Couture,
C.J.T.C.:—On
July
6,
1981
Placrefid
Ltd.
(Placrefid)
was
assessed
on
an
amount
of
$112,500
pursuant
to
the
provisions
of
paragraph
(c)
of
subsection
2(3)
and
the
application
of
subsection
115(1)
of
the
Income
Tax
Act
(the
Act)
in
respect
of
its
1980
taxation
year:
Following
a
notice
of
objection
filed
on
September
29,
1981
the
assessment
was
confirmed
by
notification
of
confirmation
by
the
Minister
dated
May
12,
1982.
A
notice
of
appeal
against
the
assessment
was
filed
on
behalf
of
the
appellant
on
July
27,
1982.
In
assessing
the
appellant,
which
was
a
non-resident
of
Canada,
the
respondent
took
the
position
that
under
the
circumstances
which
will
be
described
in
subsequent
paragraphs
it
had
disposed
of
a
taxable
Canadian
property
as
referred
to
in
paragraph
(b)
of
subsection
115(1)
of
the
Act
during
the
taxation
year
under
appeal
and
thereby
realized
a
taxable
capital
gain.
To
more
fully
understand
the
relevant
facts
which
gave
rise
to
the
assessment,
I
will
summarize
first
the
evidence
adduced
by
Mr.
Pierfrancesco
Campana
on
behalf
of
the
appellant.
He
is
a
solicitor
practising
his
profession
in
Chiasso,
Switzerland,
a
municipality
located
near
the
Italian
border.
He
explained
that
his
practice
was
oriented
in
the
field
of
international
law
and
taxation.
He
was
introduced
by
counsel
for
the
appellant
as
an
expert
witness
qualified
to
testify
on
the
application
of
the
laws
of
Switzerland
as
they
applied
to
Placrefid’s
appeal.
Counsel
for
the
respondent
pointed
out
that
as
the
witness
was
a
director
of
the
appellant
and,
therefore,
to
a
certain
degree
an
interested
party
(he
was
not
a
shareholder)
the
Court
should
be
guarded
about
whatever
evidence
he
would
adduce
regarding
the
application
of
Swiss
laws
in
so
far
as
they
could
be
relevant
to
the
present
appeal.
There
are
no
rules
emanating
from
this
Court
prescribing
a
procedure
to
qualify
a
witness
as
an
expert
witness,
and
the
manner
of
presenting
his
evidence.
The
witness
impressed
me
as
honest,
straightforward,
and
as
a
well
qualified
individual
and
I
have
no
reason
to
be
suspicious
of
his
integrity
as
a
witness
for
the
appellant
or
as
to
his
knowledge
and
expertise
in
the
laws
of
his
country.
However,
it
should
be
pointed
out
that
while
the
witness
may
have
been
an
expert
on
the
laws
of
his
country,
his
appearance
before
the
Court
as
a
witness
was
primarily
to
give
evidence
on
behalf
of
the
appellant
as
one
of
its
officers.
The
burden
of
reversing
the
presumption
of
the
validity
of
the
assessment
raised
by
the
respondent
rested
with
the
appellant.
Therefore,
it
was
incumbent
upon
an
officer
of
the
appellant
to
provide
the
Court
with
the
proper
evidence
to
meet
this
challenge.
The
witness
who
was
instrumental
in
the
incorporation
of
the
appellant
and
also
its
president,
according
to
his
evidence,
was
obviously
the
best
qualified
officer
of
the
appellant
under
the
circumstances
to
testify
on
its
behalf.
The
witness
was
therefore
appearing
before
the
Court
in
a
dual
capacity,
but
primarily
as
an
officer
of
the
appellant.
As
mentioned
above,
the
witness
was
instrumental
in
having
Placrefid
incorporated
in
1978.
It
was
incorporated
under
the
laws
of
Panama
where
it
had
a
head
office
at
the
address
of
its
subscribers
in
Panama
City.
A
photocopy
of
its
articles
of
incorporation
which
are
in
Spanish
together
with
an
English
translation
thereof
were
filed
as
an
exhibit.
The
witness
is
a
director
as
mentioned
before
and
also
president
of
Placrefid.
Two
other
individuals
complete
the
board
of
directors.
À
Mr.
Felice
Cavadini,
a
financial
consultant,
its
vice-president,
and
a
Mr.
Battista
Ponti,
an
accountant,
its
secretary-treasurer.
The
three
have
been
the
only
directors
and
officers
of
the
company
since
its
incorporation.
According
to
Mr.
Campana
his
two
colleagues
on
the
board
were
and
are
residents
of
Switzerland.
Counsel
for
the
respondent
objected
to
this
portion
of
the
evidence
whereby
Mr.
Campana
affirmed
that
Messrs.
Cavadini
and
Ponti
were
residents
of
Switzerland.
Sometime
after
the
hearing
of
the
appeal
three
formal
documents
bearing
the
signature
of
an
official
of
the
canton
of
Tessin
in
Switzerland
under
seal,
duly
certified
as
to
the
signature
and
the
said
seal
by
Marcelle
Dumoulin,
consul
at
the
Canadian
Embassy
in
Berne
were
submitted.
These
documents
attested
that
the
three
individuals
in
question
were
directors
of
the
appellant,
domiciled
and
living
in
Switzerland
and
I
have
no
reason
to
question
the
validity
of
this
evidence.
The
witness
also
testified
that
Placrefid
had
an
office
in
Switzerland
at
Corso
San
Gottarda
35
in
Chiasso
and
prior
to
August
1979
it
was
located
at
Via
Motta
18,
and
all
the
directors'
meetings
since
its
incorporation
were
held
there,
except
one
which
was
held
in
Nassau
in
1979.
None
were
held
in
Panama.
It
had
no
office
in
Canada.
Placrefid
was
described
by
the
witness
as
a
corporation
incorporated
for
the
purposes
of
transacting
and
carrying
on
the
business
of
a
financial
and
investment
nature.
In
its
articles
of
incorporation
in
article
2
we
read
the
following
description:
2.
