Bowman
T.C.J.:
These
appeals
are
from
assessments
made
under
the
Income
Tax
Act
for
the
appellant’s
1989
and
1990
taxation
years.
The
appellant
carries
on
the
business
of
leasing
real
property.
The
issue
is
simply
whether
the
amounts
of
$9,106,890
and
$3,491,410
received
by
the
appellant
in
1989
and
1990
respectively
represent
proceeds
from
the
sale
of
real
property
giving
rise
to
a
profit
under
section
9
of
the
Act
or
are
prepaid
rent
under
paragraph
12(1)(a)
of
the
Act,in
which
case
the
provisions
of
subparagraph
20(
1
)(/n)(iii)
would
permit
the
appellant
to
deduct
a
reserve.
It
is
obvious
that
whether
the
appellant’s
income
is
derived
from
the
rental
or
the
disposition
of
property
it
is
in
either
case
income
from
a
business.
By
a
lease
(“the
head
lease”)
made
as
of
October
1,
1984
the
appellant
(which
was
then
called
Lindsay
Gardens
Properties
Ltd.)
leased
property
from
two
companies
to
which
it
was
related,
Capital
Construction
Supplies
Ltd.
and
Westsea
Construction
Ltd.
The
property
consisted
of
all
but
one
suite
in
six
three-storey
apartment
buildings
on
Lindsay
Road
in
Richmond,
B.C.
known
as
“Lindsay
Gardens”.
Articles
I
and
2
read:
Article
1
-
Demise
1.01
WITNESSETH
THAT
in
consideration
of
the
prepaid
rent
for
the
Term
in
respect
of
all
of
the
Suites,
aggregating
the
sum
of
$9,557,910.00
now
paid
by
the
Lessee
to
the
Lessor
(the
receipt
whereof
by
the
Lessor
is
hereby
acknowledged)
and
inter
alia
the
covenants
and
agreements
hereinafter
reserved
and
contained
on
the
part
of
the
Lessee
to
be
observed
and
performed,
the
Lessor
hereby
demises
and
leases
unto
the
Lessee
subject
to
the
terms,
convenants
and
conditions
as
hereinafter
set
forth,
each
of
the
suites
known
by
the
suite
numbers
as
more
particularly
set
forth
in
Column
1
of
Schedule
“A”
hereto
and
as
each
are
shown
on
the
Explanatory
Plan
numbered
68601
and
filed
at
the
New
Westminster
Land
Title
Office
on
the
2nd
day
of
October,
1984
including
any
adjoining
balcony
(the
“Suites”)
TOGETHER
WITH
the
right
in
common
with
Lessor
and
the
Lessees
of
all
suites
in
the
Building
and
all
others
having
the
like
right
to
use
for
purposes
only
of
access
to
and
egress
from
the
Suites,
the
entrance
hall,
staircases,
corridors
and
elevators
(if
any)
in
the
Building
and
to
use
the
laundry
rooms
and
storage
facilities
(as
may
be
designated
by
the
Lessor)
in
the
Building
for
the
purpose
for
which
they
are
designed.
Article
2
-
Term
2.01
TO
HAVE
AND
TO
HOLD
the
same
unto
the
Lessee
for
the
term
commencing
on
the
1
st
day
of
October,
1984
and
ending
on
the
31
st
day
of
December,
2083
(hereinafter
called
the
“Term”).
Clause
3.01
of
Article
3
provides
that
the
lessee
was
required
to
pay
for
light
and
power
supplied
to
each
of
the
suites.
Generally,
the
lessee’s
and
the
lessor’s
convenants
were
those
that
one
would
expect
to
find
in
a
lease
of
residential
property.
Article
6
of
the
lease
provides
that
the
lessee
must
pay
its
share
of
the
operating
expenses,
as
defined.
The
“Lessee’s
Share”
is
the
ratio
which
the
area
of
each
of
the
suites
bears
to
the
total
area
of
all
suites,
and
this
ratio
is
set
out
in
detail
in
a
schedule
to
the
lease.
It
is
clear
that
the
head
lease
contemplated
the
assignment
of
the
lease
on
individual
suites.
Article
8
provided
that
each
of
the
suites
was
held
separately
and
independently
from
each
of
the
other
suites.
This
conclusion
is
reinforced
by
Article
9A,
which
provided:
Article
9A
-
Prepaid
Rent
Consideration
Adjustment
In
the
event
that
the
Proceeds
received
by
the
Lessee
on
its
assignment
of
this
Lease
with
respect
to
any
Suite
shall
be
less
than
the
Escalated
Consideration
for
any
such
Suite,
the
prepaid
rent
consideration
set
forth
in
page
2
hereof
shall
be
adjusted
and
reduced
by
the
amount
of
the
shortfall
and
the
Lessor
agrees
to
pay
to
the
Lessee
forthwith
on
demand
the
amount
of
such
shortfall.
“Escalated
Consideration”
in
this
Article
means:
a)
103%
of
the
Allocated
Consideration
with
respect
to
an
assignment
entered
into
prior
to
31
July
1985:
b)
106%
of
the
Allocated
Consideration
with
respect
to
an
assignment
entered
into
prior
to
31
July
1986;
C)
109%
of
the
Allocated
Consideration
with
respect
to
an
assignment
entered
into
prior
to
31
July
1987;
d)
112%
of
the
Allocated
Consideration
with
respect
to
an
assignment
entered
into
prior
to
31
July
1988;
e)
115%
of
the
Allocated
Consideration
with
respect
to
an
assignment
entered
into
prior
to
31
July
1989.
“Allocated
Consideration”
in
this
Article
means
the
allocation
of
the
prepaid
rent
of
$9,557,910.00
allocated
by
agreement
between
the
parties
hereto
with
respect
to
any
such
Suite.
