Tremblay, TCJ [TRANSLATION]: This case was heard at Montreal, on August 30, 1984.
1. Issue
According to the originating pleadings, the issue is whether the appellant is correct in regarding a notarized agreement executed on June 9, 1977, retroactive to July 5, 1976, as a contract of lease. Under that agreement the appellant leased its immovables located on boulevard Paquette in Mont- Laurier to Robert Bédard Auto (1976) Inc (hereinafter “Robert 76”) for five years with an option to purchase, by July 4, 1981.
The respondent, for his part, maintained that the contract was a lease in form but that in substance it was a contract of sale, pursuant both to the Civil Code of the province of Quebec and to the meaning of the word “disposition” defined in the Income Tax Act. He argued, among other things, that pursuant to the said lease, Robert 76 was obliged to purchase the immovables in question, that the price was fixed and that Robert 76 had agreed to purchase. Consequently, for the years 1976 to 1979, the respondent disallowed the capital cost allowance claimed by the appellant and also taxed the recapture and calculated the capital gain.
2. Burden of Proof
2.01 The burden is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct until proved otherwise. In the present case, the assumed facts are described in the reply to the notice of appeal as follows:
In reassessing the appellant for its 1976, 1977, 1978 and 1979 taxation years, the respondent, the Minister of National Revenue, relied on the following facts, inter alia:
(a) Until July 5, 1976, the appellant owned a building and land located at 588 boulevard Paquette in Mont-Laurier;
(b) Immediately prior to July 5, 1976, the appellant was involved in the automobile business and held a Chrysler franchise;
(c) On July 5, 1976, the appellant sold its business by a written contract to Robert Bédard Auto (1976) Inc;
(d) The said contract of July 5, 1976, a copy of which is appended to form an integral part hereof as though set out in full, provides, among other things, that the sale of the inventory and the franchise is conditional upon the sale of the building and land briefly described in subparagraph (a);
(e) In fact, and in substance, it is clear that the appellant disposed of its building and land on July 5, 1976, since it is clear that the appellant would not have sold its business or its Chrysler franchise if its building and land had not been sold;
(f) There was a sale on July 5, 1976, on the condition that the sale price of $225,000 would be paid within five years, as was done by Robert Bédard Auto (1976) Inc;
(g) The sale price of $225,000 agreed upon in 1976 by the appellant and the purchaser Robert Bédard Auto (1976) Inc represented the fair market value of the building and the land in 1976;
(h) As a result of the sale, the appellant realized a capital gain of $35,430 during its 1976 taxation year, representing the difference between the sale price of $225,000 and the fair market value of the building and the land at December 31, 1971, and of the improvements and additions made after that date;
(i) Since the appellant did not receive any of the sale price for the immovable during the 1976 to 1979 taxation years, a reserve on the capital gain realized was allowed;
(j) As a result of the disposition of the building during the 1976 taxation years, the building being the only immovable in its class belonging to the appellant, there is a recapture of the capital cost allowance calculated as follows:
UCC at December 31, 1975 $ 75,394.46 Disposition in 1976 (building) $112,476.45 Recapture: $ 37,081.99 (k) Had it not been for the disposition of the building in the circumstances described in subparagraph (j), the capital cost allowance would have been that claimed by the appellant, namely the following amounts:
YEAR AMOUNT 1976 $3,769.72 1977 $3,581.00 1978 $3,402.00 1979 $3,232.09 (l) As a result of the disposition of the building in 1976, the appellant could
not deduct the capital cost allowance referred to in the preceding paragraph;
(m) In addition to the contract alleged in subparagraph (d), the appellant signed an agreement collateral to the agreement of June 5, 1976 with Robert Bédard Auto (1976) Inc;
(n) This collateral agreement dated June 9, 1977 retroactive to July 5, 1976, a copy of which is appended to form an integral part hereof as though set out in full, provides in substance that the appellant had already disposed of the building and land to Robert Bédard Auto (1976) Inc in 1976 since the latter:
(i) assumes the charges normally borne by an owner as established in clauses 1, 2, 3, 5 and 7 of the general terms and conditions;
(ii) must pay the sale price or find someone to do so;
(o) The general agreement of July 5, 1976 involves the sale of the building and land in 1976 especially since the sale price of $225,000 was less than the fair market value of the building and land at the time Robert Bédard Auto (1976) Inc paid for it in 1981 since the latter resold the property shortly afterwards for its fair market value in 1981, namely $325,000;
(p) In substance, the alleged “rent” was in fact interest payable on the balance of the sale price of $225,000;
3. Facts
3.01 M Jacques Lapalme, age 38, president of Robert 76, testified that on June 22, 1976, Robert 76 had purchased certain assets from the appellant in order to operate a garage from July 5, 1976. The contract was filed as Exhibit A-1.
