T-2965-89
James M. Shaw (Plaintiff)
v.
Her Majesty the Queen (Defendant)
INDEXED AS: SHAW V. CANADA (TD.)
Trial Division, Strayer J.—Calgary, December 10,
1991; Ottawa, January 31, 1992.
Income tax — Income calculation — Settlement of action
increased compensation for expropriated land including
$1,020,368 interest — M.N.R. including in income as interest
— Sum to be treated as proceeds of disposition — Compensa
tion should be treated as unit, not dissected into various cate
gories of damages — When "compensation for property" in s.
54(h)(iv) read in conjunction with definition of "property",
which includes "right of any kind whatever", compensation for
loss of source of income loss of "right" and thus of "prop-
erty".
This was an appeal from a reassessment of 1986 income tax
wherein the Minister treated $1,020,368 as interest income. In
1977 the province of Alberta expropriated the plaintiff's farm
lands and paid him $719,400 as compensation. Plaintiff com
menced an action seeking greater compensation. Under a set
tlement agreement, effective February 28, 1986, the plaintiff
received a further $566,100 plus interest from September 30,
1977 (date of taking ownership) to February 28, 1986, of
$1,020,368. In 1986, the plaintiff reported these further sums
as proceeds of disposition of the expropriated lands. The issue
was whether the $1,020,368 should be treated as proceeds of
disposition or as interest income. Income Tax Act, paragraph
44(2)(a), states that "For the purposes of this Act, the time at
which a taxpayer has disposed of a property ... and the time
at which an amount, in respect of ... proceeds of disposition
has become receivable by the taxpayer shall be deemed to be
the earliest of (a) the day the taxpayer has agreed to an amount
as full compensation ...." The plaintiff submitted that under
that paragraph he was deemed to have disposed of his property
on February 28, 1986. Therefore there could not have been
interest payable on the agreed value of the property. He further
submitted that subparagraph 54(h)(iv), which defines "pro-
ceeds of disposition" as including compensation for property
taken under statutory authority, is broad enough to include all
forms of compensation agreed upon in the settlement. The
defendant relied upon The Expropriation Act of Alberta to sup
port the argument that the payment was interest.
Held, the appeal should be allowed.
The sum of $1,020,386 was part of the compensation for
property taken under statutory authority and was therefore pro
ceeds of disposition within the definition in subparagraph
54(h)(iv), notwithstanding that provincial law treated the pay
ment as interest, and the purpose for which it was paid was to
replace profits or interest lost because the plaintiff did not have
available to him the capital sum representing the total value of
the land as finally agreed upon. This conclusion is most consis
tent with the rationale of the Federal Court of Appeal in Sani
Sport Inc. v. Canada which held an award for loss resulting
from frustation of the appellant's plans to enlarge its business
was part of the proceeds of disposition. The Court of Appeal
further held that the matter was determined by subparagraph
54(h)(iv). Parliament intended that compensation for expropri
ation be treated as a whole for tax purposes, and not be subject
to dissection under the various headings of damages. Although
calculation of compensation might be based on lost profits (i.e.
interest on the capital sum ultimately paid for the property) and
thus its purpose was to replace lost income, the Court should
not use that as a basis for characterizing such component of the
compensation package as other than proceeds of disposition. In
a concurring judgment, Desjardins J.A. read "compensation for
property taken" in subparagraph 54(h)(iv) in conjunction with
the definition of "property" which includes a "right of any kind
whatever". Her Ladyship considered compensation for loss of
a source of income to be loss of a "right" and thus of "prop-
erty" capable of expropriation. Accordingly, the $1,020,368
was paid for "loss of a source of income", the right to that
source being a form of "property".