The
purposes
for
which
the
corporation
is
established
are:
(a)
to
establish,
transact,
and
carry
on
the
business
of
a
financial
and
investment
company;
to
purchase,
sell
and
deal
in
all
kinds
of
goods
and
commodities,
shares,
bonds,
and
securities
of
all
kinds;
to
enter
into
partnerships,
business
participations,
limited
partnerships,
agreements
for
sharing
profits,
joint
venture
or
otherwise;
to
purchase,
sell,
lease
or
otherwise
acquire
or
dispose
of
real
estate;
to
borrow
and
lend
money,
with
or
without
security;
to
enter
into,
make
and
perform
and
carry
out
contracts
of
all
kinds,
to
become
surety
for,
or
guarantee
the
performance
and
fulfillment
of
any
and
all
contracts.
(b)
To
engage
in
any
lawful
business
not
prohibited
to
corporations;
and
to
transact
any
of
the
foregoing
as
principals,
agents,
trustees,
or
in
any
other
representative
capacity
whatever.
His
evidence
further
disclosed
that
a
group
of
156
individuals
mostly
Italian
citizens
were
shareholders
of
a
holding
company
located
in
Montreal
by
the
name
of
Place
Crémazie
(the
full
corporate
name
was
not
disclosed).
It
held
all
the
shares
of
a
wholly-owned
subsidiary
by
the
name
of
Century
Plaza
Inc.
(Century)
also
of
Montreal,
which
in
turn
owned
a
property
comprising
land,
buildings
and
accessories
referred
to
as
Place
Crémazie
also
located
in
Montreal
(the
property).
Century
in
1973
or
1974
had
borrowed
$3.6
million
from
a
company
by
the
name
of
Mirlaw
Investments
Ltd.
(Mirlaw)
on
the
security
of
a
second
hypothec
(mortgage)
and
had
defaulted
on
its
obligations
under
the
said
hypothec
in
1978.
Early
in
1979
Mirlaw
commenced
proceedings
against
Century
in
the
Superior
Court
of
Quebec
in
Montreal
by
way
of
a
“dation
en
paiement”.
According
to
Mr.
Campana’s
evidence
the
156
shareholders
of
Place
Crémazie
had
mandated
him
through
their
banker
to
examine
the
situation
of
Century
in
which
they
stood
to
lose
their
original
investment
in
the
property
should
Mirlaw
be
successful
in
its
Court
action,
and
suggest
to
them
what
steps
should
be
taken
to
avoid
this
financial
disaster.
In
his
report
to
the
shareholders
he
informed
the
Court
that
he
recommended
that
they
advance
at
least
another
$500,000
to
Place
Crémazie
as
a
minimum
contribution
to
attempt
to
refloat
the
company
financially
but
in
reality
according
to
the
witness
the
company
needed
an
injection
of
additional
capital
of
between
one
and
two
million
dollars.
In
any
event
the
shareholders
rejected
his
recommendation.
In
addition
to
the
financial
problem
facing
the
shareholders
the
witness
stated
that
legislation
had
been
enacted
in
Italy
about
that
time
providing
that
Italian
citizens
could
not
own
investments
in
real
estate
in
foreign
countries,
and
as
the
majority
of
them
were
Italians
this
legislation
presented
a
new
dimension
to
their
already
critical
situation.
the
witness
added:
“So
the
first
idea
of
Place
Crémazie
was
cancelled.
So
we
had
to
study
another
solution
to
try
to
recover
just
something
from
this
operation.”
Accordingly,
Placrefid
was
incorporated
to
salvage
somehow
Place
Crémazie
investment
on
behalf
of
its
shareholders.
A
number
of
meetings
were
held
in
Montreal
and
in
Chiasso
between
representatives
of
Mirlaw
and
Placrefid
followed
by
an
exchange
of
correspondence
which
resulted
eventually
in
a
proposal
of
settlement
of
the
issues
between
the
parties.
Placrefid
conducted
its
negotiations
with
Mirlaw
through
the
office
of
a
solicitor
of
Montreal,
Me.
Michael
Rusko,
Q.C.,
while
Mr.
Naim
Levy,
its
president
represented
Mirlaw.
At
a
meeting
held
in
Montreal
on
February
1,
1979
the
terms
and
conditions
of
what
is
referred
to
as
a
"principe
d'entente”
were
reached
by
the
parties
and
were
set
out
in
a
memorandum
which
reads:
MEMORANDUM
D'UNE
RENCONTRE
AU
BUREAU
DE
MIRLAW
INVESTMENT
LTD.
EN
DATE
DU
1er
FEVRIER,
1979
ENTRE
M.
Cavadini
M.
N.
Levy
M.
À.
Lawee
M.
M.
Lawee
M.
À.
Lawi
M.
Michael
Rusco
Après
discussion
et
une
revision
générale
de
la
situation
de
Century
Plaza
Limitée,
un
principe
d'entente
est
intervenu
sujet
à
l'approbation
de
tous
les
partis
concernés.
Une
entente
globale
incorporant
les
items
suivants
sera
signée
entre
les
partis:
Paiement
des
taxes
municipales
1978-79:
Le
groupe
de
M.
Cavadini
paiera
les
taxes
municipales
évaluées
à
approximativement
$1,100,000
plus
intérêts
par
subrogation
mais
sujet
aux
premières
hypothèques
et
à
la
deuxième
hypothèque
de
Mirlaw
Investments
Ltd.
seulement.
Procédures
Légales:
Mirlaw
Investment
Ltd.
poursuivra
ses
procédures
légales
en
vertu
de
son
hypothèque
jusqu'à
jugement
final
Si
toutefois
Mirlaw
Investments
Ltd.
se
fait
repayer
en
entier
son
hypothèque,
le
groupe
Cavadini
devra
être
repayés
les
taxes
plus
intérêts
qui
ont
été
payés
par
subrogation.
Titres
de
propriété:
Lors
de
l'obtention
du
jugement
final
de
Mirlaw
Investments
Ltd.,
et
le
transfert
des
titres
de
propriété
légale
à
Mirlaw
Investments
Ltée.,
Mirlaw
Investments
Ltd.
s'engage
a
vendre
et
le
groupe
de
M.