“Proceeds”
in
this
Article
means
the
consideration
payable
by
an
assignee
to
the
Lessee
with
respect
to
any
Suite
less
the
selling
costs
thereof
and
the
costs
of
renovations
to
such
Suite
made
prior
to
such
assignment.
It
is
obvious
that
from
the
outset
it
was
intended
that
the
leases
on
individual
suites
would
be
disposed
of
at
a
profit
over
the
prepaid
rent
allocated
to
such
suites
and
that
if
that
the
price
at
which
the
leases
were
to
be
assigned
fell
below
a
pre-arranged
minimum
the
prepaid
rent
of
$9,557,910
was
to
be
adjusted
downwards
proportionally.
On
January
I,
1988,
the
lessors
and
the
appellant
modified
the
lease
by
deleting
Article
9A,
extending
the
term
of
the
lease
to
December
31,
2087
and
increasing
the
prepaid
rent
by
$35,000
in
consideration
of
the
extension
of
the
lease,
so
that
the
entire
cost
was
$9,592,910.
Between
October
1,
1984
and
1988,
the
appellant
had
leased
the
suites
to
members
of
the
public
under
short-term
month
to
month
leases.
I
digress
here
briefly
to
outline
certain
legislative
changes
that
have
a
bearing
on
this
case.
The
Strata
Titles
Act,
S.B.C.
1974
c.
89
permitted
the
conversion
of
a
previously
occupied
building
only
with
the
approval
of
the
municipality.
The
administrative
practice,
according
to
the
evidence
of
Mr.
Ronald
Wilson,
a
solicitor
who
acted
for
the
appellant
and
who
had
a
considerable
amount
of
experience
in
such
matters,
was
generally
not
to
give
such
approval.
The
result
therefore
was,
as
a
practical
matter,
that
previously
occupied
buildings
could
not
as
a
rule
be
converted
into
strata
lots.
A
similar
provision
appeared
in
the
B.C.
Condominium
Act
of
1979.
Also
the
Residential
Tenancy
Act,
R.S.B.C.
1979
c.
365,
subsection
8(11),
prohibited
the
entering
into
tenancy
agreements
with
respect
to
residential
premises
in
a
residential
property
comprising
more
than
two
residential
premises
for
a
term
of
more
than
three
years
without
the
approval
of
the
municipal
council
of
the
municipality.
In
1984
the
Residential
Tenancy
Act
was
repealed
and
a
new
act
substituted
in
which
the
restriction
on
long-term
leases
did
not
appear.
In
1990
the
Labour
and
Consumer
Services
Statutes
Amendment
Act,
1990
reinstated
the
restriction
on
long-term
leases,
but
put
a
limitation
of
20
years
on
the
permissible
term
of
leases.
Therefore,
from
May
1,
1984
to
July
27,
1990
there
was
no
statutory
prohibition
to
long-term
leases.
The
appellant
therefore
saw
this
as
an
opportunity
to
condominiumize
the
apartment
buildings
leased
by
it
by
means
of
long-term
leases.
Commencing
in
1988
the
appellant
disposed
of
212
of
the
213
suites
in
the
three
buildings
to
members
of
the
public.
I
use
the
words
“disposed
of”
in
a
neutral
sense
to
indicate
merely
that
it
was
paid
amounts
of
money
by
persons
who
were
thereafter
entitled
to
exclusive
possession
of
the
suites,
and
not
to
indicate
the
legal
relationship
that
prevailed
between
them.
It
is
the
manner
of
such
disposition
that
is
central
to
these
appeals.
The
first
129
suites
were
disposed
of
by
assignments
of
the
appellant’s
interest
in
the
particular
suites
under
the
head
leases.
The
document
is
called
an
assignment
of
lease
and
the
price
(called
the
“True
Value”)
was
paid
in
full
on
closing.
In
some
cases
the
appellant
took
a
mortgage
back,
in
some
cases
the
assignee
borrowed
the
money
by
way
of
mortgage
from
a
third
party
and
in
some
cases
the
acquisition
was
financed
under
the
British
Columbia
Home
Purchase
Assistance
Act.
Recitals
A
and
B
of
an
assignment
that
is
typical
of
this
group
of
transactions,
as
well
as
Clause
1,
read
as
follows:
Whereas:
A.
By
a
lease
(the
“Lease”)
registered
in
the
New
Westminster
Land
Title
Office
under
number
Xl
14174
made
between
the
Lessor
of
the
First
Part
and
the
Assignor
as
Lessee
of
the
Second
Part,
as
modified
by
agreement
registered
in
such
Land
Title
Office
under
number
AB4652
the
Suite
bearing
the
Suite
Number
in
the
apartment
building
located
as
set
out
in
Form
17
above
and
shown
on
Explanatory
Plan
filed
in
the
New
Westminster
Land
Title
Officer
under
number
68601
(the
“Suite”),
was,
with
other
suites
in
the
apartment
building
(the
“Building”)
situate
on
the
Land
(the
“Land”)
described
in
Schedule
“1”
hereto,
demised
and
leased
to
the
Assignor
for
the
term
commencing
on
the
Ist
day
of
October,
1984
and
ending
on
the
31st
day
of
December,
2087,
on
the
terms
and
conditions
therein
contained,
(a
copy
of
which
Lease
as
so
modified
forms
Schedule
“1”
hereto).
B.
The
Assignee
has
agreed
to
purchase
the
unexpired
leasehold
estate
of
the
Assignor
in
the
Suite
for
the
consideration
hereinafter
set
forth.
Now
this
Deed
Witnesseth:
l.
