The Queen v. Trade Investments Shopping Centre Ltd., 93 DTC 5486, [1993] 2 CTC 333 (FCTD)

Noël, J.:— This is an appeal by Her Majesty the Queen (hereinafter "the plaintiff") from a decision by the Tax Court of Canada allowing an appeal by Trade Investments Shopping Centre Ltd. (hereinafter "the defendant") and referring back to the Minister of National Revenue the assessment made against the latter for the 1986 taxation year.

Introduction

The issue turns on the interpretation of transitional provisions applicable when the amendment to s. 13(21.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), came into effect on May 9, 1985.

Before that amendment came into effect, it was in the interests of the seller of a commercial property, in the event that the buyer wished to undertake a new development, to demolish existing structures before selling the subjacent land. This enabled him to assign the building no value for the purposes of the transaction, to make all his profit in the form of a capital gain on the subjacent land and to set off against this gain the final loss made on the building at its demolition. [1] The general effect of the amendment at issue here is to reduce the final loss realized on the building in such circumstances, as also where the building is demolished by the buyer soon after its purchase by taking into account its taxable value.

Facts

The agreed statement of facts filed by the parties discloses the following:

1. During 1061, the defendant purchased a shopping centre from the company "Intermediary Properties Ltd.” (hereinafter"I.P.L.");

2. this shopping centre was located in Scarborough, Ontario and known as the "Golden Mile Plaza Shopping Centre”;

3. the total cost of the transaction amounted to $3,403,471, $400,000 of which was allocated to the land and the rest to the building;

4. on August 31, 1961 the defendant concluded an agreement with I.P.L. by which it leased the latter the Golden Mile Plaza Shopping Centre for 25 years (with three options to renew of ten years each). . . .

5. clause 37 of the lease gave I.P.L. an option to purchase the defendant's shopping centre for $3,000,000 as of January 1, 1986, and by at the latest 60 days before expiry of the lease (or expiry of each of the renewals, if applicable);

6. on July 1, 1963 I.P.L., with the consent of the defendant, assigned its rights in the lease of August 31,1961 to United Principal Properties Limited. .. . .

8. on January 20, 1986 Campeau Corporation exercised the purchase option Indicated in the lease. . . .

9. on March 12, 1986 the defendant gave Campeau Corporation, at its request, an "Estoppel Certificate" so that Campeau Corporation could give it to the party which was the new purchaser of the lease, I.P.C.F. Properties Inc. . . .

10. on March 24, 1986 Campeau Corporation assigned its rights in the lease of August 31,1961 to I.P.C.F. Properties Inc. . . .

11. on March 27, 1986 defendant approved the assignment of the lease of March 24, 1986 between Campeau Corporation and I.P.C.F. Properties Inc. and assignment of the purchase option contained in the lease. . . .

12. on August 29, 1986 the sale of the shopping centre was concluded between the defendant and I.P.C.F. Properties Inc. . . .

13. immediately after making the purchase, I.P.C.F. Properties Inc. proceeded to demolish the shopping centre;

14. the total of the proceeds of disposition of $3,000,000 was assigned by the defendant to the land, which had a value of at least $8,000,000, while the value of the building on August 29, 1986 was nil;

15. in its tax return for its 1986 taxation year the defendant considered that all the proceeds of disposition were attributable to the land;

16. the Minister of National Revenue admitted that the allocation of the proceeds of disposition by the defendant was correct, in view of the respective values of the land and building at the time of disposition on August 29, 1986;

17. the Minister of National Revenue also set the fair market value as of December 31, 1971 at $1,804,209 for the land and $1,595,791 for the building, that is the same amounts as those used by the defendant in its tax return for the taxation year at issue;

18. based on the foregoing amounts for the allocation of the proceeds of disposition and the fair market value as of December 31, 1971 the defendant, in its tax return for its 1986 taxation year, reported a final loss on the disposition of the building amounting to $981,240 and a capital gain on the disposition of the land of $1,195,791;

19. relying on subsection 13(21.1) of the Income Tax Act, the Minister of National Revenue disallowed the final loss of $981,240 claimed by the defendant and reduced the taxable capital gain reported by $490,620;

20. on August 30, 1988 the Minister of National Revenue issued a reassessment for the defendant's 1986 taxation year and made the changes mentioned in the preceding paragraph.

The defendant filed a notice of objection to the reassessment, which was filed with the Tax Court of Canada to stand as a notice of appeal. In January 1990, the Tax Court of Canada allowed the defendant's appeal for its 1986 taxation year and referred the assessment at issue back to the Minister of National Revenue for reassessment, in accordance with what was reported by the defendant when it filed its tax return for the year in question. The plainti appeals that decision to this Court.

