T-2679-89
Westcoast Energy Inc. (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: WESTCOAST ENERGY INC. V. CANADA (T.D.)
Trial Division, Denault J.—Vancouver, November
13 and 14, 1990; Ottawa, April 25, 1991.
Income tax — Income calculation — S. 12(1)(x) requiring
inclusion in income of reimbursement received in respect of
cost of property — Action for negligence and breach of con
tract for manufacture and testing of defective pipeline settled
— Settlement amount, equivalent to cost of replacing pipeline,
not included in income — "Reimbursement" in s. 12(1)(x) not
including damage award — Ordinary meaning "to repay" —
Other legal relationships (i.e. agency, guaranty) contemplated
by "reimbursement", wherein flow of benefits between parties,
distinguished — S. 12(1)(x) not intended to include case law
on damage awards — Departure from previous law to remedy
situation in Canada v. Consumers' Gas Co., [1987] 2 F.C. 60
(C.A.) — Not up to Court to remedy taxation inequity in that
undepreciated capital cost of Class 10 property not reduced by
damage award, but cost of replacing pipeline included therein.
This was an appeal from a reassessment of the plaintiff's
1985 income tax return. Interprovincial Steel and Pipeline
Corporation (IPSCO) had manufactured and tested a pipeline
to transmit unprocessed gas for the plaintiff. Three years after
installation the pipeline failed because of cracking on the inside
weld of the pipe. The plaintiff built a new pipeline and included
the costs of replacing the defective pipe in the undepreciated
capital cost of its Class 10 property. It then commenced an
action against IPSCO claiming damages for breach of contract
and negligence. The case was settled, IPSCO paying the plain
tiff approximately $20 million in complete and full satisfaction
of all claims. The plaintiff did not include the amount received
from IPSCO in income, and did not reduce its undepreciated
capital cost of Class 10 property. On reassessment the $20
million was included in income, under subparagraph
12(1)(x)(iv), as reimbursement for the cost of the replacement
pipe. Subparagraph 12(I)(x)(iv) requires that any amount
received in the course of earning income from a business or
property as reimbursement in respect of the cost of the property
be included in income. The plaintiff suggested that the cases on
taxing damage awards could be distinguished from what para
graph 12(1)(x) intended to capture through the word "reim-
bursement", and argued that the measurement of the amount
of the payment does not determine its character, and that the
amount received was not a reimbursement under either the
ordinary or legal meaning of the word. The defendant submit-
ted that although the plaintiff sought compensation for the
wrong committed, the replacement factor weighed heavily in its
recourse against IPSCO; as the settlement did not admit
liability, the plaintiff's action was in reimbursement, not dam
ages; and, the use of "reimbursement" in paragraph 12(1)(x)
incorporated recent tax law characterizing damages to a large
extent as reimbursement. The issue was whether the settlement
award was a "reimbursement" within subparagraph
12(I)(x)(iv).
Held, the appeal should be allowed.
The lawsuit against IPSCO was an action in damages for
failure of the old pipeline and not in reimbursement. Its aim
was to put the plaintiff in the same position as if IPSCO had
built the pipeline according to the contract specifications. That
there was no admission of liability did not prevent the payment
from being a damage award. The only reason for the settlement
payment was to remedy the wrong IPSCO had committed in
constructing the old pipeline. That the measure of damages
with respect to the old pipeline was based on what it cost to
replace the pipeline and that the new pipeline was commenced
before the action, did not change the character of the lawsuit.
The replacement cost was a factor only in so far as it estab
lished the amount of damages.
"Reimbursement" does not include damage awards. Its ordi
nary meaning is "to repay". It contemplates other legal rela
tionships than parties to a law suit (i.e. agency, guaranty), all
of which involve a flow of benefits between the parties. There
was here no flow of benefits. The plaintiff expended a sum of
money to replace a defective pipeline emanating from a breach
of contract. IPSCO had no legal obligation to pay back the
money. Its legal obligation arose when the action was settled
out of court.
As to legislative intent, paragraph 12(1)(x) was designed to
capture the amount received for the cost of an asset by any
reimbursement or similar payment that relates to the acquisi
tion of the asset or the incurring of the expense. Parliament did
not intend to include the case law on damage awards within
paragraph 12(1)(x). It was not just another provision to include
capital amounts in damage awards. It was a departure from
previous law rather than a clarification of existing law as
evidenced by the existence of a transitional provision. More
over, the new section introduced a choice to the taxpayer either
to reduce the undepreciated capital cost or include the amount
in income. The word "reimbursement" was included to remedy
the situation in Canada v. Consumers' Gas Co., [1987] 2 F.C.
60 (C.A.), wherein the taxpayer was neither required to include
in income payments from third parties in respect of certain
pipeline relocations carried out at the latter's request nor to
adjust its capital cost base.
