Walsh, J:—This action was joined for hearing with T-1831-76 Gladstone Investment Corp and Her Majesty the Queen, the facts and legal issues being the same except for the amounts added back to income by the Minister for the 1969 and 1970 taxation years of the two companies. The issue arises out of whether two sales of land by Place Versailles Inc, acting as a nominee for the two plaintiffs, to Eastmere Investment Corporation on February 13, 1969 and January 30, 1970 resulted in profits which should be treated as capital gain or as a trading transaction. The land in question has been purchased in 1962 as part of a much larger area on which a shopping centre was developed, and it will be convenient to refer to the land so sold as the “apartment house land”.
According to the figures of the Minister the two sales resulted in a profit amounting to $241,290.39 in_1969 and $320,618.37 in 1970 of which plaintiff Choice Realty’s share was 76 /3% amounting to $184,997.34 in 1969 and $245,818 in 1970 respectively and plaintiff Gladstone Investment Corporation’s 23 /3%. share amounted to $56,293.05 in 1969 and $74,800.37 in 1970. These were the amounts added to income of the two corporations by the Minister in his assessment.
In addition to the contention that the profit so realized was a capital gain transaction, which would not be taxable by virtue of the law in force in 1969 and 1970, plaintiffs raised two subsidiary arguments which only become applicable if the sale is found to be a trading transaction. The first of these arguments is to the effect that by virtue of the provisions of paragraph 85B(1)(d) of the Income Tax Act in effect at the time they are entitled to a reserve with respect to the 1969 taxation year, although not for the 1970 sale which was a cash transaction. The second subsidiary argument is to the effect that the calculation by the Minister of the so-called profits is incorrect, plaintiff’s cost of land having been reduced by the amount of expropriation proceedings pursuant to an expropriation effected by the Government of the province of Quebec subsequent to the agreement to purchase but before the deed of sale was signed, plaintiff’s contention being that part of such proceeds represented an accretion in value of the land so expropriated which should not be used to reduce the cost to them of the balance of the land which includes the apartment house: land.
The background of the litigation is complex, involving a considerable number of individuals and corporations, most of whom were not dealing together at arm’s length although not in all cases related within the meaning of subsections (5), (5a), (5b), (50), (5d) and (6) of section 139 of the Act. By memorandum of agreement entered into on January 22, 1962, with Lanabar Realty Inc (which later changed its name to Place Versailles Inc), Harry Dubrovsky who held 70% of the shares of Lanabar Realty Inc and William Gregory who held 29% of the shares, acting as nominees for Mrs Gloria Gregory, Michael Shoore, Louis Dubrovsky, Harold Rosen, Fay Cotier, Explorer Investment Corporation, Choice Realty Corporation, and Gladstone Investment Corporation, acquired a parcel of land of an area of approximately 2,872,637 square feet in the east end of Montreal bordering in part on Sherbrooke Street East and in part on Montée St Léonard from La Communauté des Soeurs de Charité de la Providence. This property, part of a very large tract of land owned by the Sisters had outstanding development potential in that it is unusual to find in an urban area such a large tract of vacant land with residential and commercial development having already taken place in the immediate vicinity. At the time it was in the town of Gamelin, an unusual independent municipality consisting almost entirely of land owned by La Communauté des Soeurs de Charité de la Providence including the large St Jean de Dieu Hospital property to the south, and as a result was not subject to any building bylaws or restrictions. The promoters of the development, primarily the. Dubrovsky family, and William Gregory who owned all the shares of Gladstone Development Corporation, all had wide experience as real estate developers as was conceded. Their intention was to develop a large shopping centre and other ancillary property, as in fact was done. They foresaw that such a development would require the provision of extensive municipal services and that the town of Gamelin was bound to be taken into either the city of Montreal or Ville d’Anjou to the North at an early date. The city of Montreal had building bylaws limiting commercial construction to a depth of 100-150 feet on Sherbrooke Street. They had discussed zoning with Ville d’Anjou in the event the property was annexed by it and that municipality had agreed to furnish services and to zone the property as commercial, but they were afraid that since the city of Montreal had more influence with the Quebec authorities the property was more likely to be annexed by that city as was in fact done by the Act 11-12 Elizabeth II, ch. 70 assented to on April 24, 1963. Being astute developers they decided that while the property was still part of the town of Gamelin and not subject to restrictions they would immediately arrange for some commercial development on Sherbrooke Street so that if and when the property was annexed by the city of Montreal the city would be faced with existing commercial development on Sherbrooke Street before its bylaws became applicable. A Fina service centre was constructed at the corner of the property using a depth of 375 feet on Sherbrooke Street whereas the city of Montreal normally allowed only 100 to 150 feet and also had a bylaw prohibiting further gas stations fronting on that street. Because they did not wish to alert the city of Montreal to their acquisition of the property, the purchase memorandum of agreement was not registered against it and was kept a closely guarded secret. The actual deed of sale was not executed until August 6, 1962. Meanwhile in April 1962 the Fina centre had been built and in June or July construction was started on the first portion of the shopping centre on behalf of Steinberg’s, Miracle Mart, and 35 other stores. Meanwhile they had given the Sisters an additional $100,000 to extend the delay for the signing of the deed for 60 days, and subsequently another $100,000 for further delay of 60 days until the Quebec Legislature Session of 1962 was closed so that there was no danger of the city of Montreal obtaining annexation of the property that year.
