[1993] 2 F.C. 190
A-267-92
Her Majesty the Queen (Appellant)
v.
James M. Shaw (Respondent)
Indexed as: Shaw v. Canada (C.A.)
Court of Appeal, Hugessen, Linden JJ.A. and Holland D.J.—Calgary, February 18, 1993.
Income tax — Income calculation — Income or capital gain — Expropriation of land under Alberta Expropriation Act in 1977; compensation settled in 1986—$1,020,368 in interest from 1977 to 1986 treated as income by M.N.R. — Appeal from Trial Division decision holding $1,020,368 should be included as proceeds of disposition and treated as capital — Appeal allowed — Under Alberta Act, interest not considered part of compensation — Trial Judge wrongly interpreting F.C.A. decision in Sani Sport Inc. as holding interest should be included as part of compensation — Interest not paid as damages or compensation for expropriation but as compensation for failure to pay balance of land value promptly — Interest not merged in total compensation paid; calculated separately, based on total compensation amount — Income Tax Act, s. 44(2)(a), on which Trial Judge relied to characterize interest as proceeds of disposition, merely timing provision; not designed to be substantive provision capable of recharacterizing nature or essence of transaction.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Expropriation Act, S.A. 1974, c. 27 (now R.S.A. 1980, c. E-16), ss. 29(5), 37, 40(2), 64.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 12(1)(c) (as am. by S.C. 1980-81-82-83, c. 140, s. 4), 16(1) (as am. idem, s. 10), 44(2)(a) (as am. by S.C. 1977-78, c. 1, s. 18), 54(h)(iv), 165(3)(b) (as am. by S.C. 1980-81-82-83, c. 158, s. 58).
CASES JUDICIALLY CONSIDERED
APPLIED:
Wride v. M.N.R., 86-257 (IT), Bonner J., judgment dated 28/1/88, T.C.C., not reported; Wideman (B) v. MNR, [1983] CTC 2589; (1983), 83 DTC 531 (T.C.C.); Hallman & Sable Ltd. v. M.N.R. (1969), 69 DTC 551 (T.A.B.); Elliott (RA) v. MNR, [1984] CTC 2373; (1984), 84 DTC 1325 (T.C.C.).
DISTINGUISHED:
Sani Sport Inc. v. Canada, [1990] 2 C.T.C. 15; (1990), 90 DTC 6230 (F.C.A.); E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114; (1986), 86 D.T.C. 634 (F.C.T.D.).
APPEAL from a Trial Division decision ([1992] 2 F.C. 162) holding that a payment of money described as “interest” on a delayed settlement payment representing compensation for expropriated land should not be characterized as interest and taxed as income but included as proceeds of a disposition and treated as capital. Appeal allowed.
COUNSEL:
Douglas Titosky and Louis A. T. Williams for appellant.
Alan D. Macleod and James G. McKee for respondent.
SOLICITORS:
Deputy Attorney General of Canada for appellant.
Macleod, Dixon, Calgary, for respondent.
The following are the reasons for judgment rendered in English by
Linden J.A.: The issue on this appeal is whether a payment of money described as “interest” on a delayed settlement payment representing compensation for expropriated land should be characterized as interest and taxed as income, according to paragraph 12(1)(c) 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)] or whether it should be included as proceeds of a disposition, pursuant to subparagraph 54(h)(iv) of the Act, and treated as capital.
FACTS
In November 1963, the respondent, James Shaw, inherited farm land near Calgary from his father. Fourteen years later, on July 20, 1977, Mr. Shaw received a notice of intention to expropriate portions of this land pursuant to the Alberta Expropriation Act, S.A. 1974, c. 27 (as am.) [now R.S.A. 1980, c. E-16]. On September 30, 1977, the Province of Alberta issued a certificate of approval advising James Shaw that the land in question was taken effective that day. The province, therefore, became the registered owner of the expropriated lands on September 30, 1977 and took possession a few months later on January 31, 1978.
In the meantime, the province served Mr. Shaw with a notice of proposed payment and two cheques for a total of $719,400, which he received November 6, 1977. James Shaw accepted the proposed payment on the condition, provided for in subsection 29(5) of the Expropriation Act, that there be no prejudice to his right to claim additional compensation.
In September 1978, the respondent (along with a group of adjacent land owners) commenced an action against the province of Alberta seeking greater compensation. James Shaw sought an increased amount for revised market value, costs incurred to determine the proper amount of compensation (section 37), compensation for loss of special economic advantage of the land (paragraph 40(2)(c)), expenses for locating replacement land (paragraph 40(2)(b)), compensation for injurious affection to non-expropriated land (paragraph 40(2)(d)), and interest on the sum of these amounts for the period between February 1978 and the date of payment of these monies (section 64).
