A-1808-83
The Queen (Appellant)
v.
Albert Manley (Respondent)
Court of Appeal, Heald, Mahoney and Ryan JJ.—
Toronto, February 13; Ottawa, February 25, 1985.
Income tax — Income calculation — Trading adventure —
Damages for breach of warranty of authority awarded
respondent in action based on agreement to pay finder's fee re
share purchase — Capital receipt or income — Nature of
transaction in respect of which damages awarded — Criteria
for adventure in nature of trade — Damages treated as
finder's fee, therefore profit from adventure in nature of trade
— Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 5(1), 9(1),
248(1) — Federal Court Rules, C.R.C., c. 663, RR. 324,
337(2)(b).
The respondent, a businessman, entered into an arrangement
with one Benjamin Levy, who presented himself as acting on
behalf of himself and other Levy family members and corpora
tions, whereby Levy agreed to pay the respondent a 2% finder's
fee if the latter found a buyer for Levy family shares.
Within a few days, the respondent found a buyer who paid
approximately 30 million dollars for the shares. Levy and the
other Levy family shareholders refused to pay the finder's fee
and the respondent brought an action.
The courts eventually awarded the respondent damages for
breach of warranty of authority, half of which he had to pay to
a third party as a result of other proceedings.
The Minister of National Revenue, in a reassessment of the
respondent's tax return, included the remaining half, along with
the Court-awarded interest thereon, as "finder's fee" and "int-
erest on finder's fee".
The Trial Judge found that what was received was not a
finder's fee, but damages for breach of warranty of authority;
that the transaction could be classed as an adventure in the
nature of trade only if there had been a contract with all the
Levy shareholders; and that the arrangement between the
respondent and Benjamin Levy did not meet the criteria of an
adventure in the nature of trade established in Minister of
National Revenue v. Taylor, James A. He concluded that the
transaction was not in the nature of a commercial enterprise
because the respondent neither risked nor used money or
property and neither bought nor sold anything. Consequently,
His Lordship vacated the Minister's reassessment. This is an
appeal from that decision.
Held, the appeal should be allowed.
The issue here is whether the damages for breach of warran
ty of authority were required by sections 3 and 9 and subsection
248(1) of the Act, to be included in the computation of the
respondent's income. Those damages should be so included as
profit from an adventure in the nature of trade.
What the respondent did was neither more nor less an
adventure in the nature of trade only because Benjamin Levy
lacked authority to make the agreement on behalf of the other
shareholders. First, there was an intention of profit, and second,
while he may have done less than most finders have to, he did
what was necessary and there is no suggestion that he did it
differently. The more difficult question is whether the damages
for breach of warranty of authority were "profit" from that
business. The Atkins case is not, and does not purport to be,
authority for the proposition that damages, or an amount paid
to settle a claim for damages, cannot be income for tax
purposes. The applicable rule is found in London and Thames
Haven Oil Wharves, Ltd. v. Attwooll (Inspector of Taxes):
compensation received by a trader pursuant to a legal right for
failure to receive a sum of money which would have been
credited to the profits of his trade for that year is to be treated
in the same way as that sum for tax purposes. In this case, the
compensation is the damages and the sum of money is the
finder's fee. The finder's fee would have been a profit from a
business required to be included in the respondent's income and
the damages are to be treated in the same way for income tax
purposes.
CASES JUDICIALLY CONSIDERED
APPLIED:
Minister of National Revenue v. Taylor, James A.,
[1956-1960] Ex.C.R. 3; 56 DTC 1125; London and
Thames Haven Oil Wharves, Ltd. v. Attwooll (Inspector
of Taxes), [ 1967] 2 All E.R. 124 (C.A.).
DISTINGUISHED:
The Queen v. Atkins (1976), 68 D.L.R. (3d) 187; 76
DTC 6258 (F.C.A.).
CONSIDERED:
Jack Cewe Ltd. v. Jorgenson, [1980] 1 S.C.R. 812; 111
D.L.R. (3d) 577; The Queen v. Pollock, B.N. (1984), 84
DTC 6370 (F.C.A.).
REFERRED TO:
Irrigation Industries Limited v. The Minister of National
Revenue, [1962] S.C.R. 346; 62 DTC 1131; The Queen v.