Issue

The only issue is whether paragraph 13(21.1.)(a), which came into effect on May 9, 1985, is applicable to the transaction made on August 29, 1986 between I.P.C.F. Properties Inc. and the defendant. If so, the defendant conceded that the reassessment for its 1986 taxation year was valid. If not, the plaintiff admitted that its appeal should be dismissed.

Pursuant to subsection 7(6) of the Act to amend the statute law relating to income tax and to make a related amendment to the Tax Court of Canada Act, S.C. 1985, c. 45 (hereinafter “the transitional provision”), paragraph 13(21.1.)(a) of the Act as amended by 1985, c. 45 is applicable to any disposition occurring after May 9, 1985 other than dispositions occurring pursuant to the terms of an agreement in writing entered into on or before that date.

Parties’ positions

On the one hand, the plaintiff submitted that the disposition of the shopping centre did not occur pursuant to the terms of an agreement in writing concluded on May 9, 1985 and that since, moreover, the sale took place after that date, the disposition of the shopping centre was subject to paragraph 13(21.1.)(a) of the Act. On the other hand, the defendant submitted that the lease of August 31, 1961 is an agreement in writing which was in effect at May 9, 1985, and that since the disposition of the shopping centre occurred pursuant to the terms of the purchase option contained therein, the transitional provision applies here and paragraph 13(21.1.)(a) could not be relied on in support of the assessment.

The option contained in the lease of August 31, 1961 provided that:

IF THE TENANT is not in default hereunder, the tenant shall have an option to purchase the lands and premises leased herein for the sum of $3,000,000. The said amount shall be paid either by cash or certified cheque drawn on a chartered bank in the City of Toronto, on closing, or by the assumption of an existing registered first mortgage and the payment of the balance of the option price by cash or certified cheque drawn on a chartered bank in the City of Toronto, on closing. The said option may be exercised at any time after January 1, 1986, but not later than 60 days prior to the expiration of the initial term of the lease or prior to the expiration of any one of the renewal periods thereof contemplated by paragraph 33 of this lease in the event of the lease having been so renewed; and such option, if exercised, shall provide for the purchase of the said lands and premises by the tenant on the last day of the initial term or on the last day of each of the renewal terms of the lease, as the case may be, and the closing of the transaction on such last day. The said option may be exercised by registered letter addressed to the landlord or its solicitors or agents accompanied by a certified cheque for $25,000 dollars by way of deposit. The exercise of the option shall not terminate the lease, but the lease shall remain in full force and effect until the sale is closed.

This is the option that was exercised by Campeau Corporation on January 20, 1986, and the rights under which were assigned to I.P.C.F. Properties Inc. on March 24, 1986. The letter by which the option was exercised read as follows:

Reference is made to that certain lease, as amended, (the Lease”), for the property known as Golden Mile Shopping Centre, Scarborough, Ontario, dated August 31, 1961 and entered into between Trade Investments Properties Limited as tenant to which Campeau Corporation is now a party being the successor in interest to Intermediary Properties Ltd. as tenant.

Pursuant to Article 37 of the lease and this notice, Campeau Corporation hereby exercises the option to purchase contained in Article 37.

As provided for in Article 37 of the lease, we are enclosing herewith our certified cheque in the sum of $25,000 representing the amount required to be sent to you with this notice.

We would appreciate it if you would acknowledge receipt of this letter in the space provided below.

The question presented is therefore whether the lease of August 31, 1961, and in particular the option conferred by it, can be regarded as an agreement in writing pursuant to the terms of which the disposition of the shopping centre occurred on August 29, 1986 within the meaning of the transitional provision.

Analysis

It is worth noting, to begin with, that transitional legislation is remedial in nature. In tax matters, its purpose is generally to protect taxpayers who have made certain dispositions in good faith in accordance with the law applicable at the time, by allowing them to be covered by the former law despite the coming into force of the new law.

Such provisions are necessary in tax matters since it is well established in this area that the state of the law confers no vested right for subsequent years. In Gustavson Drilling (1964) Ltd. v. M.N.R., [1977] 1 S.C.R. 271, [1976] C.T.C. 1, 75 D.T.C. 5451, the Supreme Court had to decide whether the right to make certain deductions conferred vested rights for subsequent taxation years. In deciding that it did not, Dickson, J. stated,at pages 282-83 (C.T.C. 9, D.T.C. 5456) that:

No one has a vested right to continuance of the law as it stood in the past. . . . A taxpayer may plan his financial affairs in reliance on the tax laws remaining the same; he takes the risk that the legislation may be changed.