Although there existed a taxation inequity in that the plain
tiff was able to add the costs of rebuilding its pipeline to its
undepreciated capital cost, but did not reduce its undepreciated
capital cost by the amount recovered from IPSCO, the Court
was not prepared to expand the legal meaning of "reimburse-
ment" to make the tax system fair. Parliament could have been
more specific if the intention was to include commercial
damage awards in paragraph 12(1)(x).
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 5(1), 9,
12(1)(x) (as am. by S.C. 1986, c. 6, s. 6),
13(21)(c),(d),(/), 54(h)(iii), 248(1).
CASES JUDICIALLY CONSIDERED
APPLIED:
The Queen v. Atkins (1976), 68 D.L.R. (3d) 187; [1976]
CTC 497; 76 DTC 6258; 13 N.R. 338 (F.C.A.); Wood-
ward Stores Ltd. v. Canada, 11991] 1 C.T.C. 233;
(1991), 91 DTC 5090 (F.C.T.D.).
DISTINGUISHED:
Canada v. Consumers' Gas Co., [1987] 2 F.C. 60; [1987]
I C.T.C. 79; (1986), 87 DTC 5508; 8 F.T.R. 321; 72
N.R. 206 (C.A.); affg [1986] 1 C.T.C. 380; (1986), 86
DTC 6132; 2 F.T.R. 30 (F.C.T.D.).
CONSIDERED:
Henley v. Murray (1949), 31 T.C. 351 (K.B.); R. v.
Consumers' Gas Company Ltd., [1984] 1 F.C. 779;
[1984] CTC 83; (1983), 84 DTC 6058; 52 N.R. 106
(C.A.); Bayker Construction Ltd. v. M.N.R. (1974), 74
DTC 1236 (T.R.B.).
REFERRED TO:
Minister of National Revenue v. Pillsbury Holdings Ltd.,
[1965] 1 Ex. C.R. 676; [1964] C.T.C. 294; (1964), 64
DTC 5184; Johnston (R. M.) v. M.N.R., [1987] 2 C.T.C.
2374; (1987), 87 DTC 632 (T.C.C.); London and
Thames Haven Oil Wharves, Ltd. v. Attwooll (Inspector
of Taxes), [1967] 2 All E.R. 124 (C.A.); Courrier MH
Inc v The Queen, [1976] CTC 567; (1976), 76 DTC 6331
(F.C.T.D.); R. v. Manley, [1985] 2 F.C. 208; [1985] I
CTC 186; (1985), 85 DTC 5150; 57 N.R. 364 (C.A.).
AUTHORS CITED
Black's Law Dictionary, 4th ed., St. Paul, Minn.: West
Publishing Co., 1968, "reimburse".
Budget 1985, Canada Tax Service, 2nd ed., Special
Release, Toronto: DeBoo, May 23, 1985.
McGregor, Harvey, McGregor on Damages, 15th ed.
London: Sweet & Maxwell Ltd., 1988.
Shorter Oxford English Dictionary, vol. II, 3rd ed.,
Oxford: Clarendon Press, 1978, "reimburse".
COUNSEL:
W. J. A. Mitchell, Q.C. and Karen R. Shar-
low for plaintiff.
T. I. McAuley for defendant.
SOLICITORS:
Thorsteinssons, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DENAULT J.: This is an appeal from a reassess
ment by Revenue Canada of the plaintiff's corpo
rate income tax return. It involves a sum of
$20,250,000 received by the plaintiff from Inter-
provincial Steel and Pipeline Corporation (herein-
after referred to as "IPSCO") in settlement of a
court action. The parties have narrowed the issue
to a question of whether the amount is a reim
bursement pursuant to paragraph 12(1)(x) of the
Income Tax Act (the "Act") [S.C. 1970-71-72, c.
63 (as am. by S.C. 1986, c. 6, s. 6)]. If the
settlement award falls under paragraph 12(1)(x),
it should have either been included in the plain
tiff's corporate income or the undepreciated capi
tal cost of the plaintiff should have been reduced
by the amount received in the taxation year 1985.
FACTS
The facts are not in dispute and the material
ones were agreed to by the parties.
The plaintiff is a company with its head office in
Vancouver B.C. It is involved in buying unpro-
cessed gas in B.C., Alberta, the Yukon and the
Northwest Territories. It sells processed gas to
customers in B.C. and the U.S. In 1977, the
plaintiff required a line approximately 100 miles
long to transmit unprocessed gas from a number of
gas fields to its Pine River processing plant. The
line became known as the Grizzly Pipeline. The
plaintiff hired IPSCO to manufacture and test the
pipe to be used in the Grizzly Pipeline. The plain
tiff installed the pipeline in 1978. The line was
first used to transmit sweet gas and commencing
January 1980, the pipe began to carry sour gas.
The Grizzly Pipeline failed on July 20, 1981
after which it was shut down for repair. It failed
again on July 27, 1981 after which its use was
restricted by the National Energy Board on the
grounds of public safety. Both of these failures
occurred as a result of cracking on the inside of the
longitudinal weld of the pipe.
