Date:
20080220
Docket:
A-466-06
Citation:
2008 FCA 65
CORAM: DESJARDINS
J.A.
NOËL
J.A.
TRUDEL
J.A.
BETWEEN:
VALLEY
EQUIPMENT LIMITED
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE
COURT
(Delivered
from the Bench at Fredericton, New Brunswick, on February 20,
2008)
NOËL J.A.
[1]
This is an
appeal by Valley Equipment Limited (“Valley Equipment”) from a decision of
Campbell J. of the Tax Court of Canada (the “Tax Court Judge”), confirming the
assessment issued by the Minister of National Revenue (the “Minister”) with
respect to its 2002 taxation year on the basis that damages awarded to Valley
Equipment as a result of an unlawful cancellation of a Dealer Agreement with John
Deere Limited (“John Deere”) were proceeds of disposition of property, subject
to a capital gains tax, and did not constitute a non-taxable capital receipt.
RELEVANT FACTS
[2]
The matter
before the Tax Court Judge proceeded on the basis of an agreed statement of
facts which is fully reproduced in the decision under review (Reasons, para.
2). For the purposes of the appeal, if suffices to outline the following facts.
[3]
Valley
Equipment is a company incorporated under the laws of the Province of New Brunswick. It carried on several lines of
business, including that of a John Deer Dealer. Throughout the course of their
commercial relationship Valley Equipment and John Deere signed several dealer
agreements (“Dealer Agreement” or “Dealer Agreements”), the latest of which
came into effect as of February 14, 1986 and March 12, 1991. However, between
1988 and 1992 relations between John Deere and Valley Equipment were strained
and on September 28, 1995, John Deere terminated its Dealer Agreement with
Valley Equipment.
[4]
Refusing
to accept this termination (and based on what appears to have been an intent to
challenge the termination), Valley Equipment’s sole shareholder, Raymond Cook
and his son entered into an agreement with Roy and Murray Culberson (the
“Culbersons”) on September 29, 1995, which specified that the Culbersons were
to acquire the John Deere division of Valley Equipment’s business for
$500,000.00; to lease the building owned by Raymond Cook at $54,500.00 a year
for the term of one year; and to acquire the parts and service inventory at
cost.
[5]
On
December 14, 1995, Valley Equipment and the Cooks commenced an action in the
New Brunswick Court of Queen’s Bench against John Deere alleging breach of
contract and claiming injunctive relief and damages. On January 14, 2000,
Glennie J. issued a decision (Valley Equipment Ltd. v. John Deere Ltd.,
[2000] N.B.J. No. 28), holding that John Deere had wrongfully cancelled Valley
Equipment’s Dealer Agreements and awarded damages plus interest and costs.
[6]
Valley
Equipment submits that it then planned an appeal relating to certain points in
the judgment, however, it subsequently reached a settlement with John Deere
whereby Valley Equipment, Raymond Cook and Nadia Cook agreed to release John
Deere from liability in consideration of John Deere paying the amount of $1,014,807.10 and on the condition that the plaintiffs
not enter a formal judgment against John Deere (Amended Appeal Book, Tab 6).
[7]
In
filing its tax return for the taxation year ending December 31, 2000, Valley
Equipment disclosed that: “the company received court awarded damages from John
Deere Limited for wrongful cancellation of its dealership agreements. The
damages received less applicable legal costs, have been determined by counsel
to be a non-taxable receipt and have, therefore, been excluded from net income
and retained earnings in the financial statements" (Agreed Statement of
Facts, para. 9).
[8]
Valley
Equipment was subsequently assessed on the basis that the award paid by John
Deere constituted proceeds of disposition of capital property. The T7 W-C Form
received on May 29, 2003 indicated that Valley Equipment’s net income for the
year 2000 was revised by including a “Taxable Capital Gain … of $536,457.00”.
[9]
Valley
Equipment appealed this assessment to the Tax Court. The Tax Court Judge came
to the conclusion that the assessment had been properly issued on the basis
that the damage award constituted proceeds from the disposition of capital property.
