A-662-01
2003 FCA 128
Tod T. Manrell (Appellant)
v.
Her Majesty the Queen (Respondent)
Indexed as: Manrell v. Canada (C.A.)
Court of Appeal, Strayer, Sexton and Sharlow JJ.A.-- Vancouver, January 15; Ottawa, March 11, 2003.
Income Tax -- Income Calculation -- Capital Gains and Losses -- Payment by share purchaser as consideration for non-competition covenant -- Whether taxable capital gain -- $4 million paid to selling shareholders of three plastics manufacturing businesses -- Taxpayer declared payments as taxable capital gains, claiming benefit of statutory reserves as payments made over number of years -- Sought reassessments reducing capital gains to nil following Fortino v. Canada (non-competition payments held non-taxable capital receipts) -- Denial of reassessments sustained by T.C.C. -- Issue in F.C.A.: whether disposition of "right to compete" within definition of "property" in Income Tax Act, s. 248(1) -- Appeal allowed -- Whether "right to compete" is "right of any kind whatever" -- Taxpayer arguing "right to compete" merely everyone's freedom to carry on business, not exclusive right involving claim against another -- In interpreting taxing statutes, courts should be cautious before finding unexpressed legislative intention for fear of upsetting balance struck by Parliament -- Open to Parliament to specifically deal with mischief wishes to prevent -- "Property" not defined in Income War Tax Act -- Criticisms of that Act -- Definition of "property" in Income Tax Act of 1948 -- "Property" one of three named income sources -- 1948 Act did not expand meaning of "property" -- Meaning not altered by subsequent amendments -- Case law recognizing "property" having very broad meaning in tax cases but not holding everything of value "property" -- Phrase "right of any kind whatever" not possessing infinite meaning -- No case holding "property" including right not constituting exclusive, legally enforceable claim -- What taxpayer gave up not "property" within statutory definition -- Foreign cases of limited assistance, statutory context being different -- Tempting for Court to legislate in guise of statutory interpretation as decision considered unsatisfactory fiscal policy but tax policy matter for Parliament.
Construction of Statutes -- Whether disposition of "right to compete" in share sale contract within definition of "property" in Income Tax Act, s. 248(1) -- Necessity for understanding scheme of Act as to taxable capital gains -- Whether "right to compete" is "right of any kind whatever", thus "property" -- Crown arguing "right of any kind whatever" so broad as to include rights lacking usual property characteristics -- In interpreting taxing statutes, Courts cautious in finding unexpressed legislative intent as could upset balance of myriad considerations struck by Parliament -- Parliament can specifically deal with mischief to be prevented -- Ordinary meaning of "property" -- "Property" not defined in Income War Tax Act -- Act criticized as insufficiently precise, leaving too much to ministerial discretion -- Obsolete provisions, some dating back to 1806 British legislation -- Income Tax Act of 1948 improved clarity of legal drafting, not substantive tax reform -- Defining "property" for greater certainty -- Did not expand definition of "property" -- Definition thrice amended but 1948 version forms core of that in current Act -- Amendments modernized terminology, did not expand definition -- Contrasted with 1982 amendment to capture work in progress of professional business -- "Property" broadly interpreted in tax cases but case law not holding everything of value "property" -- Phrase "a right of any kind whatever" not possessing infinite meaning, not accorded meaning extending Act's grasp beyond what Parliament conceived -- No case holding "property" including right not constituting exclusive, legally enforceable claim -- Foreign cases of limited value given different statutory context -- Case presenting temptation to legislate in guise of statutory interpretation as decision considered bad fiscal policy -- Parliament proper forum for tax policy debate.
The issue in this appeal was whether a payment from a share purchaser given as consideration for a promise not to compete within a specified territory for a specified period gives rise to a taxable capital gain.
The taxpayer, Manrell, owned or controlled three operating companies in the plastic manufacturing business. A numbered Canadian corporation agreed to purchase all of the shares and shareholder debt of these three companies except for those in one of the companies which belonged to a Delaware corporation. One term of the share purchase agreement required the purchaser to pay $4 million to the selling shareholders in consideration for a non-competition agreement. Under this agreement, sellers could not have any interest in any conflicting organization whether as an employee, officer, director, agent, security holder, partner, creditor, consultant, licensor, licensee or otherwise. Taxpayer was one of the "sellers" referred to in this provision. It also required him to assign to purchaser all his "right, title and interest" in any "innovations" (including know-how), to protect the trade secrets of the operating companies and not to solicit employees of the operating companies. The consideration paid for this non-competition agreement was not allocated between the non-competition covenant and the other undertakings. The appeal was argued, by both sides, on the basis that substantially all of the consideration was for the non-competition covenant.
In his 1995, 1996 and 1997 returns, taxpayer reported the non-competition payments as included in the share disposition proceeds, thus increasing his taxable capital gain. He claimed the benefit of statutory reserves to spread this gain over the years the payments were received. But in the 1997 case, Fortino v. Canada, non-competition payments were held to be non-taxable capital receipts. A Crown appeal in Fortino was dismissed by the Federal Court of Appeal in 2000. Taxpayer then sought reassessments for 1996 and 1997, reducing to nil the taxable capital gains he had reported. Taxpayer's objections were denied and his appeal was rejected by the Tax Court of Canada.
Upon this appeal, only one argument was advanced by the Crown: the non-competition payments were proceeds of disposition of a "right to compete", a right which meets the definition of "property" in Income Tax Act, subsection 248(1). Taxpayer suggested that the "right to compete" falls outside the statutory definition of "property" but, if within the definition, he had not disposed of it.
Held, the appeal should be allowed.
The scheme of the Act in relation to taxable capital gains had to be understood. If "property" within the statutory definition of that word is sold for an amount in excess of the cost of the property plus sale expenses, a taxable capital gain arises (assuming the sale to be, as was here the case, on capital account). So the question was as to whether the "right to compete" was a "right of any kind whatever" and thus "property" for Income Tax Act purposes.
The Crown's submission was that the phrase "a right of any kind whatever" was sufficiently broad as to include rights not having the usual characteristics of property. Because of taxpayer's experience and abilities, he could have profitably competed, to their detriment, with the operating companies after the shares were sold. That is why the non-competition covenant was so valuable to purchaser. In view of the inextricable link between the companies' value and the payment for the covenant, the payment should be brought to account for income tax purposes. Taxpayer's argument was that what the Crown characterized as a "right to compete" was nothing more than everyone's freedom to carry on business--a personal liberty and not an exclusive right involving a claim against another.
The Supreme Court of Canada has held that in the interpretation of taxing statutes in which Parliament seeks to balance a myriad of principles, courts must be cautious before finding an unexpressed legislative intention as to do so risks upsetting the balance Parliament has attempted to strike. As for tax avoidance, as the Act contains many specific anti-avoidance provisions, courts should not be quick to embellish upon what the statute provides in response to concerns about tax avoidance. It is open to Parliament to be specific in dealing with any mischief it wishes to prevent.