Cavadini
s
engage
à
acheter
dans
les
soixante
(60)
jours
qui
suivront
la
date
de
l’obtention
du
jugement
final,
50%
des
propriétés
au
coût
de
Mirlaw
soit,
seulement
à
titre
indicatif
et
sujet
à
ajustement
pour
$5,500,000
établi
comme
suit:
Coût
de
la
propriété:
|
1er
hypothèque
approx.
|
$
6,000,000
|
|
2e
hypothèque
Mirlaw
|
3,600,000
|
|
Taxes
payées
par
subrogation
|
1,100,000
|
|
Frais
divers
|
300,000
|
|
$11,000,000
|
|
Le
prix
de
$5,500,000
sera
payable
comme
suit:
|
|
|
$1,100,000
|
—
déjà
payé
pour
les
taxes
|
|
|
$1,400,000
|
—
comptant
lors
de
la
signature
du
|
|
|
transfert
des
titres
|
|
|
$3,000,000
|
—
en
assumant
les
premières
|
|
|
hypothèques
déjà
existantes
sur
|
|
|
les
propriétés
|
|
Si
pour
quelques
raisons
le
groupe
de
M.
Cavadini
ne
pourrait
pas
acheter
les
50%
des
propriétés
tel
que
prévu
ci-haut,
Mirlaw
Investments
Ltd.
gardera
les
titres
de
propriété
à
100%
et
remboursera
au
groupe
de
M.
Cavadini
les
montants
de
taxes
de
$1,100,000
payés
par
subrogation
sans
aucun
intérêt.
Il
est
entendu
que
Mirlaw
Investments
Ltd.
gardera
et
maintiendra
l’administration
des
immeubles
et
sera
rémunéré
en
conséquence.
Lors
du
transfert
des
Titres
de
propriété,
une
entente
sera
signée.
Cette
entente
devra
contenir
une
clause
déterminant
les
modalitées
de
vente
et
d’achat
des
intérêts
entre
partenaires.
It
must
be
observed
that
as
at
February
1,
1979
Mirlaw
was
not
the
owner
of
the
property
that
was
the
object
of
this
“entente”.
It
merely
held
a
second
hypothec
on
it
and
had
instituted
an
action
in
the
Superior
Court
to
be
declared
the
lawful
owner
and
have
the
title
to
the
property
transferred
to
its
name.
On
April
6,
1979
Mirlaw
wrote
to
Placrefid
under
the
signature
of
Naim
Levy
confirming
the
“principe
d’entente”
reached
on
February
1,
1979
and
setting
out
the
conditions
under
which
Placrefid
could
acquire
the
property.
The
letter
reads:
April
6,
1979
We
refer
to
that
certain
action
(the
“Litigation”)
presently
pending
before
the
Superior
Court
for
the
District
of
Montreal,
bearing
no.
500
05-017270-784
of
the
records
of
such
Court
and
relating
to
the
acquisition
by
dation-en-paiement
of
the
immoveable
property
(the
“Property”)
described
in
such
action
and
which
was
hypothecated
in
favour
of
the
undersigned.
This
will
serve
to
confirm
our
agreement
and
undertaking
to
sell
to
you
an
undivided
50%
interest
in
whatever
rights
we
may
acquire
in
the
Property
in
the
event
of
and
upon
a
final
judgment
in
our
favour
pursuant
to
the
Litigation.
(Emphasis
added)
Our
obligations
hereunder
are
subject
to
the
following
conditions
each
of
which
shall
be
sine
qua
non
and
of
the
essence
hereof
without
the
fulfillment
of
which
our
obligations
would
not
have
been
contracted:
1.
The
purchase
price
for
such
interest
shall
be
50%
of
the
total
cost
to
us
of
the
Property
whether
such
cost
is
incurred
prior
or
subsequent
to
the
date
hereof.
Without
in
any
way
limiting
the
generality
of
the
foregoing,
such
cost
shall
include,
without
being
limited
to,
the
amount
of
our
hypothec
in
principal,
interest
and
accessories;
our
costs
and
expenses
of
administering
and
carrying
the
property;
real
estate
taxes
paid
and
not
recovered
by
us
from
the
debtor;
management
and
administrative
costs
and
fees
not
recovered
by
us;
costs
and
fees
of
the
Litigation,
legal
and
notarial
expenses;
and
payments
to
any
prior
ranking
creditor.
2.
On
account
and
in
reduction
of
such
purchase
price
you
shall
have
paid
us
on
execution
of
this
letter
the
sum
of
ONE
HUNDRED
THOUSAND
DOLLARS
($100,000)
and
you
shall
pay
us
a
further
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000)
on
or
before
Tuesday,
April
17,
1979.
3.
The
balance
of
the
purchase
price
shall
be
payable
in
cash
at
the
Closing
as
hereinafter
referred
to.
4.
The
Closing
shall
take
place
before
our
Notary,
at
your
expense,
within
ninety
(90)
days
of
Judgment
of
the
Superior
Court
in
our
favour.
5.
In
the
event
we
do
not
obtain
such
Judgment
in
our
favour,
or
in
the
event
such
Judgment
is
appealed
by
the
Defendants
to
the
Court
of
Appeal,
or
in
the
event
of
any
default
by
you
hereunder,
this
agreement
shall
be
null
and
void
ipso
facto
without
recourse
on
either
side,
and
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
or
any
portion
thereof
as
is
received
by
us
from
you,
shall
be
refunded
to
you
forthwith
without
interest.
6.
The
sale
shall
be
made
by
us
without
any
warranty
on
our
parts
whatever
and
without
any
representation
on
our
parts
as
to
our
rights
in
the
Property.
7.
As
additional
conditions
of
the
sale:
(a)
You
will
enter
into
and
maintain
in
force
a
Management
Agreement
for
the
Property
with
Canadian
Alpha
Lessors
Limited
(or
its
nominees)
on
terms
and
conditions
satisfactory
to
our
legal
counsel
at
his
sole
and
absolute
discretion,
and
at
a
fee
rate
generally
competitive
with
institutional
property
management
firms
operating
in
the
Montreal
area.
(b)
You
will
enter
into
and
maintain
in
force
an
agreement
regulating
the
joint
ownership
of
the
Property
on
terms
and
conditions
satisfactory
to
our
legal
counsel
at
his
sole
and
absolute
discretion
and
providing
inter
alia
for
payment
on
demand
by
the
co-owners
of
their
respective
portions
of
any
cash
deficiency
in
current
operations
of
the
Property
as,
when
and
to
the
extent
required,
and
in
the
event
of
default
by
any
co-owner,
at
the
option
of
the
non-defaulting
party,
the
acquisition
at
the
lower
of
the
cost
or
market
value
of
the
share
of
the
Property
of
such
defaulting
party;
the
equal
contribution
of
each
party
to
the
cost
of
any
agreed
renovation
or
conversion
of
the
whole
or
any
part
of
the
Property;
the
undertaking
of
each
party
to
enter
into
contracts;
deeds
or
documents
providing
for
any
financing
of
the
Property;
and
an
appropriate
buy-sell
provision.
