Greenway v. The Queen, 91 DTC 5251, [1991] 1 CTC 445 (FCTD)

Muldoon J.:—This lawsuit constitutes an appeal by the plaintiff against a notice of reassessment of income tax effected by the Minister of National Revenue, whereby the Minister disallowed certain expenses relating to a multiple unit residential building (hereinafter: MURB) and legal costs claimed by the plaintiff.

By means of an agreement in writing, the joint venture agreement, Exhibit 1(1), dated December 5, 1980, the plaintiff, with many other individuals, became party to a joint venture to purchase real property and to develop a 36-unit strata title complex (hereinafter: the development), detailed in a schedule thereto, on the property. According to the terms of the joint venture agreement (Exhibit 1(1)) the individuals including the plaintiff, would utilize a numbered corporation, 221,401 B.C. Ltd. (hereinafter: 221,401) as the bare trustee to enter into contracts with respect to the development, on their behalf. By purchase agreement, Exhibit 1(2), dated December 17, 1980, made between Marbar Holdings Ltd. (hereinafter: Marbar) and 221,401, the latter purchased the real property from Marbar for the sum of $325,000, out of a total of $4 million as provided in the said purchase agreement, paragraph 2.2, thus:

2.2 Development of the Lands

The Contractor [Marbar] as agent for the Owner [221,401] shall act on his [sic] behalf to cause the construction of the Units and to provide the Development Services as hereinafter specified for the additional sum of Three Million Six Hundred Seventy-Five Thousand ($3,675,000.00) Dollars payable by [221,401] to [Marbar] in accordance with Article V herein.

Then, that purchase agreement, Exhibit 1(2), continues with some pertinent provisions, couched as undertakings of the contractor, Marbar, thus:

2.2.1 Construction Services

(b) negotiate contracts on behalf of the Owner [221,401] with a general contractor if required and/or subtrades performing any work related to the Units;

(c) negotiate with all governmental agencies concerned with the development of the Lands and the construction of the Units, making application for and pursuing the obtaining of all zoning and planning permissions and permits required to permit the development and construction of the Units;

2.2.2 Financing Services

(a) arrange interim financing for the construction of the Units and the Contractor may for this purpose arrange to secure such interim financing by mortgage against the Title to the Lands. The interim financing so arranged will be utilized to pay the Price as hereinafter defined. The Owner agrees to authorize and direct the lender to make all advances to the Contractor. The Contractor as agent for the Owner will apply all draws under the interim financing to pay the Development Costs. The Owner agrees to repay the said interim financing from any monies advanced under long-term mortgage financing;

(b) obtain long-term mortgage financing for the development of the Lands with such terms as may be approved by the Owner, and shall arrange to secure such financing by a series of individual mortgages, each mortgage to be registered as a first charge against each strata title to the Lands. The Owner shall authorize and direct the lender to make all advances thereunder to the Contractor. The Contractor as agent for the Owner will apply all draws under any mortgages in payment of the Price.

2.2.3 Off-site Services

arrange for the provision of off-site services including but not limited to hydro, electricity and other requirements of the municipality;

2.2.9 C.M.H.C.

obtain as agent for the Owner a Type 31 Certificate issued by Canada Mortgage & Housing Corporation qualifying the Units as a multiple unit residential building [i.e. a MURB].

3. Guarantees of Contractor

3.3 The Contractor covenants and agrees that the Units shall be Substantially Complete on or before the 31st day of October, 1981.

3.4 The Contractor [Marbar] covenants and agrees to transfer title to the Lands to the Owner free and clear of all encumbrances whatsoever save and except for the long-term mortgages referred to in Paragraph 2.2.2 (b) and Restrictive Covenants reservations and exceptions in the original grant from the Crown, easements in favour of utilities and public authorities within ten (10) business days of Substantial Completion.

4. Covenants & Warranties of the Owner

The Owner hereby covenants and agrees with the Contractor to: [sic]

4.6 the Owner [221,401] acknowledges and agrees that the Lands and Units shall be at risk of the Owner following the date of Substantial Completion.