In
consideration
of
the
True
Value
cited
in
Form
17
above
now
paid
by
the
Assignee
to
the
Assignor
(the
receipt
whereof
by
the
Assignor
is
hereby
acknowledged)
the
Assignor
hereby
assigns
unto
the
Assignee
the
Assignor’s
interest
in
the
Suite
together
with
the
unexpired
residue
of
the
said
term
of
years
TO
HOLD
THE
SAME
unto
the
Assignee
for
all
the
residue
now
unexpired
of
the
term
created
by
the
Lease
with
respect
to
the
Suite,
subject
henceforth
to
the
payment
by
the
Assignee
of
the
monthly
sum
set
out
in
clause
4
of
the
subject
Offer
to
Purchase
Leasehold
Estate
during
the
calendar
year
therein
set
out,
in
lieu
of
the
Lessee’s
Share
of
Operating
Expenses
(as
defined
by
the
Lease
and
pursuant
to
Article
6
thereof)
and
thereafter
subject
to
payment
of
the
Lessee’s
Share
of
Operating
Expenses
with
respect
to
the
Suite
pursuant
to
Article
6
of
the
Lease
(being
in
percentage
terms
as
set
out
in
Schedule
“A”
to
the
Lease)
and
subject
to
the
performance
of
the
Lessee’s
covenants
and
agreements
and
the
conditions,
provisos,
rules
and
regulations
in
the
Lease
reserved
and
contained.
In
1989,
the
appellant
concluded
that
it
had
made
an
error
in
assigning
the
full
term
of
the
lease
of
the
assignees
(presumably
because
of
the
different
tax
consequences
of
assignments
and
subleases,
described
below),
and
therefore
it
entered
into
modification
agreements
with
112
of
the
129
assignees.
The
parties
to
these
agreements
were
Capital
Construction
Supplies
Ltd.,
described
as
the
owner
,
the
appellant,
the
assignees
and
the
mortgagees,
if
any.
Article
I
of
the
modification
agreement
reads
as
follows:
Article
1
-
Modification
of
Assignment
1.01
The
Assignment
is
modified
by
reserving
to
and
for
the
benefit
of
Sussex
the
last
day
of
the
term
of
the
Head
Lease
namely
the
31st
day
of
December
2087.
1.02
The
Assignment
is
further
modified
by
the
incorporation
of
the
covenant
of
Capital
as
Lessor
of
the
Head
Lease
that
it
agrees
with
the
other
parties
hereto
and
their
successors
in
title
that
Capital
shall
have
no
right
hereafter
of
re-entry
or
repossession
and
no
right
to
terminate
the
Head
Lease
with
respect
to
the
Suite
by
reason
of
any
default
in
the
part
of
Sussex
as
lessee
or
any
successor
in
title
to
Sussex
as
lessee
of
the
Head
Lease.
1.03
The
Assignment
is
further
modified
by
the
incorporation
therein
of:
a)
all
rights
and
remedies
of
the
Lessor
granted
by
the
Head
Lease,
as
rights
and
remedies
of
Sussex
as
sublessor,
enforceable
against
the
Assignee
as
sublesse
including
but
without
restricting
the
generality
of
the
foregoing
Article
7.04
of
the
Head
Lease;
b)
all
of
the
Lessee’s
covenants
and
agreements
contained
in
the
Head
Lease,
as
obligations
of
the
Assignee
as
sublesse
in
favour
of
and
to
the
benefit
of
Sussex
as
sublessor:
C)
all
rights,
remedies
and
interests
of
the
Lessee
under
the
Head
Lease,
as
the
rights,
remedies
and
interest
of
the
Assignee
as
sublessee;
and
d)
all
of
the
Lessor’s
covenants
and
agreements
in
the
Head
Lease,
as
obligations
of
Sussex
as
sublessor,
in
favour
of
and
to
the
benefit
of
the
Assignee
as
sublessee;
to
the
same
extent
and
with
the
same
effect
as
if
the
whole
of
the
Head
Lease
of
the
Suite
(except
the
last
day
of
its
term)
had
comprised
the
Assignment
instead
of
its
original
terms
and
that
Sussex
had
been
the
Lessor
and
the
Assignee
had
been
the
Lessee
of
such
lease,
as
modified
by
this
Agreement.
1.04
The
Assignment
as
so
modified
constitutes
a
sublease
and
is
referred
to
hereafter
as
the
“Lease”.
The
provincial
Land
Titles
Office
declined
to
register
the
modification
agreements.
The
appellant
and
Capital
Construction
Supplies
Ltd.
petitioned
the
Supreme
Court
of
British
Columbia
for
an
order
requiring
the
Registrars
of
the
Land
Titles
Offices
of
Vancouver
and
New
Westminster
to
register
the
modification
agreements.
When
the
matter
came
on
before
Mr.
Justice
Coll
ver
of
the
Supreme
Court
of
British
Columbia,
the
Registrars
of
the
Land
Titles
Office
did
not
appear,
although
duly
served.
Collver
J
.
made
the
following
order
on
March
3],
1992:
THIS
COURT
DECLARES
THAT
the
documents
described
as
assignment
and
leases
modified
by
modification
agreements
numbered
AE13837-AE1
3908,
AE15218-AE15249
and
AE24011-AE24023
that
were
lodged
for
filing
in
the
New
Westminster
Land
Title
Office
have
been
rectified
so
that
they
are
now
sub-leases.
THIS
COURT
ORDERS
that
the
Registrar
of
Titles
in
the
Land
Title
Office
located
in
New
Westminster,
without
prejudice
to
rights
acquired
bona
fide
for
value,
upon
presentation
of
a
certified
copy
of
this
order,
registrar
said
series
of
documents
numbered
AE1
3837
through
AE
13908,
AE15218
through
AE
15249
and
AE24011
through
AE24023
as
modification
of
the
assignments
of
leases
referred
to
in
said
series
of
documents
such
that
they
now
constitute
sub-leases.
This
order
applied
to
63
of
the
129
assignments.
A
further
49
modification
agreements
were
registered
after
the
court
order
without
the
necessity
of
an
application
to
the
court.
Seventeen
of
the
original
assignments
were
not
modified.