The ordinary meaning of "property" at law is a bundle of rights--a collection of rights over things enforceable against others. It contemplates claims to tangible and intangible items. A general right to do something anyone can do is not the "property" of anyone. Whatever taxpayer gave up by signing the non-competition agreement, it was not "property"--at least within the ordinary meaning of that word.
The word "property" was nowhere defined in the Income War Tax Act, which was replaced by the Income Tax Act in 1948. The former statute was open to criticism as insufficiently precise and leaving too much to ministerial discretion. Lawyers and accountants were of the view that its language was now incapable of coping with the vastly changed economic structure of the country. Many of its provisions were obsolete, some dating back to the English Act passed in 1806. The 1948 Act was intended to improve the clarity of legal drafting rather than to bring about substantive tax reform. "Property" was for the first time defined, most likely to provide greater certainty. The definition was found in paragraph 127(1)(af): "property means property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action". Did the phrase "a right of any kind whatever" extend to a non-exclusive, commonly held right to carry on business? The 1948 Act introduced the concept of taxing income by source-- "property", "business" and "office" being the three named income sources. "Property" would obviously include: interest- bearing debts; shares that yield dividends; real property that produces rent; resource and intellectual property rights that provide for royalties. The statutory definition of "property" was not expanded in the 1948 Act. While the definition has been thrice amended, the 1948 definition forms the core of that currently found in the Act. The amendments appear to have been made for the modernization of terminology and greater certainty, rather than to expand the statutory definition of "property" beyond its ordinary meaning. This can be contrasted with an expansion of the statutory meaning of "property" in 1982 to include the work in progress of a professional business. This suggests that Parliament did not consider an inchoate right--such as work in progress--to fall within the pre-1982 definition.
The case law does indeed support the proposition that "property" is capable of being broadly interpreted, especially in the fiscal context. Lord Langdale once stated that "property" is "indicative and descriptive of every possible interest" which a party can have. This Court's reasons in Canada v. Kieboom, while recognizing that, in tax cases, "property" has a very broad meaning, does not go so far as to say that everything of value is "property". And, while the phrase "a right of any kind whatever" also has a broad meaning, it does not possess an infinite meaning and cannot be accorded a meaning that would extend the grasp of the Act beyond that which Parliament has conceived. It would, for example, be going too far to suggest that in receiving compensation for personal injury caused by negligence, the victim had disposed of capital property and was subject to income tax thereon. Taxpayer's counsel provided the Court with an exhaustive list of cases in which things were held to be "a right of any kind whatever" and there was not even one case in which "property" was held to include a right that did not constitute an exclusive and legally enforceable claim. Absent the non-competition agreement, while taxpayer could have gotten involved in a plastics manufacturing concern in competition with the operating companies, that gave him no claim against anyone else and no right to stop anyone from getting into that business. What he gave up was not "property" within the statutory definition.
Cases from Australia and the United Kingdom were referred to in which it was held that non-competition payments do not generate taxable gains while there is, on the other hand, American case law going the other way. But too much reliance ought not be placed on foreign cases since the statutory context is inevitably somewhat different.
This case presented a strong temptation to legislate in the guise of statutory interpretation as many will consider the result unsatisfactory in terms of fiscal policy. But Parliament is the only proper forum in which to debate matters of tax policy.
statutes and regulations judicially
considered
Estate Tax Act, S.C. 1958, c. 29.
| Income Tax Act, R.S.C. 1952, c. 148, s. 139(1)(ag). |
| Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 14 (as am. by S.C. 1994, c. 7, Sch. II, s. 10; c. 21, s. 8; 1995, c. 3, s. 5; c. 21, s. 3), 38, 39 (as am. by S.C. 1994, c. 7, Sch. II, s. 22; 1995, c. 21, s. 49), 39.1 (as enacted by S.C. 1995, c. 3, s. 11), 40 (as am. by S.C. 1994, c. 7, Sch. II, s. 23; Sch. VIII, s. 12; 1995, c. 3, s. 12; c. 21, s. 11), 41 , 42, 43, 44 (as am. by S.C. 1994, c. 7, Sch. II, s. 24; c. 21, s. 17), 45 (as am. by S.C. 1994, c. 7, Sch. II, s. 25; c. 21, s. 18; 1996, c. 21, s. 10), 46, 47 (as am. by S.C. 1995, c. 21, s. 13), 48 (as am. by S.C. 1994, c. 21, s. 19), 49 (as am. by S.C. 1994, c. 7, Sch. II, s. 27; 1995, c. 3, s. 13; c. 21, s. 14), 50 (as am. by S.C. 1994, c. 7, Sch. II, s. 28; 1995, c. 21, s. 15), 51 (as am. by S.C. 1994, c. 21, s. 20; 1995, c. 21, s. 16), 52 (as am. by S.C. 1994, c. 7, Sch. II, s. 29; c. 21, s. 21), 53 (as am. by S.C. 1994, c. 7, Sch. II, s. 30; Sch. VIII, s. 15; c. 21, s. 22; 1995, c. 3, s. 14; c. 21, c. 17), 54 (as am. by S.C. 1994, c. 7, Sch. II, s. 31; Sch. VIII, s. 16; c. 21, s. 23; 1995, c. 3, s. 15; c. 21, s. 18), 55 (as am. by S.C. 1994, c. 21, s. 24; 1995, c. 3, s. 16), 248(1) "property". |
| Income Tax Act, S.C. 1970-71-72, c. 63, ss. 10 (as am. by S.C. 1980-81-82-83, c. 140, s. 3), 248(1) "property" (as am. by S.C. 1974-75-76, c. 26, s. 125; 1980-81-82-83, c. 140, s. 128). |
| Income Tax Act (The), S.C. 1948, c. 52, ss. 3, 11(1)(a),(c), 127(1)(af). |
| Income War Tax Act, R.S.C. 1927, c. 97, ss. 2(i)(i) "personal corporation", 3(f) (as am. by S.C. 1934, c. 55, s. 1), 6(c),(e). |
| Income War Tax Act, 1917 (The), S.C. 1917, c. 28, ss. 3, 4(4). |
cases judicially considered
followed:
Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082; (2001), 204 D.L.R. (4th) 590; [2002] 1 C.T.C. 95; 2001 DTC 5505; 275 N.R. 90.
applied:
Fortino v. Canada, [1997] 2 C.T.C. 2184; (1996), 97 DTC 55 (T.C.C.); appeal dismissed [2000] 1 C.T.C. 349; (1999), 269 N.R. 391 (F.C.A.).
considered:
Canada v. Kieboom, [1992] 3 F.C. 488; [1992] 2 C.T.C. 59; (1992), 92 DTC 6382; 46 E.T.R. 229 (C.A.).