The next pertinent feature of Exhibit 1(2), the purchase agreement between Marbar and 221,401, is the form and manner of execution. Although the then relevant provisions of the Company Act, R.S.B.C. 1979, did not require this purchase agreement to be executed under seal, as it was so executed, the parties obviously evinced the mutual desire and intention to express their contractual undertakings in a deed. This factor, of a deed under seal on the part of both Marbar and 221,401 means that Marbar, at least, could not maintain an action on this purchase agreement against the plaintiff and the other individuals, since they were 221,401‘s undisclosed principals. So it was held by Macdonell, J. of the British Columbia Supreme Court in Marbar Holdings v. 221,401 B.C. Ltd. (1984), 54 B.C.L.R. 169 at 173. That judgment stands, undisturbed, since after Marbar gave notice of appeal, the contending parties made a new agreement to settle the litigation and circumvent the hearing in the Court of Appeal.

By a trust agreement, Exhibit 1 (3), also dated December 17,1980, and like the other agreement, Exhibit 1(2) of the same date, also under seal, Marbar, now called the trustee and 221,401, now called the beneficiary, Marbar agreed to hold the lands in these arrangements in trust for and unto 221,401. Marbar also declared in paragraph 1 that:

* * * any income and rights in respect of the said lands as well as any proceeds arising from the sale thereof do not in any manner belong to the Trustee [Marbar] but are the sole property of the Beneficiary [221,401].

In consequence of this trust undertaking, Marbar also covenanted to convey the lands to 221,401, or anyone it directed, in general, free and clear of any encumbrance. Thereupon, 221,401 entered the following pacts, being paragraphs

3. The Beneficiary covenants and agrees to at all times hereafter indemnify and save harmless the Trustee against all liabilities which they may incur by reason of holding the said lands in trust for the Beneficiary.

4. The parties acknowledge that no remuneration is payable to the Trustee with respect to the trusts and agreements herein contained.

These latter two agreements under seal, Exhibits 1(2) and (3), effectively bar the plaintiff and his erstwhile fellow joint venturers from participation, it being quite clear that those venturers enjoyed no privity of contract with Marbar in their role of 221,401‘s undisclosed principals. So, of course, was their role when Marbar and 221,401, on January 4, 1982, by agreement, Exhibit 1(4), clarified their previous agreements of December 17, 1980 to ensure that the lands stand at the risk of 221,401 and as between themselves, under seal, the parties agreed that 221,401,

is considered to be the legal and beneficial owner of the lands notwithstanding that for purposes of facilitating the construction of the units and arranging financing, registered title remains in the name of the Contractor until substantial completion of the units as specified in the Development Services Agreement [i.e. the purchase agreement].

Unhappy differences arose between Marbar and 221,401, precipitating litigation whereby Marbar sued not only 221,401 but also the plaintiff and his fellow joint venturers, on September 24, 1982. A copy of Marbar's statement of claim No. C825488 in the Vancouver Registry of the Supreme Court of British Columbia is Exhibit 1(5). Marbar claimed that 221,401 and the individual joint venturers, including the plaintiff, were in breach of the purchase agreement and that Marbar was entitled to re-transfer of the beneficial ownership of the property and the development thereon and a litany of consequential relief. Some of the plaintiff's fellow joint venturers in a statement of defence which is a tour de force of denials, Exhibit 1(6), heaped scorn on Marbar's contentions and went on to plead that the agreements were all void, as well as voidable. The joint venturers applied for a summary determination as to whether there was any enforceable contract between Marbar and any of the joint venturers. In Marbar Holdings v. 221,401 B.C. Ltd., supra, Macdonell, J. of the Supreme Court of British Columbia, on May 3, 1984, found in favour of 221,401 and the investors including the plaintiff, and ordered that the money paid to Marbar be returned. He found that the agreements were not enforceable against the applicants therein because of want of a prospectus mandated by subsection 50(6) of the Real Estate Act, R.S.B.C. 1979, c. 356. Such non-compliance effected that result pursuant to section 62 of the same statute. Macdonell, J. also found that the agreements having been intended by the parties to be deeds under seal, no action was maintainable against the undisclosed principals. In his reasons, Macdonell, J. referred to a similar case Springer Developments Corp. v. Rogers (1984), 52 B.C.L.R. 169, subsequently reversed on appeal in British Columbia, [1987] 3 W.W.R. 494, 11 B.C.L.R. (2d) 145, in regard to which leave to appeal further to the Supreme Court of Canada was refused with costs, [1987] 1 S.C.R. xiv, 81 N.R. 196. The Court of Appeal in Springer followed its then recent decision in Chambers v. Pennyfarthing Development Corp. (1985), 20 D.L.R. (4th) 488; 64 B.C.L.R. 145, wherein it was held that a sale contrary to subsection 50(6) is unenforceable by reason of section 62, but that the invocation of section 62 by the purchaser is subject to the doctrines of election, waiver and acquiescence. In that same case of. Chambers v. Pennyfarthing it was also held that, notwithstanding the sophistication of the purchaser in real estate developments, a prospectus must be filed and subject to those above-mentioned doctrines, the transaction is unenforceable. This Court, too, acknowledges the angelic pin-head dancing involved in distin- guishing void from voidable, from unenforceable, from frustrated, from executory and other sophistries in regard to contracts. In full tradition, but lack of logic, a transaction so devoid of mutuality that it cannot even be enforced against one of the parties is still said to be a valid contract and not a nullity. However logic is not the law's life, just as equity is not a feature of income tax law.

