A-91-80
The Queen (Appellant)
v.
J. E. Cranswick (Respondent)
Court of Appeal, Urie and Le Dain JJ. and Kelly
D.J.—Toronto, December 2, 1981 and January 11,
1982.
Income tax — Income calculation — Appeal — Sale of part
of company's assets — Respondent's income reassessed to
include payment by parent company to respondent, a minority
shareholder in the subsidiary company — Whether a sum paid
by the majority shareholder of a company to a minority
shareholder is income — Income Tax Act, R.S.C. 1952, c. 148,
ss. 3, 9, as amended.
This is an appeal from a judgment of the Trial Division
allowing an appeal from reassessments whereby respondent's
1977 taxable income was adjusted to include an amount paid to
him by Westinghouse Electric Corporation ("Westinghouse
Electric"), the majority shareholder of Westinghouse Canada
Limited ("WCL"). In 1976, WCL agreed to sell its appliance
business. In order to avoid a possible complaint about the sale
of part of the company's assets, Westinghouse Electric extend
ed to shareholders of WCL the alternatives of purchasing their
shares at $26 per share or to pay them $3.35 per share.
Respondent accepted the second alternative and received the
total sum of $2,144 in respect of his 640 common shares in
WCL. The Trial Division held that the payment was not
income and allowed respondent's appeal. The issue is whether a
sum paid by the majority shareholder of a company to a
minority shareholder is income in the hands of the recipient.
Held, the appeal is dismissed. The payment received by the
respondent was not income earned by or arising from the
respondent's shares, which are the only possible source of
income in this case. In the absence of a special statutory
definition extending the concept of income from a particular
source, income from a source will be that which is typically
earned by it or which typically flows from it as the expected
return. The income which is typically earned by shares of
capital stock consists of dividends paid by the company in
which the shares are held. The payment in the present case was
of an unusual and unexpected kind that one could not set out to
earn as income from shares and it was from a source to which
the respondent had no reason to look for income from his
shares. The Court agrees with the Trial Judge that it was in the
nature of a "windfall".
Federal Farms Ltd. v. Minister of National Revenue
[1959] Ex.C.R. 91, considered. Walker v. Carnaby [1970]
1 All E.R. 502, considered. Simpson v. John Reynolds &
Co. (Insurances) Ltd. [1975] 2 All E.R. 88, considered.
Murray v. Goodhews [1978] 2 All E.R. 40, considered.
INCOME tax appeal.
COUNSEL:
W. Lefebvre and Beverly Hobby for appellant.
D. J. M. Brown and P. K. Tamaki for
respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Blake, Cassels & Graydon, Toronto, for
respondent.
The following are the reasons for judgment
rendered in English by
LE DAIN J.: This is an appeal from a judgment
of the Trial Division [[1980] 2 F.C. 563] allowing
an appeal from a reassessment of income tax in
respect of the respondent's 1977 taxation year.
The issue is whether a sum paid by the majority
shareholder of a company to a minority sharehold
er to avoid a possible complaint about the sale of
part of the company's assets is income in the hands
of the recipient.
The essential facts, which are not in dispute,
were the subject of an agreed statement of facts in
the Trial Division. They may be summarized as
follows. The respondent was at the relevant times a
shareholder of Westinghouse Canada Limited
(hereinafter referred to as "Westinghouse Cana-
da" or "WCL"). The majority shareholder of
Westinghouse Canada was Westinghouse Electric
Corporation (hereinafter referred to as "Westing-
house Electric"). In 1974 Westinghouse Electric
sold its appliance business to White Consolidated
Industries Inc., a United States corporation, and
Westinghouse Canada agreed to sell certain assets
of its appliance business to WCI Canada Limited,
the Canadian subsidiary of White Consolidated
Industries Inc., for an amount consisting of their
net book value, to be paid by WCI Canada Lim
ited, and $8 million, to be paid by Westinghouse
Electric. This sale was not completed because the
necessary approval under the Foreign Investment
Review Act, S.C. 1973-74, c. 46, was refused. In
1976 Westinghouse Canada agreed to sell its
appliance business to Canadian Appliance Manu
facturing Company Limited ("CAMCO") for $6
million less than the book value of the business as
of December 31, 1976. The closing of the sale took
place on June 30, 1977. On February 8, 1977
Westinghouse Electric made an offer to the other
shareholders of Westinghouse Canada consisting
of the following alternatives: (a) to purchase their
shares at $26 per share; or (b) to pay them the
sum of $3.35 per share. The respondent accepted
alternative (b) and received the total sum of
$2,144 in respect of his 640 common shares in
Westinghouse Canada. The reason for the offer by
Westinghouse Electric is described in paragraph
10 of the agreed statement of facts as follows:
10. The alternative offers were made by Westinghouse Electric
for its business purposes and in the hope of avoiding contro
versy or potential litigation on behalf of minority shareholders
of WCL which may have arisen in respect of the sale of the
household appliance division, particularly as a result of the
disallowance of the original sale to WCI Canada Limited
pursuant to the Foreign Investment Review Act. The respective
offers were not made by reason of any enforceable claims by
WCL shareholders against Westinghouse Electric.
