[1] Transocean Offshore Limited ("Transocean") appeals a judgment of the Tax Court of Canada dated June 25, 2004, dismissing its appeal from an assessment made under Part XIII of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.). The tax was assessed on a payment of US $40 million made as consideration for the anticipatory breach of an agreement under which rent would have been payable for the use in Canada of an offshore drilling rig. The decision under appeal is reported as Transocean Offshore Limited v. Canada, 2004 D.T.C. 2915, [2004] 5 C.T.C. 2133.

[2] The statutory basis for the assessment is paragraph 212(1)(d) of the Income Tax Act, which is found in Part XIII (entitled "Tax on Non-Resident's Income from Canada"). The relevant parts of paragraph 212(1)(d) read as follows:

212. (1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays [...] to the non-resident person as, on account or in lieu of payment of, or in satisfaction of,

212. (1) Toute personne non-résidente doit payer un impôt sur le revenu de 25% sur toute somme qu'une personne résidant au Canada lui paie [...] au titre ou en paiement intégral ou partiel :

[...]

(d) rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, any payment

d) du loyer, de la redevance ou d'un paiement semblable, y compris, sans préjudice de la portée générale de ce qui précède, un paiement fait :

(i) for the use of or for the right to use in Canada any property [...]

(i) en vue d'utiliser, ou d'obtenir le droit d'utiliser, au Canada, des biens [...]

but not including [...]

mais à l'exclusion : [...]

(ix) a rental payment for the use of or the right to use outside Canada any corporeal property [...].

(ix) d'un loyer en vue d'utiliser ou d'obtenir le droit d'utiliser à l'étranger tout bien corporel [...].

[3] Transocean is a corporation incorporated in the Cayman Islands. It is affiliated with two American corporations. One of the American affiliates is Transocean Offshore Inc., which I will refer to as "Transocean Parent" because it indirectly controls Transocean and the other American affiliate. The other American affiliate is Transocean Offshore Ventures Inc., which I will refer to as "Transocean #2".

[4] Transocean is the owner of the "Transocean Explorer", a semi-submersible offshore drilling rig. Throughout the period relevant to this appeal, the Explorer was physically located in the North Sea and was under contract to Marathon Oil U.K. Ltd. All three of the Transocean corporations are in the business of chartering off-shore drilling apparatus and providing related ancillary services. For income tax purposes, none of the Transocean corporations are considered to be resident in Canada.

[5] In 1997, Petro-Canada and a number of its co-venturers wished to undertake an offshore drilling project, referred to as the "Terra Nova Project", in Canadian waters off the coast of Newfoundland. In furtherance of the Terra Nova Project, Petro-Canada entered into a number of agreements on behalf of itself and its co-venturers. One agreement, dated May 15, 1997 and entitled "Bareboat Charter", required Transocean Parent to provide the Explorer to the co-venturers for their use in the Terra Nova Project for a term of two years. It was contemplated that Transocean, the owner of the Explorer, would make it available to Transocean Parent for the required term. The appeal record has no information about how that was intended to be done, but that is not relevant for the purposes of this appeal.

[6] A second agreement also dated May 15, 1997, entitled "Drilling Services Contract - Offshore", provided that Transocean #2 would operate and maintain the Explorer for the co-venturers during the two year term.

[7] The Bareboat Charter entitled the co-venturers to exclusive possession of the Explorer during the two year term, and stipulated that rent would be payable to Transocean Parent at the rate of US $60,000 for each day of use. The estimated total rent for the term was US $43.8 million.

[8] The contemplated use of the Explorer is set out in section 4.1 of the Bareboat Charter, which reads in part as follows:

... for the purposes of offshore drilling in the Terra Nova Project and such other drilling or auxiliary operations or services in offshore east coast Canada, whether or not as part of the Terra Nova Project, as Charterer [the co-venturers] shall in its sole discretion shall determine.

[9] The Bareboat Charter permitted the co-venturers to designate a different geographical area of operation for the Explorer, subject to the written consent of Transocean Parent, which was not to be unreasonably withheld. This right of designation was never exercised. Counsel for Transocean conceded that it was always intended that the rent payable for the Explorer would be payable for the use of the Explorer in Canada.