Atkins (1975), 59 D.L.R. (3d) 276; 75 DTC 5263
(F.C.T.D.); In re National Coffee Palace Company, Ex
parte Panmure (1883), 24 Ch. D. 367 (C.A.); Levy et al.
v. Manley, [1975] 2 S.C.R. 70.
COUNSEL:
R. E. Taylor and Nancy J. Ross for
appellant.
John I. Laskin and Colin Campbell for
respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Davies, Ward & Beck, Toronto, for respon
dent.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: This is an appeal from a judg
ment of the Trial Division [(1983), 83 DTC 5440]
which vacated the reassessment of the respondent's
1974 personal income tax return. The Minister of
National Revenue had added $327,190.42 to the
respondent's income, being $293,700 damages for
breach of warranty of authority awarded to and
received by him and $33,490.42 interest thereon.
The respondent had sued certain former share
holders of Levy Industries Limited for a finder's
fee of $600,000 and, alternatively, sued Benjamin
Levy for $600,000 damages. The action arose out
of Benjamin Levy's agreement, on their behalf, to
pay the respondent a 2% finder's fee if he found a
purchaser for the controlling shares of the com
pany owned by him and other members of the
Levy family. The Trial Judge dismissed the
respondent's action against all the other defen
dants and awarded him $125,000 damages against
Benjamin Levy for breach of contract and deceit.
The Ontario Court of Appeal held:
It follows from the learned Judge's findings that the plaintiff
is entitled to recover damages against Benjamin Levy for
breach of warranty of authority, and counsel for the said
appellant does not contest the claim of the plaintiff that the
measure of damages to be awarded for said breach is equivalent
to the amount of the finder's fee determined in accordance with
the agreement between the plaintiff and the defendant Benjam-
in Levy.
Accordingly, the damages recoverable were fixed
at $587,400. That decision was affirmed by the
Supreme Court of Canada [in Levy et al. v.
Manley, [1975] 2 S.C.R. 70]. As a result of other
proceedings taken in the Ontario courts, the
respondent was obliged to pay half of the $587,400
to a third party. The remaining half, $293,700, is
subject of the reassessment in issue.
The learned Trial Judge, in his reported deci
sion, 83 DTC 5440, quoted extensively from the
trial judgment in the Supreme Court of Ontario.
He found [at page 5441] that "The facts come
essentially from the reasons for judgment in [the
Ontario courts and the Supreme Court of Cana-
da]". They establish the respondent's activities
which led to his recovery of damages. He not only
made an agreement with Benjamin Levy; he car
ried out his part of that agreement.
As far as the agreement is concerned, the find
ing was that Benjamin Levy had agreed that the
family members would pay the respondent a 2%
fee if he found a purchaser for their shares in Levy
Industries for a total price of $25 to $30 million.
As to what the respondent did in carrying out his
part of the bargain, Mr. Justice Donohue found:
Manley states that he had been dealing with one Perry
Sherman about a possible sale of Manley's tax loss company,
Aitrim Lumber, to Seaway. Present in his mind was the
possibility that he might through Sherman interest Seaway in
the purchase of the Levy family shares. To this end he called
Sherman and a meeting took place between Manley and Sher-
man on the 17th of October, 1968. As a result of this meeting,
Norton Cooper, the president of Seaway, got in touch with Ben
Levy and, as mentioned above, in an astonishingly short time a
contract was made for the purchase of the Levy family shares
by Seaway at a price of approximately thirty million dollars.
In a preceding passage, referred to in the forego
ing, Mr. Justice Donohue, had said:
It is certain that conversation did take place between the
plaintiff and the defendant, Benjamin Levy, relative to finding
a buyer for the Levy family shares and, wonderful to relate,
within a matter of days of that conversation, Seaway Corpora
tion contracted to buy the Levy shares for almost thirty million
dollars and there is no doubt that the plaintiff had something to
do with bringing the Levys and Seaway together.
In its statement of defence in the action subject
of this appeal, the appellant pleaded:
... that the damages received of $293,700.00 and interest
thereon of $33,490.42 were received in respect of business, or
an adventure in the nature of trade, carried on by the Plaintiff;
that the Plaintiff became entitled to such amounts in the
taxation year 1974; and that as a consequence the Minister of
National Revenue correctly included such amounts, totalling
$327,190.42, in computing the Plaintiff's income for the 1974
taxation year by virtue of Sections 3 and 9 and Subsection
248(1) of the Income Tax Act.