The assets purchased "subject to the transfer of the Chrysler franchise"' to Robert 76 were (a) the inventory of new and used vehicles; (b) the inventory of parts; (c) expenses paid in advance; (d) equipment and tools; and
(e) the tow truck. In addition, the contract stipulated that this was a bulk sale within the meaning of the Civil Code. The sale was also subject to the signature by the parties of a contract to lease the immovable (building and land) for five years (monthly rent of $2,000) with Robert 76 being obligated to purchase the immovable at the end of the period for $225,000.
3.02 According to Mr Lapalme, since he himself had no experience in this type of business, he asked Eugène Duval, president of the appellant, to agree to act as an adviser. It was for similar reasons, moreover (since this was for him "a developing business”), that he wished to have as few debts as possible at the outset and that initially, in June 1976, he purchased only certain assets, namely what was essential. Robert 76 did not even purchase all the appellant’s movable assets. The appellant had to dispose of them.
Furthermore, it would not have been financially possible to purchase the immovable in 1976. It was preferable first to pay for the assets acquired before purchasing the immovable. The five-year period seemed reasonable for this purpose (transcript, pp 7, 8, 9).
3.03 With this option to purchase the immovable, they would be able, if business went well, to protect themselves and not find themselves with an owner who might have demanded an excessive price for the immovable "since he would have you by the throat with no way out” (transcript, pp 9, 10 and 11). The situation might have been similar with a lease renewal without an option to purchase if, when everything was going well, the rent was doubled or tripled when the lease was renewed (transcript, p 20).
"So, what was decided at the time, was to have a fairly long lease to allow us to build and establish our business and eventually, we froze an amount, we said, fine, the building in five years, we decided, I decided at the time, if in five years, to purchase the building for a certain price, which made it possible first to operate on a base and if in five years, it suited us, as turned out to be the case, well we resold it” (transcript, pp 9 1 12 to 24).
After four and a half years, "we were literally losing money in the business” (transcript, p 10). Since Robert 76 was obliged to purchase, that is what it did and resold the same day; "in the type of business we were running at the time, we couldn't afford to purchase the building”. Economic conditions in 1981 were otherwise more difficult than in 1976. It was necessary to keep between $400,000 and $500,000 in vehicle inventory with interest rates of between 14 and 20 per cent and few buyers.
3.04 The official lease contract for the immovable (land and building) signed on June 9, 1977 retroactive to July 5,1976 was filed as Exhibit A-2. Its clauses dealing with (1) price, (2) general terms and conditions, (3) declarations by the owner, (4) promise to sell and (5) special clause read as follows:
PRICE
This lease is granted for and in consideration of the sum of one hundred and twenty thousand dollars ($120,000) which the lessee undertakes to pay to the owner, at the owner's head office in Montréal, at 12195 Daigle, by means of sixty equal and consecutive monthly payments of two thousand dollars ($2,000) each, the first of these sixty instalments being due and payable on the fifth of July, one thousand nine hundred and seventy-six, and the others on the same day of each subsequent month until payment has been made in full; the whole without interest before the due date but with interest at the rate of ten per cent per annum after the due date on any payment owing, outstanding and not paid when due.
The owner recognizes in this regard that he has received before now to his full Satisfaction the instalments of rent payable and due up to the first day of June, one thousand nine hundred and seventy-seven inclusive, and he discharges the lessee thereof accordingly.