So while all of the British Columbian jurisprudence, including the valiant attempt to reform the common law by Bouck, J. in Kootenay Savings Credit Union v. Toudy (1987), 17 B.C.L.R. (2d) 203 and (1987) 22 B.C.L.R. (2d) 201, and the discourse by Lysyk, J. on interpretation of contracts in regard to section 62 of the provincial Real Estate Act in First City Development Corp. v. Bekei (1986), 3 B.C.L.R. (2d) 175, is usefully bound up with the questions arising under the provincial statutes, such jurisprudence is not necessarily germane to the imperatives of the federal taxing statute. Needless to say, however, a disposition of land under the provincial law, statutory or otherwise, must be accepted as such in contemplation of the Income Tax Act, R.S.C. 1952, c. 148 (am. 5.C. 1970-71-72, c. 63) (the "Act"), unless and until Parliament would enact some other, extraordinary provision. There is no such peculiar provision, but there is jurisprudence and doctrine.

In the plaintiff's case book there is exhibited a copy of interpretation bulletin IT-170R of August 25, 1980, on the subject of: “Sale of Property—When Included in Income Computation”. It is understood that such bulletins, published under the authority of the Deputy Minister of National Revenue for Taxation, are not the definitive statement of the law, but they are of no little utility for taxpayers and the Minister, and their provisions are frequently adopted and ratified by the Court. Bulletin IT-170R is the subject of commentary by Howard J. Kellough, in a paper entitled The Legal Efficacy of Unwinding or Negating a Transaction in Whole or in Part, published in the 1985 Canadian Tax Foundation Conference Report. A copy of Mr. Kellough’s cited paper is also exhibited in the plaintiff's case book.

On page 9:2 of the Kellough dissertation the author makes this wholly acceptable statement:

This paper approaches the topic by analyzing the notion of a disposition for income tax purposes under various contractual arrangements. Only when a disposition occurs do potential income tax consequences arise, and, in general terms, a disposition arises only when beneficial ownership passes. Accordingly, it is necessary to examine the circumstances in which the beneficial ownership will or will not pass under contract law. In this regard, conditions precedent and subsequent, void contracts, and voidable contracts are reviewed. The legal notion of void and voidable contracts and the circumstances in which they can arise at law is examined in greater detail, along with the remedies of rescission and rectification.

[Emphasis added.]

The Court adopts the following statements made in the Kellough paper, p. 9:3:

Generally speaking, most transactions give rise to income tax consequences only at such time as the transactions effect a disposition of property. In light of the broad definition of property contained in the Act, it is difficult to imagine any transaction not contemplating a disposition of property.

Revenue Canada, in Interpretation Bulletin IT-170R, dated August 25, 1980, sets out its policy with respect to the timing of income inclusions from the sale of property. This appears to be Revenue Canada's only written policy statement on this area. In paragraph 4, Revenue Canada takes the position that the Act is interested only in dispositions involving a change of beneficial ownership unless the contrary is expressly stated. This is said to be based on subparagraph 54(c)(v), and to apply in respect of dispositions of depreciable property described in paragraph 13(21)(c) and the sale of trading assets under paragraph 12(1)(b). From Revenue Canada's perspective, transactions not involving a concurrent change in beneficial ownership are to be disregarded.

