[1996] 1 F.C. 613
A-582-94
Brenda Bellingham (Appellant) (Plaintiff)
v.
The Queen (Respondent) (Defendant)
Indexed as: Bellingham v. Canada (C.A.)
Court of Appeal, Stone, Décary and Robertson JJ.A.— Ottawa, November 2 and 30, 1995.
Income tax — Income calculation — Income or capital gain — Where property acquired as adventure in nature of trade, proceeds from expropriation taxable as income — Additional interest punitive, not compensatory or restructionary — Windfall gain, not income under Income Tax Act, s. 3(a).
The taxpayer’s land was expropriated by the town of Grand Centre, Alberta. Compensation was established in accordance with the Expropriation Act of Alberta. She received $377,015 as compensation, $181,319 as ordinary interest and $114,272 as “additional interest” under subsections 66(4) and (5) (interest awarded where the amount of the proposed payment is less than 80% of the amount awarded for the interest taken and severance damage). The taxpayer argued that compensation for the land was taxable as a capital gain, ordinary interest taxable as interest income under paragraph 12(1)(c) of the Income Tax Act and finally, additional interest was non-taxable. The Minister assessed the proceeds from the expropriation as business income. The Trial Division Judge concluded that as the property was acquired as an adventure or concern in the nature of trade, any profit realized on its disposition was taxable on account of income. Ordinary interest was taxable under paragraph 12(1)(c) of the Act and the remaining amount, including additional interest, was taxable as income from a business under subsection 9(1). This was an appeal from that decision on the basis that the additional interest was a windfall gain and, as such, not taxable and that the proceeds of disposition should be treated as a capital receipt by virtue of subparagraph 54(h)(iv) of the Act.
Held, the appeal should be allowed only with respect to the additional interest.
Subparagraph 54(h)(iv) was not a deeming provision. It did not deem proceeds of disposition received on an expropriation to be a capital receipt. Subparagraphs 54(h)(iv) and (v) were added to the Act to counter the decision in Kicking Horse Forest Products Ltd. v. British Columbia (Minister of Finance), [1973] 6 W.W.R. 343 (B.C.S.C.); affd (1974), 49 D.L.R. (3d) 149 (B.C.C.A.); affd [1976] 1 S.C.R. 711, wherein it was held that an expropriation did not constitute a sale within the meaning of the Logging Tax Act, R.S.B.C. 1960, c. 225, s. 2(b). Accordingly, the $377,015 received as compensation for the land was taxable as income from a business under subsection 9(1) of the Act.
The remaining issue was whether additional interest was income within the meaning of subsection 9(1) or paragraph 3(a) of the Act. Applying the reasoning in Shaw v. Canada, [1993] 2 F.C. 190(C.A.), it was clear that additional interest did not constitute compensation for lands which have been taken, nor did it represent compensation for the loss of the use of money. In Mannix v. The Queen in right of Alberta (1984), 31 L.C.R. 299 (Alta. C.A.), it was stated that the interest awarded pursuant to subsection 66(4) was “clearly penal, as distinct from compensatory or restitutionary”. While ordinary interest respresents “compensation for the use or retention by one person of a sum of money, belonging to ... another”, additional interest serves the same end as a punitive damages award. Therefore, additional interest was not to be used for the purpose of calculating a gain or loss on the disposition of a property pursuant to subsection 9(1) of the Act.
Nor could additional interest be included as income from a source under paragraph 3(a) of the Act. In Canada, the definition of income is circumscribed by the source doctrine, but the scope of that doctrine is difficult to establish. It has been established by case law that gambling gains, gifts, inheritances and the residual category of windfall gains fall outside the grasp of paragraph 3(a). In the present case, the true source of the additional interest was the Expropriation Act which dictated, as a matter of public policy, that expropriating authorities are obligated to pay a penal sum in circumstances where their behaviour falls below a prescribed standard. In certain respects, an award of additional interest possesses the attributes of a gift. The payment did not flow from either an express or implied agreement between the parties. There was no element of bargain or exchange, no consideration, no quid pro quo. The payment was simply a windfall and, therefore, not income under paragraph 3(a) of the Act.
A non-compensatory receipt cannot be treated in the same manner as a compensatory one simply because both arise from the same transaction (the expropriation). The nature and purpose of a particular payment or award must be considered when assessing how it will be dealt with for tax purposes.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Expropriation Act, R.S.A. 1980, c. E-16, ss. 42, 66(1),(2),(3),(4),(5).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3(a), 6, 9(1), 12(1)(c) (as am. by S.C. 1980-81-82-83, c. 140, s. 4), 39(4) (as enacted by S.C. 1977-78, c. 1, s. 16; S.C. 1980-81-82-83, c. 140, s. 18), 43 (as am. by S.C. 1974-75-76, c. 26, s. 17), 53(2)(d), 54(h)(i),(ii),iii), (iv),(v), 54.2 (as enacted by S.C. 1988, c. 55, s. 32), 81, 248(1) “business” (as am. by S.C. 1979, c. 5, s. 66).