GENERAL TERMS AND CONDITIONS
This lease is granted on the following conditions, which the lessee undertakes to respect and comply with well and faithfully, to wit:
(1) to maintain the property (land and buildings) in good repair even as regards major repairs, and to restore it to such condition at the end of the lease, the owner being in no way obliged to contribute thereto in any circumstances;
(2) to keep the buildings erected thereon insured against lightning, fire and vandalism, on behalf of the owner, with a promise to sell to the lessee, for at least the amount for which they are currently insured under policy No T305695, issued by Les Prévoyants du Canada, being at present the sum of two hundred and fifty thousand dollars ($250,000) on the buildings and with an insurance company approved by the owner, and to provide him with a copy of the policy and the premium payment receipts upon request, as well as the renewal certificates at least fifteen days prior to expiry;
(3) to maintain liability insurance at least equivalent to that currently held by the owner with Les Prévoyants du Canada under policy No 1305695 with an insurance company approved by the owner and to provide him with the policy and the premium payment receipts upon request, as well as the renewal certificates at least fifteen days prior to expiry;
(4) to fit out the demised premises with furniture and equipment sufficient to guarantee payment of three months' rent;
(5) to pay all municipal and school taxes that become payable on the immovable, including those for water and garbage collection service, as soon as they respectively fall due, and provide receipts therefor to the owner upon request;
(6) to use the demised premises only to operate a business consisting in the sale of new and used motor vehicles (cars and trucks) and of parts for such motor vehicles and their repair and maintenance, except the apartment located above the garage, which may continue to be occupied as such;
(7) to pay himself for his electricity and for heating the demised premises during the cold season;
(8) not to assign his rights under this lease or sublet in whole or in part, without the written consent of the owner, except, of course, with regard to the apartment located above the garage, which he may rent for his benefit, retroactive to the first of July, one thousand nine hundred and seventy-six, and except as agreed in the promise to sell hereinafter;
(9) to indemnify the owner for any expenses, damage or charges of any kind that may be caused or that he may incur as a result of the lessee’s failure to comply with all municipal or other by-laws pertaining to or affecting the demised premises;
(10) in the event the insurance policies protecting the demised premises are terminated owing to the use or occupation made of the said premises, in whole or in part, by the lessee or any assignee or sublessee or any other person having received permission to occupy the said premises from the lessee, the owner may, at his option, declare the present lease to be terminated, by giving the lessee notice in writing to that effect, and dispose of the demised premises as he wishes and for his benefit, the lessee being required to give the owner immediate possession of the demised premises;
(11) to allow the owner or his representatives and agents, superintendents and workers, to enter the demised premises at any reasonable time, in order to inspect them, and, where necessary, to make repairs and alterations;
(12) not to make any changes in the demised premises without the owner's written consent, and if he makes any, he must leave everything the way it is at the end of this lease, without any compensation for the lessee, unless the owner prefers to have the premises the way they were previously, in which case the lessee must immediately perform the necessary work for this purpose, at his own expense;
(13) the parties hereby expressly stipulate that should the lessee fail to pay the rent provided for in this lease, and/or should he contravene or fail to perform the terms and conditions of this lease, and/or in the event any of the lessee's movables or furniture in the demised premises are seized or taken in execution or guarantee by any of the lessee's creditors, or if they were seized or taken from the lessee for taxes or pursuant to a deed of pledge, and/or if the lessee makes any assignment of his property for the benefit of his creditors or becomes insolvent, or becomes subject to any Act concerning insolvency, and/or if the lessee, at any time during his occupation of the demised premises, removes or attempts to remove from the said premises any part of his movables and furniture therein, except in the ordinary course of his business, without the prior written consent of the owner, and/or if a writ of execution or seizure is issued by any court in the province of Quebec against the lessee's movables and furniture, the current rent shall become due and payable, and the owner shall have the right to terminate this lease immediately and to resume possession of the demised premises, or lease them again, if he so wishes;
(14) to pay the costs and fees hereof, as well as the cost of registration and of preparing a copy for the owner;
DECLARATIONS BY THE OWNER
The owner declares:
(1) that the apartment located above the garage presently rented, is rented to Dave Roy, without a lease, and the owner subrogates the lessee in his rights as owner respecting this lease, including the right to receive rent from the first of July, one thousand nine hundred and seventy-six and the right to review this lease for such price and on such terms as the lessee deems appropriate for a term not to end later than the fourth of July, one thousand nine hundred and eighty-one;
(2) that to his knowledge this apartment complies with the municipal by-laws of the town of Mont-Laurier;
(3) that at present he has no hypothecary creditors on the immovables currently leased.
PROMISE TO SELL
In addition, it is agreed by the parties that no later than the fourth of July, one thousand nine hundred and eighty-one, the lessee or any other natural or artificial person the lessee may appoint of his choice shall purchase without liability for the present lessee if he is not the one purchasing, and the owner shall sell to him the land and buildings currently leased, for the sum of two hundred and twenty- five thousand dollars ($225,000) payable on terms the parties have decided not to fix immediately, but which they shall determine rather at the time of such sale.