On March 29, 1982 the plaintiff's Board of
Directors approved the expenditure to replace the
Grizzly Pipeline after which the plaintiff con
structed a new pipeline to carry out the transmis
sion of sour gas on approximately 27 kilometres of
the existing Grizzly Pipeline. The costs incurred by
the plaintiff in replacing the defective pipe were
included in the undepreciated capital cost of the
plaintiff's Class 10 property.
The plaintiff commenced an action against
IPSCO and others on May 4, 1982 alleging that
the failed pipe was defective and did not meet
contract specifications. It claimed damages for
breach of contract, negligence and breach of duty
of IPSCO to warn the plaintiff. The plaintiff's
claim was estimated to be $22,032,000. On Octo-
ber 30, 1985 before the trial, an agreement of
release and settlement was entered into whereby
the plaintiff was paid $20,250,000 in complete and
full satisfaction of all claims and demands set
forth in the further amended statement of claim.
Upon joint application by the plaintiff and IPSCO
the terms of the agreement were incorporated by
reference to an order of the Supreme Court of
British Columbia on October 30, 1985 and entered
on November 7, 1985.
In its income calculation for the 1985 taxation
year, the plaintiff excluded the amount received
from IPSCO as being damages, and therefore, not
subject to taxation pursuant to any of the provi
sions of the Act. The plaintiff did not reduce the
undepreciated capital cost of Class 10 property by
the amount received by IPSCO.
By notice of reassessment dated August 2, 1989,
Revenue Canada reassessed the plaintiff including
in its income the amount of $20,250,000 as
"Reimbursement re: Grizzly Pipeline" alleging
that this was an amount received by the plaintiff
as a reimbursement in respect of the cost of
replacement pipe in the Grizzly Pipeline and on
that basis was required to be included in the
income of the plaintiff for 1985 pursuant to sub-
paragraph 12(1)(x)(iv) of the Act.
By notification filed the 21st day of September
1989, the plaintiff objected to the reassessment
which the defendant confirmed November 8, 1989.
The plaintiff appeals this reassessment.
PLAINTIFF'S ARGUMENT
The plaintiff submits that the $20,250,000 paid
to the plaintiff by IPSCO was a payment of
damages and as such it was not a reimbursement
as the word is used in subparagraph 12(1)(x)(iv).
The money was given to the plaintiff to compen
sate it for the defendant's wrongdoing. The plain
tiff spent between 22 and 25 million dollars on
putting in new pipe where the old pipe was
damaged. The cause of action against IPSCO was
for the damage that was done to the old pipe and it
was based on breach of contract and negligence.
The plaintiff's reasoning is threefold. First,
counsel for the plaintiff reviews the history of
taxing damage awards and distinguishes these
authorities from what paragraph 12(1) (x) was
designed to capture through the word reimburse
ment. It draws the analogy between damages for
personal injury. If damages are included in the
word reimbursement, there is no distinction when
someone is injured by a truck and sues for
damages.
The fact that it was a settlement award does not
change its character as a damage award in law.'
Furthermore, the agreement between Westcoast
and IPSCO was incorporated by reference into an
order of the B.C. Supreme Court. Therefore, it
was a judgment.
Second, the measurement of the amount of the
payment does not determine its character. The fact
that the amount of the claim for damages was
based on the cost to the plaintiff of putting itself in
a right position does not change the character of
the award which was damages for the wrongdoing
committed by IPSCO against the plaintiff.
Third, it states that the amount received is not a
reimbursement under either the ordinary or legal
meaning of the word. The dictionary meaning of
reimbursement is "to repay or make up to a
(person) the sum expended: to repay, recompense
(a person)". The damage award is distinguished
from the ordinary meaning of the word reimburse
ment which connotes a restoration of a flow of
benefits between the parties. IPSCO was not
recompensing the plaintiff for any benefit IPSCO
derived from an expenditure made by the plaintiff;
IPSCO's payment was for the wrongdoing it had
committed with respect to the old pipe. In other
words it was not repaying an amount to the plain
tiff, it was simply compensating for its own wrong.
Along this line of argument, Mr. Macintosh, the
lawyer for the plaintiff in its suit against IPSCO,
framed the action in breach of contract, negligence
and failure of the duty to warn. In Mr. Macin-
tosh's opinion, there was no basis for an action in
reimbursement with respect to the new pipe.
Therefore, the damages cannot be considered a
reimbursement under subparagraph 12(1)(x)(iv)
of the Act.
' Henley v. Murray (1949), 31 T.C. 351 (K.B.), at p. 366.
DEFENDANT'S ARGUMENT
The defendant's position is that the $20,250,000
was a reimbursement, and therefore taxable
income pursuant to paragraph 12(1) (x) of the Act.