[10] The Bareboat Charter required the co-venturers to pay for specified upgrades to the Explorer, at an initial estimated cost of approximately US $52 million, and a mobilization fee of US $11 million to move the Explorer to the shipyard in Canada where the upgrades were to be done.

[11] The co-venturers were to retain title to the upgrades, but Transocean Parent was given an option to purchase the upgrades at the end of the term for an amount equal to their book value (computed using an eight year depreciation in accordance with generally accepted accounting principles), less the cost to remove the upgrades as soon as reasonably possible and restore the Explorer to its original condition. If Transocean Parent did not exercise that option, the co-venturers could either waive their rights in the upgrades or, at their own cost, remove the upgrades and restore the Explorer to its original condition. The record contains no information about the potential value of the upgrades, or the potential cost of removing the upgrades and restoring the Explorer to its original condition.

[12] All payments made by the co-venturers under the Bareboat Charter were to be made on an after-tax basis. That is, if Canadian tax had been imposed on the rent paid to Transocean Parent, the amount of the rent would be increased to the extent required to ensure that the after-tax rental payment would be US $60,000 per day. It is not clear whether there was ever any uncertainty about the tax treatment of the rental payments. Counsel for Transocean conceded that Part XIII tax would have been payable on any rent paid under the Bareboat Charter in respect of the contemplated use of the Explorer.

[13] The mobilization of the Explorer to the shipyard in Canada for the completion of the upgrades was to occur on the completion of the Marathon contract, but no earlier than December 31, 1997. The Bareboat Charter contemplated that, once the upgrades were complete and the Explorer was ready to be towed to the Terra Nova Project area, the two year rental term would commence. However, at the request of the co-venturers, the Marathon contract was extended and ultimately was not completed until the end of December, 1998, necessarily postponing the commencement of the rental term.

[14] The rental term never did commence. After the Bareboat Charter was entered into, the scope and complexity of the upgrades significantly increased. At the same time, the availability of higher specification rigs significantly increased and the day rates charged for such rigs decreased. The co-venturers became increasingly concerned with the escalating costs of the upgrades and attempted to get Transocean Parent to agree to either charter another rig to the co-venturers in place of the Explorer, or to limit the co-venturers' liability for the upgrades. By December, 1998, the projected cost of the upgrades had increased to as much as US $75 million.

[15] In late November, 1998, the co-venturers informed Transocean Parent that they were uncomfortable with the existing arrangements for the Explorer, and that they did not believe those arrangements were the best solution for any of the parties. From December 3, 1998 through December 21, 1998, negotiations were undertaken to determine the amount that the co-venturers would pay to Transocean Parent and Transocean #2 as a consequence of the co-venturers' repudiation of the Bareboat Charter. At least one formal offer was made, countered, and rejected.

[16] On December 21, 1998, an agreement entitled "Deed of Settlement and Release" was entered into which, among other things, released the co-venturers from their obligations under the Bareboat Charter and required the co-venturers to pay US $40 million to Transocean as full and final consideration for voluntary termination of the Bareboat Charter. The Deed of Settlement also required the co-venturers to pay Transocean #2 approximately US $1.9 million to cover "upgrade team expenses". The Deed of Settlement did not require any payments to be made to Transocean Parent.

[17] The record contains no explanation as to why the US $ 40 million was paid to Transocean, which was not a party to the Bareboat Charter, while no payment was made to Transocean Parent, which was a party. In the Tax Court, those facts were considered to be irrelevant to the issues in dispute. I assume that is the case.

[18] The Explorer was never moved from the North Sea to a Canadian shipyard as contemplated by the Bareboat Charter. After the completion of the Marathon contract and at least until April of 2004 (when the parties prepared the statement of agreed facts that was submitted at the hearing in the Tax Court), the Explorer remained idle in the United Kingdom and was not chartered to another party.

[19] The co-venturers made the US $40 million payment to Transocean pursuant to the Deed of Settlement, but withheld 25% and remitted it to the Canadian tax authorities on account of any Part XIII tax liability that might arise in respect of the payment.

[20] The act of the co-venturers in withholding and remitting 25% of the settlement payment is not relevant to the determination of the correctness of the assessment under appeal. Anyone making a payment to a person who is not resident in Canada, and who is concerned that the payment may be taxable under Part XIII, is entitled to withhold an amount to cover the potential tax liability and remit that amount to the Canadian tax authorities. If that is not done, and it turns out that the payment was taxable, the payer may find itself liable for an amount equal to the tax.