CASES JUDICIALLY CONSIDERED
APPLIED:
Shaw v. Canada, [1993] 2 F.C. 190 (1993), 93 DTC 5121; 151 N.R. 232 (C.A.); R. v. Cranswick, [1982] 1 F.C. 813 [1982] CTC 69; (1982), 82 DTC 6073; 40 N.R. 296 (C.A.); Mannix v. The Queen in right of Alberta (1984), 31 L.C.R. 299 (Alta. C.A.); Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3; (1994), 63 Q.A.C. 161; 95 DTC 5017; 171 N.R. 161.
OVERRULED:
E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114; (1986), 86 DTC 6364; 4 F.T.R. 188 (F.C.T.D.).
DISTINGUISHED:
Mohawk Oil Co. v. Canada, [1992] 2 F.C. 485 [1992] 1 C.T.C. 195; (1992), 92 DTC 6235; 140 N.R. 225 (C.A.); leave to appeal to S.C.C. refused, sub nom. Mohawk Oil Co. v. The Queen, [1992] 2 S.C.R. viii; (1992), 141 N.R. 393.
CONSIDERED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; (1984), 10 D.L.R. (4th) 1; [1984] CTC 294; 84 DTC 6305; 53 N.R. 241; Cartwright and Sons Ltd. v. Minister of National Revenue (1961), 61 DTC 499 (T.A.B.); Curran v. Minister of National Revenue, [1959] S.C.R. 850; (1959), 20 D.L.R. (2d) 385; [1959] C.T.C. 416; 59 DTC 1247; Canada v. Fries, [1990] 2 S.C.R. 1322; [1990] 2 C.T.C. 439; (1990), 90 DTC 6662; 114 N.R. 150; revg [1989] 3 F.C. 362 (1989), 89 CLLC 14,029; [1989] 1 C.T.C. 471; 89 DTC 5240; 99 N.R. 208 (C.A.); affg, sub nom. R. v. Fries, [1985] 2 F.C. 378 (1985), 86 CLLC 14,011; [1986] 1 CTC 4; 85 DTC 5579 (T.D.); revg, sub nom. Fries (W) v MNR, [1983] CTC 2124; (1983), 83 DTC 117 (T.R.B.); Sani Sport Inc. v. The Queen, [1987] 1 C.T.C. 411; (1986), 87 DTC 5253 (F.C.T.D.); affd, sub nom. Sani Sport Inc. v. Canada, [1990] 2 C.T.C. 15; (1990), 90 DTC 6230 (F.C.A.).
REFERRED TO:
Paterson Park Ltd. et al. v. Town of Grand Centre (1983), 28 L.C.R. 288 (Alta. L.C.B.); affd, sub nom. Grand Centre (Town) v. Paterson Park Ltd. et al. (1984), 29 L.C.R. 97 (Alta. C.A.); Kicking Horse Forest Products Ltd. v. British Columbia (Minister of Finance), [1973] 6 W.W.R. 343 (B.C.S.C.); affd, sub nom. Re Kicking Horse Forest Products Ltd. and Minister of Finance (1974), 49 D.L.R. (3d) 149; [1974] 5 W.W.R. 242 (B.C.C.A.); affd, sub nom. Minister of Finance v. Kicking Horse Forest Products Ltd., [1976] 1 S.C.R. 711; (1975), 57 D.L.R. (3d) 220; [1975] 6 W.W.R. 142; 5 N.R. 319; Attorney-General for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570; (1963), 42 D.L.R. (2d) 137; Vorvis v. Insurance Corporation of British Columbia, [1989] 1 S.C.R. 1085; (1989), 58 D.L.R. (4th) 193; [1989] 4 W.W.R. 218; 36 B.C.L.R. (2d) 273; 94 N.R. 321; Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130; British Columbia Railway v The Queen, [1979] CTC 56; (1978), 79 DTC 5020 (F.C.T.D.); Graham v. Green, [1925] 2 K.B. 37; Minister of National Revenue v. Walker, William S., [1952] Ex. C.R. 1; [1952] 2 D.L.R. 462; [1951] C.T.C. 334; (1951), 52 DTC 1001; Morden, Harry Edgar v. Minister of National Revenue, [1962] Ex. C.R. 29; [1961] C.T.C. 484; (1961), 61 DTC 1266.
AUTHORS CITED
Arnold, Brian J. et al. Materials on Canadian Income Tax, 10th ed., Scarborough, Ont.: Carswell, 1993.
Canada. Department of National Revenue Taxation. Interpretation Bulletin IT-365R2.
Canada. Department of National Revenue Taxation. Interpretation Bulletin IT-183.
Canada. Report of the Royal Commission on Taxation, Ottawa: Queen’s Printer, 1966. (Chair: K.M. Carter).
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Hansen, Brian G. et al. eds. Canadian Taxation, Toronto: Richard De Boo, 1981.
Krishna, Vern. The Fundamentals of Canadian Income Tax, 4th ed., Scarborough, Ont.: Carswell, 1992.
LaBrie, Francis Eugene. The Principles of Canadian Income Taxation, Don Mills, Ont.: CCH Canadian Ltd., 1965.
APPEAL from a decision of the Trial Division (Bellingham (B.) v. Canada, [1994] 2 C.T.C. 290; (1994), 94 DTC 6564; 83 F.T.R. 77) as to whether monies received by the taxpayer following an expropriation were on account of income or capital and whether an award of “additional interest” was “income”. Appeal allowed in part.