referred to:
Miller Estate v. Minister of National Revenue, [1973] C.T.C. 793; (1973), 73 DTC 5583 (F.C.T.D.); Driol v. Minister of National Revenue, [1989] 1 C.T.C. 2175; (1989), 89 DTC 122 (T.C.C.); Furfaro-Siconolfi v. M.N.R., [1990] 2 F.C. 3; [1990] 1 C.T.C. 33; (1989), 89 DTC 5519; 38 E.T.R. 77; 32 F.T.R. 1; 25 R.F.L. (3d) 13 (T.D.); R. v. Burgess, [1982] 1 F.C. 849; (1981), 125 D.L.R. (3d) 477; [1981] C.T.C. 258; 81 DTC 5192 (T.D.); Nissim v. Canada, [1999] 1 C.T.C. 2119 (T.C.C.); Donald v. Canada, [1999] 1 C.T.C. 2025 (T.C.C.); Kirby (Inspector of Taxes) v. Thorn EMI plc, [1988] 2 All E.R. 947 (C.A.); Hepples v. Federal Commissioner of Taxation (1990), 90 A.T.C. 4497 (Fed. Ct.); Hepples v. Federal Commissioner of Taxation (1991), 91 A.T.C. 4808 (H.C.).
authors cited
Canada. Department of National Revenue. Taxation. Interpretation Bulletin, IT-330R, September 7, 1990.
Canada. Parliament. Senate. Journals of the Senate of Canada, Vol. LVII, No. 34, Ottawa: Queen's Printer, May 28, 1946.
Douglas, Monteath. "Income Tax Revision" (1948), 26 Can. Bar Rev. 1212.
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
"The Association's Brief to the Senate Committee on Taxation" (1946), 24 Can. Bar Rev. 283.
Ziff, Bruce H. Principles of Property Law, 3rd ed. Scarborough: Carswell, 2000.
APPEAL from a decision of the Tax Court of Canada ((2001), 19 B.L.R. (3d) 273; [2002] 1 C.T.C. 2543; 2002 DTC 1222), dismissing taxpayer's appeal against the Minister's refusal to grant reassessments reducing to nil taxable capital gains resulting from non-competition payments under a share purchase agreement. Appeal allowed.
appearances:
Werner H. G. Heinrich and David E. Graham for appellant.
Peter M. Kremer, Q.C. and Rosemary Fincham for respondent.
solicitors of record:
Koffman Kalef, Vancouver, for appellant.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment rendered in English by
[1]Sharlow J.A.: The issue in this case is whether, for the purposes of the Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, a taxable capital gain arises when an individual receives a payment from the purchaser of the shares of a corporation as consideration for a promise not to compete with that corporation for a specified period within a specified territory.
Background
[2]The events that gave rise to this appeal occurred in 1995 when the shares of three corporations, Alberta Plastic Industries Ltd., B.C. Plastic Industries Ltd. and Canada Cap Snap Corporation, were sold. Alberta Plastic Industries Ltd. and B.C. Plastic Industries Ltd. manufacture plastic moulds. Canada Cap Snap Corporation manufactures caps for those moulds. I will refer to the three corporations as the "operating companies".
[3]Before June 16, 1995, the appellant Mr. Manrell owned or controlled substantial interests in all three operating companies. He owned 70% of the shares of Alberta Plastic Industries Ltd. He owned all of the shares of Llernam Holdings Ltd., which owned all of the shares of Allwest Industries Incorporated, which in turn owned all of the shares of B.C. Plastic Industries Ltd. Llernam Holdings Ltd. also owned 80% of the shares of 322597 B.C. Ltd., which owned 50% of the shares of Canada Cap Snap Corporation.
[4]Minority interests in Alberta Plastic Industries Ltd. and 322597 B.C. Ltd. were owned by two other individuals, Bob Williamson and Bruce Gallop. A Delaware corporation called Portola Packaging Inc. owned 50% of the shares of Canada Cap Snap Corporation.
[5]In 1995, a corporation called 3154823 Canada Inc. agreed to purchase the shares and shareholder debt of the three operating companies (excluding the shares owned by Portola Packaging Inc.). The terms of the agreement are set out in a document entitled "Share Purchase Agreement" dated June 16, 1995. The total purchase price of the shares and shareholder debt was $14,626,000 (subject to certain adjustments that are not now relevant), to be allocated among the selling shareholders as stipulated by the Share Purchase Agreement.
[6]One of the terms of the Share Purchase Agreement required 3154823 Canada Inc. to make payments totalling approximately $4 million to the selling shareholders as consideration for the delivery and performance of "non-compete agreements", the terms of which were set out in a schedule to the Share Purchase Agreement. The payments were to be made in four annual instalments, the first being due on the date of the completion of the Share Purchase Agreement. Mr. Manrell's share was $979,575 of which $244,393.75 was payable in each of 1995, 1996, 1997 and 1998.
[7]Among the terms of the non-compete agreement signed by Mr. Manrell was section 3.1, which reads as follows:
Sellers agree that they will not at any time during the Term directly or indirectly engage in the Territory, or have any interest in any Conflicting Organization or other entity (whether as a employee, officer, director, agent, security holder, partner, creditor, consultant, licensor, licensee, or otherwise) that engages in the Territory, or is preparing to engage in the Territory, any activity in which the activity is the same as, or similar to, or competitive with any business now carried on by any Acquired Company or Parent.
[8]Mr. Manrell was one of the "sellers" referred to in this provision. The phrase "acquired company" refers to the three operating companies, and the word "parent" refers to Portola Packaging, Inc. The words "term" and "territory" set out temporal and geographical limits for the operation of the non-competition covenant.
[9]The non-compete agreement signed by Mr. Manrell also required him to assign to 3154823 Canada Inc. all his "right, title and interest" in any "innovations" (defined to include such things as discoveries, data and know-how), to protect the trade secrets of the operating companies, and to promise not to solicit any employees of the operating companies or Portola Packaging, Inc. The record contains no evidence as to whether there were any substantial "innovations", confidential information or prized employees to protect. In any event, no attempt was made to allocate the consideration paid under the non-compete agreements between the non-competition covenant and the other commitments. Both parties argued this case on the premise that substantially all of the consideration paid by 3154823 Canada Inc. to Mr. Manrell under his non-compete agreement was consideration for the non-competition covenant. I accept that premise, there being nothing in the record to contradict it.
[10]Mr. Manrell filed his returns for 1995, 1996 and 1997 on the basis that, by virtue of section 42 of the Income Tax Act, the non-competition payments he received had to be included in the proceeds of disposition of the shares he sold to 3154823 Canada Inc., thus increasing his taxable capital gain. This was the approach suggested in paragraph 6 of Interpretation Bulletin IT-330R dated September 7, 1990, entitled "Dispositions of Capital Property Subject to Warranty, Covenant, or other Conditional or Contingent Obligations".