8.
Our
undertaking
shall
be
conditional
upon
evidence
of
your
compliance
with
the
provisions
of
the
Foreign
Investment
Review
Act
to
the
extent
that
such
Act
is
applicable.
9.
Nothing
herein
contained
shall
be
deemed
to
oblige
us
to
obtain
judgment
or
to
settle
the
Litigation
and
our
failure
or
refusal
to
do
so
shall
not
result
in
any
recourse
by
you
against
us
other
than
the
recovery
of
all
sums
paid
by
you
to
us
pursuant
hereto.
10.
Time
shall
be
of
the
essence
hereof.
11.
The
Parties
have
requested
that
this
agreement
and
all
other
documents
contemplated
hereby
be
drawn
up
in
English
to
the
extent
legally
permitted.
Les
parties
ont
exigé
que
cette
entente
et
tous
autres
documents
envisagés
soient
rédigés
en
anglais,
dans
la
mesure
où
la
Loi
permet.
Yours
very
truly,
MIRLAW
INVESTMENTS
LTD
Per:
This
letter
was
filed
as
an
exhibit.
This
offer
was
not
formally
accepted
by
Placrefid
as
subsequent
events
brought
about
substantive
changes
to
the
proposal
outlined
therein.
On
April
9,
1979
Mirlaw
wrote
another
letter
to
Placrefid
which
was
apparently
prompted
as
a
result
of
Placrefid,
following
receipt
of
the
April
6
letter,
offering
to
acquire
100
per
cent
of
the
property
rather
than
50
per
cent
as
originally
provided
in
the
said
letter
of
April
6.
This
letter
reads:
April
9,
1979
Further
to
our
letter
of
April
6,
1979,
you
have
requested
the
additional
option
of
acquiring
our
entire
interest
in
the
Property
(as
therein
defined).
This
will
serve
to
confirm
our
agreement
and
undertaking
to
sell
to
you
our
entire
interest
in
the
Property
on
the
following
conditions,
each
of
which
shall
be
sine
qua
non
and
of
the
essence
hereof,
without
the
fulfillment
of
which
our
obligations
would
not
have
been
contracted:
1.
Your
right
to
acquire
our
entire
interest
shall
be
exercised
by
written
notice
received
by
us
within
thirty
(30)
days
of
today,
that
is,
on
or
before
the
close
of
business
of
May
8,
1979.
2.
You
shall
have
paid
to
us
the
respective
sums
of
ONE
HUNDRED
THOUSAND
DOLLARS
($100,000)
and
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000)
referred
to
in
paragraph
2
of
our
letter
of
April
6,
1979,
on
the
dates
therein
indicated.
3.
Contemporaneously
with
and
as
a
condition
of
such
notice,
you
shall
have
paid
all
arrears
of
real
estate
taxes
affecting
the
Property.
4.
In
the
event
such
notice
is
validly
given
the
sale
and
purchase
shall
occur
within
fifteen
(15)
days
after
the
Judgment
on
the
Litigation
becoming
final;
that
is,
within
forty-five
(45)
days
of
the
date
of
Judgment,
at
which
time
the
entire
purchase
price
shall
be
payable.
5.
The
purchase
price
shall
consist
of
the
total
cost
to
us
of
the
Property
whether
such
cost
is
incurred
prior
or
subsequent
to
the
date
hereof,
plus
the
sum
of
ONE
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($150,000).
Without
in
any
way
limiting
the
generality
of
the
foregoing,
such
cost
shall
include,
without
being
limited
to,
the
amount
of
our
hypothec
in
principal,
interest
and
accessories;
our
costs
and
expenses
of
administering
and
carrying
the
Property;
real
estate
taxes
paid
and
not
recovered
by
us
from
the
debtor;
management
and
administrative
costs
and
fees
not
recovered
by
us;
costs
and
fees
of
the
Litigation;
legal
and
notarial
expenses;
and
payments
to
any
prior
ranking
creditor.
6.
Such
purchase
price
shall
be
payable
in
cash
at
the
execution
of
the
Deed
of
Sale,
credit
to
be
given
on
account
of
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
referred
to
in
paragraph
2
hereof.
7.
We
shall
have
the
right
at
any
time
prior
to
receipt
of
your
notice,
to
notify
you
in
writing
that
we
elect
to
cancel
the
rights
granted
you
in
our
letter
of
April
6,
1979
in
consideration
of
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000).
Should
we
elect
to
so
notify
you,
you
shall
still
have
the
right
to
purchase
contained
herein,
provided
you
are
not
default
hereunder
and
provided
you
continue
to
fulfill
all
the
requirements
hereof,
but
your
rights
under
the
letter
of
April
6,
1979
shall
be
terminated
upon
payment
by
us
of
such
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000).
In
such
event,
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
or
any
portion
thereof
as
is
received
by
us
pursuant
to
paragraph
2
of
the
letter
of
April
6,
1979,
shall
be
applied
by
us
on
account
of
the
purchase
price
herein
contemplated
in
the
event
you
notify
us
pursuant
to
paragraph
1
hereof,
or
refunded
to
you
without
interest
in
the
event
you
do
not
so
notify
us.
8(a)
In
the
event
you
have
given
us
notice
pursuant
to
paragraph
1
hereof,
such
notice
shall
ipso
facto
cancel
and
terminate
your
rights
under
the
letter
of
April
6,
1979.
(b)
In
the
event
you
shall
have
given
us
notice
pursuant
to
paragraph
1
hereof
and
default
in
your
obligations
hereunder,
such
default
shall
ipso
facto
annul
and
terminate
your
rights
under
this
agreement.
(c)
In
the
event
no
notice
is
given
by
either
of
us
under
this
agreement,
this
agreement
shall
become
null
and
void
without
recourse
on
either
side
on
May
8,
1979,
under
reserve
of
your
rights,
if
any,
in
virtue
of
the
letter
of
April
6,
1979.