The
appellant
concedes
that
it
cannot
succeed
in
respect
of
these.
The
remaining
83
suites
were
disposed
of
by
way
of
sublease
for
a
term
that
ended
on
December
30,
2087,
one
day
before
the
expiry
of
the
head
lease.
The
result
is
that
the
appellant
retained
a
one
day
reversionary
interest
in
respect
of
these
83
leases.
The
consideration,
described
as
the
True
Value,
was
paid
on
closing.
Unlike
the
preceding
129
assignments,
which
were
described
as
assignments,
the
documents
in
the
group
of
83
were
described
as
“Leases”.
In
all
212
transactions,
the
agreement
that
preceded
the
formal
demise
was
described
as
an
“Offer
to
Purchase
Leasehold
Estate”
I
do
not
think
that
anything
turns
on
this.
The
essential
question
is
the
nature
of
the
relationship
between
the
parties
under
documents
described
as
leases
or
assignments
of
lease.
On
assessing,
the
Minister
of
National
Revenue
treated
the
entire
proceeds
of
$9,106,890
and
$3,491,410
received
by
the
appellant
in
1989
and
1990
as
business
income
in
the
year
of
receipt.
He
allowed
as
the
cost
of
the
leases
$6,860,997
and
$2,243,817,
the
portion
of
the
prepaid
rent
of
$9,592,910
paid
by
the
appellant
allocable
to
the
suites
disposed
of
in
each
year.
He
also
treated
as
part
of
the
cost
of
the
lease
amounts
expensed
by
the
appellant
of
$1,452,106
and
$585,401
in
1989
and
1990
respectively.
These
amounts
were
for
the
costs
of
preparing
the
suites
for
disposition,
costs
of
disposition
such
as
repairs,
advertising,
real
estate
commissions,
legal
expenses,
mortgage
buydowns
and
sales
office
expenses.
It
was
not
surprising
that
the
assessor
saw
these
transactions
as
being
in
substance
sales
rather
than
leasing
transactions.
The
sales
campaign
carried
out
by
the
appellant
through
a
real
estate
agent
that
specialized
in
the
sale
of
condominiums
advertised
the
suites
as
if
they
were
selling
freehold
interests.
In
the
advertisements
nothing
was
said
about
assignments
of
leases
or
subleases.
The
appellant
in
its
financial
statements
treated
the
profit
as
a
gain
on
the
sale
of
leasehold
interests.
The
assessor
did
not
draw
a
distinction
between
an
assignment
of
a
lease
and
a
sublease.
I
can
see
no
reason
for
applying
some
vague
principle
of
“economic
substance”
over
form.
In
Continental
Bank
of
Canada
v.
R.
(1994),
94
D.T.C.
1858
(T.C.C.)
at
1871
I
summarized
my
view
of
the
substance
versus
form
doctrine
as
follows:
The
principle
to
be
deduced
from
these
authorities
is
simply
this:
the
essential
nature
of
a
transaction
cannot
be
altered
for
income
tax
purposes
by
calling
it
by
a
different
name.
It
is
the
true
legal
relationship,
not
the
nomenclature
that
governs.
The
Minister,
conversely,
may
not
say
to
the
taxpayer
“You
used
one
legal
structure
but
you
achieved
the
same
economic
result
as
that
which
you
would
have
had
if
you
used
a
different
one.
Therefore
I
shall
ignore
the
structure
you
used
and
treat
you
as
if
you
had
used
the
other
one”.
Once
it
is
determined
that
the
legal
relationships
are
what
they
purport
to
be
the
court
must
give
effect
to
them.
I
find
that
the
legal
relationships
in
this
case
are
valid,
binding
and
real.
They
were
certainly
not
shams.
In
Continental
Bank
of
Canada
v.
R.
(1998),
98
D.T.C.
6505
(S.C.C.)
at
6513
-4
Bastarache
J.
(with
whom
the
other
members
of
the
court
agreed
on
this
point)
said:
141
After
it
has
been
found
that
the
sham
doctrine
does
not
apply,
it
is
necessary
to
examine
the
documents
outlining
the
transaction
to
determine
whether
the
parties
have
satisfied
the
requirements
of
creating
the
legal
entity
that
it
sought
to
create.
The
proper
approach
is
that
outlined
in
Orion
Finance
Ltd.
v.
Crown
Financial
Management
Ltd.,
[1996]
2
B.C.L.C.
78
(C.A.),
at
p.
84:
The
first
task
is
to
determine
whether
the
documents
are
a
sham
intended
to
mask
the
true
agreement
between
the
parties.
If
so,
the
court
must
disregard
the
deceptive
language
by
which
the
parties
have
attempted
to
conceal
the
true
nature
of
the
transaction
into
which
they
have
entered
and
must
attempt
by
extrinsic
evidence
to
discover
what
the
real
transaction
was.
There
is
no
suggestion
in
the
present
case
that
any
of
the
documents
was
a
sham.
Nor
is
it
suggested
that
the
parties
departed
from
what
they
had
agreed
in
the
documents,
so
that
they
should
be
treated
as
having
by
their
conduct
replaced
it
by
some
other
agreement.
Once
the
documents
are
accepted
as
genuinely
representing
the
transaction
into
which
the
parties
have
entered,
its
proper
legal
categorisation
is
a
matter
of
construction
of
the
documents.
This
does
not
mean
that
the
terms,
which
the
parties
have
adopted,
are
necessarily
determinative.
The
substance
of
the
parties’
agreement
must
be
found
in
the
language
they
have
used;
but
the
categorisation
of
a
document
is
determined
by
the
legal
effect
which
it
is
intended
to
have,
and
if
when
properly
construed
the
effect
of
the
document
as
a
whole
is
inconsistent
with
the
terminology
which
the
parties
have
used,
then
their
ill-chosen
language
must
yield
to
the
substance.