The mere right existing in the members of the community or any class of them at the date of the appeal of a statute to take advantage of the repealed statute is not a right accrued. . . .

Accordingly, when it sees fit, Parliament makes an exception to this rule by using transitional provisions to preserve the right of certain classes of taxpayers to be covered by the old law despite the new having come into effect. The scope of these transitional provisions will be more or less restrictive depending on the precise situation contemplated by the legislature in mitigating the effect of the new Act. Sometimes, Parliament will limit the protection of a transitional provision to taxpayers who have entered into firm and binding contracts based on the old law. At other times Parliament will extend this protection to taxpayers who can show that they had in view a transaction which was substantially advanced at the relevant time, though it had not yet been concluded.

In each of these cases, the scope of a transitional provision must be determined from its wording, the nature of the provision of substantive law which it has the effect of suspending and the specific situation which Parliament sought to correct by enacting it.

The transitional provision at issue here reads:

S.C. 1985, c. 45: Section 7(6) subsection (3) is applicable with respect to dispositions occurring after May 9, 1985 other than dispositions occurring pursuant to the terms of an agreement in writing entered into on or before that date.

Prima facie this transitional provision is quite limited in scope in that it only applies to dispositions occurring pursuant to a contract concluded in accordance with the old Act. By requiring the existence of an "agreement" at May 9, 1985, Parliament excluded from the scope of the transitional provision any disposition taking place after that date, even if it did so as the result of a purchase offer submitted by May 9, 1985, but still not accepted at that date. In the absence of an acceptance, a purchase offer cannot be an "agreement" within the meaning of the transitional provision. At first glance, this could suggest that a purchase option which has not been exercised as of May 9, 1985 should be treated in the same way.

However, the legal consequence of a purchase option are distinct from those which flow from an ordinary offer. In civil law, an option has the legal nature of a unilateral promise. In his book La vente, 5th edition, published by Editions Thémis, Michel Pourcelet states the following at page 25:

An offer of sale is to be distinguished from a unilateral promise. The offer is a unilateral act: only the will of the offeror is involved. The person to whom the offer is addressed makes no commitment, in that he is free to consider the offer made to him or to reject it. On the contrary, a unilateral promise of sale is in the form of a unilateral contract: only the promisor undertakes an obligation (a unilateral promise differs from a contractual promise in this respect). However, the unilateral promise is a real contract (binding only on the promisor), as there is a meeting of minds between the promisor and the beneficiary of the promise, who accepts the option given to him to consider the proposition, to take up the option or reject it.

The distinction is the same at common law. Beck, J. of the Supreme Court of Alberta said the following in Lowes v. Herron (1911), 18 W.L.R. 167, at page 168:

There is an important distinction — probably often overlooked — between a mere offer to sell upon certain terms and an option to buy upon certain terms. An offer to sell is not a contract — not even a unilateral contract. The intending vendor is at liberty to withdraw his offer at any time before it is accepted. To make a contract, acceptance is necessary; and the mere acceptance, without more, concludes the contract. An option is a unilateral contract, the intending vendor is bound by virtue of the option during the period fixed for acceptance.

The option in question is thus a unilateral contract which was incorporated in the lease of August 31, 1961 and which in the case at bar was in writing and in effect on May 9, 1985. The question remains whether the disposition in Question was made in accordance with this agreement within the meaning of the transitional provision.

First, the parties agreed that the terms of the option agreement were adhered to and that in that sense the disposition took place in accordance with its terms. However, counsel for the plaintiff argued that the disposition in question did not take place in accordance with this agreement perse, but with the subsequent agreement which came into being when the option was exercised in January 1986. In his submission, only a purchase/sale agreement duly concluded as of May 9, 1985, but taking effect at a later date, was contemplated by the legislature when it enacted the transitional provision.

It is true that an agreement which has the effect of conferring a purchase option is separate from the agreement which occurs when the option is taken up. In the first case, the subject-matter of the agreement for the beneficiary of the option is the right to exercise it during the period specified by the agreement. It is this right, and none other, which was conferred on the eventual purchaser by the option agreement reflected in the lease of August 1961. On the other hand, the subject-matter of the agreement which arose when the option was exercised on January 20, 1986 is the immovable property covered by the option, and counsel for the plaintiff correctly argued that, strictly speaking, the disposition of the property was made pursuant to this latter agreement.

In view of this, counsel for the defendant argued that the wording of the transitional provision did not support such a strict interpretation. First, he noted that the transitional provision deals with dispositions made "conformément" [pursuant to] an agreement in writing and not“ en vertu” [by virtue of] such an agreement. He made the same observation with respect to the English version, in which the legislature used the term “pursuant to” rather than “under the terms of” or "by virtue of”.