COUNSEL:
Neil W. Nichols for appellant (plaintiff).
Douglas B. Titosky for respondent (defendant).
SOLICITORS:
Neil W. Nichols, Edmonton, for appellant (plaintiff).
Deputy Attorney General of Canada for respondent (defendant).
The following are the reasons for judgment rendered in English by
Robertson J.A.: This is an appeal from a decision of the Trial Division [[1994] 2 C.T.C. 290] involving the taxation of monies received by the appellant (the taxpayer) following an expropriation of her lands. Two issues arise for our consideration. One focuses on whether a specific award of “additional interest”, made under subsection 66(4) of the Expropriation Act, R.S.A. 1980, c. E-16, constitutes “income”. The other issue involves the perennial question of whether “proceeds of disposition” were received on account of income or capital.
In regard to the income/capital issue, I am in agreement with the learned Trial Judge who concluded that the proceeds of disposition were received on account of income. With great respect, however, I cannot subscribe to his conclusion that an award of additional interest is income within the meaning of the relevant provisions of the Income Tax Act, S.C. 1970-71-72, c. 63 as amended (the Act). Such an award is imposed for purposes of censuring and discouraging unacceptable conduct on the part of an expropriating authority. It has no compensatory element and, in my view, it is tantamount to a punitive damage award and, therefore, falls outside the charging provisions of the Act. Specifically, additional interest is not “in-come … from a business” under subsection 9(1), nor is it “income ... from a source” as contemplated by paragraph 3(a) of the Act. Succinctly stated, it is my opinion that punitive damage awards fall within the tax-exempt category of “windfall gains”. My reasoning begins with a recitation of relevant facts.
The taxpayer was one of a small group of landowners whose lands were expropriated effective June 2, 1981 by the town of Grand Centre located in northeastern Alberta. The lands in question consisted of two adjacent quarter sections. The taxpayer held an undivided one-half interest in one of the quarter sections. Ultimately, the matter of compensation was determined by the Land Compensation Board (the Board) whose decision was affirmed on appeal: see Paterson Park Ltd. et al. v. Town of Grand Centre (1983), 28 L.C.R. 288 (Alta. L.C.B.); affd (1984), 29 L.C.R. 97 (Alta. C.A.). The landowners were awarded approximately $3.8 million dollars. The compensation available for each quarter section was broken down into three components in accordance with the provisions of the Expropriation Act.
Section 42 of the Expropriation Act grants a right to compensation for the value of the land, disturbance damages, special value to the landowner and injurious affection. Subsection 66(1) provides for the payment of interest, with respect to compensation for the value of the land from the date the expropriating authority acquires title until payment in full. With respect to disturbance damages, interest is calculated from the date of the award until payment in full, pursuant to the same subsection. Subsection 66(3) provides for the payment of interest in circumstances where the initial offer of payment was delayed beyond the statutory prescribed period. The parties to this appeal have treated interest payable under these two subsections as “ordinary interest”. (Query: Is not interest awarded under subsection 66(3) also additional interest? On this point see also subsection 66(5), which refers to both subsections 66(3) and (4), and Mannix v. The Queen in right of Alberta (1984), 31 L.C.R. 299 (Alta. C.A.), at page 309.)
The remaining component of the award relates to additional interest, or what the parties have labelled “penalty interest”. I prefer not to use the latter term lest it connote the idea that such an award stems from the failure to pay monies promptly (see discussion infra). Pursuant to subsections 66(4) and (5) of the Expropriation Act, the Board is under an obligation to award additional interest in circumstances where the expropriating authority offers less than 80% of the amount ultimately awarded and the Board is of the opinion that such lower figure was due to the “fault” of the expropriating authority. In circumstances where the Board can find no fault, it retains a discretion as to whether to make such an award. Additional interest is calculated by reference to the “ordinary” rate of interest and applied against the difference between the compensation amount originally offered and that ultimately awarded.
In the case at bar, the expropriating authority’s offer amounted to approximately 17% of the Board’s award. On the facts the Board had no difficulty in finding fault on the part of the expropriating authority. This is a convenient place to reproduce the relevant sections of the Expropriation Act.
42(1) When land is expropriated, the expropriating authority shall pay the owner such compensation as is determined in accordance with this Act.
(2) When land is expropriated, the compensation payable to the owner shall be based on
(a) the market value of the land,
(b) the damages attributable to disturbance,
(c) the value to the owner of any element of special economic advantage to him arising out of or incidental to his occupation of the land to the extent that no other provision is made for its inclusion, and
(d) damages for injurious affection.
…
66(1) An expropriating authority shall pay interest at a rate the Board considers just
(a) with respect to
(i) compensation for the land, and
(ii) severance damages on a partial taking from the date of acquisition of title until payment in full;
(b) on damages for disturbance from the date of the award of the damages until payment in full.
(2) Notwithstanding subsection (1), if the owner is in possession when the expropriating authority acquires title, he is not entitled to interest until he has given up possession.
(3) If the expropriating authority has delayed in notifying the owner of the proposed payment beyond the prescribed time, the Board shall order the expropriating authority to pay additional interest on the value of the land and severance damage, if any, from the beginning of the delay until the proposed payment is or was made, at the same rate as that prescribed in subsection (1).
