Nature of Income

The subsidiaries of the taxpayer, who distributed electricity (the “Distributors”) were required to connect customers even if the present value of the incremental cost exceeded the present value of the incremental revenue. However, in those circumstances, the customer was required to make a “Customer Cash Contribution” to the Distributor, based on the shortfall.

In finding that the Customer Cash Contributions were ordinary income to the Distributors, Moshinsky J stated (at para. 165):

As the Distributors’ businesses included connecting new customers to the electricity network, and as the Customer Cash Contributions were gains (in the sense that they were amounts derived) in respect of new connections, it follows that they constituted ordinary income … . The Customer Cash Contributions were derived by the Distributors under transactions that occurred as an ordinary incident of their electricity distribution businesses.

In the above “uneconomic” scenario, the customer could choose to perform the work, in which case, on transferring the constructed assets to the Distributor, the Distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that the Customer Contributions were not ordinary income to the Distributors (and before going on to find that they were income under a special deeming provision), Moshinsky J stated (at para. 179):

[T]he Distributor offered to pay the customer an amount (the Rebate) calculated as the estimated cost of construction less the Customer Contribution. The customer accepted that offer. In these circumstances, in my view, the Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the amount to be paid by the Distributor to the customer.

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants. Around the time of launching the action, he and the two other directors entered into a "litigation agreement" with Disctronics which provided (para. 101):

In consideration of [Disctronics'] promises [to pay all costs and disbursements] the directors…assign absolutely unto… [Disctronics], any award of damages (whether on revenue or capital account)… made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings… .

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. After finding that the taxpayer had not become entitled to his share of the award as constructive trustee for Disctronics, Hayne and Crennan JJ. then turned to the effect of the litigation agreement, stating that "the better construction of the litigation agreement is that it provided for the assignment of any proceeds of the action, not for the assignment of the appellant's rights under any judgment obtained in the proceedings" (para. 104). As thus "the litigation agreement provided for the assignment of future income, dissociated from the proprietary interest which produced the income, the proceeds of the action, when received….were income in the hands of the appellant [Booth [1987] HCA 61; (1987) 164 CLR 159 at 167 per Mason CJ.]" (para. 102).

The taxpayer had been a director of corporation ("Canam") which had been struck from the corporate registry. Unaware of Canam's dissolution, CIBC maintained a corporate account for Canam, over which the taxpayer had sole signing authority. The taxpayer deposited a fraudulently altered cheque into the account in the amount of $350,000, and $118,000 of the money disbursed was not later recovered by CIBC. It was unclear whether the fraud had been perpetrated by the taxpayer or by an associate, Mr. Craine, who died before a proper investigation could be conducted. In finding that the $102,000 of funds that the taxpayer disbursed for the benefit of Mr. Craine was not income of the taxpayer, Hogan J. stated (at para. 48):

The cases of Nigro [(2007 DTC 224, 2006 TCC 589] and Obodoechina [2003 DTC 574, 2003 TCC 190)] establish that where the amounts of payments are substantiated as being attributable to another person and as having been made for that person's purposes, those amounts are not to be taxable in the hands of the taxpayer.

The taxpayer's business was to facilitate B.C. municipalities in obtaining vehicles and equipment. The taxpayer would borrow funds from the B.C. Municipal Finance Authority (the "MFA"), purchase the equipment from the supplier, and lease the equipment to the municipality. It would then assign the lease payments, lease, and equipment to the MFA.

Campbell J. interpreted such assignment as an absolute assignment rather than one by way of security only. In effect, the taxpayer was only acting as a "conduit" through which municipalities could borrow from the MFA to acquire equipment. Accordingly, such assignment repaid an interim loan from the MFA, and the lease payments subsequently received under the lease were not income to the taxpayer.

The taxpayer, which was a member of a joint venture which produced iron pellets, had agreed with its shareholders to sell them its share of the pellets produced by the joint venture for a sales price equal to the greater of the fair market value of the pellets and the cost of producing those pellets. In the years in question, in which the costs of production exceeded the fair market value of the pellets produced, it treated only the fair market value of the pellets as sales revenue for purposes of computing its income for purposes of the Act, and treated the balance as a contribution of capital, notwithstanding that its financial statements had treated the full amount received from its shareholders as sales revenue.

In finding that the full amounts received by the taxpayer were income to it, Paris, J. noted that although one of the motivating factors behind the sales agreement was to provide financing for the taxpayer's joint venture operations in order to protect the bondholders, the means chosen by the parties to achieve this purpose was a guaranteed purchase price (so that the legal character of the amounts received was sales price) and that the fact that the shareholders agreed to defray the taxpayer's costs of production even if production was interrupted was not inconsistent with their interests under the agreement being as purchasers. Furthermore, even if the amounts in excess of fair market value were intended as a reimbursement to the taxpayer for any shortfall between its revenue and its share of the net operating expenses of the joint venture, these amounts were received by it as part of its ordinary business operations so that they were received on income account even if they were not sales revenue.

Chiropractic income earned by a corporation of which the taxpayer was the sole shareholder was income of the taxpayer in light of the prohibition under Quebec law against the sharing by a chiropractor of his fees with a person who is not a member of the Order of Chiropractors.

