T-5472-78
J. E. Cranswick (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Grant D.J.—Toronto, January 15
and 22, 1980.
Income tax — Income calculation — Inclusions — Direct
cash payment made to plaintiff by foreign parent company of
subsidiary in which plaintiff was a minority shareholder
Whether the payment is a receipt of income within the provi
sions of the Income Tax Act — Income Tax Act, R.S.C. 1952,
c. 148, as amended by S.C. 1970-71-72, c. 63 and S.C.
1974-75-76, c. 26, ss. 9(1), 15, 248(1).
Plaintiff appeals from reassessments of his 1977 taxable
income, whereby his taxable income was adjusted to include a
special payment made to him by Westinghouse Electric Corpo
ration. The plaintiff owned 640 common shares in the capital
stock of Westinghouse Canada Limited (hereinafter referred to
as WCL). In 1977, Westinghouse Electric Corporation (West-
inghouse Electric), extended to shareholders of WCL the alter
natives of tendering their shares to Westinghouse Electric at
$26 per share or of accepting a direct cash payment of $3.35
per share from Westinghouse Electric and keeping their shares.
The plaintiff did not tender any of his shares, and so received a
direct cash payment of $2,144. The plaintiff was not a share
holder of Westinghouse Electric nor had he any connection
with it at any material time. Westinghouse Electric held
approximately 75% of the shares of WCL at the time the
alternative offers were made. The alternative offers were made
by Westinghouse Electric for its business purposes and in the
hope of avoiding controversy or potential litigation on behalf of
minority shareholders of WCL which may have arisen in result
of the sale of the household appliance division in 1977 for
substantially less than its book value. The offers were made not
by reason of any enforceable claims by WCL shareholders
against Westinghouse Electric. The plaintiff did not include the
direct cash payment from Westinghouse Electric in his 1977
income but his income was reassessed to include the payment.
The issue is whether the payment is a receipt of income within
the provisions of the Income Tax Act.
Held, the appeal is allowed. The payment received by the
plaintiff was not a receipt of income. So far as the plaintiff was
concerned the payment to him was voluntary and no relation
ship existed between the payor and the taxpayer who had no
expectation of receiving the same until he received the offer. It
is most unlikely that a further payment will be made to him in
respect of the transaction. The payment might be termed a
windfall.
Federal Farms Ltd. v. Minister of National Revenue
[1959] Ex.C.R. 91, applied. London Investment and
Mortgage Co., Ltd. v. Inland Revenue Commissioners
[1957] 1 All E.R. 277; [1958] 2 All E.R. 230, distin
guished. J. Glisten & Son Ltd. v. Green [1929] A.C.
(H.L.) 381, distinguished.
INCOME tax appeal.
COUNSEL:
J. B. Tinker, Q. C. and D. J. M. Brown for
plaintiff.
N. Helfield for defendant.
SOLICITORS:
Blake, Cassels & Graydon, Toronto, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GRANT D.J.: This is an appeal by the plaintiff
from reassessments of his taxable income under
the Income Tax Act, R.S.C. 1952, c. 148, in
respect of the year 1977 by the Deputy Minister of
National Revenue whereby the latter adjusted the
same to include a special payment made by West-
inghouse Electric Corporation to him in the total
sum of $2,144. The plaintiff has chosen to appeal
direct to the Federal Court pursuant to the provi
sions of section 172(2) of the Income Tax Act,
rather than to the Tax Review Board.
The parties have filed a statement of facts
agreed upon by them (Ex. 1) which is in the
following words and figures:
AGREED STATEMENT OF FACTS
With respect to the appeal from the reassessment of tax for
the Plaintiff's 1977 taxation year, the Plaintiff and the Defend
ant, by their respective solicitors, for the purposes of this action
only, admit the following facts:
1. The Plaintiff is an individual who resides in the City of
Burlington, in the Province of Ontario.
2. During 1977, the Plaintiff beneficially owned 640
common shares in the capital stock of Westinghouse Canada
Limited (hereinafter referred to as "WCL"), a publicly-trad
ed Canadian corporation.
3. On February 8, 1977, Westinghouse Electric Corporation
("Westinghouse Electric"), a publicly-traded U.S. corpora
tion, extended to shareholders of WCL the alternatives of
tendering their shares to Westinghouse Electric at $26.00 per
share or of accepting a direct cash payment of $3.35 per
share from Westinghouse Electric and keeping their shares.
4. The Plaintiff did not tender any of his shares of WCL
pursuant to the above-mentioned alternative offers. There
fore, in accordance with the second alternative referred to
above, on or about March 18, 1977, the Plaintiff received a
direct cash payment from Westinghouse Electric in the
amount of $2,144.00.