This sale shall be made with a legal guarantee by the vendor and the guarantee that these immovables are free of any privileges and hypothecs, without the vendor being obliged to provide any deeds other than those he may have in his possession, including, however, a certificate of title search for at least thirty years and a survey certificate not more than five years old, documents which shall be submitted before the fourth of January, one thousand nine hundred and eighty- one, with all the usual clauses in notarial deeds of sale respecting immovables where the sale price is not paid in full in cash, if the parties agree at the time to make the sale for a price which is not fully paid in cash, such as clauses concerning fire insurance, additional hypothecs (15%), giving in payment, expiry of the term, etc.
SPECIAL CLAUSE
It is essential to the signature hereof and the parties agree that this contract shall be registered by being deposited AT LENGTH in the office of the registration division of Labelle, so that the description will mention all agreements concerning the lease, as well as all agreements concerning the promise to sell contained in this contract.
NOW THEREFORE, the parties hereto request the Registrar of the registration division of Labelle to register this deed AT LENGTH by deposit, in order to give full effect to the agreements of the parties hereto, failing which this lease shall be null and void and of no effect, and any amounts paid by the lessee to the owner shall be reimbursed to the lessee by the owner without prejudice to any other rights and remedies the lessee might exercise against the owner for any injury that may have resulted therefrom.
3.05 In cross-examination, Mr Lapalme testified that:
(a) the building may have been 30,000 square feet in area and the land between 75,000 and 80,000 square feet;
(b) He had just moved to Mont-Laurier when he established the business in 1976. He did not know whether he would be accepted and whether the business would succeed;
(c) in addition to the rent of $2,000, he also had to pay municipal and school taxes and for heat and electricity and liability insurance against fire. This is what is known as a net net lease (transcript, p 21). Furthermore, he even had to make major repairs. At the time of the purchase in 1981 all the conditions had been met:
(d) the price paid was that specified, namely $225,000;
(e) explaining his lease and the promise to purchase, "when you're having commercial discussions, the only way is to step into the other person's shoes", the lessor wished to lease, to have a reasonable price, but not to find himself at the end of two or three years with a lessee who was no longer able to pay and who had killed the business. The lessor would then find himself with an empty building. The lessee, on the other hand, did not wish to find himself, after his lease (with or without an option to purchase) when the business was flourishing with a lessor who would double or triple the rent or demand an exorbitant price for the property. This explains the various clauses in the lease (A-2).
3.06 Testimony of Eugène Duval
Eugène Duval, age 59, president of the appellant, testified that when he transferred his business to Robert 76, he had owned the said business for 20 years; someone else, Robert Bédard, had owned it before him for 10 years.
3.07 Concerning the sale of the property, he said:
First of all, I wanted to sell the garage in question and if I had demanded an additional $225,000 from the purchaser for the buildings, which he was unable to pay at the time, so I agreed to take, to sell him the inventory and deal on the basis of a rental for five years with a promise to purchase by the purchaser for the buildings (transcript, p 30).
For him it was a question of a financial guarantee which Robert 76 could not give in 1976.
3.08 On the appellant’s financial statements for 1976 to 1981 (filed as Exhibit A-3), the property (building and land) was shown as a capital asset.
3.09 The rent of $2,000 was fixed following discussion between the two parties, taking into account the expenses the lessee would have to pay (municipal taxes, etc).
3.10 Had it not been for the clause in which Robert 76 agreed to purchase the property, the appellant would not have leased it.
3.11 The purchase price of $225,000 was fixed by the appellant following various calculations; "when you want to sell something, you sit down and jot something down". Mr Duval admitted that if he had asked a higher price, he would probably not have sold the business. The maximum Robert 76 could put into the business in 1976 was $175,000, or the price of the inventories and other assets sold pursuant to Exhibit A-1.
4. Act — Case law — Analysis
4.01 Act
The principal provisions of the Income Tax Act involved in this case are 13(1), 13(21 )(c), (d) and (f), 54(c) and (h), 39(1)(a) and 40(1)(a).
They will be cited in the analysis if necessary.