(d)
In
the
event
the
Judgment
referred
to
herein
is
appealed
by
the
Defendants
to
the
Court
of
Appeal,
this
agreement
shall
ipso
facto
be
null
and
void
without
recourse
on
either
side,
and
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000),
or
any
portion
thereof
as
is
received
by
us
from
you
shall
be
refunded
to
you
forthwith
without
interest.
9.
The
Sale
shall
be
made
by
us
without
any
warranty
on
our
part
whatever
and
without
any
representation
on
our
part
as
to
our
rights
in
the
Property.
10.
Our
undertaking
shall
be
conditional
upon
evidence
of
your
compliance
with
the
provisions
of
the
Foreign
Investment
Review
Act
to
the
extent
that
such
Act
is
applicable.
11.
Nothing
herein
contained
shall
be
deemed
to
oblige
us
to
obtain
judgment
or
to
settle
the
Litigation
and
our
failure
or
refusal,
to
do
so
shall
not
result
in
any
recourse
by
you
against
us,
other
than
the
recovery
of
all
sums
paid
by
you
to
us
pursuant
hereto.
12.
Time
shall
be
of
the
essence
hereof.
13.
The
Parties
have
requested
that
your
agreement
and
all
other
documents
contemplated
hereby
be
drawn
up
in
English
to
the
extent
legally
permitted.
Les
parties
ont
exigé
que
cette
entente
et
tous
autres
documents
envisages
soient
rédigés
en
anglais,
dans
la
mesure
où
la
loi
permet.
|
Accepted
|
Yours
very
truly,
|
|
PLACREFID
LTD.
|
MIRLAW
INVESTMENTS
LTD.
|
|
Per
:
|
On
April
17,
1979
Placrefid
wrote
to
Mirlaw
accepting
the
terms
of
the
""entente”
(for
lack
of
a
better
description
as
to
its
true
nature)
outlined
in
its
letter
of
April
9
with
minor
changes
which
were
then
formally
accepted
by
Mirlaw
on
April
18,
1979.
Between
the
letter
of
April
9,
1979
and
May
4,
1979
Mirlaw
had
a
change
of
heart
as
to
the
offer
made
to
Placrefid.
Invoking
the
provisions
of
paragraph
7
contained
in
its
letter
of
April
9
on
May
4
it
elected
to
cancel
the
rights
of
Placrefid
granted
in
the
letter
of
April
6,
1979
in
consideration
for
a
payment
of
the
sum
of
$250,000.
In
addition
Mirlaw
undertook
to
refund
the
sum
of
$250,000
already
paid
by
Placrefid
pursuant
to
the
provisions
of
paragraph
2
of
the
letter
of
April
6,
1979.
In
consideration
of
the
foregoing
payment
all
of
Placrefid
options
or
rights
acquired
pursuant
to
its
negotiations
with
Mirlaw
were
cancelled
and
terminated.
Mirlaw
refunded
the
sum
of
$250,000
and
paid
the
appellant
$250,000
after
withholding
25
per
cent
for
the
non-resident
tax
payable
to
Revenue
Canada
and
the
Department
of
Revenue
of
Quebec.
The
letter
of
May
4
reads:
May
4,
1979
We
refer
to
our
letter
agreements
of
April
6,
1979,
April
9,
1979
and
April
17,
1979
(collectively
the
("‘Correspondence”)
relating
to
certain
option
rights
granted
to
you
to
acquire
an
interest
in
the
property
therein
described,
subject
to
the
fulfillment
of
the
conditions
therein
contained.
This
will
serve
to
confirm
that
pursuant
to
the
Correspondence
and
in
particular
paragraph
7
of
the
letter
agreement
of
April
9,
1979,
we
have
elected
to
cancel
the
rights
granted
you
in
our
letter
of
April
6,
1979
in
consideration
of
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
which
sum
will
be
payable
by
us
to
you
on
June
1,
1979.
In
addition,
the
sum
of
TWO
HUNDRED
AND
FIFTY
THOUSAND
DOLLARS
($250,000)
paid
by
you
to
us
pursuant
to
the
Correspondence
will
be
refunded
to
you
without
interest
on
May
9,
1979.
You
shall
deliver
to
us
prior
to
June
1,
1979
Certificates
of
Limit
pursuant
to
Section
116
of
the
Income
Tax
Act
(Canada)
and
Section
820
of
the
Taxation
Act
(Quebec)
should
such
Certificates
be
necessary
in
the
opinion
of
our
legal
counsel,
failing
which
we
shall
withhold
the
amounts
required
by
such
Acts.
In
consideration
of
the
foregoing
payments
you
do
hereby
agree
that
all
and
any
of
the
options
and/or
rights
granted
to
you
pursuant
to
the
Correspondence
are
cancelled
and
terminated
as
of
the
date
hereof
so
that
you
will
have
no
right
whatever
to
acquire
the
whole
or
any
part
of
the
property
in
question
as
and
from
this
date.
You
do
further
confirm
and
agree
that
you
have
not
exercised
any
of
your
said
options
and/or
rights
prior
to
the
date
hereof
and
that
you
do
not
possess
any
rights
whatever
in
the
properties
in
question
as
of
this
date.
You
do
hereby
confirm
that
you
are
properly
empowered
and
authorized
as
signing
officer
to
receive
the
payments
aforesaid
and
to
grant
a
valid
receipt,
release
and
discharge
therefor
and
that
you
will
hold
us
free,
clear,
harmless
and
indemnified
against
any
claims
from
any
other
party
in
connection
with
such
payments.
Subject
as
aforesaid
the
parties
do
hereby
grant
to
each
other
full
and
final
mutual
release
and
discharge
from
any
and
all
liability
in
virtue
of
and/or
pursuant
to
the
Correspondence.
Yours
very
truly,
MIRLAW
INVESTMENTS
LTD.
Per:
ACCEPTED
THIS
4th
DAY
OF
MAY
1979.
PLACREFID
LTD.
Per:
On
July
1,
1980
Placrefid
filed
an
income
tax
return
claiming
a
refund
of
the
non-resident
tax
in
the
amount
of
$37,500
withheld
by
Mirlaw
from
the
sum
of
$250,000
referred
to
above.