5. The Plaintiff was not a shareholder of Westinghouse
Electric nor had any connection with it at any material time.
6. At the time the alternative offers were made, Westing-
house Electric held approximately 75% of the shares of
WCL.
7. By agreement with White Consolidated Industries Inc., a
U.S. corporation, Westinghouse Electric sold its appliance
business and certain of its world-wide rights to White Con
solidated Industries Inc. as of December 31, 1974. WCL
subsequently agreed to sell to WCI Canada Limited, a
subsidiary of White Consolidated Industries Inc., certain
assets of its household appliance business. The consideration
to be received by WCL for such assets was to have been
equal to their net book value, to be paid by WCI Canada
Limited, plus $8,000,000, to be paid by Westinghouse
Electric.
8. The proposed sale to WCI Canada Limited was subject to
the approval under the Foreign Investment Review Act, S.C.
73-74, c. 46, and after two applications was subsequently not
approved and the agreement between WCL and WCI
Canada Limited was terminated.
9. As of December 31, 1976, WCL agreed to sell its
household appliance business to Canadian Appliance Manu
facturing Company Limited ("CAMCO"). The price to be
paid by CAMCO was approximately $6,000,000 less than
the book value of the household appliance business as of
December 31, 1976. The closing of the sale of CAMCO took
place on June 30, 1977.
10. The alternative offers were made by Westinghouse Elec
tric for its business purposes and in the hope of avoiding
controversy or potential litigation on behalf of minority
shareholders of WCL which may have arisen in respect of
the sale of the household appliance division, particularly as a
result of the disallowance of the original sale to WCI Canada
Limited pursuant to the Foreign Investment Review Act. The
respective offers were not made by reason of any enforceable
claims by WCL shareholders against Westinghouse Electric.
11. In computing his income for the 1977 taxation year, the
Plaintiff did not include the direct cash payment received
from Westinghouse Electric.
12. By his Notice of Reassessment No. 604960 dated Sep-
tember 25, 1978, the Deputy Minister of National Revenue
reassessed the Plaintiff in respect of the 1977 taxation year
and adjusted the Plaintiffs income to include the amount of
$1,474,000. The Notice of Reassessment stated as follows:
Your income has been adjusted to include a special pay
ment of $1,474.00 received in 1977 from Westinghouse
Electric Corporation as a shareholder of Westinghouse
Canada Limited.
This amount represents the direct cash payment in respect of
the 440 shares registered in the Plaintiffs own name (the
remaining 200 shares owned by the Plaintiff are registered in
the name of Wood Gundy Limited).
13. On October 4, 1978, the Plaintiff duly filed a Notice of
Objection with respect to the said reassessment.
14. By his Notice of Reassessment No. 605202 dated Octo-
ber 31, 1978, the Deputy Minister of National Revenue
further reassessed the Plaintiff in respect of the 1977 taxa-
tion year and adjusted the Plaintiffs income to include the
amount of $670.00. The Notice of Reassessment stated as
follows:
Your return has been adjusted to include an additional
payment from Westinghouse Electric Corporation of
$670.00.
This additional amount represents the direct cash payment in
respect of the 200 shares of the Plaintiff registered in the
name of Wood Gundy Limited.
DATED at Toronto this 10th day of January, 1980.
BLAKE, CASSELS & GRAYDON
Per: John B. Tinker [signed]
Solicitors for the Plaintiff
DATED at Toronto this 10th day of January, 1980.
R. TASSÉ
Deputy Attorney General of Ontario
Per: N. M. Helfield [signed]
Solicitor for the Defendant
The plaintiff also gave evidence to the effect
that at all material times he was a shareholder in
Westinghouse Canada Limited but that he was
never associated with Westinghouse Electric Cor
poration and was never a shareholder in that Com
pany or employed by it. The only communication
he ever had from such Company was the offer of
February 8, 1977 (Ex. 2). He retained his shares
in Westinghouse Canada Limited and without any
solicitation on his part received from Westing-
house Electric Corporation the cheque for $2,144.
which he cashed. He did not start litigation over
the sale by Westinghouse Canada Limited of cer
tain of its household appliance business nor did he
communicate with other shareholders in respect of
the matter.
The question to be decided is the nature of such
payment. Was it a receipt of income within the
provisions of the Income Tax Act? Counsel for the
Minister acknowledges that if it is to be adjudged
income it must be in relation to property. Section 9
of the Act reads:
9. (1) Subject to this Part, a taxpayer's income for a taxa
tion year from a business or property is his profit therefrom for
the year.