Valley Equipment now appeals this decision before this Court.
RELEVANT STATUTORY PROVISIONS
[10]
Before
turning to the decision under appeal, it is useful to set out the relevant
statutory provisions. Paragraph 40(1)(a) of the Income Tax Act, 1985, c. 1 (5th Supp.)
(the “Act”) defines the term “capital gains” as follows:
|
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 and expenses
to the extent that they were made or incurred by the taxpayer for the purpose
of making the disposition, or
…
|
40. (1) Sauf indication contraire expresse de
la présente partie :
a) le gain
d’un contribuable tiré, pour une année d’imposition, de la disposition d’un bien
est l’excédent éventuel :
(i) en cas de
disposition du bien au cours de l’année, de l’excédent éventuel du produit de
disposition sur le total du prix de base rajusté du bien, pour le
contribuable, calculé immédiatement avant la disposition, et des dépenses
dans la mesure où celles-ci ont été engagées ou effectuées par lui en vue de
réaliser la disposition,
[…]
|
[11]
“Disposition”
is defined in paragraph 248(1) of the Act to include:
|
"disposition" of
any property, except as expressly otherwise provided, includes
(a)
any transaction or event entitling a taxpayer to proceeds of disposition of
the property,
…
|
«disposition »
Constitue notamment une disposition de bien, sauf indication contraire
expresse :
a) toute
opération ou tout événement donnant droit au contribuable au produit de
disposition d’un bien;
[…]
|
[12]
Subsection
248(1) of the Act also defines “property” as:
|
"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;
|
«biens » Biens
de toute nature, meubles ou immeubles, corporels ou incorporels, y compris,
sans préjudice de la portée générale de ce qui précède :
a) les droits
de quelque nature qu’ils soient, les actions ou parts;
b) à moins
d’une intention contraire évidente, l’argent;
c) les avoirs
forestiers;
d) les
travaux en cours d’une entreprise qui est une profession libérale.
|
[13]
The
relevant portion of the definition of “proceeds of disposition” in section 54
of the Act provides:
|
"proceeds of
disposition" of property includes,
(a)
the sale price of property that has been sold,
(b)
compensation for property unlawfully taken,
…
|
«produit de
disposition » Le produit de disposition de biens comprend :
a) le prix de
vente de biens qui ont été vendus;
b) les
indemnités pour biens pris illégalement;
[…]
|
TAX COURT DECISION
[14]
At the
beginning of her analysis, the Tax Court Judge identified the basis for the
Minister’s position in issuing the assessment as follows (page 4):
… the dealer
agreements with John Deere Limited reflected a right which comes within the
definition of property as defined in the Act and that the damages
represented an award for the unlawful cancellation of the agreements which are
proceeds of disposition. Therefore a capital gain on the disposition of the
agreements was properly calculated and included in the Appellant's income.
[15]
According to the Tax
Court Judge the resolution of the issue before her was dependent on “what the
award of damages was actually for” (Reasons, para. 5). She proceeded to deal
with this question as follows (idem):
The judgment
of Mr. Justice Peter Glennie is close to one hundred pages long. It recounts a
sequence of events replete with copious duplicities on the part of John Deere
Limited and its representatives. His findings of fact point to a very blatant
and shameful picture of cunning and deception initiated to undermine the
Appellant's contractual arrangements with John Deere Limited. Mr. Justice
Glennie made numerous findings of acts of bad faith on the part of John Deere
Limited. However on a review of the judgment in its entirety, I conclude that
Mr. Justice Glennie awarded damages to the Appellant for breach of the dealer
agreements by John Deere Limited. In the final few pages of the judgment, under
the heading "Conclusion and Disposition", Mr. Justice Glennie states:
On the basis of my review of all the evidence I
conclude that Valley's Dealer Agreements were wrongfully cancelled by John
Deere. Since John Deere was not entitled at law to cancel Valley's Dealer
Agreement, Valley and Raymond Cook are entitled to damages as a consequence.