(4) If the amount of the proposed payment is less than 80% of the amount awarded for the interest taken and severance damage, if any, the Board shall order the expropriating authority to pay additional interest at the same rate as that prescribed in subsection (1), from the date of notifying the owner of the proposed payment until payment, on the amount by which the compensation exceeds the amount of the proposed payment.
(5) Notwithstanding subsections (3) and (4), if the Board is of the opinion that a proposed payment of less than 80% of the amount awarded for the interest taken and severance damage, if any, or any delay in notifying the owner of the proposed payment is not the fault of the expropriating authority, the Board may refuse to allow the owner additional interest for the whole or any part of any period for which he would otherwise be entitled to interest.
Although the Board awarded a total of $3.8 million, the landowners settled for a global cash payment of $2.8 million after protracted and acrimonious litigation. In light of the settlement, all the landowners agreed that each would receive his or her proportionate share. The taxpayer’s share was allocated in accordance with, and in the same proportion as the constituent elements appearing in the Board’s award. According to the parties she was deemed to have received: (1) $377,015 as compensation under section 42; (2) $181,319 as ordinary interest under subsections 66(1) and (3); and (3) $114,272 as additional interest under subsections 66(4) and (5) of the Expropriation Act.
I pause here to note that I can see no basis for questioning the method chosen by the landowners for allocating the proceeds of settlement and, in turn, the way in which their respective shares were allocated to reflect the various components of the original award. This is not a case where allocations were arrived at after due consideration of the tax consequences. In substance, there is no difference between the allocations made by the Board, a neutral third party, and those arrived at by the landowners. The facts of this case are to be contrasted with those in Mohawk Oil Co. v. Canada, [1992] 2 F.C. 485(C.A.), leave to appeal to S.C.C. refused June 5, 1992 [[1992] 2 S.C.R. viii], where the allocations were premised on professional tax advice. That being said I note that the above figures differ from those in the notice of objection and the notice of confirmation, but I accept them for purposes of this appeal as they were accepted by both parties and apparently by the Trial Judge.
The taxpayer reported her share of the proceeds from the expropriation as business income on her 1984 income tax return and it was so assessed by the Minister of National Revenue (the Minister) on October 22, 1985. By notice of objection, dated December 5, 1985, the taxpayer objected to the assessment on the basis that compensation for the land was taxable as a capital gain, ordinary interest was taxable as interest income under paragraph 12(1)(c) [as am. by S.C. 1980-81-82-83, c. 140, s. 4] of the Act, and, finally, additional interest was simply non-taxable. In response, the Minister confirmed the assessment of October 22, 1985. The taxpayer then launched an appeal to the Trial Division of this Court.
As the arguments advanced before the Trial Judge bear little resemblance to those urged upon us, it is sufficient to outline his critical findings. First, the Trial Judge concluded that as the property was acquired as an adventure or concern in the nature of trade, a fact admitted by the taxpayer, any profit realized on its disposition is taxable on account of income. This was held to be true irrespective of whether the property was disposed of by sale or expropriation. In accordance with the decision of this Court in Shaw v. Canada, [1993] 2 F.C. 190(C.A.), ordinary interest in the amount of $181,319 was held taxable under paragraph 12(1)(c) of the Act. The remaining amount, including additional interest, was held taxable as income from a business under subsection 9(1) of the Act.
No appeal was launched by the Minister with respect to the Trial Judge’s finding that the award made in respect of ordinary interest is taxable under paragraph 12(1)(c) of the Act. This leaves us with the two principal arguments advanced by the taxpayer.
First, it is urged that additional interest is an award in respect of punitive damages, and not “interest” in the strict legal sense in which that term is employed. Furthermore, it is maintained that additional interest is not compensation for lands which have been taken and, therefore, cannot constitute part of the proceeds of disposition. Counsel for the taxpayer admits that this part of his argument is undermined by the ruling in E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114 (F.C.T.D.). However, he maintains that that case is distinguishable on the facts or, alternatively, no longer good law in light of Shaw v. Canada, supra. If these arguments find acceptance then counsel reasoned that subsection 9(1) of the Act can have no application in this case. As to the application of paragraph 3(a) the taxpayer relies principally on R. v. Cranswick, [1982] 1 F.C. 813(C.A.). That case brings into consideration the concept of windfall gains.
As an alternative argument, counsel for the taxpayer submits that if additional interest is deemed part of the proceeds of disposition, then the former should be treated as a capital receipt along with the $377,015 compensation award. This leads us to the taxpayer’s second argument, namely that the proceeds of disposition (minus ordinary interest) must be taxed as a capital receipt by virtue of subparagraph 54(h)(iv) of the Act. The taxpayer concedes that had she effected a voluntary sale of her lands, the sale would have given rise to income from a business by virtue of the extended definition of “business” found in subsection 248(1) [as am. by S.C. 1979, c. 5, s. 66] of the Act, which includes an adventure or concern in the nature of trade. However, the taxpayer insists that the monies received are not of an income nature since subparagraph 54(h)(iv) deems compensation for property taken under statutory authority to be proceeds of disposition giving rise to a capital gain. I shall deal with the latter argument first.