[21] If the payer withholds and remits as the co-venturers did in this case, the recipient of the payment may apply for a refund. If the Minister determines that no tax is payable, the refund is paid. However, if the Minister decides that tax is payable, the application for a refund will be denied and a notice of assessment issued for the tax. That assessment may then be challenged by an objection to the Minister, and then an appeal to the Tax Court of Canada.

[22] Transocean was entitled to apply, and did apply, for a refund of the withheld amount. On July 17, 2000, a notice of assessment was issued denying the refund requested on the basis that Transocean was liable for tax on the settlement payment pursuant to paragraph 212(1)(d) of the Income Tax Act (quoted above). Transocean objected to the assessment. When it was confirmed, Transocean appealed to the Tax Court of Canada by filing a notice of appeal. A reply was filed on behalf of the Minister. Paragraph 9 of the reply states the assumptions upon which the assessment was said to have been based. Among the stated assumptions are these:

c) Petro-Canada agreed to rent a drilling rig from the Appellant [Transocean] to be used in its operations in offshore Newfoundland for $60,000 per day;

d) before starting to drill, Petro-Canada decided it did not want to rent the rig and agreed to pay the Appellant $40,000,000 instead of paying rent; and

e) Petro-Canada paid the Appellant $40,000,000 in lieu of payment of rent within the meaning of paragraph 212(1)(d) of the [Income Tax] Act.

[23] The appeal was heard by the Tax Court on April 7, 2004. Neither party offered any oral evidence. The record before the Tax Court consisted of the pleadings, a statement of agreed facts, and a number of documents, including the Bareboat Charter and the Deed of Settlement referred to above.

[24] The appeal was dismissed, for reasons that were thoroughly explained by the Judge and summarized in the following words at paragraph 38 of the Judge's reasons:

To conclude, I find that the damages paid to the appellant were so paid to compensate for the rent that would have been paid under the Bareboat Charter if it had not been repudiated. In accordance with the caselaw on the taxation of amounts of damages received as compensation for breach of trade agreements, I therefore find that the compensatory monetary amount here in question was paid as, on account or in lieu of payment of, or in satisfaction of, rent or a similar payment for the use of, or for the right to use in Canada, a property.

[25] Transocean then appealed to this Court.

[26] As mentioned above, counsel for Transocean has conceded that if the co-venturers had fulfilled their original obligations under the Bareboat Charter, the rental payments for the Explorer would have been taxable under paragraph 212(1)(d) of the Income Tax Act, even though the Explorer was not in Canada when the agreement was made. That is because the Bareboat Charter required the Explorer to be brought to Canada before the commencement of the rental term, and it was contemplated that the Explorer would be in use in Canada during the rental term.

[27] Counsel for the Crown has conceded that the US $40 million payment was not rent, because no rent became payable under the Bareboat Charter. The position of the Crown is that the US $40 million payment is within the scope of paragraph 212(1)(d) of the Income Tax Act because it was paid in lieu of the rent stipulated by the Bareboat Charter.

[28] The Judge's conclusion, "that the damages paid to the appellant were so paid to compensate for the rent that would have been paid under the Bareboat Charter if it had not been repudiated", is a finding of fact that answers the question, "Why was the payment made?" The Judge says, in paragraph 34 of her reasons, that her factual conclusion is based on the assumptions stated in the Minister's reply, which were not directly contradicted by any evidence. The Judge does not specify which assumption she relied on, but it would appear to be the assumption in paragraph 9(d) of the reply, which I repeat here for ease of reference:

d) before starting to drill, Petro-Canada decided it did not want to rent the rig and agreed to pay the Appellant $40,000,000 instead of paying rent [...].

[29] Counsel for Transocean did not question the Judge's factual conclusion in his notice of appeal or in his memorandum of fact and law, and it appears that this point was not the subject of argument in the Tax Court.

[30] However, at the hearing of this appeal, counsel for Transocean argued that this Court should not dismiss the appeal solely on the basis of the Judge's finding of fact as to the purpose of the payment. He relied on a recent Tax Court decision as authority for the proposition that a taxpayer does not have the onus of demolishing a factual assumption made by the Crown if the fact is one that is within the Crown's knowledge and outside the knowledge of the taxpayer. He did not have the case citation in hand, but he later provided the Court with a copy of Redash Trading Inc. v. Canada, 2004 G.T.C. 386, [2004] G.S.T.C. 82. (The Crown appealed this decision (Court File A-468-04) but discontinued the appeal on February 2, 2005.)