The characterization of the $1,020,368 as proceeds of dispo
sition is also most consistent with paragraph 44(2)(a), which
deems the time at which the compensation is receivable by the
taxpayer for the purposes of the whole Income Tax Act. In this
case, that time was February 28, 1986 when the settlement was
finalized. Until that time, no moneys were receivable by the
plaintiff in respect of the disposition of the property and there
fore no interest could be receivable by him in respect of the
capital sum until the date of settlement. The deemed timing
affects all other relevant parts of the Act, including the inter
pretation of "compensation for property" in subparagraph
54(h)(iv) such that amounts received under a settlement, no
matter how calculated, cannot be treated as interest on money
owed to the taxpayer prior to settlement.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 12(1) (as am.
by S.C. 1980-81-82-83, c. 140, s. 4), 44(2)(a) (as am.
by S.C. 1977-78, c. 1, s. 18), 54(h)(iv), 248.
The Expropriation Act, S.A. 1974, c. 27 (now R.S.A.
1980, c. E-16), ss. 39, 40, 64.
CASES JUDICIALLY CONSIDERED
APPLIED:
Sani Sport Inc. v. Canada, [1990] 2 C.T.C. 15; (1990), 90
DTC 6230 (F.C.A.); Ã ffg [1987] 1 C.T.C. 411; (1986), 87
DTC 5253 (F.C.T.D.).
NOT FOLLOWED:
Wride v. M.N.R., 86-257 (IT), Bonner J., judgment dated
28/1/88, T.C.C., not reported.
CONSIDERED:
Elliott (R A) y MNR, [1984] CTC 2373; (1984), 84 DTC
1325 (T.C.C.); Wideman (B) v MNR, [1983] CTC 2589;
(1983), 83 DTC 531 (T.C.C.); 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.).
COUNSEL:
Alan D. Macleod and James G. McKee for
plaintiff.
D. B. Titosky for defendant.
SOLICITORS:
Macleod, Dixon, Calgary, for plaintiff.
Deputy Attorney General of Canada for defen
dant.
The following are the reasons for judgment ren
dered in English by
STRAYER J.:
Relief Requested
The plaintiff appeals the second reassessment by
the Minister of National Revenue in respect of his
1986 income tax on the ground that the Minister
wrongly treated the amount of $1,020,368 as interest
income rather than as proceeds of disposition of
property. He also seeks recovery of income tax paid
in accordance with that reassessment together with
interest thereon.
Facts
The plaintiff was owner of farm lands near Calgary
when on July 20, 1977 Her Majesty the Queen in
Right of Alberta served a notice of intention to expro
priate certain of those lands for the purposes of a pro
vincial park. He was subsequently sent a notice on
September 30, 1977 that effective that day the land
had been expropriated. The province acquired title
that day and took possession on January 31, 1978. On
November 6, 1977 the province served the plaintiff
with a notice of proposed payment for the expropri
ated lands together with actual payments in accor
dance therewith of $719,400, the amount which the
province thought appropriate as compensation.
In 1978 the plaintiff and adjacent land owners sim
ilarly affected commenced an action against the prov
ince seeking higher compensation. The plaintiff's
claim against the province included an enhanced
amount for market value, a further amount for loss of
special economic advantage attributable to these
lands, a sum representing the cost of locating replace
ment land, a sum for injurous affection, and interest
on the total of the foregoing for the period from Feb-
ruary 1, 1978 (when the plaintiff lost possession of
the land) to judgment. This action was settled. While
there is no single document incorporating the settle
ment agreement, the parties accept that the terms are
adequately set out in a letter from counsel for the
province dated January 9, 1986 (Exhibit 4), a letter
from the provincial department of public works dated
April 8, 1986 (Exhibit 5), and a release signed by the
plaintiff in this action and his co-plaintiffs in the
action in the Court of Queen's Bench of Alberta
(Exhibit 6). It is further agreed that the agreement
was effective February 28, 1986 and that under that
agreement James M. Shaw, the taxpayer in this
action, would receive a further $566,100 representing
the value of his expropriated property in excess of the
amount already paid by the province, together with
interest on that excess amount at 13% compounded
annually from September 30, 1977 (the date of taking
of ownership) to February 28, 1986, which interest
amounted to $1,020,368, the amount in issue in the
present case.