The flaw in the taxpayer’s capital/income argument can be traced to her assumption that subparagraph 54(h)(iv) deems proceeds of disposition received on an expropriation to be a capital receipt. At the relevant time, subparagraph 54(h)(iv) and the preceding subparagraphs read as follows:
54. ...
(h) “proceeds of disposition” of property includes,
(i) the sale price of property that has been sold,
(ii) compensation for property unlawfully taken,
(iii) compensation for property destroyed, and any amount payable under a policy of insurance in respect of loss or destruction of property,
(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given,
As is apparent paragraph 54(h) is not a deeming provision and in this respect is to be contrasted, for example, with subsection 39(4) [as enacted by S.C. 1977-78, c. 1, s. 16; S.C. 1980-81-82-83, c. 140, s. 18] and section 54.2 [as enacted by S.C. 1988, c. 55, s. 32] of the present Act. Pursuant to subsection 39(4), a disposition of Canadian securities is deemed to be a disposition of capital property if the taxpayer makes an election to this effect. Under section 54.2 shares received as consideration for the transfer to a corporation of all or substantially all of the assets of an active business are deemed to be capital property. Subparagraphs 54(h)(iv) and (v), on the other hand, were added to the Act to counter the decision in Kicking Horse Forest Products Ltd. v. British Columbia (Minister of Finance), [1973] 6 W.W.R. 343 (B.C.S.C.); affd (1974), 49 D.L.R. (3d) 149 (B.C.C.A.); affd [1976] 1 S.C.R. 711. In that case it was held that an expropriation did not constitute a sale within the meaning of the Logging Tax Act, R.S.B.C. 1960, c. 225, s. 2(b). In the absence of subparagraph 54(h)(iv) it would be open for a taxpayer to assert that property taken by expropriation does not constitute a disposition and, therefore, there can be no proceeds: see generally B. J. Arnold, T. Edgar, and J. Li, eds., Materials on Canadian Income Tax, 10th ed. (Scarborough, Ont.: Carswell, 1993), at page 533, note 78.
The foregoing analysis, in my view, is sufficient to dispose of the capital/income issue. Accordingly, the $377,015 received by the taxpayer as compensation for the land is taxable as income from a business under subsection 9(1) of the Act. On that point the Trial Judge’s decision must be affirmed. The only issue that remains is whether additional interest is income within the meaning of subsection 9(1) or paragraph 3(a) of the Act. I turn first to the issue of taxation under subsection 9(1) which reads as follows:
9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.
The jurisprudence relating to the taxation of monies received by a taxpayer from an expropriating authority embraces three decisions of this Court: Sani Sport Inc. v. The Queen, [1987] 1 C.T.C. 411 (F.C.T.D.); affd [1990] 2 C.T.C. 15 (F.C.A.); Shaw v. Canada, supra, and E.R. Fisher Ltd. v. The Queen, supra.
In Sani Sport Inc. it was held that an amount paid as damages for loss of potential business use was to be included in the computation of the taxpayer’s proceeds of disposition under paragraph 54(h)(iv) of the Act. The general rule which flows from that decision is that compensation paid for expropriated lands will be treated as a unitary sum. In certain instances, however, specific awards will be allocated and receive differential tax treatment. An exception to the general rule arises in the context of compensation paid for injurious affection. Such compensation does not relate to lands which have been taken, but rather with the diminution in value of lands retained by the taxpayer following the expropriation. Subparagraph 54(h)(v) of the Act makes express provision for awards based on injurious affection. It is generally assumed that the part-disposition rules in section 43 [as am. by S.C. 1974-75-76, c. 26, s. 17] and paragraph 53(2)(d) of the Act are applicable in such circumstances: see Arnold, supra, at page 533, note 79.
The general rule cannot, of course, apply to compensation which falls into the category of ordinary interest. In Shaw v. Canada, supra, this Court was required to determine whether ordinary interest payable under the Expropriation Act, in regard to a capital property, should be characterized as interest taxable under paragraph 12(1)(c) or whether it should be included as proceeds of disposition pursuant to subparagraph 54(h)(iv) and, therefore, treated as a capital receipt. It was held taxable under the former provision on the ground that ordinary interest is not compensation for property taken, but rather is compensation for the loss of use of money not paid on the date the expropriation takes effect. Thus, ordinary interest was segregated from the capital component of the expropriation award.
Applying the reasoning in Shaw to the facts of this case, it is clear that additional interest does not constitute compensation for lands which have been taken, nor does it represent compensation for the loss of use of money. As to the true nature of such an award, one need only turn to the decision of the Alberta Court of Appeal in Mannix v. The Queen, supra. At page 310 Stevenson J.A. (as he then was) stated that interest awarded pursuant to subsection 66(4), “is clearly penal, as distinct from compensatory or restitutionary”. Additionally, he states that additional interest is intended to discourage token or unrealistic payments from being tendered and that an owner of land is not entitled to such an award as a matter of compensation.