[31] Counsel for the Crown responded with two cases dealing with the question of the taxpayer's onus in tax appeals: Pollock v. Canada, 94 D.T.C. 6050, [1994] 1 C.T.C. 3 (F.C.A.) and Cadillac Fairview Corp. v. Canada, 97 D.T.C. 405, [1996] 2 C.T.C. 2197 (T.C.C.), affirmed without discussion on this point: 99 D.T.C. 5121, [1999] 3 C.T.C. 353 (F.C.A.), leave to appeal refused, [1999] S.C.C.A No. 194 (QL).

[32] Redash involved a corporate appellant that had claimed input tax credits under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, in respect of 210 vehicles said to have been acquired between October 1, 1997 and September 30, 1998 for purposes of resale. The appellant was reassessed on the basis that the claim for input tax credits was not well founded. It appears that the Crown had taken the position that the transactions upon which the appellant relied to establish its acquisition of the vehicles were artificial or fictitious. Among the factual assumptions stated in the Crown's reply were a number of statements about the activities of certain third parties, who apparently were not related to the appellant or in any way under its control, and who were not involved in the income tax appeal.

[33] The third parties were not called by the appellant or by the Crown to give evidence. However, an officer of the appellant offered oral testimony, which the Judge accepted as credible, to the effect that he believed the transactions to be valid, and that he had no knowledge that led him to believe that the third parties named in the Crown's assumptions were engaged in improper transactions. The Crown adduced no evidence. The Judge found that the assumptions, to the extent they were within the knowledge of the appellant, had been rebutted.

[34] The Judge in Redash also said this about the factual assumptions that were not within the knowledge of the appellant (at paragraph 31):

[...] Perceptions of fact based upon facts which lie within the peculiar knowledge of the Respondent [the Crown] which are paraded as assumptions in the Reply to the Notice of Appeal, which are beyond the knowledge of the Appellant [Redash] and which are not easily or practicably deniable by the Appellant without extraordinary effort and expenditure, should not be deemed to be facts simply because they are not specifically negated by the Appellant's evidence. Assumptions of fact in such circumstances cannot displace the need of the Respondent to produce evidence to substantiate or support that which may be relevant to counter or affect the Appellant's factual presentation.

[35] This statement recognizes the general principle that, in a tax appeal, the Crown's factual assumptions are taken as true unless they are rebutted (see Pollock, cited above). It also recognizes that this general principle, like all general principles, may have exceptions. The justification for the general principle is that the taxpayer knows or has the means of knowing all of the facts relevant to an income tax assessment. A trier of fact is entitled to draw an inference adverse to a party who has or may reasonably be presumed to have some evidence that is relevant to disputed facts, but fails to adduce that evidence. However, there may be situations where fairness would require that no onus be placed on a taxpayer to rebut a specific factual assumption made by the Crown. One example might be a fact that is solely within the knowledge of the Crown. However, I do not see this as such a case.

[36] The only factual controversy in this case is this: why was the US $40 million payment made? Section 2 of the Deed of Settlement states that the US $40 million payment was made pursuant to the Deed of Settlement "in consideration for the voluntary termination of the Bareboat Charter" (clause 2).

[37] The evidence presented in the Tax Court consisted only of documents, including a statement of agreed facts. What do the documents establish? The terms of the Bareboat Charter required the co-venturers to pay rent that could have totalled US $43.8 million for the use of the Explorer for a two year period. The termination of the Bareboat Charter meant that the anticipated rent would not be paid. The fact that the Explorer remained idle for some years after the cancellation of the Bareboat Charter suggests that the loss of the anticipated rent could not easily have been mitigated by some alternative use of the Explorer, so that the foregone rent was a dead loss.

[38] The Bareboat Charter required the co-venturers to pay a fee of US $11 million to Transocean Parent for moving the Explorer to the place where the upgrades were to be done. The documents do not disclose what it would have cost Transocean Parent to make that move. Therefore it is not possible to determine whether Transocean Parent would have made a profit on that fee, if it had been necessary to move the Explorer.