It reads 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:
(x) any amount (other than a prescribed amount) received
by the taxpayer in the year, in the course of earning income
from a business or property, from
(iv) as a reimbursement, contribution, allowance or as
assistance, whether as a grant, subsidy, forgivable loan,
deduction from tax, allowance or any other form of assist
ance, in respect of the cost of property or in respect of an
expense
to the extent that the amount
(v) was not otherwise included in computing the taxpayer's
income for the year or a preceding taxation year,
(vi) except as provided by subsection 127(11.1), does not
reduce, for the purposes of this Act, the cost or capital cost
of the property or the amount of the expense, as the case
may be,
(vii) does not reduce pursuant to subsection 13(7.4) or
paragraph 53(2)(s), the cost or capital cost of the prop
erty, as the case may be, or
(viii) may not reasonably be considered to be a payment in
respect of the acquisition by the payor or the public
authority of an interest in the taxpayer, his business or his
property.
The defendant's submission centres around its
interpretation of the section. The purpose of the
section is to require a taxpayer to apply reimburse
ments against either the costs of the property by
reducing the undepreciated capital cost or alterna
tively to have the amount included in income.
This section was implemented in response to
certain court cases, in particular Consumers' Gas'
in which the taxpayer was in the business of
'- Canada v. Consumers' Gas Co., [ 1987] 2 F.C. 60 (C.A.).
The Federal Court of Appeal decided in R. v. Consumers' Gas
Company Ltd., [1984] I F.C. 779 that the reimbursements did
not affect the undepreciated capital cost. In the 1987 case, the
Federal Court of Appeal upheld the Federal Court Trial Divi
sion [1986] 1 C.T.C. 380 finding that reimbursements do not
have to be included in the taxpayer's income.
distributing natural gas. The taxpayer received
certain payments from third parties in respect of
certain pipeline relocation carried out at the Tat
ter's request. The taxpayer treated the reimburse
ments as capital receipts which resulted in reduc
ing the annual depreciation of the assets and the
taxpayer's income was higher than it would have
been had the reimbursements been taken into
account. The Federal Court of Appeal held that 1)
the corporation was not required to include that
amount in its income and 2) it was also not
required to adjust its capital cost base. This deci
sion created an inequity to which Parliament
addressed its attention. This is evidenced by the
budget speech for 1985:
It is a generally accepted commercial principal [sic] that the
cost of an asset or the amount of an expense should be reduced
by any reimbursement or similar payment received that relates
to the acquisition of the asset or the incurring of the expense.
For example, a commercial tenant who was reimbursed by a
landlord for part or all of the cost of making leasehold improve
ments would subtract the payment in computing the cost of
such property. A similar result would arise with respect to the
manufacturers' rebates.
Recent court decisions have indicated that this principle [sic]
may not apply for all income tax purposes.
The budget proposes to require that all payments in the nature
of reimbursements or inducements in respect of the acquisition
of an asset or the incurring of a deductible expense be included
in income for tax purposes unless the recipient elects to reduce
the cost basis of the related property or the amount of related
expense.'
Since Parliament directed its mind to solving this
inequity, the plaintiff must either include the
$20,250,000 as income or adjust its capital cost
base.
In support of its position, the defendant submits
that the evidence indicates that the replacement
cost and reimbursement of the old pipe were inex
tricably linked. In other words while the plaintiff
sued for the wrong committed by IPSCO and
sought compensation for its wrong, the replace
ment factor weighed heavily in its cost summaries
for the pipe replacement and in its recourse
against IPSCO. The defendant refers to the posi
tion paper prepared by Mr. Kavanagh who is the
Vice President of Engineering and Construction at
3 Budget 1985, Canada Tax Service, Special Release, May
23, 1985, at p. 79.
Westcoast. He recommended that "[r]ecourse be
sought from IPSCO for the replacement of the
pipe and installation for all of the pipeline
constructed...".
Furthermore, the defendant submits that the
settlement does not make any admission of liabili
ty. This supports the conclusion that the plaintiff's
action was in reimbursement and not damages.
With respect to the plaintiff's argument that the
amount represents a damage award and is there
fore not taxable, the defendant argues that wheth
er it is labelled a reimbursement or damages does
not matter, because recent tax law goes beyond
this distinction to characterize damages as reim
bursements to a large extent.
The defendant withdrew its alternative argu
ments. It had alternatively argued that the
$20,250,000 constituted compensation for property
injuriously affected or compensation for property
damages pursuant to paragraphs 13(21)(c),
13(21)(d) and 13(21)(f) [as am. by S.C. 1976-77,
c. 4, s. 3; 1977-78, c. 1, s. 6] and that it therefore
should reduce the undepreciated capital cost
claimed by the plaintiff. It withdrew its further
alternative argument that the amount is taxable as
compensation for repairing damaged property pur
suant to paragraph 12(1)(f). Therefore, the sole
issue in this trial is whether the $20,250,000 is a
reimbursement pursuant to subparagraph
12(1)(x)(iv).
FINDINGS
In an income tax appeal by the taxpayer, the
onus is on the plaintiff to discharge the basis of the
Minister's assessment. 4 In the present appeal,
Revenue Canada took the view that the amount
received from IPSCO was intended to reimburse
the plaintiff for the cost of the new pipe and not
for the damages relating to the cost of the old pipe
4 Minister of National Revenue v. Pillsbury Holdings Ltd.,
[1965] 1 Ex. C.R. 676; Johnston (R. M.) v. M.N.R., [1987] 2
C.T.C. 2374 (T.C.C.).
and secondly that the amount received was not
damages, but was a reimbursement.