The plaintiff had in 1977 reported the initial sum
of $719,400 received by him at that time from the
province as proceeds of disposition and this was
accepted by the Minister. In respect of his 1986 taxa
tion year the plaintiff reported all these further sums
as proceeds of disposition of the expropriated lands.
As I understand it, in both his first reassessment and
his second reassessment the Minister of National
Revenue declined to treat the sum of $1,020,368
described above as proceeds of disposition but
instead treated it as interest income. The plaintiff
paid the additional tax assessed but filed an objection
and, after the second reassessment which was
unchanged in respect of the issues in question here,
he brought this appeal.
In essence the Minister contends that the sum in
question should be treated as income pursuant to sub
section 12(1) of the Income Tax Act [S.C. 1970-71-
72, c. 63 (as am. by S.C. 1980-81-82-83, c. 140, s. 4)]
which provides that there shall be included in com
puting the income of a taxpayer any amount received
on account of interest. On the other hand the taxpayer
relies on paragraph 44(2)(a) [as am. by S.C. 1977-78,
c. 1, s. 18] and subparagraph 54(h)(iv) of that Act.
These provide as follows:
44....
(2) For the purposes of this Act, the time at which a taxpayer
has disposed of a property for which there are proceeds of dis
position as described in subparagraph I3(2I)(d)(ii), (iii) or (iv)
or 54(h)(ii), (iii) or (iv), and the time at which an amount, in
respect of those proceeds of disposition has become receivable
by the taxpayer shall be deemed to be the earliest of
(a) the day the taxpayer has agreed to an amount as full
compensation to him for the property lost, destroyed, taken
or sold,
54. ...
(h) "proceeds of disposition" of property includes,
(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.....
The plaintiff contends that by paragraph 44(2)(a) he
must be deemed to have disposed of his property on
February 28, 1986, the date of the settlement. There
fore, he argues, there could not have been interest
payable on the agreed value of the property prior to
that time in terms of the Income Tax Act because by
the terms of that Act he was still the owner of the
property until the date of settlement. Further he
argues that the language of subparagraph 54(h)(iv) is
broad enough to include as proceeds of disposition all
forms of compensation agreed upon in the settlement
of February 28, 1986 as owing on that date. He says
that the only interest income, whose taxability is not
in dispute, was a small amount of interest owing to
him due to the delay from February 28 to March 26,
1986 in the actual making of the compensation pay
ment.
Issue
The issue is whether the sum of $1,020,368 paid
pursuant to the settlement of February 28, 1986
should be treated as proceeds of disposition or as
interest income for the purposes of the Income Tax
Act.
Conclusions
It is a difficult task indeed to characterize this sum
for tax purposes. Counsel did not provide me with
any clear and binding precedent on the matter. There
are some decisions of the Tax Court of Canada and its
predecessors supporting both sides of the issue.'
I See e.g. Elliott (R A) y MNR, [1984] CTC 2373 (T.C.C.)
where interest paid on the final agreed value of the property,
calculated up to the date of settlement, was treated as part of
the compensation and not as interest; but see Wride v. M.N.R.,
86-257 (IT), Bonner J., not reported, 28/1/88 (T.C.C.) where a
similar kind of payment was characterized as interest and the
Elliott decision was specifically disagreed with. The latter
approach was taken in Wideman (B) y MNR, [1983] CTC 2589
(T.C.C.) but the characterization there was essentially obiter
dicta.
Counsel for the Minister has relied in part on the
provincial Act under which the land was expropri
ated, namely The Expropriation Act, 2 to support his
view that the payment in question was interest. In
reviewing sections 39, 40, and 64 of that Act I
believe that the provincial law treats such a payment
not as "compensation" but as "interest". Therefore if
I could decide the matter solely on the basis of The
Expropriation Act of Alberta I could probably charac
terize this payment as "interest".