It
is
trite
law
that
there
is
a
fundamental
legal
difference
between
an
assignment
of
a
lease,
where
the
assignor
retains
no
reversion,
and
a
sublease
where
the
lessee
sublets
a
portion
of
the
term
to
a
sublessee
and
retains
a
reversionary
interest.
The
matter
is
succinctly
put
in
Anger
and
Hon-
sberger,
Law
of
Real
Property,
second
edition
at
pages
259-260:
Because
of
the
differences
in
the
legal
relationships
created
by
an
assignment
of
lease
on
one
hand,
and
a
sublease
on
the
other,
the
distinction
between
the
two
must
be
carefully
noted.
When
a
tenant
enters
into
a
lease
with
a
landlord
there
is
privity
of
estate
(and
privity
of
contract
between
the
two
as
the
lease
operates
both
as
a
conveyance
and
a
contract).
When
the
tenant
assigns
the
lease
to
a
third
party,
the
assignee
becomes
the
tenant
of
the
landlord
with
resulting
privity
of
estate
between
the
two.
If
there
is
privity
of
contract,
all
covenants
are
enforceable.
If
there
is
privity
of
estate,
but
not
privity
of
contract,
only
those
covenants
which
touch
and
concern
land
are
enforceable,
but
no
others.
If
there
is
no
privity
of
estate
or
contract,
then,
apart
from
restrictive
covenants
running
with
the
land
and
apart
from
the
right
of
an
assignee
to
enforce
the
benefit
of
the
covenant
in
certain
cases,
no
covenants
are
enforceable.
Thus,
in
the
case
of
an
assignment,
covenants,
which
touch
and
concern
the
land
are
enforceable
between
the
assignee
and
the
landlord.
A
sublease
creates
no
direct
relationship
between
the
subtenant
and
the
landlord.
Hence,
there
is
neither
privity
of
estate
nor
privity
of
contract
between
them.
Rather,
as
between
the
head
tenant
and
the
subtenant,
the
head
tenant
stands
in
the
position
of
landlord
vis-a-vis
his
subtenant,
while
retaining
his
position
as
tenant
vis-a-vis
his
own
landlord.
It
has
been
decided
that
a
“sublease”
of
the
entire
term
operates
as
an
assignment,
not
a
sublease,
as
there
is
no
reversionary
interest
left
in
the
original
tenant
to
support
a
tenurial
relationship
between
the
tenant
and
the
third
party.
In
other
words,
to
create
a
valid
sublease,
notwithstanding
the
words
used,
the
tenant
in
creating
the
sublease
must
reverse
the
last
day
of
his
original
term.
[footnotes
omitted]
The
legal
difference
between
an
assignment
and
a
sublease
results
as
well
in
a
difference
for
income
tax
purposes.
An
assignment
of
the
entire
term
is
a
disposition
of
property
and
the
consideration
for
that
disposition
constitutes
a
receipt
on
income
or
capital
account,
depending
on
the
circumstances.
In
this
case,
in
light
of
the
appellant’s
business
and
the
marketing
campaign
it
carried
on,
the
amounts
received
on
the
dispositions
are
obviously
income
and
it
is
not
suggested
otherwise.
Amounts
received
for
a
sublease
of
property
are
rent
and
where
the
rent
for
the
entire
period
of
the
sublease
is
paid,
as
here,
at
the
beginning
of
the
term
of
the
sublease
they
must
be
included
in
income
under
paragraph
12(
!)(«),
which
reads:
(1)
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
(a)
Services,
etc.,
to
be
rendered
—
any
amount
received
by
the
taxpayer
in
the
year
in
the
course
of
a
business
(1)
that
is
on
account
of
services
not
rendered
or
goods
not
delivered
before
the
end
of
the
year
or
that,
for
any
other
reason,
may
be
regarded
as
not
having
been
earned
in
the
year
or
a
previous
year,
or
(ii)
under
an
arrangement
or
understanding
that
it
is
repayable
in
whole
or
in
part
on
the
return
or
resale
to
the
taxpayer
of
articles
in
or
by
means
of
which
goods
were
delivered
to
a
customer.
Although
paragraph
12(1)(a)
does
not
refer
specifically
to
rent,
I
think
it
applies
to
rent
and
that
the
words
following
“for
any
other
reason”
are
not
to
be
construed
eiusdem
generis.
I
draw
this
inference
from
subparagraph
20(1)(m),
which
reads:
20(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(m)
Reserve
in
respect
of
certain
goods
and
services
—
subject
to
subsection
(6),
where
amounts
described
in
paragraph
12(1)(a)
have
been
included
in
computing
the
taxpayer’s
income
from
a
business
for
the
year
or
a
previous
year,
a
reasonable
amount
as
a
reserve
in
respect
of
(i)
goods
that
it
is
reasonably
anticipated
will
have
to
be
delivered
after
the
end
of
the
year,
(ii)
services
that
it
is
reasonably
anticipated
will
have
to
be
rendered
after
the
end
of
the
year,
(iii)
periods
for
which
rent
or
other
amounts
for
the
possession
or
use
of
land
or
chattels
have
been
paid
in
advance,
or
(iv)
repayments
under
arrangements
or
understandings
of
the
class
described
in
subparagraph
12(
1
)(r/)(ii)
that
it
is
reasonably
anticipated
will
have
to
be
made
after
the
end
of
the
year
on
the
return
or
resale
to
the
taxpayer
of
articles
other
than
bottles.
It
is
clear
that
subparagraph
20(
1
)(m)(iii)
is
premised
upon
the
assumption
that
paragraph
12(
1
)(«)
covers
rent
for
periods
beyond
the
year
of
receipt.
There
are
four
categories
of
transaction
to
be
considered:
(a)
the
17
original
assignments
that
were
not
modified.