[11]Because the non-competition payment was payable in instalments, Mr. Manrell also claimed the benefit of statutory reserves to spread the taxable capital gain over the years in which the payments were received. His returns were apparently accepted as filed.
[12]Subsequently, the Tax Court rendered its decision in Fortino v. Canada, [1997] 2 C.T.C. 2184, a case with facts that are similar to the facts of this case. The non-competition payments in Fortino were held to be non-taxable capital receipts. The Crown appealed that decision but its appeal was dismissed: Fortino v. Canada, [2000] 1 C.T.C. 349 (F.C.A.).
[13]Mr. Manrell filed notices of objection for 1996 and 1997 to seek reassessments reducing to nil the taxable capital gains he had reported in relation to his non-competition payments. When his objections failed, Mr. Manrell appealed to the Tax Court, which dismissed his appeal: Manrell v. Canada (2001), 19 B.L.R. (3d) 273 (T.C.C.). Mr. Manrell now appeals to this Court.
[14]Only Mr. Manrell's assessments for 1996 and 1997 are before this Court. The record does not indicate the status of Mr. Manrell's assessment for 1995. However, it was not suggested in argument that there is anything in those assessments that affects the analysis of the issues raised for 1996 and 1997.
[15]The Crown defends the assessments in this case on the basis of a single argument, which is that the non-competition payments are proceeds of disposition of a "right to compete", a right which the Crown argues meets the definition of property in subsection 248(1) of the Income Tax Act. Mr. Manrell argues that the "right to compete" is not within the statutory definition of "property", and alternatively, if it is within the statutory definition, he has not disposed of it.
[16]It is common ground that the transactions that are the subject of this case are transactions on capital account, and that if the non-competition payments are not the proceeds of disposition of property, they are non-taxable capital receipts.
The Statute
[17]To assess the parties' arguments, it is necessary to understand the scheme of the Income Tax Act relating to taxable capital gains. In the Income Tax Act as in force during the years under appeal, the relevant provisions are sections 38 to 55 [[ss. 39 (as am. by S.C. 1994, c. 7, Sch. II, s. 22; 1995, c. 21, s. 49), 39.1 (as enacted by S.C. 1995, c. 3, s . 11), 40 (as am. by S.C. 1994, c. 7, Sch. II, s. 23; Sch. VIII, s. 12; 1995, c. 3, s. 12; c. 21, s. 11), 41, 42, 43, 44 (as am. by S.C. 1994, c. 7, Sch. II, s. 24; c. 21, s. 17), 45 (as am. by S.C. 1994, c. 7, Sch. II, s. 25; c. 21, s. 18; 1996, c. 21, s. 10), 46, 47 (as am. by S.C. 1995, c. 21, s. 13), 48 (as am. by S.C. 1994, c. 21, s. 19), 49 (as am. by S.C. 1994, c. 7, Sch. II, s. 27; 1995, c. 3, s. 13; c. 21, s. 14), 50 (as am. by S.C. 1994, c. 7, Sch. II, s. 28; 1995, c. 21, s. 15), 51 (as am. by S.C. 1994, c. 21, s. 20; (1995), c. 21, s. 16), 52 (as am. by S.C. 1994, c. 7, Sch. II, s. 29; c. 21, s. 21), 53 (as am. by S.C. 1994, c. 7, Sch. II, s. 30; Sch. VIII, s. 15; c. 21, s. 22; 1995, c. 3, s. 14; c. 21, s. 17), 54 (as am. by S.C. 1994, c. 7, Sch. II, s. 31; Sch. VIII, s. 16; c. 21, s. 23; 1995, c. 3, s. 15; c. 21, s. 18), 55 (as am. by S.C. 1994, c. 21, s. 24; 1995, c. 3, s. 16)] of the Income Tax Act (subdivision c of Division B of Part I of the Income Tax Act). The parties have cited paragraph 38(a), paragraph 39(1)(a), subparagraph 40(1)(a)(i), the definitions of "disposition" and "proceeds of disposition" in section 54, and the definition of "property" in subsection 248(1). The parts of those provisions that are relevant to this case read as follows during the relevant period:
PART I
INCOME TAX
. . .
Division B
Computation of Income
. . .
Subdivision c
Taxable Capital Gains and
Allowable Capital Losses
38. For the purposes of this Act,
(a) a taxpayer's taxable capital gain for a taxation year from the disposition of any property is 3/4 of the taxpayer's capital gain for the year from the disposition of that property;
. . .
39. (1) For the purposes of this Act,
(a) a taxpayer's capital gain for a taxation year from the disposition of any property is the taxpayer's gain for the year determined under this subdivision . . . from the disposition of any property. . . .
. . .
40. (1) Except as otherwise expressly provided in this Part
(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount, if any, by which the taxpayer's proceeds of disposition exceed the total of the adjusted cost base to the taxpayer of the property immediately before the disposition and any outlays or expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition . . . .
. . .
54. In this subdivision,
. . .
"disposition" of any property, except as expressly otherwise provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of disposition of property,
. . .
"proceeds of disposition" of property includes
(a) the sale price of property that has been sold,
. . .
PART XVII
INTERPRETATION
248. (1) In this Act,
. . .
"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting 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,
(c) a timber resource property, and
(d) the work in progress of a business that is a profession;
Analysis
[18]The statutory scheme for the taxation of capital gains, as it relates to this case, is simple. According to the provisions quoted above, if a person sells property that meets the statutory definition of "property" for an amount of money that exceeds the cost of the property plus any expenses incurred making the sale, a taxable capital gain arises (assuming, of course, the sale is on capital account, which is agreed to be the case here). This case asks a single question: is the "right to compete" a "right of any kind whatever", and thus "property" as defined for the purposes of the Income Tax Act?
[19]I summarize as follows the argument of the Crown. The right to compete would not be considered "property" within the ordinary meaning of that word. However, the use of the word "includes" in the statutory definition of "property" indicates that it must be give a meaning that is broader than its ordinary meaning. In particular, the phrase "a right of any kind whatever" is sufficiently broad that it includes rights that do not necessarily have the usual characteristics of property. Mr. Manrell, given his personal experience and ability, could have realized substantial profits by competing with the three operating companies after their shares were sold, and if he had done so it would have been to the detriment of those companies and their purchaser. That is why Mr. Manrell's covenant not to compete was of such value to the purchaser. Because of the inextricable link between the value of the three operating companies and the payment Mr. Manrell received for his non-competition covenant, the payment should be brought to account for income tax purposes as proceeds of disposition of property, the "right to compete".