When Mr. Kellough goes on to discuss paragraphs 5 and 6 of the interpretation bulletin IT-170R, it is just as useful to recite the very words of that bilingual document, thus:

5. Despite the absence of terminology in paragraph 12(1)(b) identical to that found in section 54 and subsection 13(21) (see 2 and 3 above), it is the Department's view that the sale price of any property sold is brought into account for income tax purposes when the vendor has an absolute but not necessarily immediate right to be paid. As long as a "condition precedent" remains unsatisfied, a vendor does not have an absolute right to be paid. However, the fact that an event subsequent to the completion of a sale restores the ownership of the property involved to the vendor or adjusts the sale price does not alter the fact that the vendor was at a particular time entitled to the sale price and therefore disposed of the property for tax purposes at that time. Similarly, the fact that a contract of sale is subject to ratification is of no consequence in determining a date of disposition unless it is made a condition precedent of the agreement.

6. A "condition precedent" is an event (beyond the direct control of the vendor) that suspends completion of the contract until the condition is met or waived and that could cancel the contract” ab initio” if it is not met or waived. Two examples of conditions precedent are

(a) a condition in a contract for the sale of a hotel business that provides that the transfer of ownership is not to take place until the purchaser obtains a liquor licence, and

(b) a condition in a contract for the sale of land that suspends completion until

the purchaser's solicitor has approved the vendor's title to the property.

Plaintiff's counsel drew particular attention to Mr. Kellough’s passages of "only a brief review of void and voidable contracts” on pages 9:6,9:7 and 9:8, but he did not emphasize what may well be the more important discourse on the pertinent law, the considerations of conditions precedent at pages 9:4, 9:5 and 9:6. Here are passages which the Court is pleased to adopt and ratify:

Conditions Precedent

A condition may be defined as a statement of fact that forms an essential term of a contract. Often the condition will be a "contingent" condition—a provision that an obligation shall not come into force unless or until some event has happened. The obligation is made conditional upon the happening of that event, but there is no guarantee or promise that the event will occur. When contracts are suspended until the happening of the stated event, they are said to be subject to a condition precedent.

It is common for agreements for the sale of land to be made conditional on some occurrence, such as the consent of a planning authority to a proposed use. Such a condition usually is aimed at protecting the purchaser, but in a number of cases the purchaser has sought to waive the condition and take the land notwithstanding the absence of planning consent. If the terms of the agreement expressly reserve the purchaser's right to waive such conditions, doubtless he may do so. But it has been held in several cases that if such a power is not reserved the granting of the consent is a true condition precedent and that the vendor no less than the purchaser is excused if the consent is not granted.

In Turney et al. v. Zhilka [[1959] S.C.R. 578], the Supreme Court of Canada held that a true condition precedent was an external condition upon which the existence of an obligation depended. Until the event occurred there was no contract and therefore no right to performance on either side. The Supreme Court also held that the parties cannot waive a true condition precedent. This is so regardless of the fact that it may have been inserted into the contract for the benefit of only one of the parties. If the condition is an“ "internal condition”, that is, one whose fulfilment is within the control of the parties, and if that condition has been inserted for the benefit of one party only, that party may waive the benefit unilaterally and demand performance. Accordingly, whether a contract subject to a condition precedent becomes binding will depend upon (1) whether the condition is a true condition precedent (that is, dependent upon an external condition);

(2) whether the condition is an internal condition (that is, within the control of the parties); and (3) if it is an internal condition, for whose benefit it was inserted.

In British Columbia, section 49 of the Law and Equity Act [R.S.B.C. 1979, Chap. 224] was introduced to avoid the rule in Turney v. Zhilka. Section 49 provides as follows: where the performance of a contract is suspended until the fulfilment of a condition precedent, a party to the contract may waive the fulfilment of the condition precedent notwithstanding that the fulfilment of the condition precedent is dependent on the will or actions of a person who is not a party to the contract if

(a) * * *

(b) the contract is capable of being performed without fulfilment of the condition precedent; and

(c) *

If a situation does not fall within the parameters of section 49, then the rule in Turney v. Zhilka applies.