In a preliminary report to its shareholders for the
year 1976 Westinghouse Canada made the follow
ing references to the offer:
As you will recall on November 11, 1976, a press release was
issued by Westinghouse Canada which stated in part ... "a
plan is being developed by which the shareholders—other than
Westinghouse Electric Corporation—will be offered benefits in
lieu of those which otherwise would have been available in the
original proposed sale to White Consolidated Industries".
In summary, the plan extends to shareholders of Westing-
house Canada the alternatives of accepting a direct cash pay
ment of $3.35 per share from Westinghouse Electric or of
tendering their shares to Westinghouse Electric at $26 per
share, which includes a premium over the recent market price.
This cash payment is intended to put the shareholders in a
position comparable to that contemplated in the White Con
solidated transaction. For those shareholders who, in view of
the disposition of the household applicance [sic] business, or for
any reason, prefer to sell their shares, the tender offer provides
a premium over the recent market price.
The testimony of the respondent in the Trial
Division indicated that he was not a shareholder or
employee of Westinghouse Electric or otherwise
connected with it, or a party to any agreement
with it; that he had had no prior communication
with that company concerning the offer and that it
"came as a complete surprise" to him; and that he
had had no contact with the other minority share
holders of Westinghouse Canada and did not know
whether there had been any litigation instituted.
The clear implication of his testimony was that
while he had been disappointed that the proposed
sale to WCI Canada Limited had not gone
through he had not considered taking any action as
a result of the disposition that was ultimately
made of the household appliance business of West-
inghouse Canada.
In computing his income for the 1977 taxation
year the respondent did not include the payment of
$2,144 received from Westinghouse Electric. By
notices of reassessment dated September 25, 1978
and October 31, 1978 the Deputy Minister of
National Revenue reassessed the respondent in
respect of his 1977 taxation year and adjusted his
income to include the amounts of $1,474 and $670,
for a total of $2,144. The respondent appealed
against these reassessments.
The Trial Division held that the payment was
not income and accordingly allowed the appeal.
The appellant contends that the payment by
Westinghouse Electric to the respondent was
income from property within the meaning of sec
tions 3 and 9 of the Income Tax Act, R.S.C. 1952,
c. 148, as amended by S.C. 1970-71-72, c. 63, and
in any event that it was income from a "source"
within the meaning of section 3. Section 3 provides
for inclusion in the taxpayer's income for a taxa
tion year of his income "from a source inside or
outside Canada, including, without restricting the
generality of the foregoing, his income for the year
from each office, employment, business and prop
erty", and section 9 provides that "a taxpayer's
income for a taxation year from a business or
property is his profit therefrom for the year."
The appellant argues that the respondent
received the payment by virtue of, and only by
virtue of, his ownership of shares in Westinghouse
Canada, and that the shares were therefore the
source of the payment. It was conceded that the
case was an unusual one, and that there were no
decisions directly in point. Counsel for the appel
lant reasoned by analogy from certain cases in
which receipts of an unusual nature were held to
be income because of their particular relationship
to an employment or office. He referred to The
Queen v. Poynton 72 DTC 6329, in which "kick-
backs" received by an employee of a company
were held to be benefits received by him in respect
of, in the course of, or by virtue of his employ
ment; to Herbert v. McQuade [1902] 2 K.B. 631,
in which it was held that a grant to a beneficed
clergyman from a fund established to supplement
the income of benefices enjoying less than £200
per year was income as a perquisite or profit
accruing from his office; and Ryall v. Hoare
(1923) 8 T.C. 521, in which it was held that
commissions received by directors for guaranteeing
a bank overdraft of a company were taxable
income as an instance of "casual profit." Counsel
for the appellant in the present case contended
that the sum paid to the respondent by Westing-
house Electric was a case of "casual profit" arising
from the fact that the respondent held shares in
Westinghouse Canada.
In concluding that the payment to the respond
ent was not income the learned Trial Judge relied
particularly on the judgment of Cameron J. in
Federal Farms Limited v. M.N.R. [1959] Ex.
C.R. 91 and the criteria suggested there. That case
involved a voluntary payment or grant from a fund
established to provide relief and assistance for
persons who suffered loss or damage as a result of
a hurricane and flood. Cameron J. considered the
cases such as J. Gliksten & Son, Ltd. v. Green
[1929] A.C. (H.L.) 381, and London Investment
and Mortgage Co., Ltd. v. Inland Revenue Com
missioners [1958] 2 All E.R. 230, which had
established that insurance or other compensation
for the loss of stock in trade was income, but held
that the case before him was distinguishable on the
ground that the taxpayer had contributed nothing
to the relief fund and had no legal right to claim
payment from it, as in the case of insurance or
compensation for expropriation or war damage.
He concluded [at page 97] that the payment
received by the appellant from the relief fund was
"in the nature of a voluntary personal gift and
nothing more." Again, to the same effect, he said
[at page 98], "The gift here in question, it seems
to me, is of an entirely personal nature, wholly
unrelated to the business activities of the
appellant."