The memorandum of agreement previously referred to provided that the first five persons named, namely Mrs Gloria Gregory, Michael Shoore, Louis Dubrovsky, Harold Rosen and Fay Cotler, acting on behalf of a company or companies to be formed would acquire an area of 1,713,000 square feet referred to as “shopping centre land’’ while Gladstone Investment Corporation, Choice Realty Corporation and Explorer Investment Corporation would acquire the remainder of the total area of 2,872,637 square feet referred to as “development land” in the said memorandum. The development land was vested to the extent of 70% in Choice Realty Corporation, 15% in Gladstone Investment Corporation and 15% in Explorer Investment Corporation. but Subsequently Explorer Investment Corporation sold its share to the other two owners, the resultant ownership at the date of the sale of the apartment house land being, as already indicated, 76%% for Choice Realty Corporation and 23 /3% for Gladstone Investment Corporation.
The shareholders of Choice Realty Corporation who are Loudee Holdings Inc hold 50% of the shares and Fred-Mar-Da-Rick Inc hold the other 50%. Louis Dubrovsky owned 100% of the shares of Loodee Holdings Inc and the shareholders of Fred-Mar-Da-Rick are the four sons of Harry Dubrovsky (paragraph 6(f) of the defense states they were the sons of Louis Dubrovsky but this was amended at the opening of the hearing). As already indicated William Gregory owned all the shares of Gladstone Investment Corporation. It was conceded that part of the income of Loudee Holdings Inc, Fred-Mar-Da-Rick Inc and Gladstone Investment Corporation was derived from purchase and sale of land or buildings. The two sales of the apartment house land in 1969 and 1970 have already been referred to, but it is important to note that the apartment house land so sold did not constitute all nor even the major portion of the “development land” owned by the two companies, the two sales involving 131,773.5 square feet and 208,374 Square feet respectively or a total cf 340,147.5 square feet, while the development land had an area of 1,159,637 square feet.
At the time of the purchase offer and the signing of the deed of sale a portion of the property which was situated along Montée St Léonard at the corner of Sherbrooke Street and on the northwest side of Sherbrooke Street of a total area of 512,600 square feet had been expropriated by the Provincial Government in connection with the construction of the Trans Canada Autoroute. The deed of sale therefore, provided for the reduction of the area sold by this portion. The witness Gregory explained however that the Sisters preferred to have the purchasers carry out the negotiations with the Provincial Government, believing that they would be able to secure a greater indemnity, so the purchase price of $2,000,000 remained unaltered but it was agreed that whatever was received for the portion expropriated would be applied in reduction of the balance due. A table prepared by a representative of the Minister gave the actual area of the May 30, 1962 expropriation as 513,115 square feet. In any event there was a retrocession by the Provincial Government on July 11, 1963 of 142,216 square feet which apparently it did not require. Since at the date of the expropriation the owner of the expropriated land was still La Communauté des Soeurs de Charité de la Providence the retrocession was made to them. A further expropriation took place on May 26, 1965, however, amounting to 69,256 square feet. Another expropriation from Place Versailles Inc took place on the same day as the retrocession on July 11, 1963 and amounted to 73,241 square feet. The net area of land remaining was 2,359,241 square feet and according to the Minister’s calculations the net cost of this was $1,427,917.25. The calculation is involved, contains errors, and extended litigation took place between Place Versailles Inc and La Communauté des Soeurs de Charité de la Providence against the Minister of Justice of Quebec which ended up in the Supreme Court. The parties agreed that the summary of the expropriations as set out in that judgment dated October 5, 1976 is correct and for that purpose the judgment was filed as an exhibit. The actual figures respecting the amount of the indemnity only become relevant, as mentioned earlier, if, as a result of concluding that the subsequent sale of a portion of the property by plaintiffs to Eastmere Investment Corporation was a trading transaction, the cost to them of the property so sold becomes pertinent. It is not without significance however that the total area of the property Originally bought ended up by being substantially reduced as a result of?various expropriations, the first of which was between the date of signing of the purchase agreement and the deed of sale.