4.02 Case Law and Other Authorities
The principal case law and other authorities referred to by the parties are as follows:
(A) Other Authorities
1. Interpretation Bulletin IT-233R
2. Traité de Droit Civil du Québec, Léon Faribault
3. La Vente, Michel Pourcelet, Les Editions Thémis
(B) Case law
4. Victory Hotels Ltd v MNR, [1962] CTC 614; 62 DTC 1378;
5. The Queen v Lagueux & Frères Inc, [1974] CTC 687; 74 DTC 6569;
6. The Queen v Compagnie Immobilière BCN Limitée, [1979] CTC 71; 79 DTC 5068;
7. Olympia and York Developments Ltd v The Queen, [1980] CTC 265; 80 DTC 6184;
8. Eustache Laflamme v MNR, [1983] CTC 2507; 83 DTC 464;
9. MNR v Wardean Drilling Ltd, [1969] CTC 265; 69 DTC 5194;
10. Chibougamau Lumber Ltée v MNR, [1973] CTC 2174; 73 DTC 134;
11. Lord Elgin Hotel v MNR, 36 Tax ABC 268; 64 DTC 637;
12. C R Stewart Equipment Ltd v MNR, [1977] CTC 2232; 77 DTC 176.
4.03 Analysis
4.03.1 The central issue is whether contract A-2 is first a lease or a sale within the meaning of Civil Code.
If the conclusion is that it is not a sale, it will be necessary to determine whether by this contract A-2, the appellant nevertheless "disposed” of his property (land and building) within the meaning of the Income Tax Act in 1976.
In the case of a sale within the meaning of either the Civil Code or the Income Tax Act, it will be necessary to calculate and include in the appellant's income for 1976 an amount equal to the recpature of the excess capital cost allowance previously allowed. Moreover, the capital gain will be taxed only at the time of payment, in 1981.
Furthermore, it goes without saying that in a case of sale or disposition, the appellant is not entitled to deduct the capital cost allowance it claimed for 1976 to 1979, as appears in subparagraph (k) of pargraph 4 of the reply to the notice of appeal cited earlier (para 2.02).
4.03.2 Sale or lease within the meaning of the Civil Code
After reading the appropriate provisions of the Civil Code of the Province of Quebec, the articles referred to by the parties and the Olympia Floor case, where the same subject is discussed, the Court finds that agreement A-2 is not a sale within the meaning of the Civil Code of the Province of Quebec, relying in short on the following reasoning:
Article 1476 of the Civil Code provides that “‘a simple promise of sale is not equivalent to a sale”. This article includes a bilateral promise of sale as in the case we are concerned with where one party offers to sell and the other undertakes to purchase. Either party may force the other to complete the transaction where the latter refuses to do so on the date previously set by them or where there is no date set, after reasonable notice. The judgment is then equivalent to a sale. In the case at bar, however, the transaction time is set for “no later than July 4, 1981” (A-2 clause: promise of sale) with the lessee having the option of purchasing earlier. Thus, on the basis of the fundamental principle that the contract is the law between the parties, the actual time of the transaction is the one decided on by the lessee "Robert 76”, being early 1981.
Moreover, Article 1478, which provides that a promise of sale with tradition and possession is equivalent to sale, is subject, in my view, to the above principle, in other words, the contract is the law between the parties and the actual time of the transaction, once again, is the one determined by the lessee under the terms of the contract.
Consequently, where the parties have agreed for a future time, it cannot be decided under civil law that the transaction took place at a time other than the one determined and executed by them.
A bilateral promise does not have the effect of making the promissor- purchaser owner; it merely allows him to become one when the contract of sale is executed or when the judgment in lieu of the contract is rendered; Michel Pourcelet (reference 4.02, page 23), relying on Marler's Law of Real Property, paragraph 430.
In short, all these principles are fundamentally based on the fact that in Quebec, ownership includes both the right to enjoy and the right to dispose of things (Art 406 CC). The right of enjoyment may be transferred separately from the right of disposition.
4.03.3 Whether or not a "disposition" within the meaning of the Income Tax Act
4.03.3.1 Sections 13(1) and 13(21)(c) and (d) of the Act read as follows:
SEC 13 Recaptured depreciation
(1) Recaptured depreciation.—Where, at the end of a taxation year, the aggregate of all amounts determined under subparagraphs (21)(f)(iii) to (viii) in respect of depreciable property of a particular prescribed class of a taxpayer exceeds the aggregate of all amounts determined under subparagraphs (21)(f)(i) to (ii.1) in respect of depreciable property of that class of the taxpayer, the excess shall be included in computing the income of the taxpayer for that taxation year.