It seems to me that this wording is concise and
definitive in respect to the nature of the damage award.
[16]
The Tax Court Judge
went on to hold that the rights of Valley Equipment under the Dealer Agreement constitute
“property” within the meaning of the Act (Reasons, para. 7), and that this
right was unlawfully “taken” when the Dealer Agreement was unilaterally
cancelled (Reasons, para. 8). It follows that upon payment of the judgment
award, the appellant was in receipt of proceeds resulting from the disposition
of property.
[17]
The Tax Court Judge rejected
the appellant’s contention that the compensation was for the overall tortuous
conduct of John Deere (Reasons, para. 9). She referred to the reasons for judgment
of Glennie J. and noted that there was no explicit discussion of tortuous
behavior in the reasons and in fact that the words “tort” or “tortuous” are not
used (idem). Furthermore, the judgment specifically provided that the
damages were intended to compensate Valley Equipment for the wrongful
cancellation of the Dealer Agreement.
[18]
Finally, even if the
appellant had presented a compelling argument that John Deere’s behavior was
tortuous, the explicit words of Glennie J. showed that this was not the basis
for the damage award (Reasons, para. 10).
[19]
The Tax Court Judge
went on to dismiss the appeal.
ALLEGED
ERRORS IN DECISION UNDER APPEAL
[20]
In support of its
appeal, Valley Equipment makes two propositions (Memorandum of Fact and Law of
the appellant, paras. 12-52). First, the Tax Court Judge erred in failing to
consider the settlement reached by the parties after Glennie J.’s decision was
rendered, as the basis for the payment. Had she done that, she would have been
bound to conclude that the settlement was not “property” under the Act.
[21]
Second, the Tax Court
Judge erred in holding that the damages related to the harm arising from the
loss of the John Deere dealership. According to Counsel for the appellant, the
exact basis for the harm was as follows (Memorandum of Fact and Law of the
appellant, para. 17):
… In reality, after the
cancellation of the dealership, Valley Equipment, on its own, attempted to find
a purchaser for its John Deere business. But then after the cancellation, John
Deere wrongfully interfered with the potential sale. That was the harm: an
interference with the non-property rights of Valley Equipment to freely engage
in business. …
(My emphasis.)
[22]
According to counsel
for the appellant, this “non-property right to freely engage in business” is a res
nullius analogous in nature to the “non-exclusive, commonly held
right to carry on business” which was held by this Court not to be “property”
under the Act in Manrell v. Canada, [2003] F.C.J. No. 408 (C.A.) (“Manrell”)
at paragraph 47.
ANALYSIS
AND DISPOSITION
[23]
Dealing first with
this last proposition, the conclusion of the Tax Court Judge that the award was
paid as compensation for the loss of the John Deere distributorship is in my
view unassailable. Although, as pointed out by counsel for the appellant,
Glennie J., in the course of his reasons, does refer to John Deere having
interfered in the contractual negotiations with the Culbersons (Reasons, para.
180), his ultimate conclusion, which I have already reproduced (see para. 15
above) confirms that the award was intended to compensate Valley Equipment for
the wrongful cancellation of the Dealer Agreement. In providing for this
compensation, Glennie J. was giving effect to the central allegation made by
Valley Equipment in its statement of claim before the New Brunswick Court of
Queen’s Bench i.e., (Appeal Book, Vol. I, p. 130, para. 12):
… that grounds for
termination of its Dealership with Deere do not exist and that Deere is not
acting in good faith in the exercise of its powers under the Agricultural
Dealer Agreement and that in consequence the purported termination of Valley as
Deere’s Dealer is unlawful, unjustified and of no force or effect.