Having reviewed the evidence, including the tes
timonies of Messrs. Kavanagh and Macintosh, I
have reached the conclusion that the lawsuit
against IPSCO was an action in damages and not
in reimbursement. I find as a fact that it was an
action for breach of contract and negligence.
Counsel for the defendant emphasized the fact
that the release and settlement agreement with
IPSCO made no admission of liability. However,
for several reasons, this argument does not support
his submission that the action was one for reim
bursement. Rarely does a settlement agreement
make any admission of liability. Mr. Macintosh
indicated in his testimony that the main concern
was a clause in the contract limiting IPSCO's
liability to the cost of the pipeline. In the action,
Westcoast attempted to recover all of the costs
including the replacement of the damaged pipe
line, as well as the cost of all of the research and
studies that it had conducted. In short, the objec
tive of the lawsuit was to put Westcoast in the
same position as if IPSCO had built the pipeline
according to the contract specifications. The limi
tation of liability clause was one of the motivating
factors to settle the matter out of court because
Westcoast was concerned that the Court might
apply the clause, thereby reducing the claim. How
ever, Mr. Macintosh testified that he is certain
that the plaintiff would have obtained judgment at
trial.
As a legal principle, the fact that there was no
admission of liability does not prevent the payment
from being an award for a damage claim.' In Her
Majesty the Queen v. Atkins, 6 Jackett C.J. (as he
then was) reiterated the legal principle as follows:
s Supra, note 1 at pp. 366-367.
6 The Queen v. Atkins (1976), 68 D.L.R. (3d) 187 (F.C.A.),
at pp. 188-189.
Once it is conceded, as the appellant does, that the respond
ent was dismissed "without notice", moneys paid to him
(pursuant to a subsequent agreement) "in lieu of notice of
dismissal" cannot be regarded as "salary", "wages" or "remu-
neration" or as a benefit "received or enjoyed by him ... in
respect of, in the course of, or by virtue of the office or
employment". Moneys so paid (i.e., "in lieu of notice of dismis
sal") are paid in respect of the "breach" of the contract of
employment and are not paid as a benefit under the contract or
in respect of the relationship that existed under the contract
before that relationship was wrongfully terminated. The situa
tion is not altered by the fact that such a payment is frequently
referred to as so many months' "salary" in lieu of notice.
In the present case, even if it was settled, the
British Columbia Supreme Court issued an order
requiring the defendant IPSCO to pay the
impugned sum "in complete and full satisfaction
of all claims". Therefore, the overwhelming evi
dence shows that IPSCO was paying the
$20,250,000 for the wrong it had committed in
constructing the old pipeline. There is no other
reason why IPSCO would give the plaintiff this
sum of money.
This finding is consistent with the intention of
damage awards. Harvey McGregor in his treatise
McGregor on Damages' demonstrates the histori
cal object of an award of damages:
The object of an award of damages is to give the plaintiff
compensation for the damage, loss or injury he has suffered.
And later on [at pages 7-8] he elaborates:
The statement of the general rule from which one must
always start in resolving a problem as to the measure of
damages, a rule equally applicable to tort and contract, has its
origin in the speech of Lord Blackburn in Livingstone v.
Rawyards Coal Co. He there defined the measure of damages
as "that sum of money which will put the party who has been
injured, or who has suffered, in the same position as he would
have been in if he had not sustained the wrong for which he is
now getting his compensation or reparation."
In the present case, the amount received by the
plaintiff from IPSCO went towards putting it in
the same position that it should have been in if the
latter had not committed the wrong in the first
place. The fact that the cost of replacing the
7 McGregor, H. McGregor on Damages, (1988) - London:
Sweet & Maxwell Ltd., 15th ed., at p. 7.
pipeline weighed heavily in the cost summaries for
the pipeline replacement does not change the char
acter of the award which is the crucial factor. In
this case, the measure of damages with respect to
the old pipe is based on what it cost to replace the
pipeline. The fact that Mr. Kavanagh once recom
mended that "recourse be sought from IPSCO for
the replacement of the pipe and for installation for
all of the pipeline" does not change the character
of the lawsuit. The lawsuit against IPSCO was in
relation to the failure of the old pipe. The replace
ment cost was a factor only in so far as it estab
lished the amount of damages.
Having found that the $20,250,000 received by
the plaintiff from IPSCO was an award of dam
ages, the question is whether the word damages
falls within the meaning of reimbursement as set
out in subparagraph 12(1)(x)(iv).
Both parties in their oral arguments have
referred to jurisprudence on the issue of including
damage awards as taxable income. I will review
briefly the history of damage awards. The issue is
the relationship between previous case law relating
to the taxation of an award of damages and para
graph 12(1)(x).