He noted that, in the French version, the word "conformément' [2] , and the words "pursuant to" [3] in the English version, have a broad scope and denote a disposition which is a consequence of, which follows or results from an agreement. He concluded that if Parliament had intended to limit the protection of the transitional provision, as suggested by the opposing party, it would have used the term "en vertu” in the French version or “by virtue of” in the English version.

He further submitted that if Parliament had intended to exclude a purchase option from the concept of an "agreement" within the meaning of the transitional provision, it would have done so clearly, as in fact it did in other transitional provisions contemporary with that under consideration.

For example, counsel for the defendant referred me to subsection 194(4.2) of the Act, the relevant portion of which reads as follows:

194(4.2) Notwithstanding subsection (9), no amount may be designated by a corporation in respect of

(a) a share issued by the corporation after October 10, 1984, other than

(i) a qualifying share issued before May 23, 1985, or

(ii) a qualifying share issued after May 22, 1985 and before 1986

(A) under the terms of an agreement in writing entered into by the corporation before May 23,1985, other than pursuant to an option to acquire the share if the option was not exercised before May 23, 1985. . . .

[Emphasis added.]

This transitional provision accompanied provisions confirming the moratorium announced by the Minister of Finance on October 10, 1984, for certain transactions allowing the transfer of tax credits for research and development by an issuing corporation. This transfer was made by issuing qualifying shares and this is the context in which the transitional provision was enacted. It demonstrates a contrario that in the mind of the legislature a share purchase option could, in this particular context, be an agreement in writing that could give rise to a subsequent transaction in accordance with its terms even if it remained unexercised at the relevant time.

Counsel for the defendant also drew to my attention the French version of the transitional provision accompanying the amendments announced by the Minister of Finance on July 19, 1985, regarding the treatment of income from carved-out property. Subsection 73(2) of the amending Act (S.C. 1986, c. 55) provided in its relevant portion that:

73(2) Le paragraphe (1) s'applique aux biens restreints acquis après le 19 juillet 1985, à l'exclusion de ceux qui sont acquis avant 1987 d'un contribuable par une personne conformément à une convention de vente a cette personne conclue par écrit par le contribuable:

(c) soit avant le 20 juillet 1985. . . .

[Emphasis added.]

Counsel for the defendant concluded from this that when Parliament wishes to limit the effect of a transitional provision to persons covered by a particular type of agreement, it does so expressly. In the case at bar, since Parliament failed to do this, it must have intended to extend the benefit of the transitional provision to anyone making a disposition after May 9, 1985 pursuant to the terms of an agreement in writing, without the agreement necessarily being one of purchase/sale. As these other transitional provisions are in pari materia to that under consideration and were adopted at the same time and by the same legislature, counsel for the defendant concluded that it could not be otherwise.

While it may be useful to compare various transitional provisions used by Parliament in tax legislation in order to determine their meaning, this must be done with great care. This is particularly true when one is trying to compare transitional provisions emanating from different budgets, as is the case here.

Transitional provisions do not lend themselves to the scrutiny of an overly strict interpretation. It should be borne in mind that transitional provisions are secondary and incidental to the provisions of substantive law which they accompany. Unlike taxing provisions, they are not adopted as part of a coherent legislative plan in which the provisions must interrelate with one another in a logical scheme. They are ad hoc provisions the sole purpose of which is to ensure that the particular provision of substantive law which they accompany is introduced in an equitable manner. By their very nature, therefore, they are likely to create discrepancies, and a review of the wording of these provisions in recent years indicates that each budget produces transitional provisions peculiar to it and designed without reference, or at least with little reference, to preceding in pari materia provisions. While a comparative analysis of such provisions remains useful, I do not think it can be conclusive in the case at bar.

In my view, when a question of interpretation arises as to the scope of a transitional provision, it must be answered by reference to the provision of substantive law it accompanies and the specific situation which Parliament sought to alleviate by introducing it.

In the instant case the introduction of paragraph 13(21.1.)(a) was intended to put an end to planning which, though legitimate, nevertheless was regarded by Parliament as undesirable. Ultimately such planning allowed a seller, in the circumstances we have seen, to make all the profit from the sale of a commercial property in the form of a capital gain, while giving rise to a final loss on the demolished buildings.

This result was unacceptable to Parliament since the reduction in value of the demolished building realized as a final loss was deductible in its entirety, whereas only half the increased value of the land was taxable as a capital gain.