Mr Gregory testified that they had sought to have the city of Montreal zone the entire property as commercial but. that the city wanted a buffer zone to the north adjacent to Ville d’Anjou for apartment development. It was finally agreed that about 2,000,000 square feet would be zoned as commercial and about 500,000 to the north as residential. They wanted the residential area zoned to permit 10 story apartment buildings and this was at first agreed to but was reduced to 6 stories. The plan of February 21, 1963, indicating the 10 story zoning is referred to in the Act of the Legislature, in condition 1 of the conditions of the annexation of the land by the city of Montreal appearing in section 57 of the Act 11-12 Elizabeth Il, referred to above. He testified that the Place Versailles shopping centre development now has 750,000 square feet of buildings and uses 2,000,000 square feet of land. There are 130 stores, the revenue being $4,000,000 a year. At the time of the purchase the Rockland shopping centre was the largest in the Montreal area containing 800,000 to 900,000 square feet but he and his associates felt that they would require 1,000,000 to 1,250,000 square feet. Their intention for the balance of the property was to use it for ancillary developments. They had discussions with the Holiday Inn, National Bowling Company for construction of bowling lanes and restaurant, a Volkwagen dealer who was interested in 80,000 square feet and Texaco which wanted to locate a service station on Montée St Léonard but was unable to get a permit from the city of Montreal for this after the annexation. The National Bowling Company went bankrupt a few years ago. After the first development phase in June and July of 1962 already referred to a second phase took place in 1965 when 30 stores were built between the Miracle Mart and the Sherbrooke Street parking area. The next expansion in 1969 took place further to the north of the property for additional shops including a large Pascal hardware store and a 5 story office tower. In 1973 a Bay store was added and further parking area to the north adjacent to the apartment house development. A movie theatre was built some time between 1962 and 1963. Actually the developers find themselves short of parking area and had to lease part of Hydro Quebec property adjacent to their property and across the road consisting of 60,000 square feet for parking, which lease commenced January 1, 1964.
They have been trying to buy the entire Hydro Quebec property of 220,000 square feet for parking which includes the 60,000 square feet leased and made an offer for it in 1975 of $251,250 which was refused because the city of Montreal indicated it was interested in buying the property. However no sale to the city had taken place prior to 1976 and Place Versailles was still in communication with Quebec Hydro respecting the purchase of this property, until in September 1976 Quebec Hydro sold it to the city for parking in connection with a new metro station. They also attempted in 1973 to move a proposed street situated between the commercial land and a portion of the apartment house land still owned by them 150 feet to the north so that it could be rezoned and incorporated into the commercial centre to provide additional parking. The city of Montreal had previously agreed to cancel a proposed street in the middle of the property which had never been constructed but on which sewer and water lines had been placed to serve the Miracle Mart store, and the developers were hopeful that the same could be done again to the street which is now blocking the further use of their own land for parking purposes. This street diversion was finally refused by the city in March 1976. In October 1973 they also bought from the Sisters a large parcel of land on the south side of Sherbrooke Street. When Sherbrooke Street was rebuilt a tunnel had been constructed under it although it is closed but if this were opened it would give access to this property. To alleviate the parking problem they also attempted to build a parking deck over the existing parking area to the south of the Steinberg Store but Steinberg’s, while not objecting to the deck in principle, did not want it in front of their store.