SEC 13(21 )(c) "Disposition of property"
(c) Disposition of property" includes any transaction or event entitling a taxpayer to proceeds of disposition of property;
SEC 13(21)(d) "Proceeds of disposition"
(d) "Proceeds of disposition” of property includes
(i) the sale price of property that has been sold,
(ii) compensation for property unlawfully taken,
(iii) Compensation for property destroyed and any amount payable under a
policy of insurance in respect of loss or destruction of property,
(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given,
(v) compensation for property injuriously affected, whether lawfully or unlawfully or under statutory authority or otherwise,
(vi) compensation for property damaged and any amount payable under a policy of insurance in respect of damage to property, except to the extent that such compensation or amount, as the case may be, has within a reasonable time after the damage been expended on repairing the damage,
(vii) an amount by which the liability of a taxpayer to a mortgagee is reduced as a result of the sale of mortgaged property under a provision of the mortgage, plus any amount received by the taxpayer out of the proceeds of such sale, and
(viii) any amount included in computing a taxpayer’s proceeds of disposition of the property by virtue of paragraph 79(c).
SEC 13(21)(f) “Undepreciated capital cost"
(f) “Undepreciated capital cost" to a taxpayer of depreciable property of a
prescribed class as of any time means the amount by which the aggregate of
(i) the capital cost to the taxpayer of each depreciable property of that class acquired before that time,
4.03.3.2 The most important precedents are Compagnie Immobilière BCN Limitée and Olympia & York Developments Ltd, referred to above (para 4.02).
The facts and decisions in these two cases can be summarized as follows:
(a) The Queen v Compagnie Immobilière BCN Limitée
This judgment was rendered on February 6, 1979.
The question in this case is whether respondent can deduct, in computing its income for the taxation years 1967 and 1968, certain amounts in respect of the capital cost of property previously owned by it for the purpose of gaining or producing income when such property has, in a previous year, ceased to be in a prescribed class and no other property was in such class as at the end of both taxation years in question. The case concerned two distinct assets: (1) a piece of land (falling within class 3 under Schedule B of the Income Tax Regulations) which respondent held in 1964 as the successor in title of the lessee under an emphyteutic lease (the “first lease"), of which it became sole owner in January 1965 by acquiring the lessor’s rights, and which it then conveyed to the Société Immobilière Place d'Armes (the “Société") by emphyteutic lease (the “second lease"); (2) a (class 13) building erected on the piece of land, which the Société had demolished during 1965 in accordance with the stipulations of the second lease. In 1967 and 1968 respondent had no property left in classes 3 and 13 and for this reason the Minister denied the deduction claimed by respondent for the undepreciated capital cost of these two classes of assets. The Trial Division of the Federal Court affirmed this decision, but it was reversed by the Federal Court of Appeal. The appeal to this Court raises two questions: (1) does s 1100(2) of the Income Tax Regulations, relating to terminal losses, apply to the circumstances of this case, that is, were the building and the lessee's rights under the first lease disposed of or “aliénés" during 1965? (2) can respondent claim a capital cost allowance when there is no property in the relevant class?
Held: The appeal should be allowed.
Section 8(2)(b) of the Official Languages Act does not enact an absolute rule which overrides all other canons of construction, in particular that by which every provision is to be construed with reference to the context. The general canons of construction must be considered and the meaning of words determined from a consideration of all relevant statutory or regulatory provisions. Although the French sometimes uses the words “produit d'une aliénation” or “aliéné" instead of “produit d'une disposition" or “disposé", the meaning of the English phrases is not limited thereby, and the English phrase “disposed of” in s 1100(2) must be construed as if the French text were “disposé”. In light of this construction it must be concluded that respondent conveyed full ownership in the building to the Société, since under the terms of the emphyteutic lease the building was not the subject of the emphyteusis. The building was therefore disposed of or “aliéné” within the meaning of s. 1100(2). So far as the rights of respondent under the first lease are concerned, these rights were classified as a leasehold interest, which terminated when the lessee acquired the lessor’s rights. The extinction of a right through merger “destroys” that right, and in that sense it was disposed of, “aliéné”. Finally, respondent submitted that s. 1100(2) did not, so long as respondent did not take advantage of it, interfere with its normal right to claim capital cost allowance as if the property had continued to exist in the prescribed class. That argument cannot be accepted for two reasons. Firstly, the wording of the Regulation makes it clear that the deduction therein provided may be taken only in the year in which the property was disposed of. In the case at bar, as respondent did not claim in 1965 it lost the right to claim a deduction for this loss in calculating its income for a subsequent year. Secondly, the provisions of s. 1100(2) of the Regulations have the effect of extinguishing the taxpayer’s right to normal capital cost allowance in respect of the property disposed of. The amount of a terminal loss that the taxpayer is permitted but failed to take under this section must be considered as depreciation allowed for the purposes of the calculation of the undepreciated capital cost of such property. In view of this conclusion, it is not necessary to express any opinion on the second question.