Placrefid
indicated
on
its
tax
return
that
its
head
office
was
in
Panama
and
that
its
business
was
dealing
in
real
estate.
On
July
6,
1981
the
respondent
assessed
the
appellant
and
the
notation
on
Form
T7W-8
attached
to
the
notice
of
reassessment
reads:
“the
amount
received
from
a
sale
of
an
option
has
been
taxed
as
a
capital
gain
in
1980”.
The
net
capital
gain
assessed
was
$225,000
as
the
respondent
allowed
expenses
of
$25,000
as
a
deduction
in
computing
the
said
gain.
Following
the
filing
of
a
notice
of
objection,
on
May
12,
1982
by
notification
of
confirmation
by
the
Minister
the
assessment
was
confirmed
on
the
grounds
that
the
appellant
had
disposed
of
taxable
Canadian
property
within
the
meaning
of
paragraph
2(3)(c)
of
the
Act
and
had
been
assessed
in
accordance
with
the
provisions
of
subsection
115(1)
of
the
Act.
Counsel
for
the
appellant’s
submission,
as
I
understood
it,
was
that
the
cancellation
of
the
“entente”
with
Mirlaw
in
May
1979
could
not
have
given
rise
to
a
capital
gain
resulting
from
the
sale
of
an
“option”
in
respect
of
real
estate.
The
payment
in
the
amount
of
$250,060,
according
to
his
pretention
[sic],
received
by
the
appellant
in
consideration
for
this
cancellation
constituted
profit
from
an
adventure
in
the
nature
of
trade.
Counsel
further
relied
on
the
obiter
of
Jackett,
P.,
as
he
then
was,
in
M.N.R.
v.
Tara
Exploration
and
Development
Company
Limited
[1970]
C.T.C.
557;
70
D.T.C.
6370,
in
which
His
Lordship
suggested
that
an
adventure
in
the
nature
of
trade
does
not
make
a
non-resident
liable
to
tax
under
subsection
2(2)
now
2(3)
in
respect
of
the
profit
arising
therefrom
if
the
adventure
did
not
otherwise
amount
to,
and
was
not
part
of
a
business
“carried
on”
in
Canada.
The
charging
provisions
in
the
Act,
subsection
2(3),
do
not
include
as
part
of
the
taxable
income
of
a
non-resident
income
derived
from
an
adventure
in
the
nature
of
trade.
Counsel
further
submitted
that
even
if
the
appellant
could
be
regarded
as
carrying
on
business
in
Canada
by
reason
of
being
involved
in
an
adventure
in
the
nature
of
trade
or
otherwise,
it
would
not
be
taxable
in
Canada
because
as
a
resident
of
Switzerland,
with
no
permanent
establishment
in
Canada,
he
claimed,
the
provisions
of
Article
VII,
paragraph
1
of
the
Canada-Switzerland
Income
Tax
Convention
(1976)
(the
Convention)
would
be
applicable.
Counsel
for
the
respondent
on
his
part
maintained
that,
indeed,
the
payment
effected
by
Mirlaw
to
the
appellant
was
in
consideration
of
a
disposition
of
an
“option”
in
respect
of
real
property,
and
in
accordance
with
the
provisions
of
subsection
115(3)
deemed
to
be
property
referred
to
in
subparagraphs
(1)(b)(i)
to
(iv)
of
section
115,
that
is
a
taxable
Canadian
property.
The
said
payment
was,
therefore,
taxable
in
Canada
in
the
hands
of
the
non-resident
appellant.
Alternatively,
counsel
claimed
that
if
the
payment
in
question
was
in
the
nature
of
business
income
resulting
from
an
adventure
in
the
nature
of
trade,
it
would
still
be
taxable
in
Canada
because
the
obiter
of
Jackett,
P.
in
Tara
Exploration
and
Development
Company
Limited
was
not
accepted
by
the
Supreme
Court
of
Canada
according
to
him.
Therefore,
he
submitted,
an
adventure
in
the
nature
of
trade
did
constitute
carrying
on
business
in
Canada.
Counsel
also
took
the
position
that
the
Convention
could
not
be
invoked
by
the
appellant
as
it
was
legally
and
in
fact
a
resident
of
Panama
as
admitted
on
its
income
tax
return.
Even
if
the
Court
should
conclude
that
the
appellant
was
a
resident
of
Switzerland,
he
insisted
that
the
Convention
was
not
of
any
assistance
to
its
position
since
the
“option”
which
was
disposed
of
was
“immovable
property”
and
the
income
from
such
property
may
be
taxed
in
the
contracting
state
in
which
it
is
situated
in
accordance
with
the
provisions
of
Article
VI
1.
The
Article
reads:
1.
Income
from
immovable
property
including
income
from
agriculture
or
forestry
may
be
taxed
in
the
Contracting
State
in
which
such
property
is
situated.
2.
.
.
.
3.
The
provisions
of
paragraph
1
shall
apply
to
income
derived
from
the
direct
use,
letting,
or
use
in
any
other
form
of
immovable
property
and
to
profits
from
the
alienation
of
such
property.
Having
summarized
the
submissions
of
both
counsel,
I
will
deal
first
with
the
nature
of
the
payment
received
by
the
appellant
according
to
the
documentary
and
oral
evidence
adduced
before
the
Court.
I
cannot
agree
with
the
assessment
as
raised
by
the
respondent
whereby
the
amount
of
$25,000
was
a
capital
gain
realized,
by
the
appellant
on
the
disposition
of
a
taxable
Canadian
property,
the
alleged
“option”.
The
reality,
in
my
opinion,
is
that
the
“entente”
which
resulted
from
the
negotiations
between
Mirlaw
and
the
appellant
and
outlined
in
correspondence
dated
April
6,
9
and
17,
1979
was
never
in
the
nature
of
an
“option”
in
respect
of
real
property,
as
implied
by
the
respondent
by
its
assessment,
and
furthermore,
could
never
be.
Legally,
Mirlaw
did
not
own
the
property
at
the
time
of
the
negotiations
but
merely
held
an
hypothec
on
same
and
also
had
instituted
an
action
to
be
declared
its
rightful
owner.