Mr Gregory testified that Place Versailles Inc acted for seven corporations namely Loudee Holdings Inc, Fred-Mar-Da-Rick Investment Corporation, Faye-Bess Investment Corporation, Harwell Investment Corporation, Gladstone Investment Corporation, and Choice Realty Corporation and at one time also for Explorer Investment Corporation. The shopping centre development area was owned by Loudee, Harwell, Faye-Bess, Fred-Mar-Da-Rick and Explorer which Originally had an interest in part of it before selling out. The development land as already explained is owned by Gladstone and Choice in proportion of 23 /3% to 76 /3% respectively. The witness in addition to owning through Gladstone Investment Corporation 23 /3% of the development land also controlled 23 /3% of the shopping centre through Harwell Investment Corporation of which his four children are the shareholders. The other 76%% of the shopping centre development land is controlled by Loudee, Fred-Mar-Da-Rick and Faye-Bess with the latter corporation consisting of the sisters and brothers 0‘ the late Harry Dubrovsky and of Louis Dubrovsky. The original planned land division would have given about 1,200,000 square feet to the shopping centre and 1,/00,000 to the development portion of the land with the line running back of the Miracle Mart store, but the shopping centre expanded rapidly with the result that the Pascal store, the Bay store and part of the office tower are built on the development land. As the parties did not wish to develop the apartment house land themselves they attempted in June 1966 to interest Winston-Muss (Quebec Limited) in an emphyteutic lease, Winston-Muss being large American developers, and submitted a draft to them. The latter were unable to get financing however unless they held title to the land so this fell through. Negotiations were then taken up with Toulon Construction and with Eastmere Investment Corporation and in 1967 they began to negotiate with Mr D Deskin an architect in connection with an emphyteutic lease for the apartment house land. He did not take it up but put them in touch with one Pat Gavasi who was interested in taking 25%, and Joseph Brott, also a builder, Harry Greenspoon, an architect, and Louis Shoore. Place Versailles Inc also took a 25% interest in Eastmere Investment Corporation. The arrangement was that the apartment buildings were to be built on the basis of an emphyteutic lease which would yield revenue for the developers for the duration of the lease. They would retain title to the land. Financing was to be by a first mortgage guaranteed by Central Mortgage and Housing Corporation. The financing was arranged through Morguard Investments Quebec Limited a very experienced corporation in this field. On April 30, 1968 they wrote Eastmere Investment Corporation to advise them that their application for a National Housing Act insured first mortgage loan on phase 1 of the Versailles apartment development had been approved subject to the issuance of an undertaking to insure this project by Central Mortgage and Housing Corporation and the other conditions set out therein. One of these conditions was that the first advance must be drawn by October 1, 1968 or the loan commitment would be cancelled. On August 28, 1968, CMHC sent to Morguard Investment Corporation their undertaking to insure subject to certain relatively minor changes in the plans and the following day Morguard sent a copy of this letter and undertaking to insure to Mr Gavasi for Eastmere Investment Corporation.
On this basis excavation was commenced immediately by the developers especially in view of the requirement that the first advance must be drawn down by October 1, 1968. it was not until October 17, 1968, that CMHC returned the draft emphyteutic lease which they had in their possession all this time stating that a clause must be inserted to the effect that in the event of repossession by the mortgage creditor or the CMHC they would be exempt from payment of rent and that, with respect to transfer of the rentals, this would have to be subrogated to the rights of the mortgage creditor. The following day, October 18, 1968, CMHC wrote to Morguard setting out as a special requirement for insuring the loan that the lender should obtain a title of absolute ownership in the property before any claim for the insurance would be recognized and that such ownership must be transferred to CMHC free and clear of the lease. As the effect of this would be that plaintiffs in the event of a default by Eastmere would lose title to the land it was impossible for them to proceed with the emphyteutic lease. Eastmere was in the very unfortunate position therefore of having already commenced construction but now being unable to acquire the necessary loan. Whereas funds are available from private sources for commercial developments which are not insurable by CMHC the witness testified that it was impossible to get funds from any mortgage lender for an apartment house development unless same was protected by CMHC guarantee.
Despite the commitments made CMHC remained adamant in their requirements and letters to Morguard brought no results. It was therefore necessary to consider what could be done to salvage the situation and it became necessary for plaintiffs to sell the property to Eastmere Investment Corporation, and abandon the intention of obtaining revenue from an emphyteutic lease.