[20]For Mr. Manrell, it is argued that in the context of the Income Tax Act, the phrase "a right of any kind whatever" must be understood to mean a right in the nature of property. At the very least, it must be a right that entitles the holder to compel someone else to pay money or do something, or the right to exclude all competing claimants to the same right. What the Crown is trying to characterize as a "right to compete" is simply the freedom everyone shares to carry on a business or, in the specific context of this case, to carry on a plastic mould manufacturing business in the area and during the period specified by the non-compete agreement. That is a personal liberty, not a right that is exclusive or that entails any claim against anyone else, and thus is it not within the statutory definition of "property".
[21]This is a problem of statutory interpretation, the solution to which must begin with the principle from E. A. Driedger, Construction of Statutes (2nd ed. 1983), at page 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
[22]Recently Justice Iacobucci, writing for the majority in Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, explained the place of this principle in the interpretation of taxing statutes (paragraphs 37 to 39; most citations omitted):
This passage from Driedger "best encapsulates" the preferred approach to statutory interpretation. . . . This is the case for the interpretation of any statute, and it is noteworthy that Driedger's famous passage has been cited with approval by our Court on numerous occasions both in the non-tax and in the tax context. . . .
Furthermore, when interpreting the Income Tax Act courts must be mindful of their role as distinct from that of Parliament. In the absence of clear statutory language, judicial innovation is undesirable. . . . Rather, the promulgation of new rules of tax law must be left to Parliament. . . . As McLachlin J. (as she then was) recently explained in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 43:
The Act is a complex statute through which Parliament seeks to balance a myriad of principles. This Court has consistently held that courts must therefore be cautious before finding within the clear provisions of the Act an unexpressed legislative intention. . . . Finding unexpressed legislative intentions under the guise of purposive interpretation runs the risk of upsetting the balance Parliament has attempted to strike in the Act. [Citations omitted.]
Having said this, it is within the jurisdiction of courts to interpret the rules enacted by Parliament, including the elucidation of otherwise undefined concepts such as "income" or "profit". . . .
In addition, given that the Income Tax Act has many specific anti-avoidance provisions and rules, it follows that courts should not be quick to embellish the provisions of the Act in response to concerns about tax avoidance when it is open to Parliament to be precise and specific with respect to any mischief to be prevented. . . . To do otherwise would be to fail to give appropriate weight to the well-established principle that, absent a provision to the contrary, taxpayers are entitled to arrange their affairs for the sole purpose of achieving a favourable position regarding taxation. . . .
[23]It seems to me that the most important contextual considerations in this case are the (a) the ordinary meaning of the word "property", (b) the statutory context, and (c) the relevant jurisprudence, which form part of the basis upon which Parliament determines the scope of its frequent amendments to the Income Tax Act.
(a) Ordinary meaning of "property"
[24]Professor Ziff, in Principles of Property Law, 3rd ed. (Scarborough: Carswell, 2000), says this about property at page 2:
Property is sometimes referred to as a bundle of rights. This simple metaphor provides one helpful way to explore the core concept. It reveals that property is not a thing, but a right, or better, a collection of rights (over things) enforceable against others. Explained another way, the term property signifies a set of relationships among people that concern claims to tangible and intangible items. [Underlining added.]
[25]It is implicit in this notion of "property" that "property" must have or entail some exclusive right to make a claim against someone else. A general right to do something that anyone can do, or a right that belongs to everyone, is not the "property" of anyone. In this case, the only thing that Mr. Manrell had before he signed the non-competition agreement that he did not have afterward was the right he shares with everyone to carry on a business. Whatever it was that Mr. Manrell gave up when he signed that agreement, it was not "property" within the ordinary meaning of that word.
(b) Statutory context
[26]To assess the validity of the Crown's contention that the word "property" has a meaning for income tax purposes that is broader than its ordinary meaning, it may be useful to consider how the word "property" is actually used in the Income Tax Act and its predecessors.
[27]The earliest predecessor to the Income Tax Act, The Income War Tax Act, 1917, S.C. 1917, c. 28, uses the word "property" twice without defining it. It appears in the definition of "income" in section 3 (in the part which states that "income" includes the income from but not the value of property acquired by gift, bequest, devise or descent). It also appears in subsection 4(4), which deals with the consequences of a transfer of "any real or personal, movable or immovable property" to a spouse in order to evade tax. Both of these provisions appear to use the word "property" in its ordinary sense.
[28]Amendments to the The Income War Tax Act, 1917 over the next few years resulted in additional uses of the word "property", still without a statutory definition. In every instance the word "property" is apparently used in its ordinary sense. I will cite only five examples from the amended 1927 consolidation (Income War Tax Act, R.S.C. 1927, c. 97 as amended). (1) In the complex definition of "personal corporation" in subparagraph 2(i)(i), there is a reference to "bonds, stocks or shares, debentures, mortgages, hypothecs, bills, notes or other similar property". (2) The scheme for the taxation of personal corporations required a determination of the value of the property of the corporation acquired from shareholders. (3) Paragraph 6(c) prohibited the deduction of "the annual value of property, real or personal, except rent actually paid for the use of such property, used in connection with the business to earn the income subject to taxation". (4) Paragraph 6(e) prohibited the deduction of "carrying charges or expenses of unproductive property or assets not acquired for the purposes of a trade, business or calling". (5) Paragraph 3(f), added by S.C. 1934, c. 55, s. 1 provides that income includes "rents, royalties, annuities or other like periodical receipts which depend upon the production or use of any real or personal property, notwithstanding that the same are payable on account of the use or sale of any such property."
[29]In 1948, the Income War Tax Act was replaced with the The Income Tax Act, S.C. 1948, c. 52, which for the first time defined the word "property". I have been able to find nothing that explains why "property" was defined in the 1948 Income Tax Act. However, it may be possible to draw some inferences by comparing it to the Income War Tax Act it replaced.
[30]The 1948 Income Tax Act is much more detailed and specific than the Income War Tax Act. That reflects criticism that the Income War Tax Act was not sufficiently precise and left too much to ministerial discretion. The following comments are found in the Journals of the Senate of Canada, 2nd Sess., 20th Parl., 10 George VI, Volume L
Briefly, public dissatisfaction appears to concern itself with three broad general heads.
1. There is dissatisfaction with the appeal procedure as now found in the Income War Tax Act and with the lack of facilities afforded taxpayers to have cases decided rapidly and objectively. Co-existing with this feeling is the more technical and less widely held objection to the use of ministerial or administrative discretion and to the absolute authority of the administration in many matters of substance importance.
. . .
2. Secondly, a portion of the criticism which has been received deals with the phraseology of the statute itself. There appears to be a growing feeling among economists, lawyers and accountants throughout Canada that the language of the present dominion Income War Tax Act is no longer capable of permitting the legislation to fill its proper place in the vastly changed economic structure of the country in the face of concepts of profit and necessary expenditures which now exists when compared with those whose presence helped to shape the original statute in 1917.