[39] The only other substantial economic element of the Bareboat Charter was the obligation imposed on the co-venturers to pay for certain upgrades to the Explorer (initially estimated to be US $52 million and later estimated to be US $75 million). The upgrades were to remain the property of the co-venturers, unless Transocean Parent exercised its option to buy them. It is not possible to determine from the documents what benefit, if any, the Transocean corporations might have expected to obtain from the upgrades.

[40] It is also worth noting that, under the Deed of Settlement, Transocean #2 was compensated separately for certain costs incurred in respect of the upgrades. The Deed of Settlement stipulated that the co-venturers would pay Transocean #2 approximately US $1.9 million to cover "upgrade team expenses". That suggests that the US $ 40 million payment is not related to the upgrades.

[41] There must have been at least one individual within the Transocean group who participated in the decision to enter into the Deed of Settlement, and who for that reason would have had some information about the purpose of the payment, at least from the point of view of Transocean. If Transocean believed that the payment was made for something other than compensation for foregone future rent for the Explorer, that individual could have given evidence. However, no one from Transocean was called to give evidence.

[42] Given the only evidence presented to the Judge, it was open to her to conclude that the US $40 million payment made to Transocean under the Deed of Settlement was made to compensate for the rent that would have been paid under the Bareboat Charter if it had not been repudiated, and not for anything else. That is the factual assumption the Crown made. Therefore, the Judge was correct to say that the Crown's assumption on this point had not been rebutted.

[43] I turn now to the only legal issue raised in appeal, which is whether paragraph 212(1)(d) of the Income Tax Act is broad enough to cover an amount paid to compensate for the rent that would have been paid for the use of the Explorer in Canada if the Bareboat Charter had not been repudiated before the commencement of the rental term. It is argued for Transocean that paragraph 212(1)(d) does not apply because if an agreement to rent certain property for a specified term is terminated before the commencement of the term, the property is never "used" and therefore no rent is payable. For ease of reference, I reproduce the relevant portions of paragraph 212(1)(d) of the Income Tax Act:

212. (1) Toute personne non-résidente doit payer un impôt sur le revenu de 25% sur toute somme qu'une personne résidant au Canada lui paie [...] au titre ou en paiement intégral ou partiel :

[...]

(d) rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, any payment

d) du loyer, de la redevance ou d'un paiement semblable, y compris, sans préjudice de la portée générale de ce qui précède, un paiement fait :

(i) for the use of or for the right to use in Canada any property [...]

(i) en vue d'utiliser, ou d'obtenir le droit d'utiliser, au Canada, des biens [...]

but not including [...]

mais à l'exclusion : [...]

(ix) a rental payment for the use of or the right to use outside Canada any corporeal property [...].

(ix) d'un loyer en vue d'utiliser ou d'obtenir le droit d'utiliser à l'étranger tout bien corporel [...].

[44] Broadly speaking, section 212 of the Income Tax Act is part of a statutory scheme that imposes tax on certain payments made to persons who are not resident in Canada, if the payments have a specified link to a business carried on in Canada, or income earning property in Canada. Paragraph 212(1)(d), for example, imposes tax on any payment of rent, if it is paid to a non-resident for the use of property in Canada, or for the right to use property in Canada.

[45] Rent is defined as an amount paid as compensation for the use or occupation of property, or for the right to use or occupy property:Extendicare International Inc. v. Ontario (Minister of Revenue) (2000), 47 O.R. (3d) 1 (Ont. C.A.), Buonincontri v. Canada, 85 D.T.C. 5277, [1985] 1 C.T.C. 370 (F.C.T.D.), C.I. Burland Properties Limited v. Minister of National Revenue, 67 D.T.C. 5289, [1967] C.T.C. 5289 (E.C.), reversed without discussion of this point, 68 D.T.C. 5229 (S.C.C.). Thus, a payment made as compensation for the use of property in Canada or for the right to use property in Canada is within the scope of paragraph 212(1)(d) of the Income Tax Act (if it is paid to a non-resident).

[46] By virtue of the additional words in paragraph 212(1)(d), that provision also applies to any payment made on account of such compensation, or in satisfaction of such compensation. That would appear to cover virtually all situations in which a payment is made to discharge, in full or in part, an obligation to pay compensation to a non-resident for the past or current use, in Canada, of property.