The
appellant
concedes
that
it
is
entitled
to
no
relief
in
respect
of
these
and
nothing
more
need
be
said
about
them:
(b)
the
83
subleases
in
which
a
one
day
reversion
was
reserved
to
the
appellant.
I
can
see
no
reason
to
disregard
the
form
or
legal
effect
of
the
transactions
covered
by
these
subleases.
In
my
view
the
amounts
represent
prepaid
rent
that
must
be
included
in
income
under
paragraph
12(
1
)(a).
Accordingly,
the
appellant
is
entitled
to
a
reserve
in
accordance
with
subparagraph
20(
1
)(m)(iii).
The
remaining
112
transactions
that
were
the
subject
of
the
modification
agreements
themselves
fall
into
two
categories:
(c)
the
63
that
were
covered
by
the
order
of
Collver
J.
and
were
registered
in
the
Land
Titles
Office
in
accordance
with
that
order;
and
(d)
the
49
that
were,
after
the
order
of
Collver
J.,
registered
in
the
Land
Titles
Office
without
being
specifically
the
subject
of
a
court
order.
I
shall
deal
first
with
the
group
of
63
that
were
covered
by
the
court
order.
Whatever
might
have
been
the
legal
consequences
that
flowed
from
the
modification
agreements,
they
were
not
purely
contractual.
They
also
were
buttressed
by
a
court
order
of
a
superior
court.
In
a
broad
sense
the
modification
agreements
converted
assignments
of
leases
made
prior
to
about
February
1989
to
subleases.
It
is
not
clear
just
when
the
modification
agreements
were
signed.
The
“error”
was
discovered
in
January
or
February
of
1989
and
thereafter
the
transactions
took
the
form
of
subleases.
The
mistake
seems
to
have
consisted
in
the
failure
to
appreciate
the
very
different
tax
consequences
that
flowed
from
an
assignment
(immediate
full
taxability)
and
a
sublease
(a
spreading
of
the
recognition
for
tax
purposes
of
the
prepaid
rent
over
the
term
of
the
sublease).
I
place
no
importance
on
the
fact
that
the
modification
agreements
were
entered
into
solely
to
accommodate
the
appellant’s
tax
requirements.
No
other
reason
is
apparent.
The
question
is
the
legal
effect
of
what
the
parties
did,
not
why
they
did
it.
In
Dale
v.
R.
(1993),
94
D.T.C.
1100
(T.C.C.),
I
held
that
a
consent
order
of
a
Nova
Scotia
Court
in
1992
could
not
retroactively
affect
the
tax
consequences
of
an
event
that
occurred
in
1985
with
respect
to
the
share
register
of
a
company
that
at
that
time
was
subject
to
the
law
of
Prince
Edward
Island.
The
Federal
Court
of
Appeal
((1997),
97
D.T.C.
5252
(Fed.
C.A.))
disagreed
and
I
am
bound
by
that
decision.
I
shall
quote
a
number
of
passages
from
the
judgment
of
Robertson
J.A.,
speaking
for
the
majority,
at
page
5255.
In
determining
whether
a
legal
transaction
will
be
recognized
for
tax
purposes
one
must
turn
to
the
law
as
found
in
the
jurisdiction
in
which
the
transaction
is
consummated.
Often
that
determination
will
be
made
without
the
aid
of
guiding
precedents,
which
are
on
point,
and,
hence,
the
effectiveness
of
a
transaction
may
depend
solely
on
the
proper
application
of
general
common
law
and
equitable
principles.
In
some
instances
it
will
be
necessary
for
the
Tax
Court
to
interpret
the
statutory
law
of
a
province.
As
for
the
Minister,
he
must
accept
the
legal
results,
which
flow
from
the
proper
application
of
common
law
and
equitable
principles,
as
well
as
the
interpretation
of
legislative
provisions.
This
leads
me
to
the
question
of
whether
the
Minister
is
bound
by
an
order
issued
by
a
superior
court,
which
order
has
its
origins
in
the
interpretation
and
application
of
the
provisions
of
a
provincial
statute.
In
the
court
below,
the
Minister
argued
that
the
order
of
the
Nova
Scotia
Supreme
Court
might
be
binding
as
between
the
taxpayers
and
the
Dale
Corporation
but
not
on
him.
Judge
Bowman
rejected
that
argument,
and
in
my
opinion
rightly
so,
but
went
on
to
reason
that
an
order
allegedly
having
retroactive
effect
“cannot
create
a
state
of
affairs
in
an
earlier
year
that
did
not
in
fact
exist”
(at
1112).
As
I
understand
his
reasons,
this
is
so
even
though
the
Nova
Scotia
court
was
acting
under
the
provisions
of
the
Companies
Act
of
that
province.
Counsel
for
the
taxpayers
now
relies
on
the
decision
of
the
Supreme
Court
of
Canada
in
Wilson
v.
The
Queen,
[1983]
2
S.C.R.
594,
to
support
the
argument
that
the
Minister
and
Tax
Court
are
bound
by
the
terms
of
the
Nova
Scotia
order.
That
decision
establishes
the
general
rule
that
an
order
of
a
superior
court
cannot
be
attacked
collaterally
unless
it
is
lawfully
set
aside.
In
Wilson
the
Supreme
Court
was
called
on
to
determine
whether
a
provincial
court
judge
could
look
behind
the
apparently
valid
search
order
of
a
superior
court
and
rule
inadmissible
the
evidence
obtained
thereunder.
In
the
course
of
delivering
its
reasons
for
judgment
the
Supreme
Court
made
some
general
statements
of
the
law
concerning
the
binding
effect
of
orders
issued
by
superior
courts.
The
first
principle
is
that
the
record
of
a
superior
court
is
to
be
treated
as
“absolute
verity
so
long
as
it
stands
unreversed”
(per
McIntyre,
J.
at
599,
quoting
Monnin,
J.A.
in
the
Manitoba
Court
of
Appeal).