Fernand Simon testified for CMHC, although he was not in its employ at the time in question and has no personal knowledge of the dealings of the Corporation with the plaintiffs herein or with Eastmere Investment Corporation. He produced two circulars of General Instructions of the Corporation relating to emphyteutic leases, dated September 4, 1963, and August 4, 1967 respectively, from which it is evident that the requirements of the Corporation before agreeing to insure a loan on the proposed emphyteutic lease were those generally imposed. He testified that these general instructions are not. for internal use only and should be known by proposed mortgage lenders seeking to have their loans insured, but has no personal knowledge as to whether they had been communicated to Morguard or to Eastmere before approval of the loan, or before Central Mortgage and Housing Corporation had on August 28, 1968, given Morguard its undertaking to insure without calling attention to this requirement. The evidence is certainly insufficient to justify a conclusion that plaintiff’s intentions of disposing of the apartment house land to Eastmere by means of an emphyteutic lease were in any way unrealistic or incapable of being accomplished.
Mr Gregory testified that no plans had ever been made after 1963 for the development of the apartment house land by plaintiffs themselves. but that they had been approached by other people in this connection and had always insisted on emphyteutic leases. Various plans had fallen through in 1967 and 1968. Negotiations had started with the Eastmere group at the end of 1967 or early in 1968 when he became associated with it. When the eventual sale was made to Eastmere he guaranteed payment to the extent of 12 /2% but has never paid his share of the balance of price, and it seems likely that Place Versailles Inc did not press him as he was one of the original group of developers. Joseph Brott, Harry Greenspoon and Shoore paid amounts totalling $45,001.66 to Place Versailles Inc on account of their guarantees but apparently Gavasi made no payment. The statement of Place Versailles Inc showing advances and receivables to Eastmere in connection with the apartment building indicates that in addition to the original balance of price due on the first sale of $100,000 additional advances were made from time to time, and after deducting the recoveries there was still a balance owing in 1973 in the amount of $194,102.86. This has little to do with the tax assessments now before the Court but corroborates the evidence that the apartment house developments were not successful and plaintiffs have not been paid the full balances due on the purchase price. There is no issue between the parties as to the amount of the purchase price which presumably approximated the market value of the property at the time of the two sales which plaintiffs were obliged to make to enable East- mere to continue with the apartment house construction which had already been commenced prior to the first sale. Ralph Welikovitch, CA auditor for Plaintiff Choice Realty Corporation although not Gladstone testified that the $194,000 loss on the sales were charged up to those corporations as a loss on capital surplus. While some slight revenue was obtained from the development lands in 1967 as the result of the use of part of them as parking space for the shopping centre, and the carrying charges taxes and interest had always been charged to Gladstone and Choice, it was not until after 1969 that this portion of the property was really developed.
As previously indicated it is not denied that Mr Gregory, the members of his family, Louis Dubrovsky and the late Harry Dubrovsky and the members of their families have been land speculators as well as developers. They and the various companies involved in the present development, including the two plaintiffs before the Court, Choice Realty Corporation and Gladstone Investment Corporation, as well as Eastmere Investment Corporation, and Place Versailles Inc are all so closely connected that in determining the intention of the two plaintiff corporations at the time of acquisition of the subject property it is necessary to look at the background and experience of Gregory, the Dubrovsky’s, and their associates, and their intentions, not only as expressed by them, but as indicated by the course of conduct they followed in connection with the subject property.
A substantial part of the evidence adduced relates to periods subsequent to the 1969 and 1970 taxation years in issue, but is I believe admissible as indicating the consistent progress of the development, not only with respect to the shopping centre land but with respect to the area referred to as Development Lands all of which was largely envisioned by the individuai promoters at the time of the purchase, although its success may have been more rapid and exceeded even the almost certain success foreseen by them at the time.
With respect to the background experience of the parties, Gregory has since 1949 dealt in vacant land both personally and through various corporations. In 1959 he formed Gladstone Investment Corporation for the purposes of buying 7,000,000 square feet of land in St Vincent de Paul near Montreal. Part was sold to other people and part developed as apartments. Three million square feet were sold at once for a small profit as he had no intention of holding all the land. No one was interested in a shopping centre there. Some of it was expropriated by the Provincial Government for the construction of the Pix IX bridge and eventually all the land was disposed of. In these transactions he and thé corporations with which he was involved acted as traders and were taxable as such on their profits as he readily admits.
