WALSH, J.:—This is an appeal from a judgment of the Tax Appeal Board, dated April 1, 1969, maintaining in part the appeal of respondent from a notice of re-assessment dated March 28, 1968 of the income of the late Rene Fortin for the 1963 taxation year. Respondent brought the proceedings before the Tax Appeal Board in her quality as testamentary executrix of the estate of her husband, the late Rene Fortin (hereinafter referred to as "‘the deceased’’). The facts of the case are as follows. The deceased entered into partnership with four other professional engineers namely, Jean Amyot, Marcel Bhal, Gilbert Coupienne and Louis P. Derome, to carry on their profession in partnership. and share the resulting expenses and income. equally. The partnership was for a period of two years: commencing on January 1, 1962 and renewable by express or tacit agreement. Provision was made for the withdrawal of a partner, in which event the partnership would continue to exist with the remaining partners having a delay of six months o. pay to the partner who had withdrawn his share in the operating capital, but the withdrawing partner would not have the ? Fight to share in the profits for the current year.
One of the partners, Gilbert Coupienne, withdrew as of December 19, 1963 and the deceased as of December 20, 1963, the withdrawal: agreement in his case being signed on March 23, 1964. By virtue of this agreement, he accepted, as a withdrawal indemnity in settlement of all the rights which he had or might have in the partnership, the sum of $35,900, payable in the amount of $19,900 by certain ms I whieh he received from the following contracts :
| Sogefors | — $13,900 | |
| Métro | — | 3,000. |
| Stadium | — | 3,000 |
and a balance of $16,000, which was specified to be payable when the City of Montreal paid for the Métro plans, out of the share of the fees due to the three other partners on this project in accordance with the terms of a later clause in the agreement. The later clause provided that he should make the plans for and exercise supervision of the Papineau Station of the. Montreal Métro, and the division of the fees was to be in the amount of 50% for him and 50% for the other three partners. The agreement continued (translated) :
It is clearly understood that, should Rene Fortin give up his contract for this Métro station or withdraw in favour of someone else, he shall not receive from his other three partners the $16,000 which remains owing to him, and furthermore he shall be liable towards the other three partners for half of the fees paid by the City for this Métro station, less the amount of ‘$16, 000 which As owing to him.
The withdrawal agreement further provided (translated) :
This agreement is retroactive to December 30, 1963, to take effect as if it had been signed on that date and shall remain unalterable with respect to the amounts mentioned as having been collected or to be collected.
(It will be noted that the preamble of the agreement refers to the dissolution taking place as of December 20, 1963, but I do not believe this affects the issue before me.)
The amount of $35,900 payable to the deceased under this agreement appears to have been established in accordance with the handwritten schedule to the agreement appearing on page 8 of the documentary proof, filed as Exhibit C-2. This schedule, which seems to have been based on estimates in round figures at the time, indicates amounts due to him of $29,400 as his share of the partnership assets at the time, and an additional $6,500 for contracts to be completed, making a total of $35,900 and provides for the manner of payment of $19,900 of this, which amount it is admitted that he received, leaving a balance of $16,000 due to be paid to him when payment was made to the partnership by the City of Montreal for his engineering work and supervision in connection with the construction of the Papineau Station of the Montreal Métro. The deceased did not give up this contract nor did he withdraw in favour of someone else. This work was taken out of his hands by the City of Montreal which decided to do the work through its own engineers and it is alleged by the other partners, though this does not concern us here, that the deceased was aware of this at the time the withdrawal agreement was signed in March, as the result of a letter received from the Montreal Transportation Commission dated January 9, 1964. Consequently, the partnership never received payment for this work and the remaining partners refused to pay any part of this $16,000 to Fortin or to his estate. Before his death he instituted proceedings against them in the Superior Court in Montreal to claim this amount which proceedings were contested and have been carried on by his executrix, the present respondent, but have not yet come to trial.