Second,
an
order,
which
has
not
been
set
aside,
must
receive
full
effect
according
to
its
terms
(at
604).
Third,
the
order
is
binding
on
all
the
world
(at
601,
citing
Bird,
J.A.
in
Canadian
Transport
(U.K.)
Ltd.
v.
Alsbury,
[1953]
1
D.L.R.
385
(B.C.C.A.)
at
418).
Fourth,
a
collateral
attack
is
deemed
to
include
proceedings
other
than
those
whose
specific
object
is
to
effect
a
reversal
or
nullification
of
the
order.
It
seems
only
logical
that
a
court
would
decline
the
invitation
to
grant
a
retroactive
order,
which
has
the
clear
legal
effect
of
rewriting
fiscal
history.
Assuming
that
such
an
order
were
granted
then
it
would
be
proper
to
ask
whether
the
Minister
is
entitled
to
ignore
it
for
taxation
purposes.
One
might
be
tempted
to
permit
an
attack
on
the
ground
of
fiscal
revisionism
where
it
could
be
shown
that
the
order
was
obtained
by
non-disclosure
or
misrepresentation.
More
likely
than
not
revisionist
orders
will
be
obtained
on
consent,
or
in
circumstances
where
it
is
likely
that
the
tax
ramifications
of
the
order
were
not
placed
squarely
before
the
judge,
or
where
the
judge
was
obviously
sympathetic
to
the
taxpayer’s
situation.
There
are
two
reported
tax
cases
decided
prior
to
Wilson
which
aptly
illustrate
the
judicial
sympathy
scenario:
see
Bently
v.
Canada
(M.N.R.),
54
D.T.C.
510
(T.A.B.)
and
Hobbs
v.
Canada
(M.N.R.),
70
D.T.C.
1744
(T.A.B.).
In
both
cases
it
is
obvious
that
there
was
no
legal
foundation,
statutory
or
otherwise,
for
making
the
retroactive
orders
requested.
Assuming
without
deciding
that
those
decisions
some
within
the
exceptional
category
recognized
in
Wilson,
they
are
readily
distinguishable
from
the
case
under
appeal.
On
the
facts
of
this
appeal,
the
Nova
Scotia
court
granted
the
June
25,
1992
order
on
the
basis
of
section
44
of
the
Nova
Scotia
Companies
Act.
In
my
view,
any
objection
that
the
court
lacked
jurisdiction
to
issue
that
order
is
without
foundation.
If
the
legislature
of
a
province
authorizes
its
courts
to
deem
something
to
have
occurred
on
a
date
already
past,
then
it
is
not
for
the
Minister
to
undermine
the
legislation
by
refusing
to
recognize
the
clear
effect
of
the
deemed
event.
In
any
case
I
am
not
prepared
to
concede
that
section
44
has
the
revisionist
effect
advanced
by
the
Minister.
This
is
not
a
case
where
a
court
order
deems
shares
to
have
been
issued
when
in
fact
they
were
not.
This
is
a
case
where
shares
were
issued,
but
not
validly
so
until
such
time
as
either
supplementary
letters
patent
were
obtained
in
Prince
Edward
Island
or
the
Nova
Scotia
court
granted
the
June
25,
1992
order.
After
all,
no
one
has
argued
that
the
share
issuance
constituted
a
nullity,
nor
could
it
be
so
argued.
l
disgress
here
for
a
moment
to
point
out
that
while
the
common
law
may
treat
the
share
issuance
as
being
ineffective
a
different
result
could
be
reached
in
equity,
vis-a-vis
the
validity
of
the
share
issuance
as
between
the
taxpayers
and
the
Dale
Corporation.
In
other
words,
it
may
well
be
that
in
equity
the
share
issuance
would
be
viewed
as
effective.
The
maxim
that
“equity
looks
on
that
as
done
which
ought
to
be
done”
is
of
some
import.
Its
impact
is
revealed
in
the
seminal
decision
of
Walsh
v.
Lonsdale
(1882),
21
Ch.D.9.
Since
that
decision
imperfect
agreements
for
value
have
often
been
treated
as
if
they
had
been
performed
at
the
time
they
ought
to
have
been,
thus
yielding
the
same
consequences
as
if
they
had
been
completely
performed:
see
P.V.
Baker
and
P.
St.
J.
Langan,
Snell's
Principles
of
Equity
(London:
Sweet
&
Maxwell,
1982)
at
41.
I
say
no
more
on
this
point
as
it
was
not
raised
in
argument.
Robertson
J.A.
then
went
on
to
set
out
his
reasons
for
disagreeing
with
Pratte
J.A.,
dissenting,
who
held
that
an
assessment
must
be
based
upon
facts
that
existed
at
the
end
of
the
taxation
year.
He
states
at
page
5257:
My
colleague
Justice
Pratte
is
also
of
the
view
that
the
Nova
Scotia
order
is
not
subject
to
collateral
attacks.
Nonetheless
he
concludes
that
the
Minister
is
not
bound
by
that
order
for
the
reason
that
it
is
not
permissible
to
take
into
consideration
orders
based
on
facts
that
occur
after
the
end
of
the
taxation
year.
This
logically
follows
from
Justice
Pratte’s
earlier
premise
that
if
there
is
an
appeal
from
the
Minister’s
assessment
then
the
correctness
and
validity
of
that
assessment
must
be
decided
on
the
basis
of
the
facts
that
existed
at
the
end
of
the
taxation
year.
Thus,
if
the
Minister
may
not
take
into
account
facts,
which
arise
outside
the
taxation
year
for
assessment
purposes
then
neither,
can
he
take
into
consideration
orders
based
on
such
facts.