In summary, a contract that is subject to the fulfilment of a condition precedent does not become a binding agreement until such time as the condition has been met or waived within the meaning of section 49 of the Law and Equity Act or the rule in Turney v. Zhilka. In the event the condition is not met or waived, then the agreement is void ab initio; it has never come into existence. Beneficial ownership of the subject matter of the contract cannot pass until the condition precedent has been satisfied or waived.

[Emphasis added.]

Nothing in the plaintiff's testimony at trial indicated that he ever purported to waive any condition precedent in the joint venture agreement, Exhibit 1(1), or in the other agreements, under seal, Exhibits 1(2), the purchase agreement and 1(3), the trust agreement to which, in any event he was not privy. But even if he had purported to effect a waiver in contemplation of section 49 of the Law and Equity Act, such waiver would have been ineffectual in light of condition (b) above quoted, for the exhibited contracts were utterly incapable of being performed without fulfilment of their conditions precedent.

The conditions precedent inhere in the contract provisions earlier above recited. The contractor, Marbar's undertakings in paragraph 2.2.1(b) to negotiate contracts for general contracting and subtrades, in paragraph 2.2.1(c) to negotiate with all government agencies for obtaining all zoning and planning permissions and permits, in paragraph 2.2.2(a) to arrange interim financing and in paragraph 2.2.2(b) to obtain long-term mortgage financing by a series of unit strata-title mortgages, in paragraph 2.2.3 to arrange for off-site services, in paragraph 2.2.9 to obtain a MURB-type 31 certificate from C.M.H.C. and in paragraph 3.4 to convey title to 221,401 subject only to the aforesaid long-term unit mortgages and other usual reservations and easements, are all conditions precedent without the fulfilment of which the whole elaborate scheme would be, and in some instances was, reduced to utter futility. There is nothing of record here to show that any one of those conditions precedent, among all of such conditions inhering in the terms agreed by the parties, was fulfilled before the rift precipitated by the litigation which was disposed of by Mr. Justice Macdonel in Marbar Holdings v. 221,401 B.C. Ltd., supra. The plaintiff's vigorous statement of defence in that action, Exhibit 1(6), gives positive support to the assertion of lack of fulfilment of those conditions precedent, if such be needed. At that point Marbar could make no gain or enforcement against the plaintiff herein because the agreements were unenforceable against the investors pursuant to section 62 of the provincial Real Estate Act, and no action could be maintained against the plaintiff and his colleagues on those agreements under seal because he and they were undisclosed principals. So, Mar- bar's action was dismissed with costs and the plaintiff and his joint venturers, for all practical and theoretical purposes, succeeded in destroying, repudiating, aborting or terminating the intended, but as yet unfulfilled, transactions.

The net effect of all of the foregoing events is that no beneficial ownership in the property ever passed to the plaintiff, despite all the documentary assertions that it did. The failure of the necessary conditions precedent prevented the beneficial ownership from passing and, hence, prevented the occurrence of a disposition with any tax consequences. Although the soft- costs expenses claimed by the plaintiff in the 1980, 1981, 1982 and 1983 taxation years were incurred by the plaintiff with the intention of acquiring an interest in the property, no such interest was ever in fact acquired. So, also the legal fees claimed in 1982 and 1983 in regard to the Marbar litigation as expenses, were not incurred for the purpose of earning income, but merely for the purpose of defending against the proceedings instituted by Marbar to enforce the purchase agreement, which, if it had not been successfully repudiated by the plaintiff, would have produced the favourable tax consequence which he sought, but was aborted by his own conduct. As the defendant notes in the pleadings, those investors 221,401, the other joint venturers who completed their purchases under the purchase agreement—those, in effect, to whom the beneficial ownership did pass—were not reassessed by the Minister.

The jurisprudence invoked by the defendant includes: Chambers v. Pennyfarthing & Turbo, supra, Lysaght v. Edwards, [1876] 2 Ch. D. 499, Malian Ltd. v. M.N.R. (1962), 30 Tax A.B.C. 33; 62 D.T.C. 446 (T.A.B.), M.N.R. v. Wardean Drilling Ltd., [1962] 2 Ex. C.R. 166; [1969] C.T.C. 265 ; 69 D.T.C. 5195 (Ex. Ct.), The Queen v. Imperial General Properties Ltd., [1985] 1 C.T.C. 40; 85 D.T.C. 5045 (F.C.A.). The last mentioned, the Imperial General Properties case is the most pertinent in terms of extraction of applicable principles. This is the unanimous decision of a panel for whom Mr. Justice MacGuigan wrote the reasons in which the Crown's appeal was allowed.