[47] However, paragraph 212(1)(d) of the Income Tax Act also includes a payment made in lieu of compensation for the use, in Canada, of property. The ordinary meaning of the phrase "in lieu of", according to a number of dictionaries, is "instead of" or "in place of": Black's Law Dictionary (7^th ed., 1999), The Canadian Oxford Dictionary (2001, Oxford University Press), Gage Canadian Dictionary (1983, Gage Publishing Limited), The Canadian Dictionary of English Law (2^nd ed 1995 Thomson Canada Limited). It seems axiomatic that an amount that is paid instead of a payment of a particular legal character, or in the place of such a payment, does not have that same legal character. Parliament, in using the words "in lieu of" in paragraph 212(1)(d), must have intended to expand the scope of paragraph 212(1)(d) to include payments other than payments that have the legal character of rent.

[48] If the phrase "in lieu of rent" is interpreted to include only payments made as compensation for the past or current use of property, which is essentially the position of counsel for Transocean, it would add nothing to paragraph 212(1)(d), and thus would have no meaning. However, it would have meaning if it is interpreted, as the Crown contends, to include an amount paid as compensation for the anticipatory breach of a rental agreement. In my view, that is a consideration that would favour adopting the Crown's interpretation in preference to the interpretation proposed by counsel for Transocean.

[49] The Crown cites, in support of its interpretation, two cases in which an amount paid to a landlord as compensation for early termination of a lease was held to be taxable as income if the payment if found to be a replacement or substitute for future rent: Grader v. Minister of National Revenue, 62 D.T.C. 1070, [1962] C.T.C. 128 (E.C.), Monart Corporation v. Minister of National Revenue, 67 D.T.C. 5181, [1967] C.T.C. 263 (E.C.). A recent case illustrating the same principle is R. Reusse Construction Co. v. Canada, [1999] 2 C.T.C. 2928, 99 D.T.C. 823 (T.C.C.).

[50] These cases do not deal with the meaning of "in lieu of". They do not involve the application of paragraph 212(1)(d) of the Income Tax Act at all. Rather, they involve the application of Part I of the Income Tax Act, which taxes every resident of Canada on all profits earned from a business or property anywhere in the world. The concept of "profit" is very broad, but it is not broad enough to include capital receipts. Thus, the question addressed in these cases was whether a payment made to a landlord as damages or settlement of the termination of a lease is income or a capital receipt. For the purposes of Part I of the Income Tax Act, the answer to that question requires the application of a judge-made rule, sometimes called the "surrogatum principle", by which the tax treatment of a payment of damages or a settlement payment is considered to be the same as the tax treatment of whatever the payment is intended to replace. Thus, an amount paid as a settlement or as damages is income if it is paid as compensation for lost future rent (Grader, Monart, Reusse Construction, cited above). It is a capital receipt if it is compensation for a diminution of capital of the recipient: Westfair Foods Ltd v. Minister of National Revenue, [1991] 1 C.T.C. 146, 91 D.T.C. 5073 (F.C.T.D.), affirmed [1991] 2 C.T.C. 343, 91 D.T.C. 5625 (F.C.A.).

[51] The surrogatum principle need not be considered in this case because the words "in lieu of" in paragraph 212(1)(d) of the Income Tax Act express a similar idea. The fact finding process that precedes the application of the surrogatum principle is similar to the fact finding process that must be undertaken to determine whether a payment has been made "in lieu of" a specified thing. Here, the fact finding exercise was completed when the Judge determined that the US $40 million payment was made as compensation for lost future rent.

[52] Counsel for Transocean does not dispute the ordinary meaning of the phrase "in lieu of". However, he makes two arguments for limiting that meaning in the context of paragraph 212(1)(d) of the Income Tax Act, one based on the French version of paragraph 212(1)(d), and the other based on the cases dealing with the interpretation of other provisions of the Income Tax Act that use the same or similar language.

[53] Counsel for Transocean argues that the French version of paragraph 212(1)(d) of the Income Tax Act is narrower than the English version, because the French phrase "au titre" means "as", and does not mean "instead of". Counsel for the Crown answers this argument by explaining, with numerous references to the legislative history of the French version of the Income Tax Act, that the French phrase "au titre" is used in the French version of the Income Tax Act to mean "in respect of". The phrase "in respect of" has been described as "the widest of any expression intended to convey some connection between related subject matters": Nowegijick v. The Queen, [1983] 1 S.C.R. 29, per Dickson J., writing for the Court at page 39.