In
the
present
case
Justice
Pratte
notes
that
the
Dale
Corporation
had
become
a
Nova
Scotia
company
with
an
increased
capital
stock
and
that
its
shareholders
had
ratified
the
issuance
of
the
preference
shares
before
and
after
the
continuation
of
the
company
in
that
province.
Some
of
these
events
clearly
took
place
outside
the
relevant
taxation
year.
Thus,
Justice
Pratte
reasons
that
the
June
25,
1992
order
was
based
on
evidence
of
facts
that
may
not
properly
be
taken
into
account
for
taxation
purposes.
My
initial
difficulty
with
the
above
analysis
is
that
the
likelihood
of
finding
an
order
being
issued
without
the
applicant
relying
on
subsequent
facts
is
remote.
For
example,
it
would
not
have
been
unreasonable
for
the
Nova
Scotia
Court
to
insist
in
1992
that
existing
shareholders
ratify
the
issuance
of
the
preference
shares,
as
in
fact
they
did,
given
the
nature
of
the
order
sought.
Presumably,
the
purpose
of
the
ratification
was
twofold:
to
ensure
both
that
the
state
of
affairs
that
existed
on
December
31,
1985
continued
to
exist
as
of
June
25,
1992
and
that
no
shareholder
at
that
latter
time
would
be
adversely
effected
by
the
ex
parte
order
being
sought.
Had
it
been
necessary
for
the
taxpayers
to
seek
specific
performance
surely
they
would
have
had
to
establish
that
no
existing
shareholder
would
be
prejudiced
by
an
award
of
that
remedy.
In
my
opinion,
to
impose
the
requirement
that
retroactive
orders
not
be
based
on
facts
arising
after
the
end
of
the
taxation
year,
if
such
orders
are
to
have
any
force
in
tax
proceedings,
is
to
unduly
restrict
the
effectiveness
of
such
orders
and
provide
the
Minister
with
a
more
effective
means
of
avoiding
the
rule
against
collateral
attacks.
Finally,
I
have
serious
reservations
about
adopting
an
inflexible
rule
requiring
that
facts
be
established
as
of
the
end
of
the
taxation
year.
1
prefer
to
leave
that
issue
for
another
day.
As
stated
above,
I
am
bound
by
the
decision
in
Dale,
both
by
its
ratio
and
by
the
broad
principles
that
it
enunciates.
It
would
be
inappropriate
for
me
to
endeavour
to
whittle
away
its
effect
by
fine
distinctions
and
spurious
quibbles.
One
such
fine
distinction
is
the
fact
that
in
Dale
the
order
of
the
Nova
Scotia
Court
on
its
face
purported
to
be
retroactive
whereas
the
order
of
Collver
J.
does
not
so
clearly
purport
to
have
retroactive
effect.
I
think
however
that
reading
the
order
and
modification
agreements
together
it
is
clear
that
the
intent
was
that
the
documents
called
assignments
be
treated
ab
initio
as
subleases.
Any
other
conclusion
would
mean
that
the
assignees
were
reconveying
to
the
appellant
a
one
day
reversion.
Although
such
a
result
is
not
a
legal
impossibility,
it
is
a
remote
and
strained
conclusion.
So
far
as
the
remaining
49
transactions
are
concerned,
I
should
have
thought
that
it
was
impossible
by
agreement
alone
to
rewrite
fiscal
history,
on
the
authority
of
Rowlatt
J.
in
Waddington
v.
O'Callaghan
(1931),
16
T.C.
187
at
pages
197-198
he
said:
I
do
not
think
I
need
trouble
you,
Mr.
Hills.
I
think
this
is
a
plain
case.
There
is
no
sort
of
doubt
at
all
about
the
legal
position
as
I
understand
it.
When
people
enter
into
a
deed
of
partnership
and
say
that
they
are
to
be
partners
as
from
some
date
which
is
prior
to
the
date
of
the
deed,
that
does
not
have
the
effect
that
they
were
partners
from
the
beginning
of
the
deed.
You
cannot
alter
the
past
in
that
way.
What
it
means
is
that
they
begin
to
be
partners
at
the
date
of
the
deed,
but
then
they
are
to
take
the
accounts
back
to
the
date
that
they
mention
as
from
which
the
deed
provides
that
they
shall
be
partners.
There
is
no
sort
of
doubt
at
all
that
that
is
the
only
effect,
which
such
a
deed
can
have.
No
deed
can
alter
the
past,
but
of
course,
it
is
quite
possible
that
before
the
deed
was
executed
the
partners
may
in
point
of
fact
have
been
carrying
on
business
in
partnership
which
would
give
rise
to
partnership
accounts
and
which
would
give
rise
to
partnership
liabilities
and
so
on;
and
when
the
deed
is
executed
and
said
to
relate
back
to
an
earlier
period,
that
means
that
the
provisions
of
the
deed
as
to
the
partnership
rights
and
partnership
accounts
shall
supersede
the
rights
which
have
accrued
under
the
partnership
which
de
facto
had
existed
before
the
date
of
the
deed.
All
that
is
perfectly
clear
and
perfectly
simple.
(emphasis
added)
Although
a
number
of
the
statements
in
Dale
quoted
above
might
arguably
support
the
proposition
that
this
court
is
entitled
and
indeed
obliged
to
take
into
account
the
modification
agreements
which
had
the
intended
effect
of
making
the
assignments
subleases
ab
initio,
I
think
that
the
better
view
is
that
it
would
be
pushing
the
Dale
principle
too
far
if
I
applied
it
to
contractually
agreed
fiscal
revisionism
without
the
benefit
of
a
court
order.
The
appellant
is
therefore
entitled
to
the
reserve
provided
by
paragraph
20(1)(m)
in
respect
of
63
of
the
129
subleases
as
well
as
the
83
that
were
entered
into
as
subleases
originally.
The
appeals
are
therefore
allowed
with
costs
and
the
assessments
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
in
accordance
with
these
reasons.
Appeal
allowed.
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