The notice of reassessment characterized the
amounts as "Finder's Fee" and "Interest on Find
er's Fee" received, respectively. The learned Trial
Judge appears to have considered that characteri
zation significant. At page 5443, he said:
Counsel for the plaintiff submitted the Minister of National
Revenue's re-assessment is factually incorrect. I agree. The
Minister characterized the amount in issue as "finder's fee
received". What was received was not a finder's fee, but
damages for breach of warranty of authority.
What is significant in proceedings in this Court
are the pleadings. The issue here is whether the
damages for breach of warranty of authority were
required, by sections 3 and 9, and subsection
248(1) of the Income Tax Act [R.S.C. 1952, c.
148 (as am. by S.C. 1970-71-72, c. 63, s. 1)], to be
included in the computation of the respondent's
income for 1974. The material provisions of those
sections are:
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 general
ity of the foregoing, his income for the year from each office,
employment, business and property;
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.
248. (1) In this Act,
"business" includes a profession, calling, trade, manufacture or
undertaking of any kind whatever and includes an adventure
or concern in the nature of trade but does not include an
office or employment;
It seems to me that, in the circumstances, the
amount in issue is to be included in the respon
dent's income only if it was profit from an adven
ture in the nature of trade. Was what the respon
dent did an adventure in the nature of trade and, if
so, were the damages recovered profit from that
adventure?
The learned Trial Judge held that the respon
dent had not engaged in an adventure in the
nature of trade. He held, at page 5444, that:
The characterization of the arrangement between Ben Levy
and the plaintiff as an adventure in the nature of trade is based
on what the transaction might have been if Manly had, in fact,
held the authority from all the Levy shareholders, to be paid a
fee if he found a purchaser of the shares. But that hypothesis
involves speculation. It does not follow that the other Levy
shareholders would have agreed to the plaintiffs fee stipula
tion. They might have said no, or insisted Manley should look
to a potential purchaser for a fee, or part of any fee.
There never was, in fact, a contract between all the Levy
shareholders and Manley. If there had been, and depending on
the particular facts, that hypothetical transaction might, or
might not, have been classed as an adventure in the nature of
trade.
With respect, I do not agree. If Benjamin Levy
had, in fact, had the authority, his commitment
would have bound the other Levy shareholders.
Their separate agreement would not have been
required. That transaction is certainly hypothetical
but, as to whether it would have been classed as an
adventure in the nature of trade, we do have all the
facts. In any event, it is what actually happened
that is in issue. What the respondent did was
neither more nor less an adventure in the nature of
trade only because. Benjamin Levy lacked author
ity to make the agreement on behalf of the other
shareholders.
The learned Trial Judge found that the arrange
ment between the respondent and Benjamin Levy
did not meet the criteria of the adventure in the
nature of trade established by Minister of Nation
al Revenue v. Taylor, James A., [1956-1960] Ex.
C.R. 3; 56 DTC 1125, in which Thorson P., traced
the term "adventure in the nature of trade"
through Scottish and English decisions and con
cluded, at pages 22 ff. Ex.C.R.; 1136 ff. DTC, that
it substantially enlarges the ambit of the kind of
transactions whose profits are subject to income
tax but that it
[page 24 Ex.C.R.; 1137 DTC]
... is not possible to determine the limits of the ambit of the
term or lay down any single criterion for deciding whether a
particular transaction was an adventure of trade for the answer
in each case must depend on the facts and surrounding circum
stances of the case. But while that is so it is possible to state
with certainty some propositions of a negative nature.
The negative propositions are summed up in the
following [at page 27 Ex.C.R.; 1138 DTC]:
Consequently, the respondent in the present case cannot
escape liability merely by showing that his transaction was a
single or isolated one, that it was not necessary to set up any
organization or perform any operation on its subject matter to
carry it into effect, that it was different from and unconnected
with his ordinary activities and he had never entered into such a
transaction before or since and that he purchased the lead
without any intention of making a profit on its sale to the
Company.
He then went on to state some positive proposi
tions [at page 29 Ex.C.R.; 1139 DTC]:
There is, in the first place, the general rule that the question
whether a particular transaction is an adventure in the nature
of trade depends on its character and surrounding circum
stances and no single criterion can be formulated.
secondly [ibid.]:
... if the transaction is of the same kind and carried on in the
same way as a transaction of an ordinary trader or dealer in
property of the same kind as the subject matter of the transac
tion it may fairly be called an adventure in the nature of trade.
and finally [ibid.]:
... the nature and quantity of the subject matter of the
transaction may be such as to exclude the possibility that its
sale was the realisation of an investment or otherwise of a
capital nature or that it could have been disposed of otherwise
than as a trade transaction.