A corporation of which the taxpayer was the sole shareholder and director was dissolved for failure to file annual returns in 1984, an application for a revival of the corporation was prepared in 1990 but no certificate of revival was issued until February 1998 given deficiencies in the application. The Minister reassessed the taxpayer for 1991 to 1994 in respect of income that the taxpayer took the position should be treated as income of the corporation.

After noting that at the time the certificate of revival was obtained pursuant to section 209 of the CBCA, subsection 209(4) of the CBCA had not been amended to provide that a revival had retroactive effect, Dussault T.C.J. stated (at p. 793):

From 1991 to 1994, the Corporation was quite simply non-existent. It therefore did not have the capacity to act and, thus, to operate or own a business. The income earned accordingly belongs to the person who generated that income through his activity, that is to say to the person who operated the business, even if that person claims to have done so for and on behalf of the Corporation, which was dissolved at the time ... .

In order to lower the effective interest rate payable by it on a loan of £14,056,000, the taxpayer and its bank agreed that at the time the bank paid £14,056,000, to the account of the taxpayer, the bank would debit a U.S.-dollar loan facility with the equivalent sum in U.S. dollars and that the bank would purchase for the taxpayer's account for forward delivery enough U.S. dollars to enable the taxpayer to repay the outstanding principal on the U.S.-dollar loan facility on its maturity date.

Although the U.S. dollars delivered under the contract appreciated significantly, Sir John Vinelott found (at p. 137) that:

... the agreement between the company and the bank was a single composite agreement under which the company could not deal with the forward contract without the consent of the bank and under which the bank was to be at liberty to use the dollars purchased in discharge of the dollar loan, to the extent that that had not been repaid before 15 March 1983. If that is right, it must follow that the company did not make any profit on the forward purchase of dollars and made no sterling loss on the repayment of the dollar loan, ...

The taxpayer, which had a cost-plus contract for the performance of construction work, discovered that it had made excess contributions to a government agency in respect of the wages paid by it under the contract, and applied for a refund of the overpayments without informing the contractor. The refunds received by it constituted income to it notwithstanding its legal obligation to refund the same amounts to the contractor because it appeared that in all probability it would not have to do because of its successful concealment to date of the refund from the contractor.

The taxpayer, who was a partner in a New Zealand professional accounting firm, assigned 40% of his units to the trustee of a trust for the benefit of his wife and child. The partnership agreement required each partner to "diligently attend to the business ... and devote his whole time and attention thereto." Lord Jauncey of Tullichettle applied the dictum of Henry J. in Spratt v. CIR, [1964] N.Z.L.R. 272, 277 that:

No taxpayer can, by way of assignment, escape assessment of tax on income arising from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it.

He found that because, at law, such an assignment only transferred property consisting of a right to share in profits and the right on dissolution to share in assets on the deferred terms set out in the Partnership Act, therefore, "the income which accrued to the assignee flowed not from a capital asset which was capable of assignment but from the performance by the taxpayer of such obligations as he was required to perform under the partnership contract."

The taxpayer was not required to accrue interest income on an interest-bearing obligation after it had become quite clear that no interest was going to be paid and, in fact, the repayment of the principal of the note was in serious jeopardy.

The taxpayer, which was the co-owner along with Dome Petroleum of the operating rights to certain mineral properties, agreed to pay a percentage of the net proceeds of production from the taxpayer's working interest to Dome Petroleum in consideration for Dome Petroleum's services as operator. In addition, the taxpayer conveyed a net profits interest in Canadian resource properties to a subsidiary of Dome Petroleum in return for fixed payments.

Before going on to find that both categories of payments made by the taxpayer were deductible on other grounds, Gerwing J.A. first rejected a submission that those amounts were not "amounts received or receivable by him in the taxation year as, on account of or in lieu of payment of, or in satisfaction of, any revenue derived from the production of freehold oil from all oil wells" for purposes of s. 4 of the Oil Well Income Tax Act (Saskatchewan). She stated (p. 137):

It cannot be said in this case that the appellant never had any rights to these proceeds. It had the operating rights from which the right to funds arose, and having these rights, chose to alienate them to third parties, giving these third parties a contractual right to claim the funds from them.

A partnership agreed to lease real estate under a lease that ran for 25 years, that provided for a yearly rental of $27,396 payable in monthly instalments, and that provided that during a period of approximately five years beginning shortly after the commencement of the lease, the lessee was entitled to acquire the property for a price equal to $710,000 minus 30% of all payments previously made under the lease. Mr. Fordham found that the exercise of this option over two years after the commencement of the lease could not result in 30% of the rent payments received up to that date being excluded from the taxpayer's income and stated (at p. 87):

"I know of no authority for the proposition that money received as rent initially can later be treated ... as having been paid on capital account by reason of a subsequent happening."

At the end of its relevant fiscal periods a firm of bloodstock auctioneers had on hand unclaimed balances from the auction sale of horses which, under the terms of the sale, were not required to be remitted by it to the owners until written demand was made therefor. The Crown unsuccessfully submitted that these sums became a trading receipt to the firm when, at subsequent dates, the liability which had been set up for the obligation of the firm to pay those amounts was reclassified as part of the capital accounts of the partners and the partners agreed to bear any payments which the firm actually was required to make in respect of the unclaimed balances in proportion to their share of partnership income. Greene M.R. held (at p. 65) that the facts the monies had not been received as trade receipts and that the partners continued to be liable to account for the monies to the clients, had not been altered, with the result that the unclaimed balances had not been transformed into trade receipts.