Section 248(1) of the Act states:
248. (1) In this Act,
"property" means property of any kind whatever whether real
or personal or corporeal or incorporeal and, without restrict
ing the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in
action,
(b) unless a contrary intention is evident, money, and
(c) a timber resource property;
The payment does not come within the provi
sions of section 15 of the Act because the taxpayer
was not a shareholder in the Corporation which
made the payment to him. It was made in such
unusual circumstances that counsel advise me they
have been unable to find a precedent. Most of the
decisions which relate to the determination as to
whether a payment should be classed as income for
taxation purposes or otherwise are in relation to
payments which bear some resemblance to remu
neration for services rendered such as Seymour v.
Reed [1927] A.C. (H.L.) 554. Hochstrasser
(H.M. Inspector of Taxes) v. Mayes 38 T.C. 673.
Curran v. M.N.R. [1959] S.C.R. 850. Moore v.
Griffiths (H.M. Inspector of Taxes) 48 T.C. 338.
Cirella v. The Queen [1978] 2 F.C. 195. Phaneuf
Estate v. The Queen [1978] 2 F.C. 564. The
Queen v. McLaughlin [1979] 1 F.C. 470.
Moneys received by a taxpayer from his insur
ance company for stock destroyed or for stock-in-
trade which has been expropriated is a trade
receipt and is included in the taxpayer's taxable
income. The moneys so received were held to be
part of the taxpayers' trading receipts for taxation
purposes since they were money into which the
stock-in-trade was converted and was received in
the course of their business. J. Gliksten & Son,
Ltd. v. Green [1929] A.C. (H.L.) 381. London
Investment and Mortgage Co., Ltd. v. Inland
Revenue Commissioners [1957] 1 All E.R. 277;
[1958] 2 All E.R. 230.
A case which bears closer resemblance is Feder
al Farms Limited v. M.N.R. [1959] Ex.C.R. 91. It
arose from damage sustained by a market garden
ing corporation in the Holland Marsh area at the
time that Hurricane Hazel flooded lands and
spoiled farm products in the fields. A company
was incorporated to receive voluntary contribu
tions to be distributed among the unfortunate
farmers. The funds collected were not sufficient to
cover all damage and were divided proportionately
among those who had suffered loss. The plaintiff
was one who was a recipient of such fund in the
amount of $10,000. The taxpayer carried no flood
insurance and received nothing from any other
source to cover such loss. The Minister in reassess
ing the taxpayer's taxable income added such
amounts thereto. He took the position that such
amounts took the place of the vegetables and crops
destroyed which had been the stock-in-trade of the
plaintiff. Cameron J., distinguished the case from
J. Gliksten & Son Ltd. v. Green (supra) on the
basis that (a) the payment was entirely voluntary,
(b) it was given by persons who had no business
relations with the taxpayer, (c) it was unrelated to
the taxpayer's business activities, (d) the taxpayer
had no legal right to demand any portion of the
fund, (e) at the time of the loss he had no expecta
tion of being so compensated, and (f) it was un
likely ever to happen again. He held that the
payment was a gift and accordingly was not
income or a revenue receipt taxable under the
Income Tax Act.
The parties hereto by paragraph 10 of such
agreed statement of facts have agreed that the said
offers of $3.35 per share to shareholders of West-
inghouse Canada Limited were made by Westing-
house Electric for its business purposes and in the
hope of avoiding controversy or potential litigation
on behalf of minority shareholders of Westing-
house Canada Limited which may have arisen in
respect of the sale of the household appliance
division, particularly as a result of the disallow-
ance of the original sale to WCI Canada Limited
pursuant to the Foreign Investment Review Act.
The respective offers were not made by reason of
any enforceable claims by Westinghouse Canada
Limited shareholders against Westinghouse Elec
tric.
There was no evidence other than that contained
in such paragraph 10, to indicate the nature of the
controversy or litigation which Westinghouse Elec
tric hoped to avoid by the payments made to the
minority shareholders who retained their shares. If
an action could have been brought against some of
the parties involved as a result of the disallowance
of such sale any recovery by the plaintiff would not
ordinarily have the characteristics of income. In
any event as far as the plaintiff was concerned the
payment to him was voluntary and no relationship
existed between the payor and the taxpayer who
had no expectation of receiving the same until he
received the offer (Ex. 2). It is most unlikely that a
further payment will be made to him in respect of
the transaction. The payment might be termed a
windfall. I am convinced it was not a payment of
income within the provisions of the Income Tax
Act.
Judgment should therefore go declaring that the
payment in question was not a receipt of income
by the plaintiff and referring the assessment of the
plaintiff's taxable income for the year 1977 back
to the Minister for reassessment on such basis.
The plaintiff should be allowed his costs of these
proceedings against the defendant after taxation
thereof.
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