In calculating the amount of $35,900 owing to him, no allowance was included for the amount. to be earned in connection with the Papineau Métro Station, the amount of $3,000 appearing for Métro in the said ‘schedule being for services in connection with the tube under the station for which the work was completed. and payment made (evidence of Jean Amyot before Tax Appeal Board, Exhibit C-l, p. 26). In so far as the with- drawal agreement itself is concerned, therefore, it merely provided a suspensive condition for payment of the balance of $16,000 due to the deceased in connection with contracts other than the Papineau Métro Station. While the evidence of Mr. Amyot before the Tax Appeal Board was rather vague on the point, apparently the contention of the other partners is that had they known at the time, as they claim the deceased already did, that he would not be receiving the Métro contract involving some $35,000, of which they would receive 50%, they would not have agreed to pay him $35,900 on his withdrawal from the partnership, even though. his share of this potential $35,000 had not been taken into consideration in arriving at the amount he was to be paid, because Amyot and Derome, who are also surveyors, put into the partnership earnings which they had received in this capacity, which Mr. Amyot claims they were not obliged to do and would not have done had they not counted on paying the balance of $16,000 due to Fortin out of payments to be eventually received as the result of the Métro contract (pages 29-31, evidence of Jean Amyot before Tax Appeal Board). As previously indicated, this is being litigated in the Superior Court in Montreal and cannot be dealt with here.
Two amounts were in issue in the appeal before the Tax Appeal Board. The first of these was the sum of $11,110 which the deceased received in 1964 as his share of profits for work done in connection with the Sogefors contract which was completed in 1963. He filed his personal returns on a cash basis but the partnership accounting was done on an accrual basis. The financial statements of the partnership for its year ending December 31, 1963 were not filed in evidence and, in fact, production of them was quite properly objected to before the Tax Appeal Board on the grounds that the deceased was no longer a partner at that date, and that the income of the remaining three partners was not an issue in his appeal before the Board. The only accounting of the income of the partnership at the date of the deceased’s withdrawal is the rough handwritten calculation already referred to dated November 30, 1963, which established the amount due to him as $35,900. This did show amounts totalling $13,900 to be collected by him in connection with the Sogefors contract which sums it is admitted he collected. The judgment of the Tax Appeal Board found that this was for work completed while he was a member of the partnership in 1963 and consequently, pursuant to Section 6(l)(c) of the Income Tax Act, he must be assessed for the year in which it was earned whether or not he received it in that year. The assessor had transferred the sum of $11,110 from his 1964 tax return to his 1963 return and this was held to be correct, and as there has been no counter appeal on this issue it can be considered as settled.
The other question in issue, and that which is before the Court, is whether the estate of the deceased should be taxed in 1963 on the amount of $16,000 which he never received and which, in fact, may never be received, this being a litigious right.
The Minister, in assessing the deceased for this sum of $16,000 in the 1963 taxation year, relies on Sections 3, 4, 6(1) (c), 15(1) and 139(1) (e) of the Income Tax Act which read as follows:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.
6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year
(c) the taxpayer’s income from a partnership or syndicate for the year whether or not he has withdrawn it during the year;
15. (1) Where a person is a partner or an individual is a proprietor of a business, his income from the partnership or business for a taxation year shall be deemed to be his income from the partnership or business for the fiscal period or periods that ended in the year.
139. (1) In this Act,
(e) "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;
Although no proper financial. statement of the partnership was drawn up for the period ending December 20 (or December 30, 1963, as the case may be) the rough calculation prepared and on which the amount of the payment due to the deceased was established is in effect a statement prepared on an accrual basis showing the earnings of the partnership and his share in them calculated on an accrual basis as of November 30, 1963 and, in so far as he is concerned, this would represent his earnings from the partnership for the fiscal period ending in the 1963 taxation year whether or not he received payment of the amount of $35,900 so established during that year.
The judgment of the Tax Appeal Board holding that the sum of $16,000 should not be included in his income for the year because it is a litigious right, relies on the Supreme Court case of M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12; [1967] C.T.C. 418. In that case it was held that, although expropriation of property gives the owner the right to receive compensation from the moment of expropriation, even though the amount is not fixed until a subsequent date, and the taxpayer in that case was on an accrual basis, nevertheless it should be taxed only when the amount to be paid had been agreed to by the parties or established by judgment since, although the taxpayer had a right to compensation, there was nothing which could be taken into account as an amount receivable until such an amount was determined. I do not believe that the same situation exists in the present case. The sum of $35,000, of which the partners hoped eventually to receive a 50% share as a result of the Métro contract for the Papineau Station, was not taken into account in the settlement with the deceased, which settlement for $35,900 was based entirely on the amounts already earned or to be earned from contracts which were taken into account on an accrual basis. The only way in which the other three partners took into account the Métro Papineau Station contract was that they were counting on the proceeds of it to make it convenient for them to pay the deceased the $16,000, which the statement prepared on his withdrawal from partnership showed they owed him on other contracts. Whether he misled them is not an issue before me, and clearly this Métro contract did not enter into the accounting at the dissolution of the partnership in 1963, nor become a bad debt of the partnership, nor was there any reserve set aside for this.