I do not think it can be doubted that a valid distinction exists between additional and ordinary interest. The latter represents, “compensation for the use or retention by one person of a sum of money, belonging to, … another” (Attorney-General for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570, at page 575). An award in respect of additional interest does not serve those ends. Rather it serves the same ends as a punitive damage award: see generally Vorvis v. Insurance Corporation of British Columbia, [1989] 1 S.C.R. 1085; and Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130. Accordingly, the amount in question cannot be treated, for tax purposes, in the same manner as compensation awarded under the various headings set out in subsection 42(2) of the Expropriation Act. In short, additional interest is not to be used for the purpose of calculating a gain or loss on the disposition of a property pursuant to subsection 9(1) of the Act. This leads me to consider the trial decision in E.R. Fisher Ltd. v. The Queen, supra. Admittedly, that case does not support my conclusion.
The facts in E.R. Fisher Ltd. are, for all intents and purposes, identical to those under consideration. In that case the taxpayer became entitled to additional interest following an expropriation of a capital property pursuant to a comparable provision found in the federal Expropriation Act, R.S.C. 1970 (1st Supp.), c. 16, s. 33(3)(b). The taxpayer took the position that additional interest constituted a non-taxable windfall. The Minister reassessed the taxpayer on the basis that the amount formed part of the proceeds of disposition and was a taxable capital gain. The taxpayer’s appeal to the Trial Division of this Court was dismissed, inter alia, on the basis that: “The payment [of additional interest] was partial consideration for and in recognition of the [taxpayer’s] property interest” (at page 121). In light of the subsequent holding in Shaw and of the fact that an award in respect of additional interest constitutes punitive damages, E.R. Fisher Ltd. can no longer be considered good law. Thus, it remains to be decided whether additional interest is included as income from a source under paragraph 3(a) of the Act. That issue brings into consideration the fundamental concept of income, as that term is employed in the Act, and the related concept of windfall gains.
The notion of what receipts constitute income for purposes of taxation is central to the workings of the Act. Standing alone the term income is susceptible to widely diverging interpretations. Narrowly construed, income may be defined to include only those amounts received by taxpayers on a recurring basis. Broadly construed, income may be defined so as to capture all accretions to wealth. Canadian taxpayers are more likely to embrace the former definition. The latter approach reflects the economist’s concern for achieving horizontal and vertical equity in a taxation system. Such a concern translates into a broad understanding of what receipt items should be included in income. This perspective is reflected in the Report of the Royal Commission on Taxation. Working from the Haig-Simon’s definition of income, that Commission recommended a modified, but comprehensive tax base. Had its recommendations become law we would have witnessed, for example, the taxation of gifts and inheritances. Instead, the concept of income under the Act remains undefined, except to the extent that income must be from a source.
There can be no doubt that the source doctrine serves to narrow the reach of the charging provisions of the Act so as to permit certain receipts to escape taxation, including gifts and inheritances. The more difficult question relates to the precise scope of the doctrine and the legal criteria to be applied when assessing whether a particular receipt is taxable. The statutory source of the doctrine itself is, of course, section 3 of the Act which provides the basic framework for determining a taxpayer’s income for a taxation year for purposes of Part I of the Act. It is paragraph 3(a) which introduces the concept of income from a source:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property. [Emphasis added.]
The historical origins of the source doctrine are well known and worth highlighting when contrasted with the manner in which it has been recast in the above paragraph. The adoption of the source concept of income can be traced to England’s taxing statutes of the 19th century, which required taxpayers to file separate returns for each source of income. The legislated objective was to ensure that no one official knew a person’s total income. More importantly, the source doctrine distinguished between the receipt of income from a source and the disposition of the source itself. In an agrarian society, land is considered to be the source of income. Profits are derived from the annual harvest and represent income. A disposition of the land itself, that is to say the capital, is considered to be of a different character and, hence, the distinction between income and capital is critical. The distinction is as important today as it was in centuries past.
The English taxation system retains the source concept of income, now referred to as the schedule system. Unless a receipt comes within one of six named schedules it is simply not taxable. Thus gifts, inheritances and windfalls, not being from a specified source, are treated as non-taxable receipts. The distinction drawn between income and capital is preserved and, thus, capital gains are immune from taxation.
The Canadian approach is similar to its English counterpart, but only to the extent that the definition of income is circumscribed by the source doctrine. The critical distinction between the two approaches lies in the fact that paragraph 3(a) refers initially to income from any source and then goes on to identify the traditional sources: income from each office, employment, business and property. Paragraph 3(a) makes it clear that the named sources are not exhaustive and, thus, income can arise from other unidentified sources. In summary, Parliament has chosen to define income by reference to a restrictive doctrine while recasting it in such a manner as to achieve broader ends. Commentators, however, are agreed that paragraph 3(a) continues to receive a narrow construction: see Arnold, supra, at page 48 et seq.; V. Krishna, The Fundamentals of Canadian Income Tax, 4th ed., (Scarborough, Ont.: Carswell, 1992), at pages 129-130; and J. A. Rendall, “Defining the Tax Base”, in B. G. Hansen, V. Krishna and J. A. Rendall, eds., Canadian Taxation (Toronto: Richard De Boo, 1981), at page 59.
