Cases
Valley Equipment Ltd. v. The Queen, 2008 DTC 6200, 2008 FCA 65
Damages received lay the taxpayer (a John Deere dealer) in settlement of its action against John Deere for wrongful termination of its dealership agreement represented proceeds of disposition of capital property.
Mollinaro v. The Queen, 2000 DTC 6114 (FCA)
Pursuant to an agreement in which the taxpayer's holding company agreed to sell all the shares of a pizza manufacturing company ("Pizza Crust") to a corporate purchaser ("Catelli"), Catelli agreed to enter into an employment agreement with the taxpayer where he would be paid approximately $1.8 million over three years, of which he would be entitled to receive $1.5 million even if he died or was terminated for good reason.
Sexton J.A. rejected a submission of the taxpayer that the payment of $1.5 million was in substance proceeds of disposition of his capital interest in Pizza Crust. First, the taxpayer himself was owed no capital payment by Catelli. Second, given that the employment agreement had most of the terms of usual employment agreements and was seriously negotiated with lawyers and accountants representing the taxpayer, its substance was that of an employment agreement.
Bellingham v. The Queen, 96 DTC 6075 (FCA)
An award of "additional interest" received by taxpayer pursuant to s. 66(4) of the Expropriation Act (Alberta) (a provision which required repayment of such amount in circumstances where an expropriating authority offered less than 80% of the amount ultimately awarded and the Expropriation Board was of the opinion that such lower figure was due to the fault of the expropriating authority) did not, by its nature, represent compensation for the land inventory that had been taken. Robertson J.A. found that the decision in E.R. Fisher v. The Queen, 86 DTC 6364 (FCTD) could no longer be considered good law and went on to state (at p. 6083) that "you cannot treat a non-compensatory receipt in the same manner as a compensatory one simply because both arise from the same transaction".
Robertson J.A. also found that the definition of "proceeds of disposition" did not have the effect of deeming proceeds of disposition of land inventory to be proceeds of disposition of a capital property and asserted that what then were ss.54(a)(iv) and (v) were added to the Act to counter the decision in Kicking Horse Forest Products Ltd. v. British Columbia (Minister of Finance), [1973] 6 WWR 343 (BCSC), affirmed [1974] 5 WWR 242 (BCCA), affirmed [1976] 1 S.C.R. 711 to the effect that an expropriation did not constitute a sale within the meaning of the Logging Tax Act (BC).
Prince Rupert Hotel (1957) Ltd. v. The Queen, 95 DTC 5227 (FCA)
A lump sum settlement received by the taxpayer from its solicitors for their negligence in drafting partnership agreements in such a manner that it received a lower share of profits than had been negotiated did not represent proceeds of disposition of its partnership interests because its interests had not been sold or otherwise disposed of in return for the money, and because it received compensation for something it never had legally obtained (i.e., a larger share of profits) rather than for the loss or destruction of property it already had.
Pe Ben Industries Co. Ltd. v. The Queen, 88 DTC 6347, [1988] 2 CTC 120 (FCTD)
A payment made by Northern Alberta Railway ("NAR") to the taxpayer as compensation to the taxpayer for the termination by NAR of a major contract for the trucking by the taxpayer of goods and materials to a Syncrude plant represented proceeds of disposition of property. The reference in s. 54(c)(i) to "any transaction or event entitling a taxpayer to proceeds of disposition of the property" in the view of Strayer J. (at p. 6351) "would cover the payment made by NAR to the plaintiff, whether one regards it as payment pursuant to the contract or for termination of the contract". This view was reinforced by the reference in former s. 54(h)(iii) to "compensation for property destroyed" given "that the money paid by NAR to the plaintiff was for termination of any claim which the plaintiff might have against NAR under the contract which claim was thus 'destroyed'."