The learned President was, there, dealing with a
transaction involving a physical commodity: 1500
tons of lead. That some of his propositions are cast
in terms compatible with that fact is not, in my
view, to be taken as excluding their application,
mutatis mutandis, to a transaction involving a
service. His decision was referred to with approval
by the Supreme Court of Canada in Irrigation
Industries Limited v. The Minister of National
Revenue, [1962] S.C.R. 346; 62 DTC 1131.
With respect, I think the learned Trial Judge
erred in holding that the transaction, which I take
to embrace both his arrangement with Benjamin
Levy and action taken by the respondent to find a
purchaser, was not in the nature of commercial
enterprise, evidently because the respondent nei
ther risked nor used money or property and neither
bought nor sold anything. As to the negative
propositions, it is not even suggested that the
respondent made the arrangement with Benjamin
Levy other than with the intention of profit. As to
the second positive proposition, he may have done
less than most finders have to but he did what was
necessary and there is no suggestion he did it
differently. As to the third positive proposition,
given the nature of the subject matter of the
arrangement, a service to be provided by the
respondent for a fee, the possibility of it being a
capital transaction was excluded.
The respondent did engage in an adventure in
the nature of trade. It was a business within the
extended definition of that term in the Income Tax
Act. The more difficult question is whether the
damages for breach of warranty of authority were
"profit" from that business.
The respondent relies on this Court's decision in
The Queen v. Atkins (1976), 68 D.L.R. (3d) 187;
76 DTC 6258, while recognizing that the payment
in issue there related to wrongful dismissal. Some
doubt may have been cast on the validity of that
decision by the adverse dicta of the Supreme
Court of Canada in Jack Cewe Ltd. v. Jorgenson,
[1980] 1 S.C.R. 812; 111 D.L.R. (3d) 577, a case
dealing with damages for wrongful dismissal as
insurable earnings for purposes of the Unemploy
ment Insurance Act, 1971 [S.C. 1970-71-72, c. 48]
rather than, as had Atkins, the settlement of a
claim for such damages as taxable income under
the Income Tax Act. This Court has, however,
very recently, in The Queen v. Pollock, B.N.
(1984), 84 DTC 6370, found itself unconvinced
that Atkins was wrongly decided.
That said, Atkins is to be understood in light of
its facts. This Court [at page 188 D.L.R.; 6258
DTC], dismissing an appeal from the Trial Divi
sion, did so "For the reasons given by the learned
Trial Judge". It is necessary to look to the trial
judgment, (1975), 59 D.L.R. (3d) 276; 75 DTC
5263, where, at page 290 D.L.R.; 5271 DTC, the
Trial Judge made clear that the Minister's position
was "that the payment in question represents
salary (and nothing else) lost by the premature
termination of the [employment] contract". That,
perhaps, accounts for the anomaly, noted by the
Supreme Court at pages 815-816 S.C.R.; 579
D.L.R. of the Cewe decision, that in Atkins
... consideration appears to have been given only to the
question whether the damages for wrongful dismissal were
income "from an office or employment" within the meaning of
ss. 5 and 25 of the Income Tax Act (R.S.C. 1952). No
consideration appears to have been given to the broader ques
tion whether they might not be income from an unspecified
source under the general provision of s. 3.
In Pollock, the trial judgment [[1982] 1 F.C. 710;
(1981), 81 DTC 5293] makes clear [at page 711
F.C.; 5293 DTC] that the parties agreed that "the
facts in this case are substantially similar, for
income tax purposes, to the facts in the Atkins
case".
I take Atkins as authority, which I must respect,
for the proposition that an amount paid in settle
ment of a claim for damages for wrongful dismis
sal is not salary, taxable as income from an office
or employment under subsection 5(1) of the
Income Tax Act. That is nothing more than an
application of the well-known principle that a tax
payer is entitled to the benefit of any doubt as to
legislative intention to tax. It is an application in a
case where the fisc evidently elected to plead
legislative intention on a single, and as it turned
out, erroneous basis. Income tax appeals in this
Court are, of course, ordinary actions in which the
issues are defined by the pleadings. The Court
makes no decision on what might have been plead
ed but was not. Atkins is not, and does not purport
to be, authority for the proposition that damages,
or an amount paid to settle a claim for damages,
cannot be income for tax purposes.