The restrictive interpretation imposed on paragraph 3(a) can be traced, at least in part, to the pre-1984 understanding that ambiguities in the charging sections of taxing statutes—being penal in nature—were to be resolved in favour of the taxpayer: see e.g. British Columbia Railway v The Queen , [1979] CTC 56 (F.C.T.D.). That traditional view went unchallenged until the decision of the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536. In that case the Supreme Court displaced the rule of strict construction with the contextual approach to statutory interpretation advocated by E. A. Driedger in his classic work, Construction of Statutes, 2nd ed., (Toronto: Butterworths, 1983) where at page 87, the author observed:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
Recently, the Supreme Court has taken the opportunity to summarize the applicable canons of statutory construction in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3. The tenets of the “teleological” approach are, now, firmly entrenched in our jurisprudence. For our purposes, it is sufficient to draw attention to the residual tenet: “Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer” (per Gonthier J. for the Court, at page 20). I mention this particular rule of construction because it has been applied by the Supreme Court in a case involving the application of paragraph 3(a) of the Act. That case will be canvassed below.
The rule of strict construction might explain the reluctance of courts to recognize new sources of income. Unfortunately, not even the application of the contextual and teleological approaches to statutory construction sheds light on the scope of the source doctrine. Turning to two related provisions of the Act we find that Parliament has chosen to include and exclude items from income without regard to whether their tax treatment offends the source doctrine. Section 12 of the Act prescribes a multitude of inclusions to income from a business or property. The list of exclusionary items found in section 81 is even longer. Arguably, several of the items would be treated differently under the source doctrine were it not for these two sections of the Act. I recognize that it is necessary for Parliament to include and exclude items from income as a means of pursuing various social and economic objectives. The result, however, is that it is futile to pursue the contextual or teleological approach to the interpretation of paragraph 3(a). The parameters of the source doctrine cannot be distilled from provisions intended to contradict the very precepts underlying the doctrine itself.
Against this background, we are left to pursue the judicial understanding of what items fall outside the grasp of paragraph 3(a). I begin with the recognized exclusionary categories: gambling gains, gifts and inheritances, and the residual category of windfall gains. I shall deal briefly with the first two categories as they provide the underlying framework for the third.
Gambling gains are non-taxable provided the taxpayer is not in the business of gambling: see Graham v. Green, [1925] 2 K.B. 37; Minister of National Revenue v. Walker William, S., [1952] Ex. C.R. 1; Morden, Harry Edgar v. Minister of National Revenue, [1962] Ex. C.R. 29. The classical reason for excluding such receipts from income is that a “bet” is based on an “irrational agreement”. A more compelling argument is that a gambling gain does not flow from a productive source. That is, a source that is capable of producing income: see F. E. LaBrie, The Principles of Canadian Income Taxation, (Don Mills, Ont.: CCH Canadian Ltd., 1965), at page 25.
There is no need to cite authorities for the proposition that gifts and inheritances are immune from taxation. It is well accepted that these items represent non-recurring amounts and the transfer of old wealth. Underlying the source doctrine is the understanding that income involves the creation of new wealth. Gifts do not flow from a productive source of income. Where a gift emanates from what otherwise is regarded as a productive source, e.g. the taxpayer’s employment, then the issue is one of concealed wages and employee benefits (see section 6 of the Act). To qualify as a gift, there must be voluntary and gratuitous transfer of property. There must be an absence of valuable consideration. Hence, a payment that takes the form of a quid pro quo will not be characterized as a gift.
The precise scope of the residual category—windfall gains—has proven problematic. At best, it can be said that a payment which is unexpected or unplanned and not of a recurring nature, is more likely than not to be characterized as a windfall gain. But like all generalizations, this observation must be scrutinized meticulously. I turn now to the jurisprudence which reasonably bears on the issue at hand.
As a starting point, it might be felt that the decision of the Tax Appeal Board in Cartwright and Sons Ltd. v. Minister of National Revenue (1961), 61 DTC 499 (T.A.B.) offers the definitive answer. In that case it was held that a punitive damage award was not taxable on the basis that the sum paid to the taxpayer “had no income feature” (at page 501). The legal reasoning of the Board goes no further. A more extensive analysis of paragraph 3(a) was pursued in R. v. Cranswick, supra. In that case this Court had to determine whether an unsolicited payment to a minority shareholder by the majority shareholder of a Canadian company constituted income. The majority shareholder was the American parent of the Canadian company. The payment was made to thwart possible litigation arising from the sale of part of the Canadian company’s assets below book value. The Court concluded that the payment in question was not taxable because it “was of an unusual and unexpected kind that one could not set out to earn as income from shares” (at page 820). The Court also referred to several indicia which could be applied when assessing whether a receipt constitutes income from a source. The Court was careful, however, to stipulate that while each of the following may be relevant, none is conclusive in determining whether a payment represents a windfall gain (at pages 818-819):
(a) [The taxpayer] had no enforceable claim to the payment;
(b) There was no organized effort on the part of [the taxpayer] to receive payment;
(c) The payment was not sought after or solicited by [the taxpayer] in any manner;
(d) The payment was not expected by [the taxpayer], either specifically or customarily;
(e) The payment had no foreseeable element of recurrence;
(f) The payor was not a customary source of income to [the taxpayer];
(g) The payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by [the taxpayer]; it was not earned by [the taxpayer], either as a result of any activity or pursuit of gain carried on by [the taxpayer] or otherwise.