With respect to Louis Dubrovsky he testified that he, the late Harry Dubrovsky and Gregory were the prime movers in the present project. He too admits having been involved through corporation in which he is interested as well as personally in tax cases before, winning some and losing some.
In Harry Dubrovsky and Louis Dubrovsky v MNR, [1970] CTC 403; 70 DTC 6278, the brothers were held to be taxable on the basis of the doctrine of secondary intention. On the same basis they were found taxable in the case of Varennes Holdings Corporation v The Queen, [1975] CTC 230; 75 DTC 5164, a development near Montreal in which Ace Holdings, another of Mr Louis Dubrovsky’s companies was involved. However, as is frequently stated, each case must depend on its own facts and even a speculator is entitled to make a capital gain on land dealings on occasion if the facts indicate a bona fide intention of development of the property for income producing purposes and no secondary intention of disposing of it at a profit in the event that the original intention is frustrated or because an offer which is too good to refuse has been made. The doctrine of secondary intention is well stated by Noel, J as he then was in the case of Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150 at 159; 65 DTC 5098 at 5103 where it is stated:
It is not. in fact, sufficient to find merely that if a purchaser had stopped to think at the moment of the purchase, he would be obliged to admit that if at the conclusion of the purchase an attractive offer were made to him he would resell it. for every person buying a house for his family. a painting for his house, machinery for his business or a building for his factory would be obliged to admit, if this person were honest and if the transaction were not based exclusively on a sentimental attachment. that if he were offered a sufficiently high price a moment after the purchase, he would resell. Thus, it appears that the fact alone that a person buying a property with the aim of using it as capital could be induced to resell it if a sufficiently high price were offered to him, is not sufficient to change an acquisition of capital into an adventure in the nature of trade. In fact. this is not what must be understood by a “secondary intention” if one wants to utilize this term.
In the present case there is not a vestige of secondary intention. The parties clearly wanted to develop all the property for revenue producing purposes. Their plans were partially frustrated when they were unable to get the entire property zoned as commercial, but they nevertheless continued with the orderly development, first of the shopping centre land, then of the development land behind it, and could have used all of the property eventually zoned as apartment house land for commercial development had this been possible. When this could not be done, and as they themselves preferred not to develop the apartment house land personally but rather to let someone else develop it (although Gregory did have an interest in Eastmere Investment Corporation as did Place Versailles Inc) they then proposed to dispose of it on the basis of continuing to draw revenue from it by means of an emphyteutic lease. This was not an unrealistic proposal, and it was only when this was frustrated by the stringent requirements of Central Mortgage and Housing Corporation in the event of default by the borrower before they would insure the loan, that, then, as a last resort they were obliged to sell it. While, because of the development of the shopping centre and. development land to the south and developments in the area generally these sales resulted in a profit, especially as the land had originally been purchased at a very low price, there is no justification for concluding that they had at the time of the purchase, or at any subsequent time, any intention of selling any part of the land. Under the circumstances I conclude that the profit on the sale of this land constitutes capital gain and is not taxable as income in the hands of Choice Realty Corporation or Gladstone Investment Corporation and their actions should therefore be maintained.
As a result of this conclusion it is not actually necessary to deal with plaintiff’s subsidiary arguments, but since the litigation might reach a higher court it is desirable that I should make a finding on them.
With respect to the question of reserve it only arises with respect to the 1969 taxation year when the first sale of the apartment land was made calling for a balance of price of $100,000 payable on February 13, 1971. Actually this balance was never paid although as previously indicated amounts totalling $45,001.66 were paid on account of it in December 1972 and April 1973. The question of a reserve was never raised by plaintiffs in their notice of objection to the Minister’s assessment as required by section 165 of the Income Tax Act in effect at that time, and it was first raised in the statement of claim filed on April 12, 1976, in the case of Choice and May 11, 1976, in the case of Gladstone. Subsection 85B(1) and paragraphs (b) and (d) of the Act permitted the deduction of a reserve when part of the payment was to be made in a later taxation year and the taxpayer was using an accrual basis of accounting. I have examined the cases of Isadore Weinstein v MN Ft, [1968] CTC 357; 68 DTC 5332, Bronze Memorials Limited (No 2) v MNR, [1969] CTC 620; 69 DTC 9420 and Heskel S Abed v MNR, [1978] CTC 5; 78 DTC 6007 to which I was referred. In the latter case, in reference to the Weinstein case it was stated at 20, 6018:
While this is authority for the conclusion that the Minister can of his own accord apply the provisions of section 85B this is nevertheless contingent on the taxpayer failing to object to this. While it cannot be said in the present case that Appellant has refused to agree to the application of section 85B in his case by the Minister since this issue did not arise as long as he was denying any tax liability in Canada whatsoever. I do not believe that as a result of his appeals against the assessments he has now lost this option. On the contrary in view of my finding as to his taxability in Canada, I believe he should now have this option.