The learned Trial Judge in the present case
listed several features by which Cameron J. had
distinguished the relief fund payment from insur
ance compensation. He said [at page 568]:
Cameron J., distinguished the case from J. Gliksten & Son Ltd.
v. Green (supra) on the basis that (a) the payment was entirely
voluntary, (b) it was given by persons who had no business
relations with the taxpayer, (c) it was unrelated to the taxpay
er's business activities, (d) the taxpayer had no legal right to
demand any portion of the fund, (e) at the time of the loss he
had no expectation of being so compensated, and (f) it was
unlikely ever to happen again.
With these features in mind the Trial Judge
concluded from the facts of the present case as
follows [at pages 568-569]:
There was no evidence other than that contained in such
paragraph 10, to indicate the nature of the controversy or
litigation which Westinghouse Electric hoped to avoid by the
payments made to the minority shareholders who retained their
shares. If an action could have been brought against some of
the parties involved as a result of the disallowance of such sale
any recovery by the plaintiff would not ordinarily have the
characteristics of income. In any event as far as the plaintiff
was concerned the payment to him was voluntary and no
relationship existed between the payor and the taxpayer who
had no expectation of receiving the same until he received the
offer (Ex. 2). It is most unlikely that a further payment will be
made to him in respect of the transaction. The payment might
be termed a windfall. I am convinced it was not a payment of
income within the provisions of the Income Tax Act.
Counsel for the respondent adopted the indicia
which the Trial Judge had emphasized in com
menting on the Federal Farms decision and sub
mitted a more elaborate list which is set out in his
memorandum as follows:
(a) The Respondent had no enforceable claim to the
payment;
(b) There was no organized effort on the part of the
Respondent to receive the payment;
(c) The payment was not sought after or solicited by the
Respondent in any manner;
(d) The payment was not expected by the Respondent, either
specifically or customarily;
(e) The payment had no foreseeable element of recurrence;
(f) The payor was not a customary source of income to the
Respondent;
(g) The payment was not in consideration for or in recogni
tion of property, services or anything else provided or to be
provided by the Respondent; it was not earned by the
Respondent, either as a result of any activity or pursuit of
gain carried on by the Respondent or otherwise.
Counsel for the respondent cited several cases as
supportive or illustrative of these indicia. For the
most part they involved the relationship of a par
ticular payment to an office or employment or to a
business or trade as a source of income. None of
them involved shares as a source of income so they
are of limited assistance in determining what
should be regarded as income from that source.
What many of the cases reflect is the distinction
between a receipt arising from an office or employ
ment, or from a business or trade, and a gift that is
personal to the taxpayer. This distinction is reflect
ed in Seymour v. Reed [1927] A.C. (H.L.) 554,
and Moore v. Griffiths [1972] 3 All E.R. 399,
cases involving special payments to athletes in
recognition or appreciation of their achievements,
and in Walker v. Carnaby [1970] 1 All E.R. 502,
and Simpson v. John Reynolds & Co. (Insurances)
Ltd. [1975] 2 All E.R. 88, cases involving volun
tary payments to auditors and insurance brokers
upon termination of their services, made in
appreciation of those services and as a consolation
for their termination. The last two cases, in which
the payments were held to be gifts and not income
from the business of the recipients, have a certain
affinity with the payment in the present case. Like
it, they were made without legal obligation, but to
make it easier for the recipient to accept what
could be considered to be an adverse turn of
affairs—in other words, for reasons of goodwill. A
somewhat similar case is Murray v. Goodhews
[1978] 2 All E.R. 40, in which voluntary payments
by the owners of commercial premises to the ten
ants upon termination of the tenancies were held
not to be income from the business of the recipi
ents. The payments were found to have been made
in recognition of the long and friendly association
between the owners and the tenants and to main
tain the image and goodwill of the owners in the
trade.
Counsel for the respondent also relied on such
cases as Graham v. Green [1925] 2 K.B. 37 and
M.N.R. v. Morden [1962] Ex.C.R. 29, in which it
was held that the particular gambling activity of
individuals had not assumed the proportions of a
business so that their winnings should be treated as
business income. These cases, as I understood
counsel, were cited in support of his criterion that
there must be some organized effort to earn a
payment before it can be characterized as income.
Having regard to the indicia suggested by coun
sel for the respondent, which I think are all rele
vant, although not one of them by itself may be
conclusive, I am of the opinion that the payment
received by the respondent was not income earned
by or arising from the respondent's shares, which
are the only possible source of income in this case.
In the absence of a special statutory definition
extending the concept of income from a particular
source, income from a source will be that which is
typically earned by it or which typically flows from
it as the expected return. The income which is
typically earned by shares of capital stock consists
of dividends paid by the company in which the
shares are held. The payment in the present case
was of an unusual and unexpected kind that one
could not set out to earn as income from shares,
and it was from a source to which the respondent
had no reason to look for income from his shares. I
agree with the learned Trial Judge that it was in
the nature of a "windfall."
For these reasons I would dismiss the appeal
with costs.
URIE J.: I agree.
KELLY D.J.: I concur.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.