Prior to 1971, there was no taxation on capital
gains income. Thereafter, the question of whether
a damage award was taxable focused on the issue
of whether the amount was for income or for
capital. In 1972, the new Income Tax Act began to
tax capital gains, and more specifically some types
of damage awards. Subparagraph 54(h)(iii)
defines "proceeds of disposition" as including com
pensation for property destroyed.
If the damage award was compensation for loss
of profits, it was taxable. The reason for this rule
was that the performance of a business contract
will result in income and accordingly damages for
non-performance will also be income, thereby
attracting taxation consequences. On the other
hand if the contract was of sufficient importance
to constitute part of the company's business struc
ture, compensation paid on its termination was
capital in nature and not taxable. An example of a
taxable damage award was in Bayker
Construction, 8 wherein the taxpayer was compen
sated for its loss of inventory or loss of profits. The
damage award was considered income from the
conduct of the taxpayer's business. On the other
hand, the termination of a mail transportation
contract materially crippled the structure of a
delivery company's profit-making apparatus. ° The
Court found that the compensation award was
capital in nature and not taxable.
In The Queen v. Atkins, the taxpayer received a
lump sum amount for wrongful dismissal. The
Federal Court of Appeal held that damages for
wrongful dismissal were not salary pursuant to
subsection 5(1) of the Act»° Parliament changed
the Act; in 1980 [S.C. 1980-81-82-83, c. 140, s.
128], the definition of "retiring allowance" was
amended to include an amount received "(b) in
respect of a loss of an office or employment of a
taxpayer, whether or not received as, on account or
in lieu of payment of, damages or pursuant to an
order or judgment of a competent tribunal".
Counsel for the defendant has referred me to the
R. v. Manley" which involved the issue of dam
ages for breach of warranty of authority. The issue
was whether the damages for breach of warranty
of authority were required to be included as
income pursuant to sections 3, 9 and 248(1) of the
Act. The issue was characterized as whether the
taxpayer's income was profit from an adventure in
the nature of trade. The Federal Court of Appeal
held that it was. It applied the test articulated by
Lord Diplock in London and Thames Haven Oil
Wharves, Ltd. v. Attwooll (Inspector of Taxes),
8 Bayker Construction Ltd. v. M.N.R. (1974), 74 DTC 1236
(T.R.B.).
9 Courrier MH Inc y The Queen, [1976] CTC 567
(F.C.T. D.).
10 Supra, note 6.
11 R. v. Manley, [1985] 2 F.C. 208 (C.A.).
[[19671 2 All E.R. 124 (C.A.), at page 134],
which is as follows:
Where pursuant to a legal right, a trader receives from another
person compensation for the trader's failure to receive a sum of
money which, if it had been received, would have been credited
to the amount of profits, (if any) arising in any year from the
trade carried on by him at the time when the compensation is
so received, the compensation is to be treated for income tax
purposes in the same way as that sum of money would have
been treated if it had been received instead of the
compensation.
And further on, Lord Diplock stated:
If the solution to the first problem is that the compensation was
paid for the failure of the trader to receive a sum of money, the
second problem involved is to decide whether, if that sum of
money has been received by the trader, it would have been
credited to the amounts of profits (if any) arising in any year
from the trade carried on by him at the date of receipt, i.e.,
would have been what I shall call for brevity an income receipt
of that trade.
Counsel for the defendant submits that this case
is authority for the legal position that damage
awards are taxable. His reasoning is that damage
awards are split into two parts, the income stream
and the capital stream. If an award falls within the
income stream, and it can be proven that the
damages relate to lost profits, or for example,
salary, then it attracts taxation. However, if the
award falls within the capital stream, the issue is
not as clear cut. There are clear cut examples such
as damages relating to a capital gain which attract
taxation. With the issue of capital, the issue is
more complicated, and there are various provisions
in the Act which include capital damage awards as
taxable income. In the defendant's submission,
paragraph 12(1)(x) is the most recent provision to
tax capital stream damage awards. Effectively
what he is arguing is that the word reimbursement
in paragraph 12(1)(x) incorporates the case law
on taxing damage awards in the capital stream of
income. However, it is necessary to examine the
plain and ordinary meaning of the word reim
bursement, as well as the legislative intent in
enacting paragraph 12(1)(x).
To recapitulate, the relevant portions are 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:
(x) any amount (other than a prescribed amount) received
by the taxpayer in the year, in the course of earning income
from a business or property, from
(iv) as a reimbursement, contribution, allowance or as
assistance, whether as a grant, subsidy, forgivable loan,
deduction from tax, allowance or any other form of assist
ance, in respect of the cost of property or in respect of an
expense
to the extent that the amount
(v) was not otherwise included in computing the taxpayer's
income for the year or a preceding taxation year,
(vi) except as provided by subsection 127(11.1), does not
reduce, for the purposes of this Act, the cost or capital cost
of the property or the amount of the expense, as the case
may be,
(vii) does not reduce pursuant to subsection 13(7.4) or
paragraph 53(2)(s), the cost or capital cost of the prop
erty, as the case may be, or
(viii) may not reasonably be considered to be a payment in
respect of the acquisition by the payor or the public
authority of an interest in the taxpayer, his business or his
property;
Paragraph 12(1)(x) was added in 1986. 12 The
section included a transitional provision as follows:
... with respect to amounts received after May 22, 1985 other
than amounts received after that date pursuant to the terms of
an agreement in writing entered into before May 23, 1985 or to
the terms of a prospectus, preliminary prospectus or registra
tion statement filed before May 24, 1985 with a public author
ity in Canada pursuant to and in accordance with the securities
legislation of Canada or of any province and, where required by
law, accepted for filing by such authority.
