M v Donna Rae Limited v. Minister of National Revenue, [1980] CTC 2333, [1980] DTC 1284

John B Goetz:—This is an appeal against a reassessment relating to the appellant’s 1976 taxation year.

The appellant (hereinafter referred to as “Donna Rae’’) and the respondent agreed to the facts as set out in the reply to notice of appeal:

A. Statement of Facts

2. The respondent reassessed the appellant’s income tax liability for its 1976 taxation year by adding to its income the amount of $60,000 received as a result of the settlement of a claim against the USSR for destruction of fishing gear and loss of income.

3. In so reassessing the appellant’s income tax liability, the respondent relied inter alia on the following assumptions of fact:

(a) The appellant lost 350 deep sea lobster traps when a Soviet vessel drove through the string of traps dragging its own nets.

(b) The representatives of the appellant negotiated with Soviet officials as a result of the incident and the Soviets agreed to pay the amount of $60,000 to the appellant.

(c) The amount received by the appellant was not allocated between loss of equipment and loss of income.

(d) The appellant received the amount of $60,000 in its 1976 taxation year.

(e) The appellant had claimed as a deduction from income the cost of the gear destroyed.

(f) The appellant also claimed as a deduction from income the cost incurred in replacing the gear destroyed.

(g) The appellant reports its income on the cash basis.

The appellant received the sum of $60,000 in full settlement of damages suffered by reason of the negligence of the Russians in destroying the lobster traps. A claim of $98,255.80 was advanced in a settlement of claim in the Federal Court of Canada. This amount was claimed as follows:

The main basis of the claim was to replace damaged gear and for loss of profit. The settlement of $60,000 was not allocated to any specific portion or portions of the claim for damages.

The respondent contended that the settlement of the claim was subject to income tax within the meaning of sections 4, 9, subsections 18(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. On the other hand, the taxpayer appeals the assessments which considers that all of the funds received should have been included in income.

Counsel for the respondent cited the following cases:

Federal Farms Limited v MNR, [1959] CTC 98; 59 DTC 1050;

Fleck Manufacturing (1959) Ltd v MNR, 30 Tax ABC 265; 62 DTC 580;

MNR v Bonaventure Investment Co Ltd, [1962] CTC 160; 62 DTC 1083;

David Miller v MNR, [1962] CTC 488; 62 DTC 1303;

MNR v Couture, [1965] CTC 54; 65 DTC 5031;

A Janin & Cie Ltée v MNR, [1968] Tax ABC 864; 68 DTC 534; [1971] CTC 158; 71 DTC 5116; [1973] CTC 354; 73 DTC 5267;

Courrier MH Inc v The Queen, [1976] CTC 567; 76 DTC 6331;

The Queen v Transcontinental Timber Co Ltd, [1979] CTC 203; 79 DTC 5147;

Imperial Oil Ltd v MNR, [1947] CTC 353; (1946-48) DTC 1090;

Domenic Cirella v The Queen, [1978] CTC 1; 77 DTC 5442.

Counsel for the appellant cited the following cases:

Canada Permanent Mortgage Corporation v MNR, [1971] CTC 694; 71 DTC 5409;

Abbott v Albion Greyhounds (Salford) Ltd, [1945] 1 All ER 308;

Domenic Cirella v The Queen, [1978] CTC 1; 77 DTC 5442;

Owners of Dredger Liesbosch v Owners of Steamship Edison, [1933] AC 449;

Clyde Navigation Trustees v Bowring Steamship Co (1928), 32 Lloyds LR 35;

Jones v Port of London Authority (1954), 1 Lloyds LR 489;

London and Thames Haven Oil Wharves Ltd v Attwooll, [1967] 2 All ER 124;

Glenboig Union Fireclay Co Ltd v IRC (1922), SC 112; 12 TC 427; 28 Digest 412.