(b) Olympia and York Developments Ltd v The Queen
This judgment was rendered on April 21, 1980.
In August 1969, plaintiff entered into an agreement with First General Real Estate & Resources Trust (“First General”) to sell, transfer and convey Place Cremazie Complex. The agreement provided that the purchaser had the right to obtain the deed of sale upon payment of either the whole consideration or of an amount sufficient to reduce the balance owing to a specified amount. First General was entitled to legal possession forthwith, but the agreement specifically provided that notwithstanding delivery and actual possession, the agreement was not equivalent to a sale and did not give First General any rights to ownership until the deed of sale was executed. First General assigned all leases to the vendor as security for payment, but collected and retained all rentals. First General also paid wages, taxes, insurance premiums, charges of every kind, made repairs and looked after the general administration of the property. Finally, First General defaulted under the agreement and assigned its rights under the agreement to Century Plaza Limited (“Century Plaza”). A deed of sale was executed and delivered to Century Plaza in May 1974. The first issue is whether a sale took place in August 1969, or in May 1974, and the second issue is whether there was, in August 1969, a “disposition” within the meaning of section 20(5)(b) of the former Income Tax Act which would then render effective sections 20(1)(a) and 20(5)(e)(ii)(A) and (B).
Held, the plaintiff’s action succeeds in part. The plaintiff first sold the property in May 1974 to Century Plaza. There was, in September 1969, a “disposition” of Place Cremazie Complex by the plaintiff within the meaning of section 20 of the former Act (section 13 of the new Act). There was a disposition for capital cost depreciation purposes as of that time even though the profit actually realized on the transaction for the purposes of capital gains would in fact be reported in 1974 and not in 1969, as section 20 of the former Act refers only to capital cost allowances. Since there is no special definition of the word “sale” in the Income Tax Act, one must consider that word in the light of the law of the Province of Quebec as applied to the relationship. Article 406 of the Quebec Civil Code states that ownership comprises the right of enjoyment of the thing and the right to dispose of it absolutely. Enjoyment of the thing can be conveyed separately from the right of disposition and for a sale to take place the res itself must be disposed of and not merely the right to enjoy it. Numerous authorities on the law of the Province of Quebec lead to the conclusion that even though all the benefits and all of the charges of ownership which might have passed to the purchaser in possession, if the vendor has not been paid in full and the parties have expressly agreed that title would not pass, but remains in the vendor and also that there would be no sale until the purchase price has been paid, then, although under article 1478 what has transpired is “equivalent to” a sale, it still does not constitute a sale at law. As to the second issue, the substantive definitions of “disposition of property” and “proceeds of disposition” in section 20(5)(b) and ((c) are a clear indication that the words “disposed of” should be given their broadest possible meaning. The proper test as to when property is acquired must relate to the title or to the normal incidents of title, either actual or constructive, such as possession, use and risk. The plaintiff had, after executing the agreement and upon delivering possession of the property to First General in 1969, completely divested itself of all the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title. It was absolutely and irrevocably obliged to execute and deliver a clear deed to the purchaser upon receipt of the balance of the purchase price which was payable to it. Any additional rights to which it was entitled under the agreement were solely and exclusively for the protection of that balance of purchase price and are rights which would normally be granted to a mortgagee to protect his security.
4.03.3.3 The latter decision rendered by Addy, J of the Federal Court, Trial Division in 1980 refers extensively to the former judgment, rendered by the Supreme Court in 1979. After stating the issue and citing sections 20(1) and 20(5)(b), (c) and (e) of the old Act, which are substantially the same as 13(1) and 13(21 )(c), (d) and (f) of the new Act, Addy, J stated the following:
Paragraph 20(5)(c) states that “disposition” includes sale and several other types of payment such as compensation for damage, amounts payable under a policy of insurance, etc, but does not purport to be exhaustive of the definition of “disposition of property” contained in paragraph 20(5)(b) which I have quoted. In fact, paragraph 20(5)(b) itself, which uses the word “includes” is not itself an exhaustive or restrictive definition. In this respect, in delivering judgment on behalf of the Supreme Court of Canada, Pratte, J in The Queen v Compagnie Immobilière BCN Limitée, [1979] 1 SCR 865; [1979] CTC 71; 79 DTC 5068 stated:
“The substantive definitions of ‘disposition of property' and 'proceeds of disposition' in s 20(5)(b) and (c) are a clear indication that the words 'disposed of' should be given their broadest possible meaning.”