[54] The French version of the statutory provision considered in Nowegijick was not "au titre", it was "quant à ". However, the Nowegijick definition of the phrase "in respect of" was applied in The Queen v. Savage, [1983] 2 S.C.R. 428, in which the statutory provision in issue used the phrase "in respect of" in the English version and "au titre" in the French version. The case involved an employee of a life insurance company who received from her employer $300 as a result of passing certain examinations she had taken, voluntarily and on her own time, to improve her understanding of the life insurance business. There was a dispute as to whether the $300 was taxable as income from employment on the basis that it was, in the words of what was then paragraph 6(1)(a) of the Income Tax Act, R.S. 1970-71-72, c. 63, a benefit or advantage (emphasis added):

[...] in respect of, in the course of, or by virtue of an office or employment.

[...] au titre, dans l'occupation ou en vertue de la charge ou de l'emploi.

[55] Dickson J., writing for the majority, held that the payment fell within this provision. (He went on to conclude that the payment was exempt from tax because it also came within the scope of a more specific provision, paragraph 56(1)(n) of the Income Tax Act, which taxed certain awards, but only over $500.)

[56] Given the manner in which the French phrase "au titre"is typically used in the French version of the Income Tax Act, the Crown has the better side of this debate. I conclude that the French version of paragraph 212(1)(d) of the Income Tax Act is at least as broad as the English version.

[57] The second argument advanced on behalf of Transocean for limiting the scope of paragraph 212(1)(d) of the Income Tax Act is based on cases dealing with similarly worded provisions. Counsel for Transocean cited Puder v. Minister of National Revenue, 63 D.T.C. 1282, [1962] C.T.C. 445 (E.C.), as the case that most strongly supports that argument. Puder involved the interpretation of paragraph 6(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148, which reads as follows:

6(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year [...]

6(1) Sans restreindre la généralité de l'article 3, doivent être inclus dans le calcul du revenu d'un contribuable pour une année d'imposition [...]

(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest [...].

b) les montants reçus ou à recevoir dans l'année (selon la méthode que suit régulièrement le contribuable dans le calcul de ses bénéfices) à titre d'intérêts, ou à compte ou au lieu de paiement, ou en acquittement d'intérêts [...].

[58] The issue in Puder was whether an amount paid to a lender for the early repayment of a mortgage debt was within paragraph 6(1)(b). The term of the mortgage was 7½ years, but the mortgage gave the borrower the right to discharge the mortgage after three years upon payment of the principal plus an amount equal to three months' interest. The borrower wished to discharge the mortgage after only 15 months. The lender agreed, provided the borrower paid a "bonus" of $4,678, representing $4,161 of interest that would have become payable for the remainder of the initial three year term (21 months) plus $517 of interest that would have become payable for an additional three months. The payment was held not to be interest, or an amount paid in lieu of interest, because it did not represent consideration for the use of borrowed money (the principal amount of the mortgage debt having been repaid at the same time as the "bonus").

[59] The broad proposition in Puder seems to be that the phrase "in lieu of interest" means an amount that serves the same function as interest, which is compensation for the use of borrowed money. The case recognizes, for example, that damages for breach of a contractual obligation to pay accrued interest would be an amount paid "in lieu of interest". However, according to Puder, when a debt is repaid before its term, an amount paid to compensate for the loss of potential future interest cannot be an amount paid in lieu of interest, because once the debt is repaid, the borrower is no longer using the lender's money. If the same reasoning is applied to this case, no amount can be paid "in lieu of" rent (which is compensation for the use of property), if the property is never used because the rental agreement is terminated before the rental term.

[60] In my view, Puder should not be accepted as the governing authority in this case because it imposes an unjustifiably narrow meaning on the phrase "in lieu of". As mentioned above, the ordinary meaning of that phrase connotes something that takes the place of something else or is a substitute for something else. Theoretically, a thing may take the place of another thing if it performs exactly the same function as that other thing, or if it performs a function that is not exactly the same but is a reasonable substitute. Puder recognizes the first possibility but rejects the second, without suggesting any justification for doing so.