The Queen v. Demers, 86 DTC 6411, [1986] 2 CTC 321 (FCA)
Although the price stipulated in the agreement for the sale of shares of a corporation was $7,800,000, the agreement (in clause 3(t)) also provided that the vendors were required to use the sale proceeds to acquire from the corporation a debt owing to it by its subsidiary with a face amount of $1,402,225 but a fair market value of only $600,000 (the difference being $802,225). "This being the case, it logically follows that the sum of $7,800,000 represents not only the price of the shares but also of the undertaking by the sellers to pay the amounts referred to in clause 3(t). In determining the selling price of the shares, which under s. 54(h)(i) constitutes the proceeds of disposition, therefore, one must deduct from the agreed price of $7,800,000 the sum of $802,225" (p. 6412).
See Also
656203 Ontario Inc. v. The Queen, 2003 DTC 405, 2003 TCC 264
The taxpayer had failed to show that the allocation of the Minister of amounts received by it in settlement of two actions brought against its insurance company following the destruction of its sawmill by fire as between replacement of lost income (fully taxable business income), proceeds of disposition of building and compensation for loss of goodwill (eligible capital amounts) was unreasonable. In response to a submission of the taxpayer that a portion of the damages were non-taxable punitive damages, Lamarre T.C.J. stated (at p. 414):
"Bearing in mind that punitive damages are normally awarded by a court for malicious and oppressive misconduct, it would be surprising if the Insurers would have voluntarily agreed to pay damages to the appellant on that basis."
Stuart Estate v. The Queen, 2003 DTC 329, 2003 TCC 171, aff'd supra.
An agreement for the sale by the deceased taxpayer of her home provided that the purchase would not be completed until 60 days after third reading by the Municipality of Surrey for a rezoning of the property, or such earlier date as the purchaser and vendor agreed to in writing.
In finding that the taxpayer disposed of the property in 1994, when third reading was received, rather than in 1992 when the agreement of purchase and sale was entered into, Rip T.C.J. noted that the requirement to obtain third reading depended entirely on the will of a third party and thus was a true condition precedent that could not be waived, as explained in Turney v. Zhilka, [1959] S.C.R. 578, and indicated (at p. 339) that it was only in 1994 that the taxpayer could enforce payment of the purchase price for the property, so that it was only in 1994 that she was entitled to any portion of the sale price.
BP Canada Energy Resources Co. v. The Queen, 2002 DTC 2110 (TCC)
The taxpayer, which was a Canadian natural gas producer, received a lump sum as compensation for the losses it was considered to have suffered as a result of the cancellation of long-term natural gas supply contracts it had entered into with one purchaser ("A&S"), with the result that it thereafter was to sell its natural gas under short-term gas supply contracts and under a continuation of modified versions of existing sales arrangements.
These lump sums were found to be proceeds of disposition of capital assets, namely, the long-term supply contract. The contracts formed a significant part of the structure of the taxpayer's business (representing over 13% of its sales) and their capital nature was fortified by the dedication under some of the contracts of the lands containing the gas reserves to be sold under such contracts.
Molstad Development Co. Ltd. v. The Queen, 97 DTC 913 (TCC)
After the taxpayer sold land inventory at a loss for proceeds less than the amount owing to the bank that had financed the property, and the bank then forgave the remaining amount owing after application of the sale proceeds. After finding that the gain of the taxpayer from the forgiveness was on capital account, Rip TCJ. stated (at p. 921) that "there is no authority in the Act to increase the proceeds of disposition by an amount equal to the forgiveness of a debt by a person who is not a party to the transaction of purchase and sale".
Wighton v. The Queen, 96 DTC 1310 (TCC)
The sum of $200,000 received by the taxpayer in settlement of his legal action to enforce his alleged right of first refusal in a commercial lease that had expired, was found to be proceeds of disposition given that all of the concerned parties at the time of settlement had taken the position that the taxpayer indeed had an interest in the real property.
Fielder v. Vedlynn Ltd., [1992] BTC 347 (Ch. D.)
The taxpayer sold shares with substantial accrued losses to eight subsidiaries for their fair market value and for the right to deferred payment of 7.5% of any capital losses if and when they were allowed by Revenue. Two days later, the taxpayer sold the shares of the subsidiaries to a purchaser for a cash purchase price equal to the shares' open market value and a guarantee by the purchaser of the subsidiaries' deferred payment obligation. Harman J. found (p. 361) that):
"The special commissioner was entirely entitled to reach the conclusion that there is no basis on which a separate and additional monetary value could be placed upon the guarantee as part of the consideration to be added to the undoubted monetary price paid which was the true open market price of the shares."
and went on to find that the guarantee clearly fell within s. 22(4)(b) of the Finance Act 1965 which deemed the disposal of an asset to be for consideration equal to the market value of the asset where the asset was acquired "wholly or partly for a consideration that cannot be valued".