Following negotiations between the province and the respondent, this action was eventually settled. Under the settlement agreement, James Shaw received $566,100 as additional compensation for the expropriated land along with interest of $1,020,368 on that amount for the period from September 30, 1977 to February 28, 1986. The interest payment was calculated at a rate of 13%, which was based on the return Mr. Shaw earned on his other investments during that period.
These payments concluded James Shaw's claim against the province. He executed a release in favour of the province on August 13, 1987. The total sum paid by the province of Alberta to James Shaw, therefore, was as follows:
| $ 719,400 |
Compensation received November 6, 1977 |
| $ 566,100 |
Compensation received March 26, 1986 |
| $1,020,368 |
Interest received March 26, 1986 |
| $2,305,868 |
On his 1977 tax return, the respondent reported the $719,400 partial payment for his land as a capital gain of $461,400, made up of the proceeds of disposition of expropriated land in the sum of $719,400 less the adjusted cost base of $258,000. This 1977 tax return was not contested by the Minister of National Revenue.
On his 1986 tax return, James Shaw claimed both the compensation and the “interest” received in 1986 as proceeds of disposition of expropriated land. The Minister reassessed Mr. Shaw's 1986 return, recharacterizing the “interest” payment of $1,020,368 as income (i.e., interest) rather than capital (i.e., proceeds of disposition of land).
James Shaw paid the additional taxes following the initial reassessment, but filed a notice of objection on September 28, 1989. In the notice of objection, the respondent waived reconsideration of the first reassessment and indicated his intention to appeal directly to the Federal Court pursuant to paragraph 165(3)(b) of the Income Tax Act [as am. by S.C. 1980-81-82-83, c. 158, s. 58]. The Minister issued a second reassessment six days later but did not alter his determination that the “interest” payment of $1,020,368 should be treated as income.
On December 18, 1989, James Shaw filed a statement of claim initiating an appeal to the Federal Court, Trial Division. James Shaw succeeded in the Trial Division [[1992] 2 F.C. 162], and the Minister now appeals to this Court.
DECISION
Normally, interest receipts are treated as income pursuant to paragraph 12(1)(c) of the Income Tax Act which reads:
12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property …
…
c) any amount received by taxpayer in the year … as, on account or in lieu of payment of, or in satisfaction of, interest …
The Trial Judge [at page 168] recognized that the provincial law would regard the payment as interest and that “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 capital sum representing the total value of the land”. He nevertheless concluded that the sum of $1,020,368 in question should be characterized as part of the compensation for property taken under statutory authority and, therefore, as proceeds of disposition pursuant to subparagraph 54(h)(iv) of the Income Tax Act, which provides:
54. …
…
(h) “proceeds of disposition” of property includes,
…
(iv) compensation for property taken under statutory authority ...
In arriving at that conclusion, the Trial Judge relied on the decision of this Court in Sani Sport Inc. v. Canada, [1990] 2 C.T.C. 15 (F.C.A.) to the effect that the Minister of National Revenue should treat compensation as a unit and should not inquire into the various elements included in compensation paid for property taken through expropriation. The Trial Judge decided that the interest paid to Mr. Shaw should be included as part of the compensation and should not be distinguished or “dissected” from the compensation payment.
The Trial Judge, with respect, read more into this Court's decision in Sani Sport Inc. than was intended. The Sani Sport Inc. case did not deal with interest at all; rather it concerned the characterization of the compensation itself. In other words, the Court in Sani Sport Inc. dealt with the different types of damages that are compensated for when the government expropriates land. The decision of E.R. Fisher Ltd. v. The Queen, [1986] 2 C.T.C. 114 (F.C.T.D.) is also distinguishable as dealing with an interest penalty not with interest on compensation.
In this case, the headings of damages flowing from expropriation are expressly set out in subsection 40(2) of the Expropriation Act of Alberta. That subsection specifically enumerates four matters upon which compensation is to be based:
40. …
(2) Where land is expropriated, the compensation payable to the owner shall be based upon
(a) the market value of the land,
(b) the damages attributable to disturbance,
(c) the value to the owner of any element of special economic advantage to him arising out of or incidental to his occupation of the land to the extent that no other provision is made for its inclusion, and
(d) damages for injurious affection.
It should be noted that interest is conspicuously absent from this list. That is understandable, since interest is normally paid, not as compensation for the expropriation, but as compensation for the government's failure to pay promptly the balance of the value of the land they take. This differential treatment of interest is also reflected in subsection 64(1) of the Expropriation Act which deals with the payment of interest by the Board as it “considers just …with respect to … compensation for the land”.