Until
it
was
declared
the
owner
of
the
property
by
a
judgment
of
a
competent
tribunal
it
had
no
proprietary
right
whatsoever
in
the
said
property
and,
therefore,
could
not
contractually
deal
with
it
in
any
manner
whatsoever.
Furthermore,
Mirlaw
was
not
even
obligated
to
pursue
its
litigation
regarding
the
property
and
its
failure
to
do
so
could
not
give
rise
to
a
recourse
against
it.
This
is
well
spelled
out
in
the
letters
of
April
6
and
9,
paragraphs
9
and
11,
respectively.
Without
any
rights
in
the
property,
Mirlaw
could
certainly
not
grant
what
the
respondent
referred
to
as
an
"option”
in
respect
to
it,
any
more
than
it
could
dispose
of
it,
and
the
appellant
on
its
part
could
not
acquire
any
interest
or
rights
in
the
said
property
irrespective
of
how
intense
its
negotiations
with
Mirlaw
were.
In
my
opinion
the
"entente”
between
the
parties
consisted
simply
of
an
undertaking
on
the
part
of
Mirlaw
to
cause
the
property
to
be
conveyed
to
the
appellant
in
the
event
that
it
became
the
owner.
It
created
a
personal
obligation
for
Mirlaw,
which
was
binding
until
May
8,
1979,
and
as
long
as
the
appellant
did
not
default
on
its
own
commitment
under
the
said
“entente”.
It
was
also
agreed
that
this
undertaking
would
lapse
if
Mirlaw
elected
to
terminate
the
“entente”
before
May
8,
1979,
which
was
effectively
done
by
Mirlaw.
Having
reached
the
conclusion
that
the
appellant
had
not
disposed
of
an
“option”
and
thereby
a
taxable
Canadian
property
and
realized
a
capital
gain
in
the
amount
of
$225,000
during
the
taxation
year
under
appeal,
now
should
this
receipt
be
treated
in
Canada
for
tax
purposes.
The
evidence
of
Mr.
Campana
was
to
the
effect
that
the
appellant
was
incorporated
“for
the
special
purpose
to
seek
to
recover
the
investment
done
by
156
in
Place
Crémazie”
to
quote
him
verbatim.
In
other
words
the
appellant
was
incorporated
to
salvage
what
turned
out
to
be,
for
156
non-resident
investors,
a
financially
disastrous
investment
in
a
complex
located
in
Montreal
and
known
as
Place
Crémazie.
The
attainment
of
this
objective
was
made
possible
legally
by
its
wide
powers
under
its
charter
which
are
recited
in
a
prior
paragraph.
As
to
the
residence
of
the
appellant
the
witness
testified
that
all
the
meetings
of
its
board
of
directors
since
its
incorporation
had
been
held
in
Switzerland,
except
one
which
was
held
in
Nassau.
No
meeting
was
ever
held
in
Panama
in
spite
of
the
fact
that
its
head
office
was
located
there.
All
decisions
pertaining
to
the
administration
and
operations
of
the
company
were
taken
in
Switzerland,
as
all
its
directors
who
were
also
the
officers
of
the
appellant
resided
there
as
already
established.
Lord
Loreburn
held
in
the
De
Beers
case*
“that
a
company
resides
for
income
tax
purposes
where
its
real
business
is
carried
on
.
.
.
and
the
real
business
is
carried
where
management
and
control
actually
abides.”
Furthermore,
in
a
recent
judgment
of
the
Federal
Court
of
Canada,
Appeal
Division
in
the
case
of
The
Queen
v.
Gurd's
Products
Company
Limited
reported
at
[1985]
2
C.T.C.
85;
85
D.T.C.
5314
Urie,
J.
who
wrote
the
unanimous
decision
of
the
Court
expressed
himself
as
follows
at
91
(D.T.C.
5318):
Counsel
for
the
parties
agreed
that
a
line
of
jurisprudence
commencing
with
De
Beers
Consolidated
Mines
Limited
v.
Howe,
(1905),
5
T.C.
198
(H.L.)
gave
rise
to
the
common
law
principle
that
a
corporation
is
deemed
to
reside
where
its
control
and
management
is
exercised.
Based
on
this
rule,
I
have
no
hesitation
in
concluding
that
the
evidence
is
abundantly
clear
that
the
country
of
residence
of
the
appellant
was
Switzerland.
The
fact
that
a
notation
appeared
in
its
income
tax
return
indicating
that
its
head
office
was
located
in
Panama
is
completely
immaterial
and
cannot
be
conclusive
as
to
its
residence.
The
determining
factors
are
those
enunciated
in
De
Beers.
The
witness
explained,
however,
that
under
Swiss
law
“residence
is
not
the
term
or
expression
used
to
determine
if
a
taxpayer
is
taxable
or
not,
and
the
expression
commonly
used
is
“tax
subject”.
A
corporate
taxpayer
becomes
a
tax
subject
of
Switzerland,
according
to
his
testimony,
if
it
has
a
mailing
address
within
the
country
and
business
decisions
are
taken
in
the
country,
two
conditions
which
existed
in
respect
of
the
appellant.
He
had
no
doubt
that
Placrefid
was
a
tax
subject
of
Switzerland.
Having
considered
the
evidence
before
the
Court,
I
am
satisfied
that
the
“entente”
concluded
between
the
appellant
and
Mirlaw
which
eventually
gave
rise
to
the
latter
realizing
a
gain
of
$225,000
was
not
the
outcome
of
an
adventure
in
the
nature
of
trade,
but
that
the
profit
realized
by
the
appellant
was
“profit
from
carrying
on
a
business”
within
the
meaning
given
to
this
phrase
by
the
jurisprudence.
As
explained
by
Mr.
Campana
the
main
purpose
or
objective
for
the
incorporation
of
the
appellant
was
to
salvage
whatever
could
be
salvaged
of
an
investment
in
real
estate
in
Montreal
for
the
benefit
of
its
shareholders.
The
negotiations
between
the
appellant
and
Mirlaw
were
all
linked
intimately
to
the
pursuit
of
this
objective,
and,
therefore,
did
of
necessity
form
part
of
the
income-earning
process
of
the
appellant.
Under
such
circumstances,
it
cannot
be
regarded
as
an
isolated
transaction
completely
independent
or
divorced
from
its
main
business
activities
and
thereby
treated
as
an
adventure
in
the
nature
of
trade.