Sénécal v. MNR, 93 DTC 1155 (TCC)
The taxpayer sold land to a corporation of which he was a minority shareholder for $90,000 in cash and a non-interest bearing promissory note for $15,000 payment of which was subordinated to the payment of the long-term debt of the corporation. In finding that the taxpayer had realized proceeds of disposition of $105,000 rather than $90,000 notwithstanding that the promissory note likely had no value, Rip, TCCJ. noted that there was no evidence that the property had a fair market value of less than $105,000, that "part of the consideration and satisfaction of the sale price was that the appellant accepted a promissory note, regardless of the fact that it had no market value" (p. 1160), and that s. 54(h)(i) expressly referred to the sale price of property that had been sold (which, in this case, was $105,000) and made no mention of the consideration paid to satisfy the sale price.
J.F. Burns Sand & Gravel v. MNR, 68 DTC 226 (TAB)
The taxpayer agreed to rent five acres of land for a period of three years at a rent of $1,600 per annum, and provided the lessee with the option of purchasing the land at any time before the expiry of the lease for a price of $16,000 minus 90% of all rentals previously paid. Mr. Weldon found that the exercise of the option at the end of the leased term did not have the effect of converting 90% of the rentals previously received into capital receipt, after asking (at p. 229):
"How can you spell out a sale transaction in a lease-option agreement where, by the very nature of the transaction, the Lessee thereunder was not committed to purchase anything"?
Administrative Policy
20 December 2002 Memorandum 2002-014796 -
Damages received by two management advisors for terminations of their management advisory agreements with a REIT represented proceeds of disposition of capital properties (the agreements).
21 August 1995 T.I. 951975 (C.T.O. "Proceeds of Disposition")
In response to a question concerning s. 2 of the Partition of Property Act (B.C.), RC stated "if real property is jointly owned by three taxpayers, two of them may petition the court, pursuant to section 2 of the Partition Act, to have the property sold and the proceeds distributed, despite the fact that the third person dissents to the partition ... . [T]he proceeds of disposition received by the dissenting third party would be considered to be 'compensation for property taken under statutory authority' within the meaning of paragraph 54(c) ..."
24 March 1995 T.I. 950729 (C.T.O. "Sale Price of Shares - Closing")
Discussion whether an increase in the sale price of shares between the date of an agreement of sale and the closing date represents interest or an adjustment to the proceeds of disposition.
93 C.R. - Q. 42
Although specific references are made in the definition to the reduction in a liability to a mortgagee, this provision is not all-inclusive and a security arrangement containing provisions regarding the power to sell property that are similar to those found in mortgages will be treated in the same fashion.
5 April 1991 T.I. (Tax Window, No. 3, p. 6, ¶1268)
RC's assessing policy that under a farm-out it is not possible to ascertain the value of the consideration flowing between the parties and, therefore, the consideration for the disposition should be treated as being nil, does not apply to "widespread farm-outs" in which the farmee incurs CEE or CDE in respect of one property in order to earn an interest in a non-contiguous property.
89 C.R. - Q.7
Where a vendor of property is not in the business of dealing in the type of property to be sold, a forfeited deposit ordinarily will be a capital gain in the vendor's hands.
Paragraph (a)
See Also
Fiducie Claude Deragon v. The Queen, 2015 CCI 294
The taxpayer and two other trusts (the “vendors”) agreed effective May 1, 2004 to sell shares of various private companies (the “companies”) for a purchase price of $16 million minus long-term debts of the companies. $2 million of the sale price was receivable over three years provided that EBITDA of the companies was not less than 75% of the EBITDA for the fiscal year ending on January 31, 2003. A price adjustment clause provided for an increase or decrease in the sale price based on the increase or decrease in shareholders’ equity reflected in the balance sheet for the year ended January 31, 2004. In 2005, the parties realized that due to a failure to provide for accrued vacation pay and tax liabilities in the financial statements of the companies, the shareholders’ equity as at January 31, 2004 had decreased by $2.43 million.