The sum paid to Mr. Shaw as compensation, therefore, was payable because of the expropriation of his land, but that is not true of the “interest” payment. The expropriation resulted in the government owing Mr. Shaw a capital sum. The interest on the capital sum, however, was due because the government did not immediately pay that capital sum; it was not owing for “property taken” by an expropriation. Accordingly, the interest was not paid as damages or compensation for expropriation.
Unlike the various types of damages, the amount of interest paid to Mr. Shaw was not merged in the total compensation paid; it was calculated as a discrete sum after the total for compensation was ascertained with the agreement of both parties to the expropriation. There is no difficulty here to determine “rationally” what constitutes interest rather than capital. (See Marceau J.A. in Sani Sport Inc.) It should also be noted that the Income Tax Act stipulates that “[w]here a payment under a contract or other arrangement [which] can reasonably be regarded as being in part a payment of interest … and in part a payment of a capital nature, the part of the payment that can be reasonably be regarded as a payment of interest … shall … be included in computing the recipient's income from property” (subsection 16(1) [as am. by S.C. 1980-81-82-83, c. 140, s. 10]). Therefore, the interest paid to James Shaw should be distinguished from the capital sum paid to him as proceeds of disposition of his expropriated property (Wride v. M.N.R., 86-257 (IT), Bonner J., not reported, January 28, 1988 (T.C.C.); Wideman (B) v. MNR, [1983] CTC 2589 (T.C.C.); Hallman & Sable Ltd. v. M.N.R. (1969), 69 DTC 551 (T.A.B.); c.f. Elliott (RA) v. MNR, [1984] CTC 2373 (T.C.C.)).
The Trial Judge also relied, in his reasons, on paragraph 44(2)(a) [as am. by S.C. 1977-78, c. 1, s. 18] of the Income Tax Act, which reads:
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 disposition as described in subparagraph 13(21)(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,
(b) where a claim, suit, appeal or other proceeding has been taken before one or more tribunals or courts of competent jurisdiction, the day on which the taxpayer's compensation for the property is finally determined by such tribunals or courts.
(c) where a claim, suit, appeal or other proceeding referred to in paragraph (b) has not been taken before a tribunal or court of competent jurisdiction within two years of the loss, destruction or taking of the property, the day that is two years following the day of the loss, destruction or taking,
(d) the time at which the taxpayer is deemed by section 48 or 70 to have disposed of the property, and
(e) where the taxpayer is a corporation other than a subsidiary corporation referred to in subsection 88(1), the time immediately before the winding-up of the corporation,
and he shall be deemed to have owned the property continuously until the time so determined.
The Trial Judge [at page 171] noted the words “for the purposes of this Act”, and concluded that, until February 28, 1986, no money was receivable by James Shaw in respect of the disposition of property and, therefore, no interest on the capital sum could be receivable by him until that date. In other words, the Trial Judge reasoned, no interest could be calculated on money owed to the taxpayer prior to settlement because no money was deemed receivable until the date of the settlement.
With respect, we do not think that was the correct approach to the problem of how to characterize “interest” received on a delayed settlement for the expropriation of property. In our view, paragraph 44(2)(a) is merely a timing provision; it was not designed to be a substantive provision capable of recharacterizing the nature or essence of a transaction. This provision deems proceeds of disposition to be receivable on a particular date and that deemed date is applicable for all parts of the Act. However, proceeds of disposition are only relevant in the scheme of the Act to the calculation of taxable capital gains and the deemed date is only applicable for the purposes of considering the timing of the transaction, not for the purpose of characterizing. It would be misleading, then, to rely on paragraph 44(2)(a) as enlarging the scope of subparagraph 54(h)(iv), since the latter subparagraph is concerned with the nature and not the timing of a transaction. We agree with Bonner J. of the Tax Court of Canada who has remarked that subsection 44(2) cannot operate to impose upon a sum of money “a character that is at variance with reality” (Wride v. M.N.R., supra).
The reality, in this case, is that the sum of $1,020,368 was paid to James Shaw as interest on the compensation owing to him for the expropriation of his land. The Alberta Expropriation Act would treat the payment in question as interest and the Trial Judge himself recognized this when he wrote [at page 168]: “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”. The interest payment received, therefore, is taxable as income under paragraph 12(1)(c) of the Income Tax Act.
The appeal will be allowed with costs and the action of the taxpayer will be dismissed with costs.
Hugessen J.A.: I agree.
Holland D.J.: I agree.