3. The third head under which criticism falls is that pertaining to the administrative framework of the Taxation Division itself. . . .
[31]"The Association's Brief to the Senate Committee on Taxation", (1946), 24 Can. Bar Rev. 283, presented on April 9, 1946, gives further insight into the state of the fiscal laws before 1948. The Brief, referring to the work of committees of the Canadian Bar Association and the Dominion Association of Chartered Accounts, says this at page 286:
It soon became apparent to the two Committees--and I think their opinion is shared by a very substantial body of the taxpayers in Canada--that the statute is difficult to construe and quite confusing, and if left in its present form will retard reconversion and may materially affect the prosperity of Canada. It is not improbable that, owing to these features, revenue is now being lost.
. . .
The magazine published by the Dominion Association of Chartered Accountants, whose members have probably more knowledge of the actual working of the Act than any other body, stated in 1944, Vol. 45, page 195, as follows:
| One of the postwar "musts" is a rewriting of the Income Tax Act itself. It stands to-day as a horrible example of piling amendment upon amendment, with the result that what is stated or implied by one section of the Act may be modified by another. |
[32]The Brief continues with comments on specific problems. This appears under the heading "Clarification of the Act" at pages 293-294:
We are of the opinion that the principal difficulty in administering the Income Tax Act is due to the fact that most of the provisions are obsolete and many of them unintelligible. It was hard to understand the meaning of the Consolidated Act of 1927, which contained 29 pages, but since that date many amendments have been added to the Statute. These amendments cover 188 pages and have apparently been made with little reference to fundamental principles, being enacted to meet specific cases and then applied to something entirely different.
. . .
The taxpayer is not taxed on his true income, but is compelled to calculate his income by antiquated rules which nobody can understand, some of which appeared in the English Act which was passed in 1806. Many taxpayers feel that they are unjustly charged and others who, to all intents and purposes, are in the same position, escape.
[33]After some historical comments, the Brief continues at page 295:
It soon became clear that the more ambiguous the wording, the more likely the Revenue was to catch something. The drafting got worse and worse and, at the present time, it is often difficult to imagine what Parliament intended.
[34]In a 1948 address to the Canadian Bar Association, Monteath Douglas, then an officer of the Canadian Tax Foundation, commented on the 1948 Income Tax Act ( "Income Tax Revision" (1948), 26 Can. Bar Rev. 1212). He said at page 1212:
The new Act is essentially a consolidation, rearrangement and clarification of the existing law. It is an important piece of legislation, but it is lacking in spectacular features of innovation. All the elements of the income tax as a fiscal instrument, as it has evolved in Canada over the past thirty years, continue to operate in much the same framework. The changes, which are many, are primarily matters of draughtsmanship and legal construction.
[35]These comments suggest that the 1948 Income Tax Act was not intended to effect substantive tax reform. Rather, its objective was to enhance the predictability of the existing fiscal regime by improving the clarity of the legal drafting. That in turn suggests that a definition of "property" was included in the 1948 Income Tax Act to provide greater certainty.
[36]The original definition of property appears in paragraph 127(1)(af) of the 1948 Income Tax Act, and reads as follows:
127. (1) . . .
(af) "property" means property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action.
[37]It is immediately apparent that this 1948 definition contains the core of the current definition, including the portion that contains the phrase "a right of any kind whatever". I derive the following propositions from an ordinary and grammatical reading of the 1948 definition:
(a) The opening words "property of any kind whatsoever" bring within the statutory definition everything that is within the broadest ordinary meaning of the word "property".
(b) There are then two lists of things that are stated to be specifically included within the statutory definition.
(c) The first list consists of four items: real property, personal property, corporeal property, incorporeal property. This list does not expand the statutory meaning of "property" beyond its broadest ordinary meaning, which suggests that the first list is provided only for greater certainty.
(d) The second list begins with the words "without restricting the generality of the foregoing", which is intended to preclude any argument that something that is outside the second list must for that reason be considered to be outside the remainder of the definition.
(e) The second list then names three items: "a right of any kind whatever", "a share", and "a chose in action".
[38]Shares and choses in action are incorporeal property, which are within the ordinary meaning of "property". The question thus becomes whether, considering the entire context of the 1948 Income Tax Act, the phrase "a right of any kind whatever" was intended to refer to a non-exclusive, commonly held right to carry on a business, the kind of right in issue in this case.
[39]Section 3 of the 1948 Income Tax Act introduced the concept of taxing income by source, "property" being one of the three named sources of income (the others are "businesses" and "offices and employments"). The inference is that the word "property" in section 3 was intended to include, at least, anything capable of being owned and bearing income. The obvious examples are debts and other financial instruments that bear interest, shares that bear dividends, real property and personal property that bear rent, and resource and intellectual property rights that bear royalties. All of these sources of income are "property" within its ordinary meaning.
[40]The word "property" was used in many places in the 1948 Income Tax Act apart from section 3. I will refer to two frequently cited provisions as examples. One is paragraph 11(1)(a) of the 1948 Income Tax Act, which introduces the scheme of capital cost allowance, an annual deduction of part of the cost of property to the extent permitted by regulation (to replace what was a depreciation allowance subject to Ministerial discretion). Capital cost allowance could be claimed in respect of tangible personal property, and also licences and concessions of limited duration. The second example is paragraph 11(1)(c) of the 1948 Income Tax Act, which permits the deduction of interest on borrowed money used for the purpose of earning income from a business or property. No expansion of meaning was required to give effect to the new regime for capital cost allowance or deductible interest expenses.
[41]I conclude that, at least as far as the 1948 Income Tax Act is concerned, the phrase "a right of any kind whatever" is not included in the statutory definition of "property" to expand its ordinary meaning to include a non-exclusive, commonly held right to carry on a business. The next question is whether there is any reason to change that conclusion as a result of any statutory amendments after 1948.
[42]As indicated above, the original definition forms the core of the current definition. Except for the modernization of terminology (for example, "whatsoever" became "whatever"), the original 1948 definition of "property" became paragraph 139(1)(ag) of the Income Tax Act in the consolidation of federal statutes in 1952 (Income Tax Act, R.S.C. 1952, c. 148). The definition has since been amended three times. I repeat the current definition for ease of reference:
248. (1) . . .
"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting 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,
(c) a timber resource property, and
(d) the work in progress of a business that is a profession;
[43]The first amendment was made in the 1972 tax reform legislation, [Income Tax Act] S.C. 1970-71-72, c. 63. This was major tax reform legislation. The most substantial change was to include a regime for taxing capital gains realized on the disposition of property. One of the consequential changes was that the words in the original definition of "property" after "includes" became paragraph (a), and what is now paragraph (b) was added ("unless a contrary intention is evident, money"; "à moins d'une intention contraire évidente, l'argent"». I have not been able to discover why paragraph (b) was added to the definition of "property". It seems likely that the change was thought necessary because of the new regime for taxing capital gains, but I can conceive of no reason for concluding that the ordinary meaning of "property" does not include money. I have been able to find no authority on point. I conclude that paragraph (b) probably was added only for greater certainty and not to expand the statutory definition of "property" beyond its ordinary meaning.