After arduous negotiations, it was agreed on July 14, 2005 that the gross sale price would be reduced by $0.5 million to $15.5 million, that the conditional sale portion of the sale price would be increased by $1 million to $3 million and that the vendors would under stipulated conditions reimburse the following amounts to the purchaser: the sum of $1.5 million; a further sum of $0.5 million which theretofore had been held in trust for them; and the conditional sale amounts of $0.6 million per annum (i.e., $3 million in total). However, only a portion of these amounts was paid back by the vendors.
In confirming the Minister’s position before him that the vendors’ proceeds of disposition were based on the sale price as reduced only by the $0.5 million adjustment thereto under the Settlement Agreement (as contrasted to the taxpayer's position that its proceeds shuld be reduced to reflect an contingent obligation to refund a larger poriton of the sale price), Favreau J stated (at paras. 31-34):
[T]he conditional portion of the sale price for the shares was part of their proceeds of disposition.
…[T[he Settlement Agreement stipulated that, notwithstanding the adjustment clause, the total sale price of the shares would be $15,500,000 rather than $16,000,000. Consequently, the total sale price of the shares of $15,500,000 has become, following the adjustment, the maximum amount which can be received by the vendors from their sale of their shares.
The increase in the conditional sale balance from $2,000,000 to $3,000,000 and spread over five years rather than three years…did not impact on the total sale price of the shares as the conditional sale price was part of the total sale price of the shares… .
The $15,000,000 which the [vendors] were required to reimburse under the Settlement Agreement cannot detract from the total sale price of the share because it was contingent and dependent on the realization of the EBITDA condition respecting the companies.
He also noted that the taxpayer had relied on IT-462, para. 9 to avoid income treatment of the proceeds under s. 12(1)(g).
proceeds of disposition
Paragraph (d)
Cases
The Queen v. Shaw, 93 DTC 5121 (C.A.)
The farm lands of the taxpayer were expropriated pursuant to the Expropriation Act (Alberta) in 1977. Following the settlement in 1986 of an action against the Province of Alberta, the taxpayer received the sum of $1,020,368 which was calculated as a replacement of interest income which the plaintiff would have earned if he had been paid the full value of his land at the time of the expropriation.
Because the character of this sum under the Expropriation Act was compensation for the government's failure to pay promptly the balance of the value of the land that had been taken, rather than compensation for the expropriation of the land, that sum also constituted interest for purposes of the Act rather than proceeds of disposition of the land. With respect to the finding of the Trial Judge that because s. 44(2)(a) deemed the taxpayer to have disposed of the land in 1996, therefore there was no interest that had accrued to the taxpayer prior to that date, the Court found that s. 44(2)(a) was merely a timing provision that did not recharacterize the nature of the sum received.
Damka Lumber & Development Ltd. v. The Queen, 90 DTC 6101 (FCTD)
Although the taxpayer sold its property to an agent acting for an undisclosed principal (which was the Urban Transit Authority of British Columbia) in the belief that if it did not sell the property would be expropriated, it was not told that the British Columbia government or any government body which was behind the attempted acquisition would so expropriate and, in fact, the Urban Transit Authority did not at that time have statutory authority to expropriate. Accordingly, it had not received a "notice of intention".
Sani Sport Inc. v. The Queen, 87 DTC 5253, [1987] 1 CTC 411 (FCTD), aff'd 90 DTC 6230 (FCA)
Compensation in respect of expropriation proceedings by Hydro Quebec affecting the lands of the taxpayer in which it was carrying on a sports arena business, included, for purposes of s. 54(h)(iv), the compensation received by the taxpayer for damage to its business, in addition to the compensation received by it for the value of the land taken and the diminution in the value of the retained land.