I would also reserve Appellant’s right to agree to the application by the Minister of the provisions of section 85B of the Income Tax Act to his assessments for the years in question.
In that case however all relevant years were still subject to reassessment. In the Bronze Memorials case however my brother Gibson, J commented at 623, 5423:
The Minister had no power to issue a reassessment in 1965 since more than four years had elapsed from the date of the original assessment for income of the appellant’s 1959 taxation year pursuant to subsection 46(4) of the Act and the Minister had not adduced any evidence that the appellant had at any time made any misrepresentations or committed any fraud in filing its return or in supplying any information under the Act.
In the present case it is not a question of the Minister wishing to reassess the taxpayer by allowing a reserve in plaintiff's 1969 return after more than four years have elapsed since the original assessment but rather of the taxpayer first raising on April 12, 1976 for Choice and May 11, 1976 for Gladstone an issue which it should have raised in its notice of objection to the reassessment of December 5, 1974 for Choice and December 2, 1974, for Gladstone. While it was not at the date the issue was first raised in the statements of claim too late for the Minister to re-assess the 1969 taxation assessments nor to reopen the 1972 and 1973 assessments so as to include as taxable income the amounts paid in those years the Minister was certainly under no obligation to allow the reserve of his own motion when making the original reassessments, nor to re-assess again on receipt of the statements of claim. Plaintiffs had never set up a reserve under section 85B with respect to the balance of price, as they took the position that the profit on the sale was a capital gain and not taxable, and it would appear very belated for them to seek to file amended returns now.
The second subsidiary issue is more complex and I do not propose to deal with the actual figures, since the statement on which the Minister’s reassessments were based was not prepared personally by Mr Edwin Dahms, CA, defendant’s witness, and admittedly contains some errors. The issue is whether amounts received by La Communauté des Soeurs de Charité de la Providence between the date of the promise of sale agreement of January 22, 1962, which was not registered against the property and the deed of sale on August 6th, 1962, and applied against the original purchase price of the property should be taken into account to reduce the cost base to plaintiffs of the remaining property including the apartment house land with which the present actions are concerned so as to increase the profit on the sale of same to Eastmere Investment Corporation. The promise of sale agreement called for the purchase of approximately 2,872,637 square feet of land for a total price of $2,000,000. Notarial fees amounted to $4100 and Property Sales, a company controlled by Messrs Shoore and Gregory who acted as agents remitted their commission towards the satisfaction of the purchase price. Accordingly the net cost to Place Versailles Inc would have been $1,904,100 or approximately 66¢ a square foot. On May 30, 1962, the Minister of Roads of Quebec expropriated 513,115 square feet for which the sum of $501,780.50 was payable to the Sisters. In due course on July 11, 1963 142,216,000 square feet were retroceded, the value and damages being established at $159,174.97 leaving a net amount payable to the Sisters of $342,605.53. On the same day however 73,241 square feet were re-expropriated the indemnity paid being $235,917. This was strongly criticized in the Supreme Court judgment respecting the indemnities allowed in the various expropriations, the great discrepancy between the amount credited for the retrocession and that paid the Same day for the re-expropriation being unjustifiable.* On March 10, 1966, the Sisters sold to Place Versailles Inc the property which appears to be that which was retroceded to them and not re-expropriated for $106,191.95. Testimony indicated that this sum would not have been actually paid at the time but was credited against the balance due on the original purchase price. A subsequent expropriation on May 26, 1965 of 69,256 square feet for which $90,122.09 was paid does not enter into the controversy respecting the cost to plaintiffs of the apartment house land subsequently sold to Eastmere at a profit.