The word “acquired” used in paragraph 20(5)(e) is obviously the direct opposite of “disposed” (or disposition) as used in the same section and must contain substantially the same elements viewed from the side of the person acquiring the asset as opposed to the person disposing of it. The meaning of the word “acquired” as used in subsection 20(5) was fully considered by my brother Cattanach, J in MNR v Wardean Drilling Limited, [1969] 2 Ex CR 166; [1969] CTC 265; 69 DTC 5194. At 172 [271, 5197] of the report he states:
“With all deference I cannot accede to that view.
In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.”
and again at 173 [271, 5198] he states:
“As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations.”
That view is followed and approved by Bastin, DJ in The Queen v Henuset Bros Ltd [No. 2], [1977] CTC 227; 77 DTC 5169. He stated at 229 [5170]:
“It follows that all the incidents of ownership other than the legal title reserved in the vendor by the conditional sales agreements such as possession, risk and the right to use the tractors were acquired by the buyer on December 30, 1971. In my opinion the reservation of the legal title of the tractors in the vendor as security did not affect the issue any more than the taking of security on the tractors in the form of a chattel mortgage would have done. This opinion is supported by the judgment of Mr Justice Cattanach in the case of MNR v Wardean Drilling Limited, [1969] CTC 265; 69 DTC 5194.”
In the case at bar, the plaintiff had, after executing the agreement and upon delivering possession of the property to First General in September 1969, completely divested itself of all the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title. It was absolutely and irrevocably obliged to execute and deliver a clear deed to the purchaser upon receipt of the balance of the purchase price which was payable to it. Any additional rights to which it was entitled under the agreement were solely and exclusively for the protection of that balance of purchase price and are rights which would normally be granted to a mortgagee to protect his security.
4.03.3.4 In the case at bar, what are “the elements of evidence, whether criteria or degrees of comparison, to determine when ownership was acquired (or disposed of) relating to the title to the property or to the normal incidents of title, either actual or constructive, such as possession, use and risk”. It appears from Exhibit A-2 that Robert 76 was in possession of the property and had use of it from July 1976. According to the general conditions:
(1) It had to insure against the risks of “lightning, fire and vandalism” on behalf of the owner with a promise to sell in the name of the lessee;
(2) It had to have liability insurance;
(3) It also had to pay municipal and school taxes as well as for heat and electricity;
(4) In addition, it had to pay for any major repairs.
All these obligations and risks normally fall on the owner.
(5) Finally, the lessee was obliged to purchase. The only thing that was missing was the time to be chosen by the lessee for the purchase. In fact, that time could have been only a few days after June 9, 1977, that is, after the lease had been signed. But the lessee could not afford it then.
All these points support the respondent's thesis that there was a disposition of the property as soon as the lease was signed retroactive to July 4, 1976.
The price fixed of $225,000 also seems to support the respondent's thesis. That price was fixed both for the land having an area of between 75,000 and 80,000 square feet and for the building of approximately 30,000 square feet (para 3.05(a)).
Under A-2, Robert 76 was obliged to carry insurance only on the building of at least $250,000 (item 2 of the general terms and conditions). Thus in 1976 the building alone was worth more than the price for both the building and the land, possibly within only four years.
It must be concluded that the lessor, while hoping to receive the most monthly rent possible, had nonetheless decided to sell it at any time after June 9, 1977.
4.03.3.5 Although the option to purchase could not be made by Robert 76 until June 9, 1977 and thereafter, it can nevertheless be said that the appellant disposed of it within the meaning of the Income Tax Act in July 1976.
The Court is bound by contract A-2. It is retroactive to July 4, 1976, and it is at that time that Robert 76 in substance (Exhibit A-1) took possession of the premises with all the risks assumed by an owner including the option to purchase for $225,000.
Consequently, the reassessments for 1976 to 1979 must be upheld.
5. Conclusion
The appeal is dismissed for the above reasons.
Appeal dismissed.