I might similarly be driven to the conclusion that
this payment was "interest" if I only had regard to the
purpose for which it was paid to the taxpayer. That
purpose appears to have been to provide him with the
revenue that he would have had from the price of the
land had that price been paid at the time of taking of
title by the province. It is clear from the documents of
settlement and from the agreed statement of facts
filed by the parties in this case that the interest was
calculated at the rate of 13% on the increase in the
capital sum determined by the settlement to represent
a fair value for the property. The rate of 13% was
arrived at (in the words of the agreed statement of
facts) "after the Plaintiff reviewed the rate of return
from his other investments during the time Septem-
ber, 1977 to January, 1986". Therefore in economic
terms the interest payable was calculated so as to
replace profits or interest lost by the plaintiff due to
the fact that he did not have available to him the capi
tal sum representing the total value of the land as
finally agreed upon.
I have concluded, however, that the sum of
$1,020,386 in question should be characterized as
part of the compensation for property taken under
statutory authority and therefore as proceeds of dis
position, within the definition in subparagraph
54(h)(iv) of the Income Tax Act.
I believe this conclusion is most consistent with
the rationale of the Federal Court of Appeal in Sani
Sport Inc. v. Canada. 3 In that case the appellant Sani
Sport Inc. owned land upon which it operated a busi
ness. Part of the land was expropriated by Hydro-
2 S.A. 1974, c. 27 [now R.S.A. 1980, c. E-16].
3 [1990] 2 C.T.C. 15 (Fr.) (F.C.A.).
Québec. By the final settlement there was paid some
$63,000 representing the value of the property expro
priated and the decrease in value of the rest of the
land, together with a sum of some $286,000 repre
senting the appellant's "commercial loss", such loss
resulting from the frustration of the appellant's plans
to enlarge its business using some of the land expro
priated. This amount was described by Marceau J.A.
as having been "calculated by capitalizing the income
that the appellant would have earned if its plans for
expansion had been carried out ...." At trial [[1987]
1 C.T.C. 411] Pinard J. had held this amount to be
part of the proceeds of disposition and this conclu
sion was confirmed by the Court of Appeal. In cer
tain ways the case is distinguishable from the present
one. The Minister of National Revenue had not
assessed the sum of $286,000 as income from the.
business, but only as proceeds of disposition. The
taxpayer was not prepared to concede that it was pro
ceeds of disposition of property but argued instead
that it represented damage to the business. By con
trast, in the present case the taxpayer is insisting the
amount in question is part of the proceeds of disposi
tion whereas the Minister insists that it is interest
income. Further, it was easier in the Sani Sport case
to connect the loss of business opportunity with the
property because, as Marceau J.A. pointed out, this
amount represented the "particular economic value
that the land had for the expropriated party". Never
theless I believe the rationale of the Sani Sport deci
sion applies in the present case. In Sani Sport
Marceau J.A., writing for himself and MacGuigan
J.A., refers to the argument of the appellant to the
effect that the sum of $286,000 was paid for the pur
pose of compensating for damages suffered by the
business; and that the purpose was not to compensate
for lost property, although the expropriation was the
cause of that payment being made. It was argued by
the appellant that the tax treatment of a sum must
depend on the purpose for which it was paid, not the
cause of the payment. Marceau J.A. commented on
this:
I admit that I do not entirely understand where the appellant
is going with its reasoning. If we were to apply its position
here as a whole, we would have to ask what these damages
were that were to be compensated for, and we might quickly
conclude that it was for the loss of operating profits requiring
an appropriate and still more disadvantageous tax treat
ment.... [Emphasis added.] 4
He went on to say that in any event the matter was
clearly determined by subparagraph 54(h)(iv) of the
Income Tax Act, as follows:
It is clear that Parliament intended that compensation for
expropriation be treated as a unitary whole for tax purposes
and not be subject to "dissection" under the various headings
of damages considered in order to establish the amount. 5
I infer from this decision that it does not matter if part
of the compensation is calculated on the basis of lost
income. The compensation must be treated as a unit
and not "dissected" into various categories depending
on the yardstick used to calculate any particular part
of the compensation. 6 Although that calculation
might be based on lost profits (i.e. interest on the cap
ital sum ultimately paid for the property) and thus its
purpose was to replace lost income, the Court should
not use that as a basis for characterizing such compo
nent of the compensation package as other than pro
ceeds of disposition. Desjardins J.A. in a separate
concurring decision in Sani Sport approached the
matter with emphasis on the words "compensation
for property taken" in subparagraph 54(h)(iv) when
read in conjunction with the definition of "property"
in subsection 248(1) which includes "a right of any
kind whatever ...." She considered the payment of
$286,000 to be compensation for the "loss of a source
of income" which is loss of a "right" and thus of
"property" capable of expropriation.