There is one aspect of Cranswick which does not appear to have been pursued on appeal. It is open to question whether the taxpayer in that case received the payment in return for relinquishing the right to seek compensation for losses suffered as a result of the disadvantageous sale. It would appear that that issue had to be abandoned since the agreed statement of facts stipulated that the payment in question was not made by reason of an enforceable claim by the minority shareholders against the Canadian company. That concession on the part of the Minister cannot be ignored for as the law presently stands monies paid in exchange for the discharge of even a questionable legal right may constitute income in the hands of the taxpayer. This is one of the teachings of Mohawk Oil Co. v. Canada, supra.
Finally there are two decisions of the Supreme Court which must be acknowledged. The first is Curran v. Minister of National Revenue, [1959] S.C.R. 850. In that case the taxpayer received $250,000 from a third party as an inducement to leave his present employment. The agreement between the taxpayer and the third party stipulated that the payment was “in consideration of the loss of pension rights, chances for advancement, and opportunities for re-employment” (at page 853). A majority of the Supreme Court recognized that the source of the payment was the taxpayer’s employment with the third party. The payment of $250,000 received by the taxpayer was held to be income within the meaning of what is now paragraph 3(a) of the Act.
The other decision of the Supreme Court which must be acknowledged is Canada v. Fries, [1990] 2 S.C.R. 1322. In that case the Supreme Court held that strike pay does not constitute income from a source under paragraph 3(a). The taxpayer had gone on strike and received weekly strike pay, from his union, equal to his normal net take-home pay. The union’s strike fund was accumulated from the tax deductible dues paid by its members. At the time the union members voted to go on strike they were aware of a union recommendation that they be reimbursed for their loss of salary and benefits in return for their strike support. In reversing the judgment of the Federal Court of Appeal, the Supreme Court restored the decision of the Tax Review Board. The analysis offered by the Supreme Court is limited to the conclusion that “the benefit of the doubt must go to the taxpayers” (at page 1323), see [1989] 3 F.C. 362(C.A.); affg [1985] 2 F.C. 378(T.D.); revg [1983] CTC 2124 (T.R.B.).
I do not find it necessary to rely on the residual presumption to support the conclusion that a punitive damage award constitutes a windfall gain. Nor am I prepared to base my decision on the fact that an award of additional interest is, arguably, non-recurring, unexpected or an unusual form of income. As a general proposition, I accept that monies received by a taxpayer from an expropriating authority constitute income from a productive source. As well, I accept that the taxpayer has an enforceable right to additional interest once the Board concludes that there was fault on the part of the expropriating authority. Furthermore, it matters not whether the taxpayer actively sought payment of additional interest. The critical factor is that the punitive damage award does not flow from either the performance or breach of a market transaction. Of course, no distinction should be drawn between voluntary and involuntary market exchanges.
In the case at hand, the source of the additional interest award is not the expropriating authority. That body is merely the payor. The true source of the award is the Expropriation Act which dictates as a matter of public policy, that expropriating authorities are obligated to pay a penal sum in circumstances where their behaviour falls below a prescribed standard. An award of additional interest under subsection 66(4) of the Expropriation Act is unrelated to the issue of fair compensation for expropriated lands. That concern is dealt with fully under section 42 and subsection 66(2). In certain respects an award of additional interest possesses the attributes of a gift. The taxpayer is the beneficiary, not of the expropriating authority’s largesse, but of the legislature’s desire to ensure that minimum standards of commercial behaviour are observed. The taxpayer’s gain is the expropriating authority’s loss. The payment in question does not flow from either an express or implied agreement between the parties. There is no element of bargain or exchange. There is no consideration. There is no quid pro quo, on the part of the taxpayer. The payment is simply a windfall and, therefore, not income under paragraph 3(a) of the Act.
In reaching the above conclusion, I have not lost sight of the fact that the payment of additional interest is as much a part of the statutory scheme as is the payment of compensation for expropriated lands. But for the expropriation, the possibility of obtaining additional interest would not have materialized and, therefore, it is arguable that we should not isolate specific awards which are woven into the compensatory fabric of legislation. As much as that line of reasoning may be attractive to some, I do not find it persuasive.
In my view, you cannot treat a non-compensatory receipt in the same manner as a compensatory one simply because both arise from the same transaction. As the law presently stands we must look to the nature and purpose of a particular payment or award when assessing how it will be dealt with for tax purposes. This is certainly true with respect to the tax treatment of awards or settlements stemming from contractual or tortious claims. Such receipts are not treated automatically as a unitary sum. In regard to personal injury claims, the tax treatment accorded to general and special damages by the Minister is not the same as that attributable to restitution for the loss of income from employment: see Interpretation Bulletin IT-365R2 and IT-183. In cases involving breach of contract, allocations may be made according to the type of loss for which compensation has been paid: see Mohawk Oil Co. v. Canada, supra. The same approach is applicable to a receipt item which is characterized as a punitive damage award.
For the above reasons, I would allow the appeal in part, set aside the judgment of the Trial Division dated July 7, 1994 to the extent that the sum of $114,272 representing additional interest was held to be income and remit the matter to the Minister for reassessment in accordance with these reasons. In all other respects the appeal will be dismissed. The taxpayer should have her costs of this appeal.
Stone J.A.: I agree.
Décary J.A.: I agree.