The Imperial General Properties case, supra, involved the corporate taxpayer as party to an agreement of sale of its real property during one taxation year for a specified purchase price payable at certain points during the year and later, upon registration of a plan of subdivision. It was selling enough land for two apartment sites containing 307 suites. The agreement, not unlike the purchase agreements in the case at bar, was conditional upon appropriate soil condition and arrangements for proper zoning, servicing and mortgage approval. MacGuigan J.A. invoked the judgment of the Supreme Court of Canada in Turney v. Zhilka, [1959] S.C.R. 578, and noted that with respect to one of five conditions precedent in the Imperial General Properties case, supra, compliance with The Planning Act of Ontario, no power of waiver was provided. Indeed in logic, no such power could have been provided without destroying the intended transaction. That learned judge wrote, at page 45 (D.T.C. 5049):

The respondent also fails with respect to its contention that there was a binding agreement of purchase and sale under which beneficial ownership passed. The respondent defends this position of an entirely subjective approach, viz., that the parties to the agreement deliberately structured it in an unusual manner so as to ensure that the conditions specified in the agreement were subsequent and not precedent.

Not only is the extrinsic evidence for this argument too ambiguous and inadequate to establish it, but the authorities indicate that the parties cannot by their own intention make or unmake a condition precedent, although they may waive it. Thus in Turney v Zhilka, [1959] SCR 578, at 583-4 where in the absence of a power of waiver the Supreme Court held, inter alia, that specific performance could not be granted, Judson J, said:

The obligations under the contract, on both sides, depend upon a future uncertain event, the happening of which depends entirely on the will of a third party—the Village council. This is a true condition precedent—an external condition upon which the existence of the obligation depends. Until the event occurs there is no right to performance on either side. . . .

On page 47 (D.T.C. 5050), MacGuigan, J.A. is reported thus:

On the substance of the condition, it is true, as the respondent contends, that no evidence was led to show that the land in issue was within a municipally designated area of subdivision control so as to trigger the operation of section 36 of the Planning Act and, thus, the requirement that the consent of the munici-

pality’s committee of adjustment under paragraph 32b of that Act be obtained. But the fact that the condition was specified as a term of the agreement renders it unnecessary to prove that such consent was required. The parties have, by their agreement, made that a requirement, presumably whether by law it was necessary or not. Clearly, the condition as to compliance with the Planning Act was a true condition precedent in the terms of Turney v Zhilka, the fulfilment of which depended entirely on the happening of an external event in the control of third parties. This is not a condition which according to the terms of the agreement or by its very nature could be waived. Thus, until the condition had been fulfilled, the purchaser could not have required specific performance of the contract on October 31, 1968.

As it was held in the Imperial General Properties case, supra, so must it be in this case at bar. The plaintiff simply never did acquire any beneficial ownership of the property. In that instance, which the Court finds to be so, then, as the plaintiff's counsel acknowledged in argument, those rights of ownership, such as expenses for soft costs, and legal fees relative to the litigation fail, too.

The subsequent conduct of the parties, indicated in their settlement agreement, Exhibit 1(9), whereby Marbar's appeal to the British Columbia Court of Appeal was avoided, counts for naught in regard to the issues in this case at bar. It is obvious that it represents the care and caution of the competent solicitor who drew it, in that it provides not only for the restoration of some money to the plaintiff herein and his disaffected fellow joint venturers, but also, and apparently, it completes the destruction of their previous arrangements by means of an elaborate, mutual quit-claim, indemnity and release of all debts, dues, agreements, covenants, bonds, claims and demands, inter alia. It just rakes the ashes of the purported MURB sale-and-purchase agreements in order to be certain that they are fully extinguished. Nothing in that settlement purports to have conveyed any beneficial ownership to the plaintiff, although it purports to reconvey the same to Marbar in case there was any original passing of beneficial ownership, which the Court finds there was not.

The plaintiff's appeal and this action must be dismissed, with costs, and the Minister's assessment confirmed. At trial the Court made, orally, an order nunc pro tunc to amend the style of cause herein to state the plaintiff's full and correct name, as he testified: William Mack Greenway. So be it.

Appeal dismissed.