Applying the rationale of Sani Sport to the present
case, even though the sum of $1,020,368 was calcu
lated as a replacement of interest income which the
plaintiff would have had if he had been paid the full
price for his land at the time of taking, this does not
make it other than "compensation for property
4 Ibid., at p. 17.
5 Ibid., at p. 18.
6 This is also consistent with the views of McNair J. stated
in E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114
(F.C.T.D.), at pp. 121-122. However, in that case he was deal
ing with one particular form of penalty interest not involved in
the present case.
taken". The Court should not dissect the various
"heads of damage" (per Marceau J.A.) relied upon to
calculate the total amount of payment to the property
owner but should treat that amount as a whole. Also,
by the analysis of Desjardins J.A., the $1,020,368
was paid to the plaintiff for "loss of a source of
income", the right to that source being a form of
"property".
Also I believe that the characterization of the sum
in question as proceeds of disposition is most consis
tent with paragraph 44(2)(a) of the Income Tax Act,
quoted above, upon which the plaintiff relies. It will
be noted that this paragraph provides:
44. .. .
(2) For the purposes of this Act, the time at which a taxpayer
has disposed of a property ... and the time at which an
amount, in respect of ... proceeds of disposition has become
receivable by the taxpayer shall be deemed to be the earliest of
(a) the day the taxpayer has agreed to an amount as full
compensation .... [Emphasis added.]
This subsection deems, for the purposes of the whole
Income Tax Act, the time at which the compensation
is receivable by the taxpayer. In the present case that
time was February 28, 1986 when the settlement was
finalized. Until that time, for the purposes of the
entire Income Tax Act, no moneys were receivable by
the plaintiff in respect of the disposition of the prop
erty and therefore no interest could be receivable by
him in respect of the capital sum until the date of set
tlement. It is irrelevant that the compensation pack
age included the equivalent of interest on the addi
tional value of the property calculated from the time
of taking of ownership until the date of settlement.
I recognize that this view of subsection 44(2) is the
opposite of that expressed by Bonner J. of the Tax
Court of Canada in the Wride case.? In his view sub
section 44(2) operates only to deem that ownership
continues up to a certain ascertainable time but it
cannot operate to impose upon a sum of money paid
7 Supra, note 1.
to the owner "a character which is at variance with
reality". This case was decided prior to the Court of
Appeal decision in Sani Sport. With respect, it
appears to me that the opening words of subsection
44(2), which state that the time at which the proceeds
of disposition are receivable by the taxpayer are to be
deemed "[f] or the purposes of this Act" to be the date
of, inter alia, settlement, give that deemed timing an
impact affecting all other relevant parts of the Act.
Part of that impact is as an aid to interpretation of
what is meant by "compensation for property" in sub-
paragraph 54(h)(iv) and means, inter alia, that
amounts received under a settlement no matter how
calculated cannot be treated as interest on money
owed to the taxpayer prior to settlement.
The appeal is therefore allowed and the Minister of
National Revenue is directed to reassess the plain
tiff's income for the 1986 taxation year so as to treat
the sum of $1,020,368 as proceeds of disposition and
not as interest income. Any resulting excess of tax
paid by the plaintiff in respect of the 1986 taxation
year shall be refunded to him with interest where
appropriate as prescribed by the Income Tax Act. The
plaintiff is entitled to his costs in this action.
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.