[24]
Furthermore, the mode
of computation of the award is wholly consistent with Glennie J.’s expressed intent
to compensate Valley Equipment for the wrongful cancellation of the Dealer
Agreement (Reasons, para. 301):
… I allow
$500,000.00 to Valley as the loss of the sale of the dealership to the
Culbersons together with $160,000.00 for the loss of the sale of inventory to
the Culbersons. The proposed sale to the Culbersons was an arms' length
transaction negotiated by experienced business people. These amounts
represent the loss of Valley's opportunity to sell to the Culbersons and it
reflects what Valley calculated its John Deere dealership was worth at fair
market value in September of 1995 at the time of the cancellation of Valley's
Dealer Agreements.
(My emphasis.)
[25]
In my view, the Tax
Court Judge was on solid ground when she held that Glennie J’s award was
intended to compensate Valley Equipment for the loss of the John Deere
dealership.
[26]
Valley Equipment, as
a party to the Dealer Agreement, had a legally enforceable right to compel John
Deere to abide by its terms. This takes the matter outside the rule set out by
this Court in Manrell, supra which stands for the sole proposition that
a right which does not entail an exclusive and enforceable claim against
anyone, is not “property” under the Act (para. 54).
[27]
The appellant’s
alternative argument is that the payment which it received was not the result
of the judgment award but the consideration for its agreement to settle the
case. According to counsel for the appellant this payment was “unrelated to the
actual harm done to Valley Equipment” (Memorandum of Fact and Law of the
appellant, para. 12).
[28]
The record shows that
Valley Equipment signed a release on March 4, 2000 agreeing not to cause a
formal judgment to be entered further to the judgment of Glennie J., and
releasing John Deere of all liability in consideration for the payment of the
sum of $1,014,807.10. The concluding paragraph of the release reads:
AND FOR SAID
CONSIDERATION the Releasors further covenant not to cause a formal judgment to
be entered with regard to this proceeding and further acknowledge that all
monies owing pursuant to the Decision of Mr. Justice Glennie dated the 14th
of January, 2000 in this proceeding, including damages, costs, interest and
disbursements, are paid in full.
(My
emphasis.)
[29]
Given this language,
it is difficult to see how the settlement amount could represent something
different than the award made by Glennie J. An argument could be made that the
settlement amount was of a different character if it exceeded or was below the
amount which was awarded by Glennie J. However, on a quick count the amount of
$1,014,807.10 is equal to Glennie J’s award (i.e., $885,000 to Valley
Equipment, $65,450.00 to Raymond Cook, costs in the amount of $33,000.00) plus
accrued interest at the rate of 7% per annum for the period between the date of
the judgment and the date of the settlement. In these circumstances, it cannot
be seriously argued that the settlement amount represents something other than
the judgment award.
[30]
I can detect no basis
for interfering with the Tax Court Judge’s conclusion that the amount received
by Valley Equipment was compensation for the wrongful cancellation of the John
Deere dealership.
[31]
The decision of the
Tax Court in Ipsco Inc. v. Canada, [2002] T.C.J. No. 110, on which the
appellant has placed considerable reliance is also of no assistance. In that
case, the legal action and the ultimate settlement amount received by Ipsco was
characterized as compensation for a flaw in the design, installation and
construction of a pipe treatment system. Significantly, the Tax Court Judge
emphasized in that case that Ipsco did not “abandon, transfer or otherwise
provide [the payer] with any property for accepting the payment” (Ipsco,
supra, para. 19). There was no damage in the usual and ordinary meaning of
that term since Ipsco’s property was not damaged (Ipsco, supra, para.
25). The payment could not be viewed as “compensation for property unlawfully
taken” since nothing had been taken. This is the basis upon which Rowe D.C.T.J.
was able to distinguish the decision of this Court in The Queen v. Mohawk
Oil Co. Ltd., 92 DTC 6135 and conclude that the receipt of the settlement
amount did not give rise to a disposition of property.
[32]
The situation in the
present case is the opposite. In consideration for the settlement payment,
Valley Equipment abandoned its right to continue as a John Deere dealer. There
was a mutual exchange of property which brings the matter squarely within
paragraph 40(1)(a) of the Act.
[33]
I would dismiss the
appeal with costs.
“Marc
Noël”
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