Respondent contends that a payment on withdrawal from a partnership should not be assimilated in its consequences to a distribution to the partners of income and capital of the partnership on its dissolution, which did not take place in this case as the remaining partners continued in partnership. I believe, however, that a clear distinction must be made between withdrawal of capital and withdrawal of a partner’s share of the income of the partnership for the period in question. A withdrawal payment can include both elements, but in the present case most of the sum of $35,900 due to the deceased seems to have consisted of his share of the income of the partnership for the year 1963 to the date of his withdrawal. The notice of re-assessment (Book of Documents, p. 11) makes an allowance of $2,264.03 for deceased’s share of the capital of the partnership as of January 1, 1963, and this is not in dispute.
Earned income cannot be converted into capital by the process of making an agreement whereby such income is withdrawn by a partner leaving the partnership, whether such withdrawal is in the form of a lump payment or by instalments. This question was dealt with by Dumoulin, J. in the case of William G. Briggs v. M.N.R., [1958] C.T.C. 11, in which the payment received by the appellant on withdrawal from a partnership included the sum of $3,255 which, according to the partnership’s balance sheet, represented his proportion of the firm’s accounts receivable. His income was reported on a cash basis and appellant contended that this was a capital receipt resulting from the sale of his interest in the partnership to the remaining partners. It was held that the amount at issue was not paid to the appellant as the purchase price of his interest in the firm but as his share of earnings already realized by the partnership that would be collected periodically by the continuing partners. This judgment referred with approval to the case of Commissioner of Income Tax, Madras v. P.R.A.L.M. Muthukaruppan Chettiar, Gordon’s Digest of Income Tax Cases, p. 757, where, upon the dissolution of a partnership, the Commissioner of Income Tax purported to assess interest received by the respondent on capital employed in business. On the appeal, Lord Atkin held that:
. . . Being profits of the respondent up to May 31, 1930, how did they alter their character by dissolution? The account taken on dissolution ascertains what is due to the partners for profits, and what is due for capital. It can hardly be suggested that the partners share according to their capital proportions in the whole assets of the partnership. The sum due for undrawn profits was and remains a sum due by the partners to each partner, and necessarily ranks first before the sums due for capital can be distributed. In other words, on dissolution of a partnership an outgoing partner has the right to receive not as in the case of a shareholder in winding-up a company only a share of the assets, but to receive payment of his profits, profits which were his before dissolution and do not cease to be his on dissolution.
In the Supreme Court case of M.N.R. v. Joseph Sedgwick, [1963] C.T.C. 571, the respondent lawyer and four associates financed the formation of a Toronto Stock Exchange member firm to be carried on by a stockbroker who agreed to pay the five associates 90% of the firm’s profits of which the respondents share was 10% of the amount allotted to the group. In due course the five associates sold their interests for a total of $550,000 payable in instalments of which $300,000 was the amount fixed as their share of the net profits of the business for the fiscal year ending March 31, 1956. Respondent therefore became entitled to receive $55,000 of which $30,000 was related to 1956 profits and during the year 1956 he was paid $15,000 on account of this. The Minister treated him as a partner and added $30,000 to his declared income, whereas respondent contended that this was a capital reecipt. It was held, with one dissent, that the agreement could not be construed as being one for the sale of interest in a partnership but that it was rather an agreement for the winding-up of the partnership and that under the Act respondent was liable to pay tax for the year 1956 in respect of his share of the partnership income (even though not withdrawn by him) for the fiscal period ending in 1956, which period ended when the partnership was wound up on February 1, 1956, even though the partnership profits were determined by the agreement itself up to the end of its normal fiscal period ending on March 31, 1956.
In the present case, as already stated, the assessment makes allowance for the portion of the withdrawal payment made to the deceased which could be considered as capital. The question of goodwill does not enter into this case and the entire amount of $35,900, less the amount of capital already allowed for in the assessment, therefore, represents deceased’s share of the accrued earnings of the partnership on contracts completed or in course of completion at the date of his withdrawal and, hence, is taxable in that year whether or not full payment is ever made to him.
The appeal is therefore allowed with costs with respect to the assessment. for the 1963 taxation year.