The
profit
generated
from
those
negotiations
originated
from
the
formulation
of
an
indefinite
plan
aimed
at
realizing
the
objective
of
its
incorporation.
In
my
opinion
in
negotiating
with
Mirlaw
as
it
did,
the
appellant
was
exercising
vested
corporate
powers
in
an
attempt
to
salvage
the
investment
in
Place
Crémazie,
which
was
the
raison
d'être
of
its
existence.
In
so
doing
the
appellant
was,
therefore,
carrying
on
a
business.
Counsel
for
the
appellant
also
conceded
during
the
hearing
that
the
negotiations
with
Mirlaw
were
resolved
or
concluded
in
Canada.
In
fact,
as
mentioned
before,
Me.
Michael
Rusko,
Q.C.
acted
on
behalf
of
Placrefid
throughout
the
negotiations
in
question.
In
summary
the
oral
and
documentary
evidence
before
the
Court
led
to
the
conclusion
that
the
profit
of
$225,000
realized
by
the
appellant
as
a
result
of
negotiations
with
Mirlaw
was
so
realized
in
the
course
of
carrying
on
its
business;
in
addition
the
said
business
was
carried
in
Canada
by
the
appellant,
a
non-resident.
The
next
question
to
be
considered
is
the
application
of
the
provisions
of
the
Act
to
the
income
earned
by
the
appellant
from
carrying
on
a
business
in
Canada
in
the
light
of
the
applicable
provisions
of
the
Convention.
Article
IV
1.
of
the
Convention
reads:
1.
For
the
purposes
of
this
Convention,
the
term
“resident
of
a
Contracting
Stale"
means
any
person
who,
under
the
law
of
that
State,
is
liable
to
taxation
therein
by
reason
of
his
domicile,
residence,
place
of
management
or
any
other
criterion
of
a
similar
nature,
and
in
the
case
of
Switzerland
it
includes
a
partnership
created
or
organized
under
Swiss
law.
Mr.
Campana's
evidence
clearly
established
that
the
appellant
was
a
resident
of
Switzerland
for
income
tax
purposes
as
its
control
and
management
were
Clearly
exercised
in
that
country
and,
therefore,
the
appellant
was
a
“person”
referred
to
in
the
above
Article.
As
the
appellant
was
therefore
subject
to
the
protection
of
the
provisions
of
the
Convention,
reference
to
its
applicable
provisions
must
be
made
to
ascertain
the
tax
treatment
afforded
to
business
profits
realized
by
an
enterprise
of
one
of
the
contracting
states
within
the
other
contracting
state.
The
relevant
Article
is
VII
1.
which
reads:
1.
The
profits
of
an
enterprise
of
a
Contracting
State
shall
be
taxable
only
in
that
State
unless
the
enterprise
carries
on
business
in
the
other
Contracting
State
through
a
permanent
establishment
situated
therein.
If
the
enterprise
carries
on
or
has
carried
on
a
business
as
aforesaid,
the
profits
of
the
enterprise
may
be
taxed
in
the
other
state
but
only
so
much
of
them
as
is
attributable
to
that
permanent
establishment.
The
evidence
has
also
disclosed
that
the
appellant
had
no
office,
place
of
business,
bank
account
or
physical
facilities
in
Canada
which
could
be
construed
as
a
“permanent
establishment”
within
the
meaning
assigned
to
this
expression
in
Article
V,
paragraphs
1
to
6
of
the
Convention.
However,
under
certain
circumstances,
an
agent
acting
on
behalf
of
an
enterprise
of
one
of
the
contracting
states
in
the
other
contracting
state
may
be
construed
as
a
permanent
establishment
in
that
state
for
the
purposes
of
the
Convention,
and
it
must
be
remembered
that
the
evidence
has
disclosed
that
the
appellant
was
represented
by
a
Canadian
counsel
throughout
its
negotiations
with
Mirlaw.
As
Me.
Rusko
stated
in
evidence,
he
would
not
commit
himself
on
behalf
of
his
client
unless
specifically
authorized
by
a
document
to
do
so.
Therefore,
as
Me.
Rusko
when
representing
the
appellant
did
not
have
the
authority
to
conclude
contracts
on
its
behalf
in
Canada,
and
furthermore
was
acting
in
such
a
capacity
in
the
ordinary
course
of
his
business,
he
could
not
be
deemed
to
be
a
permanent
establishment
in
Canada
of
the
appellant
pursuant
to
the
provisions
of
paragraphs
4
and
5
of
the
said
Article
V
of
the
Convention
which
read:
4.
A
person
—
other
than
an
agent
of
an
independent
status
to
whom
paragraph
5
applies
—
acting
in
a
Contracting
State
on
behalf
of
an
enterprise
of
the
other
Contracting
State
shall
be
deemed
to
be
a
permanent
establishment
in
the
first-
mentioned
State
if
he
has,
and
habitually
exercises
in
that
State,
an
authority
to
conclude
contracts
in
the
name
of
the
enterprise,
unless
his
activities
are
limited
to
the
purchase
of
goods
or
merchandise
for
the
enterprise.
5.
An
enterprise
of
a
Contracting
State
shall
not
be
deemed
to
have
a
permanent
establishment
in
the
other
Contracting
State
merely
because
it
carries
on
business
in
that
other
State
through
a
broker,
general
commission
agent
or
any
other
agent
of
an
independent
status,
where
such
persons
are
acting
in
the
ordinary
course
of
their
business.
[Emphasis
added.]
Having
decided
that
the
profit
of
$25,000
realized
by
the
appellant
in
1980
was
business
income
rather
than
a
capital
gain,
and
having
decided
that
it
was
entitled
to
the
benefit
of
the
Convention
and
since
it
had
no
permanent
establishment
in
Canada
the
said
profit
was
not
taxable
in
Canada.
The
appeal
is
therefore
allowed
and
the
assessment
referred
back
to
the.
respondent
for
reassessment
in
accordance
with
the
above
reasons.
The
appellant
is
entitled
to
party
and
party
costs,
but
the
witness
fees
to
Mr.
Campana
shall
be
limited
to
those
of
an
ordinary
witness
and
not
as
an
expert
witness
because
as
previously
indicated
he
appeared
at
the
hearing
primarily
in
the
former
capacity.
Appeal
allowed.
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