The problem arose primarily because in the eventual deed of sale from the Sisters it was provided that the land expropriated (which incidentally according to the deed measured 512,600 square feet and not the figure which the parties now seem to have agreed on of 913,115 square feet) would be deducted from the land purchased without any change however in the purchase price of $2,000,000 but that the indemnities to be paid by the Government for the expropriated property would be credited by the Sisters to the purchasers in reduction of the purchase price. In short the Sisters would receive the same amount whatever was paid as a result of the expropriation and, to the extent that the purchaser, who represented and assisted the vendors in the negotiations and litigation with respect to the expropriation indemnity, succeeded in obtaining more or less than 66¢ a foot for the property expropriated the balance due for the remaining land could be less or greater as the case might be per square foot.
Defendant’s witness Mr Dahms conceded that if the expropriation had taken place after Place Versailles Inc had become the registered owner of the land the profit portion of the proceeds of the expropriation would not have been utilized by the Minister to reduce the cost base of the balance of the land but would have been treated as a profit on the expropriated property. The Minister takes the position however that since defendant !s a third party with respect to any agreement between the Sisters and plaintiffs, and the expropriation had to be made from the Sisters as registered owners of the property and the indemnity paid to them, the purchasers really acquired only the residual property after the expropriation for a price representing the balance of the $2,000,000 due after deduction of the proceeds of the expropriations. This would reduce the cost base of the residual property substantially below 66¢ a square foot.
Articles of the Quebec Civil Code are invoked. Article 1478 is involved by plaintiffs and it reads as follows:
1478. A promise cf sale with tradition and actual possession is equivalent to sale.
It is not disputed that plaintiffs had possession of the property on the date of the promise of sale agreement. Defendants invoke Article 2098 the first two paragraphs of which read as follows:
2098. All acts inter vivos conveying the ownership of an immoveable must be registered.
In default of such registration, the title of conveyance cannot be invoked against any third party who has purchased the same property from the same vendor for a valuable consideration and whose title is registered.
It would hardly appear however that this article is applicable since there is no question of the defendant having purchased the property from the Sisters, nor any dispute between defendant and plaintiffs as to the title to the property. In the Supreme Court judgment respecting the indemnities payable for the expropriation of the property in question in the case of Place Versailles Inc et al v Minister of Justice of the Province of Quebec (supra) Pigeon, J states at 1128:
There is therefore no necessity to consider the effect of the first two paragraphs of Article 2098. It is sufficient to note that this article does not go so far as to say that an unregistered document may never be invoked against third parties.
While it was entirely proper, and in fact necessary for the Minister of Justice of the Province of Quebec to take the expropriation proceedings against the Sisters who were still the registered owners of the property and to pay the indemnity to them as he would be unaffected by the unregistered agreement between the Sisters and plaintiffs, this does not mean to say that for taxation purposes we should not look at the realities of the situation which were that any amounts payable as a result of the expropriations to the Sisters would be credited against the purchase price and the lands expropriated would of course not then form part of lands sold to plaintiffs. Plaintiffs refer to the leading case of the Duke of Westminster v Commissioners of Inland Revenue, 19 TC 490 in which Lord Russell of Killowen stated at 524:
... If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v Scoble (1903) AC 299; 4 TC 618; that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a doctrine.
The fact that nearly 98¢ a foot was realized for the expropriated portion of the property as against the 66¢ a foot paid for the entire property should not, it would appear to me, have the effect of reducing the cost base of the remaining land to some 630 a foot as defendant contends. Rather this was a profit realized by plaintiffs on the sale of the expropriated land and should have been treated as such and, if not tax-free as capital gain, on which there was no tax at the time, have been taxed accordingly. This is all the more true since it was some of the best portions of the property which was expropriated, fronting on Sherbrooke Street and the Montée St Léonard. Although the expropriation indemnity was payable to the Sisters as registered owners of the land the reality of the situation is that it was for the credit of Place Versailles Inc representing the plaintiffs herein.
The parties appear to agree that the development lands remaining after the expropriations amounted to 1,039,958 square feet of which 340,148 square feet were sold to Eastmere. I find that the cost of acquisition by plaintiffs of the land so sold should be 660 a square foot to which of course would be added certain additions to cost as per the taxpayers’ records as allowed by the Minister for the purpose of establishing the cost base. Plaintiffs would therefore succeed on this second subsidiary argument even if I had not reached the conclusion that the profits on the dispositions to Eastmere Investment Corporation constituted capital gain. Costs are in favour of plaintiffs with however only one set of fees being allowed, costs of the other action being limited to actual disbursements.