E.R. Fisher Ltd. v. The Queen, 86 DTC 6364, [1986] 2 CTC 114 (FCTD)
An interest penalty which the taxpayer received pursuant to s. 33(3)(b) of the Expropriation Act as a result of the initial failure of the Crown to pay at least 90% of the amount which it finally paid in settlement of the taxpayer's claim for expropriation, was held to be part and parcel of the proceeds of disposition to the taxpayer of the expropriated property. "Without the expropriation of the Sparks Street property, there would have been no payment at all."
See Also
Drummond v. Brown, [1984] BTC 142 (C.A.)
S.22(3)(a) of the Finance Act 1965 subjected to capital gains tax "capital sums received by way of compensation for any kind of damage or injury to assets". Statutory compensation received by a tenant for losing a potential right to have his lease renewed was not compensation for the loss of any asset.
IRC v. Metrolands (Property Finance) Ltd., [1982] BTC 8032 (HL)
Property was characterized as having been "acquired compulsorily by an authority possessing compulsory powers" (s.45(4), Development Land Tax Act, 1976) notwithstanding that the expropriation procedure was initiated by the landowner serving a notice on the authority.
Choice Realty Corp. v. The Queen, 78 DTC 6415, [1978] CTC 613 (FCTD)
The taxpayer purchased lands on the basis that amounts payable to the vendor as a result of the expropriation of a portion of the lands would be credited against the purchase price. It was indicated in obiter dicta that the expropriation proceeds were a profit or capital gain realized by the taxpayer on the sale of the expropriated lands rather than a reduction in the average cost of the remaining lands.
Administrative Policy
7 October 1991 T.I. (Tax Window, No. 10, p. 23, ¶1505)
The expropriating authority of a foreign government may be considered to be a "statutory authority".
18 September 89 T.I. (February 1990 Access Letter, ¶1107)
Proceeds of disposition received from a partition or a licitation do not fall within ss.13(21)(d)(iv) or 54(h)(iv) because (under Quebec law) in a partition or a licitation a transfer of property will only happen if there is an agreement as to the compensation, or if the acquiring party outbids everyone including the owner.
Paragraph (e)
Administrative Policy
28 May 2001 T.I. 2001-0085000
CRA noted that notwithstanding the definition of "proceeds of disposition" (the receipt of which is deemed to give rise to a disposition):
"In the case of Westcoast Energy, the Crown withdrew its argument that the out-of-court settlement amount received by Westcoast constituted compensation for property injuriously affected or compensation for property damaged which would have the combined effect of reducing the undepreciated capital cost claim by Westcoast .... It is our view that the case of Westcoast Energy does not preclude CCRA to make the argument of injuriously affected or damaged property in another situation similar to that of Westcoast."
11 June 1996 T.I. 961654 (C.T.O. "Compensation for Expropriated Land")
Discussion of tax treatment of compensation received by property owners for the compulsory granting by them of right-of-way easements.
Paragraph (f)
Administrative Policy
4 March 2015 T.I. 2014-0550761E5 F - 44(1) et disposition partielle
Insurance proceeds received for the destruction of part of a building qualified as "compensation for property damaged" (para. (f) of the "proceeds of disposition" definition) rather than "compensation for property destroyed" (para. (c)), so that it was necessary for the destroyed property to qualify as a "former business property" in order for the replacement property rollover to potentially apply to the reinvestment of the insurance proceeds. See summary under s. 44(1).
Paragraph (g)
Cases
Dunne v. The Queen, 96 DTC 6400 (FCTD)
After the taxpayer went into default on a MURB property, the mortgagee acquired the property in a public auction pursuant to its reserve bid (equal to all amounts owing by the taxpayers to the mortgagee) which proved to be substantially higher than the amount it was able to sell the property for in an arm's length sale approximately a year later. In finding that the taxpayers' proceeds of disposition was equal to the reserve bid amount, Rothstein J. found that under the laws of Newfoundland, the mortgagee would be considered to have acquired the property for an amount equal to the reserve bid and that such sale had the effect of extinguishing the taxpayer's liability to the mortgagee. The fact that the deed from the mortgagee as mortgagee to the mortgagee in its own right recited that the consideration of $1 clearly was irrelevant.
Paragraph (j)
Administrative Policy
84 C.R. - Q.46
S.54(h)(x) does not reduce the proceeds of disposition of property that is not capital property.