The section was designed to capture the amount
received for the cost of an asset by any reimburse
ment or similar payment received that relates to
the acquisition of the asset or the incurring of the
expense. Examples given include reimbursement to
a commercial tenant by the landlord for leasehold
improvements. To accomplish this, the budget
required that "all payments in the nature of reim
bursements or inducements in respect of the acqui
sition of an asset or the incurring of a deductible
expense be included in income for tax purposes
unless the recipient elects to reduce the cost basis
of the related property or the amount of related
12 An Act to amend the Income Tax Act and related statutes,
S.C. 1986, c. 6, s.6(2), amending S.C. 1970-71-72, c. 63.
expense". 13 Obviously, the Court is not bound by
Parliamentary debates, and it must interpret the
legislation as it is, in its final form.
I refer to a decision of my colleague Joyal J. in
which he held that paragraph 12(1)(x) was a
departure from the previous law rather than a
clarification of existing law. In Woodward Stores
Ltd. v. Canada," Joyal J. considered whether
inducements to attract the retail tenant Woodward
Stores were taxable prior to the enactment of
paragraph 12(1)(x). Joyal J. held that the provi
sions of paragraph 12(1)(x) represent a statutory
departure from generally accepted accounting
principles. At page 246, he held that the existence
of a transitional provision seemed to rebut a pre
sumption that the legislator intended merely to
clarify the existing state of law when that para
graph was enacted. Moreover, Joyal J. reasoned,
the new section introduced a choice to the taxpay
er either to reduce the undepreciated capital cost
or include the amount in income. "This is definite
ly a change in the law, as it was held by the
Federal Court of Appeal in Consumers' Gas,
supra, that the capital cost of depreciable property
need not be reduced by the amount of the payment
for capital cost allowance purposes". 15
The facts in the case at bar are different from
Woodward Stores Ltd. However, the reasoning
with respect to the legislative intent of paragraph
12(1)(x) is applicable. Paragraph 12(1)(x) repre
sents a statutory departure from existing law to
include in the taxpayer's income money as a reim
bursement. The same choice is available to the
taxpayer, and the same transitional provision
applies. The inclusion of the word reimbursement
was designed to remedy the situation as found in
Consumers' Gas. I conclude that the word reim
bursement is a change in the law. However, the
l' Supra, note 3.
"Woodward Stores Ltd. v. Canada, [1991] 1 C.T.C. 233
(F.C.T.D.); appeal filed.
15 /bid., at p. 246.
question is whether the statutory change was
intended to capture damage awards, as it has
developed through statutory change and case law.
The word reimbursement in the ordinary sense,
as defined in the Shorter Oxford English Diction
ary, is as follows:
Reimburse ... To repay or make up to a person (a sum
expended.) 2. To repay, recompense (a person). ... Reimburse
ment, the act of reimbursing, repayment.
Black's Law Dictionary also defines the word
reimburse as: "to pay back, to make restoration, to
repay that expended; to indemnify or make
whole".
Examples of the word reimbursement in differ
ent legal relationships were cited. First, there is a
compulsory payment. This is a situation where a
person has been compelled by law to pay and pays
money for which another is ultimately liable. The
payer can make a claim for reimbursement from
the latter individual. Second, there is the example
of where a person makes repairs or improvements
to property which he believes to be his own. He
can claim a reimbursement against the owner of
the property. Third, there is the situation where a
person, such as a guarantor, discharges more than
his proportionate part of a debt. He can take
action for reimbursement against the co-guaran
tors. Finally, in the law of agency, a principal is
liable to reimburse his agent for reasonable
expenses incurred in an emergency, even if the
agent exceeded his actual authority.
Based on the above analysis, I accept these
examples as an accurate reflection of what the
word means and the meaning that Parliament
intended to capture by enacting paragraph
12(1)(x). The budget debates referred to similar
situations, such as the landlord/tenant leasehold
improvements. Moreover, as previously discussed,
the amendment was designed to capture a situa
tion such as in Consumers' Gas, wherein the tax
payer made an improvement to its property at the
request of ratepayers and was later reimbursed for
its expenditure. It was also the case in Consumers'
Gas that the taxpayer frequently relocated pipe
lines and it always sought reimbursement from the
requesting party up to the maximum amount per
mitted by law. In this case, the damage award was
a one-time payment and it was not made at the
behest of the party paying the sum. Rather, it was
paid in order to release the defendant IPSCO from
liability for its breach of contract.
