of those proceeds and as indicated earlier the intervention of the trust corpany as distributor is artificial and does nothing more than facilitate the payment out of the proceeds, quite a usual procedure in cases of this kind. Consequently, although the proceeds as a whole did not pass through the Appellant's hands the proceeds nevertheless bear the character of income.

The New Continental Oil case is quite similar factually to the case at hand since it deals with money paid pursuant to a contractual obligation.

XXX

Your truly,

ORIGINAL SIGNED BY ORIGINAL SIGNE PAR ROERT H. JOYCE

for Director Small Business and General Divisiion Specialty Ruling Directorate Legislative and Intergovernmental Affairs Branch

Encl.