The measure of damages for breach of warranty
of authority is the amount that will put the party,
to whom the representation of authority was made,
in the position he would have been had if the
authority existed. The principle was stated by
Brett M.R. in In re National Coffee Palace Com
pany, Ex parte Panmure (1883), 24 Ch. D. 367
(C.A.) at pages 371 ff. After reviewing a number
of decisions, he concluded:
... in all these cases the Court laid down that the measure of
damages was what the plaintiff actually lost by losing the
particular contract which was to have been made by the alleged
principal if the defendant had had the authority he professed to
have; in other words, what the plaintiff would have gained by
the contract which the defendant warranted should be made.
That is the measure of damages in fact awarded
by the Ontario Court of Appeal here.
The respondent received, in damages, precisely
what he would have realized, in profit, from his
adventure in the nature of trade. As to whether the
award of damages is properly to be regarded as
profit from business for purposes of section 3 and
subsection 9(1) of the Income Tax Act, I am of
the view that the rule stated by Diplock L.J., as he
then was, in London and Thames Haven Oil
Wharves, Ltd. v. Attwooll (Inspector of Taxes),
[1967] 2 All E.R. 124 (C.A.) at pages 134 ff., is to
be applied. I take it that I am, in this respect, ad
idem with the learned Trial Judge, who appears to
have agreed that this rule would have applied had
he concluded that the respondent had engaged in
an adventure in the nature of trade.
In that case, the taxpayer had received, in settle
ment of a claim in negligence, £21,404 for loss of
use of an income earning asset during its period of
repair. The issue before the Court was the assess
ment of that sum to tax. While the rule itself is
stated in the second sentence of the second para
graph below, it is desirable to quote Diplock L.J.
[at pages 134-135], at some length as its context
is, in my opinion, compelling argument for its
validity.
The question whether a sum of money received by a trader
ought to be taken into account in computing the profits or gains
arising in any year from his trade is one which ought to be
susceptible of solution by applying rational criteria; and so, I
think, it is. I see nothing in experience as embalmed in the
authorities to convince me that this question of law, even
though it is fiscal law, cannot be solved by logic, and that, with
some temerity, is what I propose to try to do.
I start by formulating what I believe to be the relevant rule.
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 compensa
tion. The rule is applicable whatever the source of the legal
right of the trader to recover the compensation. It may arise
from a primary obligation under a contract, such as a contract
of insurance; from a secondary obligation arising out of non-
performance of a contract, such as a right to damages, either
liquidated, as under the demurrage clause in a charterparty, or
unliquidated; from an obligation to pay damages for tort, as in
the present case; from a statutory obligation; or in any other
way in which legal obligations arise.
The source of a legal right is relevant, however, to the first
problem involved in the application of the rule to the particular
case, viz., to identify for what the compensation was paid. 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 amount 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. The source of the legal right to the compensation
is irrelevant to the second problem. The method by which the
compensation has been assessed in the particular case does not
identify for what it was paid; it is no more than a factor which
may assist in the solution of the problem of identification.
In the present case, the respondent was a trader;
he had engaged in an adventure in the nature of
trade. The damages for breach of warranty of
authority, which he received from Benjamin Levy
pursuant to a legal right, were compensation for
his failure to receive the finder's fee from the Levy
family shareholders. Had the respondent received
that finder's fee it would have been profit from a
business required by the Income Tax Act, to be
included in his income in the year of its receipt.
The damages for breach of warranty of authority
are to be treated the same way for income tax
purposes.
I would allow the appeal with costs here and in
the Trial Division and restore the reassessment.
There is one matter which may remain out
standing. The Trial Judge did not find it necessary
to deal with it and it was not raised on appeal. As
an alternative plea, the respondent sought to
deduct from the damages, if they were found to be
income, the legal expenses incurred in the proceed
ings which resulted in his paying half the award to
the third party. To permit this to be disposed of, if
necessary, I would, pursuant to Rule 337(2)(b)
[Federal Court Rules, C.R.C., c. 663], direct the
appellant to prepare a draft of an appropriate
judgment and to move for judgment accordingly
pursuant to Rule 324.
HEALD J.: I concur.
RYAN J.: I concur.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.