In all of the examples of the word reimburse
ment, there exists a flow of benefits between the
respective parties. The person who benefits is
under a legal obligation to pay back the amount
expended. In this case, the plaintiff expended a
sum of money to replace a defective pipeline ema
nating from a breach of contract. There is no other
reason why the plaintiff would have expended the
money. Nor was there any legal obligation on the
part of IPSCO to pay back the money expended.
The legal obligation that IPSCO incurred arose
when the action was settled out of court. I have
found as a fact that the court settlement represent
ed a damage award. There is no other reason why
the defendant IPSCO would have given the plain
tiff $20,250,000.
The strongest factor supporting the defendant's
position is that the failed pipeline was replaced and
the replacement factor weighed heavily in the
plaintiff's lawsuit against IPSCO. The plaintiff
paid over $6 million for the original pipeline, while
it received more than $20 million in the settlement.
Moreover, the plaintiff first built the new pipeline
and then sought recovery for damages from
IPSCO. These factors, in the defendant's submis
sion constitute a reimbursement for the monies
expended. However, this course of action does not
nullify the reason for which the plaintiff sought
damages, which was for the negligence and breach
of contract of IPSCO.
It is my conclusion that reimbursement does not
include damage awards. It is not based on the
evidence to say that the plaintiff received a reim-
bursement as defined in paragraph 12(1)(x). The
ordinary and legal meaning of the word does not
contemplate an award of damages. In this case,
the plaintiff did not rebuild its pipeline at the
request of IPSCO, to be reimbursed later by the
cost as occurred in the Consumers' Gas case. Nor
is it analogous to a landlord/tenant situation
whereby the tenant will make a leasehold improve
ment which benefits him during his tenancy and
which amounts to a leasehold improvement, there
by benefitting the landlord. In short, there was no
flow of benefits between the parties.
I find that it was not Parliament's intention to
include the jurisprudence on damage awards which
I have outlined within paragraph 12(1)(x). I do
not accept the defendant's submission that para
graph 12(1)(x) is just another provision to include
capital amounts in damage awards. The section
represented a legislative change and it was intend
ed to remedy a particular gap in the law of taxa
tion, which is exemplified in the Consumers' Gas
case. There is no evidence that Parliament intend
ed the section to include the jurisprudence on
damage awards under the word reimbursement. It
is not necessary for me to decide whether the
plaintiff's damage award shall be taxable or
whether the plaintiff's undepreciated capital cost
should be reduced by the amount under other
provisions of the Act. The parties have narrowed
the issue to reimbursement under subparagraph
12(1) (x) (iv).
For example, in changing the definition of
"retiring allowance" Parliament intended to
remedy the income taxation vacuum as a result of
the Atkins case. The case law which I have
reviewed dealt with specific sections of the Act.
Paragraph 12(1)(x) is a change in the existing
law, for the reasons I have outlined. Parliament
has not evidenced any intent that the word
includes reimbursement commercial damage
awards. Moreover, the ordinary and legal meaning
of the word reimbursement contemplates different
legal relationships than that of parties in a law
suit. Therefore, I cannot accept the defendant's
submission that the word reimbursement under
paragraph 12(1)(x) includes damage awards.
However, I do not accept the plaintiff's analogy
between its loss and a personal injury award. The
pain and debilitation that a person suffers as a
result of a personal injury cannot be compared to a
failed pipeline. Moreover, a damage award cannot
compensate the loss of a limb, for example. It can
only go part way to alleviating the harm that a
tortfeasor commits on a victim. In pure monetary
terms, the plaintiff's witness Mr. Kavanagh testi
fied that the plaintiff is a cost-of-service company
and that it did not suffer any loss of profits in the
wake of the failed pipeline. Westcoast was able to
replace the pipeline, make it operational and
recover damages for the failure of the first pipe
line. The two types of actions are completely dif
ferent. If commercial damage awards are not
reimbursement, then a fortiori a personal injury
award does not constitute a reimbursement.
I can appreciate the defendant's position that
this situation creates a taxation inequity. The
plaintiff in this case added the costs of rebuilding
the failed pipeline to its undepreciated capital cost,
sought recovery from IPSCO for breach of con
tract, recovered monies for the reconstruction, and
then did not reduce its undepreciated capital cost
by the amount recovered, as well as not including
its damage award in its corporate income. How
ever, I am not prepared to expand the legal mean
ing of the word reimbursement to capture this
inequity. It is not the function of this Court to
expand the meaning of a word to make the tax
system fair. Parliament could have been more
specific if the intention was to include commercial
damage awards in paragraph 12(1)(x). If there is
any ambiguity in legislative intent to tax, the
taxpayer is entitled to the benefit of the doubt.
CONCLUSION
The appeal is allowed and the reassessment for
the income tax year 1985 is vacated. The plaintiff
is entitled to the costs of this action.
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