[61] It may be that Puder was decided as it was because, at the time, the prevailing view was that taxing statutes were to be strictly construed. That is no longer the correct approach to statutory interpretation. Now, the interpretation of a statute requires a search for the intent of Parliament by reading the words of the provision in context and according to their grammatical and ordinary sense, harmoniously with the scheme and the object of the statute: R. v. Jarvis, [2002] 3 S.C.R. 757 at paragraph 77. That must require, at least, favouring an interpretation that gives meaning to the phrase "in lieu of" over an interpretation that renders it redundant.

[62] Counsel for Transocean also cited The Queen v. Atkins, 76 D.T.C. 6258, [1976] C.T.C. 497 (F.C.A.), affirming 75 D.T.C. 5263 (F.C.T.D.), as another case that supports his proposed interpretation of paragraph 212(1)(d) of the Income Tax Act. That case deals with the application of a statutory provision that is similar but not identical to the provision in this case.

[63] In Atkins, this Court held that an amount paid as damages for wrongful termination of a contract of employment was not a benefit received by the recipient "in respect of, in the course of, or by virtue of the office or employment ("à l'égard, dans le cours ou en vertu de la charge ou de l'emploi"), and therefore it was not taxable under a provision of the Income Tax Act that used those words. As I read that case, the result did not turn on the interpretation of that provision, but on a finding of fact. The trial judge had rejected the Crown's allegation that the payment was made as a replacement for future salary. He said this at page 5270:

Counsel for the plaintiff [the Crown] contended there was evidence, certainly a strong inference, that the employer intended to compensate only in respect of loss of salary; that $18,000 represented approximately 42 weeks of salary in lieu of notice; that if notice of dismissal had in fact been given, 42 weeks was a reasonable period. No witness from the company was called to say what was in the corporate mind, what the company felt would have been reasonable notice, what matters, in economic values, added up to $18,000, whether that figure was "salary" only. For all I know, the company and its advisers may well have considered (in initially offering $18,000, and later making further concessions) that the total settlement package covered many more compensable items than mere salary. I note that clause 5(a) of Exhibit 1-A does not describe the $18,000 as "salary" but as a "severance allowance ... in satisfaction of all your claims against the company for the termination of your employment and under any other arrangements with the Company ...." In paragraph 6, the employee is to release "the Company from all claims which you may directly or indirectly have against the Company ... in respect of any matters ...." Did the company have in mind claims for loss of use of the leased car, for company contributions to the pension plan, in respect of the scholarship plan, loss of group life insurance coverage, loss of potential profit sharing, and other matters on which one might realistically speculate? The evidence is silent. No reasonable inference can be drawn that the company and the defendant considered loss of salary as the sole matter for compensation. Further, it is impossible to say what portion of the $18,000 one, or either, party attributed to that aspect of the defendant's loss.

[64] Thus, even if it is assumed that the statutory language in Atkins is analogous to what is now paragraph 212(1)(d) of the Income Tax Act, the findings of fact in Atkins dictated a result favouring the taxpayer. In this case, the findings of fact point in the opposite direction.

[65] In summary, I conclude that the Crown's proposed interpretation of paragraph 212(1)(d) of the Income Tax Act is more consistent with the ordinary meaning of the words used in paragraph 212(1)(d), and its purpose, than the interpretation proposed by counsel for Transocean. I am not persuaded that any of the cases cited by counsel for Transocean requires this Court to reject the Crown's proposed interpretation.

[66] For these reasons, this appeal should be dismissed. The Crown should be granted its costs of the appeal.

(s) "K. Sharlow"

J.A.

"I agree.

Marshall Rothstein J.A."

"I agree.

Brian Malone J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-385-04

STYLE OF CAUSE: TRANSOCEAN OFFSHORE LIMITED v. HER MAJESTY THE QUEEN

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: FEBRUARY 28, 2005

REASONS FOR JUDGMENT : SHARLOW J.A.

CONCURRED IN BY: ROTHSTEIN J.A.

MALONE J.A.

DATED: MARCH 21, 2005

APPEARANCES:

Mr. Richard Thomas FOR THE APPELLANT

Mr. Michael Friedman

Ms. Kathryn Philpott FOR THE RESPONDENT

SOLICITORS OF RECORD:

McMillan Binch FOR THE APPELLANT

Toronto, Ontario

Mr. John H. Sims Q.C. FOR THE RESPONDENT

Deputy Attorney General

of Canada

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