Findings

The appellant contends that the full amount of the sum recovered from the Russians is a capital receipt being compensation for the loss of capital assets. The life of a lobster trap is approximately three years. The lobster traps, including gear and strings, constitute fixed capital assets of the appellant’s being of a basic and enduring asset by means of which the business of Donna Rae is carried on. The lobster traps cannot be equated with circulating capital or stock-in-trade of the business by the turning of which to account, the profit of the business is made. There has been no clear and comprehensive rule formulated and no clear line of demarcation can be accurately drawn, which in every case would determine whether the sum received should be regarded as a capital receipt or as a revenue receipt to be taken into account in arriving at the profits or gains of the recipient’s trade or business. Each case must be considered on its own facts. The lobster traps were capital property, being in the nature of fixed capital rather than circulating capital. In Canada Permanent Mortgage Corporation v MNR, (supra) at pp 711 and 5419 respectively, Heald, J cites Plaxton’s Canadian Income Tax Law, 2nd Ed at 44 as follows:

In ascertaining the profits of a trade or business, the familiar distinction, derived from writers of political economy, between “fixed capital”, meaning property acquired and intended for retention and employment with a view to profit and “circulating capital”, meaning property acquired or produced with a view to resale or sale at a profit, comes into full play. Profits from the realization of “fixed capital” assets are not receipts on revenue account but profits from “circulating capital” assets are receipts on revenue account. A fixed capital asset is an asset. It is intended to be kept and used in a trade and a circulating asset is an asset which is acquired or manufactured for the purpose of being turned over or sold in the course of carrying on trade.

What was the nature of the award determined by the law of damages in the settlement in the Federal Court?

The law of damages makes a distinction between cases where there has been total destruction or permanent deprivation of a profit-earning chattel and cases where there is only a partial or repairable injury or temporary deprivation of a profit-earning chattel. (McGregor on Damages, 13th Ed (London: Sweet & Maxwell Limited, 1972) at pp 661 and 664).

The law of damages does not recognize consequential loss, ie: loss of profits, as a separate head of damages where a chattel has been totally destroyed; whereas, consequential loss is an allowable head of damages where there has been partial (repairable) injury only. (McGregor on Damages, (supra).

There is a distinction in damages between cases of total destruction and cases of partial injury. See London and Thames Haven Oil Wharves Ltd v Attwooll (supra) where Willmer, JA, at 129 stated:

. . . there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing its capital value. In such a case the owner’s right is a right to recover the value of the thing which has been lost, and this can no doubt be properly described as “whole and indivisible” even though it includes some element of profitability of the thing lost; in such circumstances what is recovered is properly treated as a capital receipt. Where, however, there is only a partial injury, as there was in the present case, there are necessarily two elements to be considered if the owner is to be put back, so far as money can do it, in the same position he would have been but for the tortfeasor’s wrongdoing. First he can recover the whole cost of repair, which is without a doubt a capital receipt. Secondly, he can also recover something in respect of the loss of use during the period of repair, which the judge, in the first of the passages which I have read, quite rightly held to be a distinct element.

I consider that the rule of law applicable to this case is that expressed by Diplock, LJ at 132 in London and Thames Oil Wharves Ltd v Attwool, (supra):

. . . Even if the compensation payable for the loss of the capital asset has been calculated in whole or in part by taking into consideration what profits the taxpayer company would have made had it continued to carry on a trade involving the use or exploitation of the asset, this does not alter the identity of what the com- pensation was paid for, viz, the permanent removal from its business of a capital asset which would otherwise have continued to be exploited in the business.

This proposition is supported by the decisions in Domenic Cirella v The Queen (supra) and in Glenboig Union Fireclay Co Ltd v IRC (supra).

The Minister, in looking at the claim of the appellant before the Federal Court of Canada which included “loss of catch—$60,000’’, has concluded that the settlement figure in the sum of $60,000 relates solely to this item of the statement of claim.

For reasons stated above, I do not reach the same conclusion but feel that the settlement in the sum of $60,000 was mainly a capital receipt. Nevertheless, I feel that a portion of this settlement figure could be construed as being receipt on account of income and I apportion 30% of the settlement figure of $60,000 as being income to the appellant. In all other respects, the appeal is allowed and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed in part.