[44]Paragraph (c) of the definition of "property" (the reference to timber resource property, "les avoirs forestiers") was added by S.C. 1974-75-76, c. 26, section 125, applicable to the 1974 and subsequent taxation years. This amendment was consequential on the enactment of a specific regime for a special category of timber cutting rights, designed by the defined term "timber resource property". The rights included within the definition of "timber resource property" would have been within the pre-1974 definition of "property". I conclude that paragraph (c) was added to the definition of "property" only for greater certainty, and not to expand its statutory meaning.
[45]Paragraph (d) of the definition of "property" (the reference to "the work in progress of a business that is a profession", or "les travaux en cours d'une enterprise qui est une profession libérale") was added by S.C. 1980-81-82-83, c. 140, s. 128, applicable to the 1982 and subsequent taxation years. This was consequential on amendments to section 10 [as am. by S.C. 1980-81-82-83, c. 140, s. 3] of the Income Tax Act which, among other things, required the work in progress of a professional business to be valued at the end of every taxation year and otherwise treated as though it were inventory. Other amendments to the Income Tax Act were made at the same time to permit professional businesses to elect in certain circumstances to exclude the value of work in progress in income, as the principles of accrual accounting would otherwise require.
[46]The work in progress of a professional business is simply work for which the professional hopes to be paid at a future time. It is generally reflected in the accounts of a professional business as a sum of money representing, for example, the number of hours worked multiplied by an hourly rate. Work in progress is an asset with value, in the sense that it can be the subject of contractual terms governing the adjustment of the shares of a professional partnership in certain events, or it can be the subject of compensation if a professional business is sold. But the work in progress of a professional, by itself, generally does not entitle the professional to do or claim anything. In my view, it is not by its nature something that comes within the ordinary meaning of "property", and it may not even be "a right of any kind". If that is so, then paragraph (d) must have been added to the definition of "property" to expand the statutory meaning of "property" beyond its ordinary meaning. The purpose, apparently, was to give a statutory foundation to the amendments to section 10 that required the work in progress of a professional business as though it were inventory. This suggests that despite the apparent breadth of the definition of "property", and in particular the inclusion in that definition of "a right of any kind whatever", Parliament did not consider an inchoate right such as the work in progress of a professional to be within the definition as it read prior to 1982.
[47]I can find nothing in the statutory context to support the proposition that the phrase "a right of any kind whatever" in the statutory definition of "property" is intended to require a non-exclusive, commonly held right to carry on a business to be treated as "property" for income tax purposes.
(c) The jurisprudence
[48]I turn now to the jurisprudence that has considered the statutory definition of "property" and the meaning of the phrase "a right of any kind whatever". There is ample authority for the proposition that the word "property" is capable of many meanings, and that in the fiscal context its meaning must be understood to be broad and inclusive. For example Justice Linden, writing for this Court in Canada v. Kieboom, [1992] 3 F.C. 488 (C.A.), said this [at pages 499-500]:
As for the word property, it too has been widely interpreted. The Income Tax Act, subsection 248(1) defines property as "property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing includes (a) a right of any kind whatever, a share or a chose in action,". Lord Langdale once stated that the word property is the "most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have." (See Jones v. Skinner (1836), 5 L.J. (N.S.) Ch. 87 (Rolls Ct.), at page 90; see also Re Lunness (1919), 46 O.L.R. 320 (App. Div.), at page 322; Fasken, supra [Fasken, David v. Minister of National Revenue, [1948] Ex.C.R. 580], at page 591; and Vaillancourt v. Deputy M.N.R., [1991] 3 F.C. 663 (C.A.).)
[49]Based in part on this understanding of the word "property", Justice Linden concluded that a person who owns common shares of a corporation is considered to have transferred property to his wife when he enters into an arrangement whereby she subscribes for newly issued common shares of the corporation at a nominal price, reducing his interest from 90% to 20%, while increasing her interest correspondingly. This case is authority for the proposition that a share interest in a corporation is property, and the transaction in issue was a transfer of property because it resulted in a movement of part or all of that bundle of rights from one shareholder to another. While this case recognizes and restates the proposition that in the income tax context the word "property" has a very broad meaning, it does not say that everything of value is "property".
[50]The phrase upon which the Crown relies in this case, "a right of any kind whatever", like the word "property", has a very broad meaning. But it is not a word of infinite meaning. It cannot include every conceivable right. It cannot be given a meaning that would extend the reach of the Income Tax Act beyond what Parliament has conceived. Even counsel for the Crown conceded that it does not include a human right, or a constitutional right.
[51]It is not difficult to imagine examples in which the meaning of "a right of any kind whatever" would be taken too far. Consider the case of a person who is injured in a car accident caused by the negligence of another person. The injured person has the right, possibly a valuable right, to claim damages against the negligent person. Suppose that claim is released in consideration of the payment of a sum of money. One could say that the right to claim damages was disposed of. But no one would accept the argument that the payment is the proceeds of disposition of capital property. Why? Because fundamentally the payment is compensation for a personal injury, something that is well understood to be beyond the reach of the Income Tax Act. Although a legal claim for damages for personal injury is a "right", the settlement transaction is not within the scope of the capital gains provisions in the Income Tax Act.
[52]Counsel for Mr. Manrell has provided what appears to be an exhaustive list of all the cases in which something has found to be "a right of any kind whatever". I will not reproduce the whole list. But I will cite a few illustrative examples. The right represented by a term life insurance policy that has no cash surrender value but is convertible without evidence of insurability is a "right" for purposes of the definition of "property" in the Estate Tax Act, S.C. 1958, c. 29 (a definition very similar to the definition in the Income Tax Act): Miller Estate v. Minister of National Revenue, [1973] C.T.C. 793 (F.C.T.D.). An entitlement to receive payments from the pension plan of a deceased spouse is a "right" for purposes of the definition: Driol v. Minister of National Revenue, [1989] 1 C.T.C. 2175 (T.C.C.). An irrevocable promise in a marriage contract to pay a sum of money to the spouse during the marriage gives rise to a right in the hands of the recipient spouse as of the date of the promise, and that right is at that time a "right" for purposes of the definition: Furfaro-Siconolfi v. M.N.R., [1990] 2 F.C. 3 (T.D.). An entitlement to maintenance or alimony is a "right" for purpose of the defintion: R. v. Burgess, [1982] 1 F.C. 849 (T.D.), see also Nissim v. Canada, [1999] 1 C.T.C. 2119 (T.C.C.); Donald v. Canada, [1999] 1 C.T.C. 2025 (T.C.C.).