It was to prevent this happening that, in paragraph 13(21.1.)(a), Parliament provided that in such circumstances if the proceeds of disposition of a building are nil (or less than the lesser of the cost amount and the capital cost), the seller shall nevertheless be deemed to have received value for the building in order to eliminate (or reduce) the final loss realized on the building, while reducing by a corresponding amount the capital gain realized on the subjacent and contiguous land necessary for its use.

What is important to note for our purposes, and this was confirmed by each of the counsel at the hearing, is that paragraph 13(21.1.)(a) impacts only on the seller. The ordinary rules continue to apply in determining the buyer's cost for tax purposes. A buyer was not in any way affected by the introduction of this amendment. Only the seller was affected.

Accordingly, the transitional provision at issue must be interpreted from the standpoint of the seller, since it was enacted solely in order to protect a seller who had, at the relevant time, entered into a contract to make a disposition. From this it may be concluded that the fact that an option agreement places no obligation on an eventual purchaser is of little significance. Only the seller's contractual obligation was contemplated by the legislature when it enacted the transitional provision at issue.

Unless there is some indication to the contrary, when in a transitional provision Parliament exempts from the application of the new statute agreements concluded before it came into effect, the agreements in question are necessarily those requiring a taxpayer adversely affected by the new law to carry out the particular transaction covered by it.

In the case at bar it was established that the seller had undertaken, under the purchase option reflected in the lease of August 1961, to dispose of the shopping centre according to the terms of the option, and that this obligation was in effect at May 9, 1985. It was also established that the disposition was made in accordance with the terms of the purchase option. It is true that at May 9, 1985 the obligation to sell was subject to the beneficiary of the option choosing to take it up, but this does not in any way alter the fact that the obligation, as far as the seller was concerned, was absolute, irrevocable and irreversible. This is clear when one notes that the shopping centre was sold for a consideration of $3,000,000, the amount agreed to by the defendant in the purchase option, whereas at the time of the sale the shopping centre was worth $8 million. The only reason why the defendant sold the shopping centre for a price $5 million below its actual value was that it was contractually bound to do so.

I do not think that in the case at bar the word "agreement" can be interpreted so as to limit it strictly to a purchase/sale agreement. The defendant had irrevocably undertaken to make the sale at May 9, 1985, just as it would have been if it had been party to a purchase/sale agreement. From its point of view the contractual obligation was absolute, and the contractual obligation must be considered and the word "agreement" interpreted from its point of view. Taking this approach, it is clear that Parliament could not have intended to exclude from the benefit of the transitional provision a seller who had undertaken to sell by a written agreement solely on the ground that the other party to the contract had no corresponding obligation to buy at the relevant time. The transitional provision was enacted exclusively to protect a seller who had obligated himself to effect a sale under the old law, and the defendant was subject to this obligation pursuant to an agreement in writing which was in effect at May 9, 1985.

Since, in addition, the shopping centre was disposed of in accordance with each of the terms contained in the option agreement, I have to conclude that in the case at bar the effect of a transitional provision was to exclude application of paragraph 13(21,1.)(a) of the Act.

Finally, I should mention the fact that counsel for the plaintiff drew to my attention eleven other transitional provisions [4] which have wording similar to that under consideration, and warned me of the possible repercussions for these other provisions of a decision in favour of the taxpayer in the case at bar.

I have not had occasion to consider these other provisions in detail, but I must say that in any case I do not share the concerns of the Department's representative. To begin with, the instant decision applies only to the transitional provision at issue here. Each of these other provisions must be analyzed in light of the substantive provision it accompanies and the specific situation which the legislature sought to correct in enacting it. It will be necessary in each case to identify the purpose of the legislature in associating the benefit of the transitional provision with the existence of an "agreement" and give this term the interpretation most likely to achieve that purpose.

Second, it cannot be concluded from the foregoing that a purchase option agreement could be an “agreement” within the meaning of the transitional provision under consideration if the matter had to be analysed from the standpoint of the beneficiary of the option. It must be borne in mind that a purchase option agreement is of a special nature in that it is bilateral in formation but unilateral in its consequences. It places no obligation on the beneficiary of the option. If we keep in mind the fact that the purpose of the transitional provision is to protect persons who entered into contracts under the old law, it becomes clear that an agreement which is not binding on one of the parties could not be an "agreement" as to him. Only an agreement placing an obligation on the party claiming under it was contemplated by the legislature in enacting it.

For these reasons, the appeal is dismissed and the assessment referred back to the Minister for reassessment in accordance with what was reported by the defendant when it filed its tax return for its 1986 taxation year, with costs against the plaintiff.

Appeal dismissed.