[53]The fact is that in the history of tax jurisprudence in Canada, involving dozens of cases that consider the statutory definition of "property", there is not a single case in which the word "property" has been held to include a right that is not or does not entail an exclusive and legally enforceable claim. This does not prove that the Crown's argument is wrong, but in my view it casts serious doubt on it.
[54]Before signing the non-competition agreement, Mr. Manrell could carry on or invest in a plastic mould manufacturing business competing with the three operating companies that were sold to 3154823 Canada Inc. However, that gave him no claim against anyone else, and no right to stop anyone else from starting exactly the same business. By signing the non-competition agreement, Mr. Manrell became obliged not to undertake activities that he could have undertaken before. If what he gave up was a right of some kind, it was a right shared by everyone to carry on a business. I see nothing in the context of the Income Tax Act that justifies the conclusion that this was a "right of any kind whatever" that makes it "property" within the statutory definition.
General comments
(a) Meaning of "property" under the common law and the civil law
[55]Counsel for the Crown argued that the meaning given to the word "property" in the Income Tax Act must respect the legal traditions of both the common law and civil law. I accept that argument. However, counsel for the Crown cited no authorities that suggest there is any significant divergence between the common law and the civil law in relation to the ordinary meaning of the word "property" (biens). My analysis assumes that there is no distinction that is relevant to the issues addressed in this case.
(b) Foreign jurisprudence
[56]Counsel for Mr. Manrell cited cases from the United Kingdom and Australia in which non-competition payments were held not to generate taxable gains from the disposition of property. The cases are Kirby (Inspector of Taxes) v. Thorn EMI plc, [1988] 2 All E.R. 947 (C.A.) and Hepples v. Federal Commissioner of Taxation (1990), 90 A.T.C. 4497 (Fed. Ct) and (1991), 91 A.T.C. 4808 (H.C.). The facts and statutory provisions appear to be similar to those considered in this case.
[57]I note as well that in Fortino, supra, the Tax Court Judge was referred to American cases indicating that in the United States, non-competition payments are taxable as income. Those cases did not convince her, or this Court, to interpret the Income Tax Act in the same way.
[58]It is always interesting to learn how other countries approach the tax problems that may arise in any country. However, the statutory context is inevitably somewhat different. For that reason, it is in my view preferable not to place too much reliance on foreign cases without reasonable assurance that all statutory distinctions are well understood. In this case, the material cited by counsel for Mr. Manrell does not provide sufficient assurance on that point. For that reason, I have not relied on the foreign cases.
(c) Policy considerations
[59]The trend of recent Canadian jurisprudence is that fiscal legislation should be interpreted in a purposive manner, taking into account the desirability of consistency and certainty. It is not acceptable to stretch statutory language in a taxing statute in order to achieve what may appear to be a reasonable result in a particular case.
[60]This case presents a strong temptation to legislate in the guise of statutory interpretation. No doubt many will consider the result of this case to be unsatisfactory in terms of fiscal policy. I am sympathetic to the view that it seems unfair that the shareholder of a corporation who bargains for a non-competition payment in the context of a sale of the shares is not taxed on the payment, even though in economic terms it may represent the realization of a substantial part of the commercial value of the business of the corporation.
[61]However, it is one thing to recognize an unsatisfactory state of affairs, and quite another to repair it. Perhaps non-competition payments should be within the tax net in some way, but in what way? The history of this case and Fortino illustrate several theoretical possibilities. I have no doubt that other theories could be devised.
[62]The Crown's principal argument in Fortino, in the Tax Court proceedings, was that non-competition payments must be included in the income of the recipient. The Tax Court Judge rejected that argument because a non-competition payment cannot be said to emanate from any source of income of the recipient. This Court found no fault with the conclusion of the Tax Court Judge that non-competition payments are not income.
[63]The Crown's second argument in Fortino was that non-competition payments are "eligible capital amounts" that are subject to section 14 [as am. by S.C. 1994, c. 7, Sch. II, s. 10; c. 21, s. 8; 1995, c. 3, s. 5; c. 21, s. 3] of the Income Tax Act. If that argument had succeeded, part but not all of the non-competition payments would have been included in the income of the recipient (in most years, the inclusion rate for eligible capital amounts is the same as the capital gains inclusion rate; I do not know whether that would have been the case for the payments in Fortino). That argument failed in the Tax Court because non-competition payments to a shareholder cannot be said to be amounts in respect of a business carried on or formerly carried on by the recipient of the payment, which is a condition for the application of section 14. The Crown abandoned its section 14 argument in its appeal to this Court.
[64]The Crown's third argument in Fortino was based on section 42 of the Income Tax Act, which requires consideration received for warranties, covenants or other conditional or contingent obligations given or incurred in respect of a disposition of property to be treated as part of the proceeds of disposition of that property. That argument echoes the position stated in paragraph 6 of Interpretation Bulletin IT-330R. It failed in the Tax Court because a promise not to compete is not a conditional or contingent obligation. The Crown abandoned its section 42 argument in its appeal in this Court. I assume paragraph 6 of Interpretation Bulletin IT-330R is no longer to be relied upon (see paragraph 10 of these reasons).
[65]The Crown's fourth argument in Fortino was the argument made in this case, which was that the payment was proceeds of disposition of a "right to compete", a right which the Crown argues meets the definition of property in subsection 248(1) of the Income Tax Act. That argument could not be considered in Fortino because of a deficiency in the Crown's pleadings that was not corrected in time for the matter to be raised without unfairness to the taxpayer.
[66]According to counsel for Mr. Manrell, the Crown in this case originally proposed four alternative grounds upon which the non-competition payments could be taxed. One was the capital gains argument, the subject of this decision. The second was that the payment was income. The third was that section 42 applied. The fourth was that the payment was the proceeds of disposition of listed personal property (that argument was not raised in Fortino, and in this case it was abandoned prior to the proceedings in the Tax Court).
[67]This litigation history demonstrates that the potential solution to the problem of whether and how to tax non-competition payments ranges from full taxation as income, to partial taxation as capital gains, to no taxation at all. Every theoretical possibility could be defended as leading to a result that is appropriate, or attacked as leading to a result that is inappropriate. The debate is a matter of tax policy, for which the only proper forum is Parliament.
Conclusion
[68]For these reasons, I conclude that the Crown was wrong to assess Mr. Manrell on the basis that the payments he received under the non-competition agreements were the proceeds of the disposition of property. It follows that the Tax Court Judge erred in dismissing Mr. Manrell's appeal.
[69]This appeal should be allowed with costs, the judgment of the Tax Court should be set aside and the reassessments for 1996 and 1997 should be referred back to the Minister for reassessment on the basis that the non-competition payments are non-taxable capital receipts.
Strayer J.A.: I agree.
Sexton J.A.: I agree.