Harwill Investment Corp. v. The Queen, 93 DTC 247, [1993] 1 CTC 2424 (TCC)

Lamarre Proulx, T.C.C.J.:—This appeal was heard at the same time as the following appeals:

Gladstone Investment Corporation (91-203),

Loudee Holdings Inc. (91-205),

Fredmar-Darick Canada Inc. (91-207),

Faybess Investment Corp. (91-208), and

Choice Realty Corporation (91-289).

It was agreed that the decision reached in this appeal would apply to the other appeals. This appeal concerns the appellant's taxation year ending December 31, 1986.

The question at issue is whether payments to the City of Montréal (the "City") for local work were payments on account of income or were capital payments. The appellant submits that they were made on account of income; the respondent, that they were capital payments.

The appellant is co-owner with the other appellants of Place Versailles Shopping Centre. Place Versailles Inc. ("Place Versailles") acts as agent of the co-owners regarding the affairs of the shopping centre.

Mr. W. Gregory, who testified on behalf of the appellant, said that it was of importance to provide an adequate parking surface to compete adequately with another major shopping centre nearby, in offering good services to the tenants and their customers so that the rental income would increase accordingly. Place Versailles had hoped, since 1973, to expand the northern part of its parking lot.

For this purpose a municipal street, by the name of Pierre Corneille, had to be relocated further north. Place Versailles owned lands on the north side of that street. An agreement was reached with the City, whereby the City would transfer to Place Versailles the lands situated on the original Pierre Corneille street, and in turn, Place Versailles would transfer to the City the lands it owned on the upper north side of that street. This transaction would permit Place Versailles to expand the northern part of its parking lot by the original Pierre Corneille street, in addition to the lands it owned, up to the new Pierre Corneille Street.

The lands on the northern side of the original Pierre Corneille street were zoned residential. The City did not want to relocate the Pierre Corneille street nor proceed to the zoning change unless Place Versailles agreed to further develop the shopping centre by investing $6,000,000 on its capital structures, which Place Versailles finally agreed to do. A previous draft agreement did not contain that clause. It did however contain the clause whereby Place Versailles agreed to pay $480,900 to the City for the work the City would have to do on the new street. This is the amount that is in dispute.

Mr. W. Gregory related to the Court that Place Versailles, which had some years ago ceded lands to the City for the purpose of a municipal street, had been assessed local improvement taxes for a period of approximately ten years. These taxes had been deducted in computing the appellant's income.

On November 5, 1985, the agreement was signed between the City and Place Versailles. I will reproduce the most pertinent portions thereof:

LESQUELLES PARTIES DÉCLARENT CE QUI SUIT :

ATTENDU que LA PARTIE DE DEUXIEME PART désire agrandir et moderniser son centre d'achats connu sous le nom de «Place Versailles» et, pour ce faire, demande à la VILLE de relocaliser la rue Pierre Corneille vers le nord.

ATTENDU que LA PARTIE DE PREMIERE PART propriétaire des lots 332-Ptie 10 (rue Pierre Corneille) et 335A-Ptie 6 (rue Pierre Corneille) et que LA PARTIE DE DEUXIEME PART propriétaire des lots 332-12 Ptie 4, 335A-7-Ptie 2 et 335A- 7-2 Ptie 1 aux plan et livre de renvoi officiels de la Paroisse de Longue-Pointe, désirent échanger leur immeuble respectif pour permettre la réalisation de ce projet.

EN CONSÉQUENCE, LES PARTIES CONVIENNENT DE CE QUI SUIT :

LES PARTIES font entre elles l'échange suivant :

CESSION PAR LA PARTIE DE PREMIÈRE PART À LA PARTIE DE DEUXIÈME PART

LA VILLE (PARTIE DE PREMIÈRE PART) donne en échange, par les présentes, avec garantie légale et libre de tous privilèges et hypothèques, à LA PARTIE DE DEUXIÈME PART qui accepte, les terrains suivants, faisant partie de la rue Pierre Corneille, entre la rue de l'Authion et la rue de Boucherville, connu et désigné comme suit :

POSSESSION

Au moyen des présentes, LA PARTIE DE DEUXIÈME PART jouira et disposera comme bon lui semblera de l'immeuble présentement donné en échange par la VILLE (PARTIE DE DEUXIÈME PART), avec possession à compter du cinq novembre mil neuf cent quatre-vingt-cinq (1985).

CESSION PAR LA PARTIE DE DEUXIÈME PART À LA PARTIE DE PREMIÈRE PART

LA PARTIE DE DEUXIEME PART donne en échange, par les présentes, avec garantie légale et libre de tous privilèges et hypothèques, à la VILLE (PARTIE DE PREMIÈRE PART), qui accepte, pour fins de rue, les terrains suivants situés au nord- ouest de la rue Pierre Corneille, entre la rue de l’Authion et la rue de Boucherville, connus et désignés comme suit :

POSSESSION

Au moyen des présentes, LA VILLE (PARTIE DE PREMIÈRE PART) jouira et disposera comme bon lui semblera de l'immeuble présentement donné en échange par LA PARTIE DE DEUXIÈME PART, avec possession à compter du cinq novembre mil neuf cent quatre-vingt-cinq (1985).

LA PARTIE DE DEUXIÈME PART paiera le coût des présentes, l'enregistrement et les copies requises.

CLAUSES SPÉCIALES

10. LA PARTIE DE DEUXIÈME PART s'engage à payer à la Ville toutes les dépenses (incluant les frais d'administration de la Ville et les intérêts) qui seront encourues suite au déplacement de la rue Pierre Corneille, c'est-à-dire pour le réaménagement des services de la Ville et de la compagnie de téléphone Bell Canada, dans la nouvelle emprise de rue, et la valeur résiduaire des utilités publiques qui seront abandonnées dans l’ancienne rue Pierre Corneille, tel que :

1)	la construction de l'égoût	117,000
2)	l'abandon de la conduite d'eau et la construction d'une	44,000
	nouvelle
3)	la construction de conduits souterrains pour l'éclairage	28,300
	de rue
4)	l'enlèvement du système d'éclairage existant et l’instal-	25,000
	lation du nouveau système
5)	la construction des trottoirs	53,900
6)	la construction du pavage	132,700
7)	les installations de la compagnie de téléphone Bell	80,000
	Canada
	De son côté, la Ville reconnaît avoir reçu de LA PARTIE DE DEUXIÈME PART, à

l'exécution des présentes, une somme de QUATRE CENT QUATRE-VINGT MILLE NEUF CENTS DOLLARS (480 900 $) en guise de dépôt pour les fins ci-dessus indiquées, DONT QUITTANCE POUR AUTANT.

Il est de condition expresse que les présents travaux de relocalisation de la rue Pierre Corneille ne devront débuter qu'au moment ou le changement de zonage prévu à la clause 8 de l'offre d’échange ci-annexée aura été adopté par le Conseil Municipal.

60. LA PARTIE DE DEUXIÈME PART s'engage à faire des travaux d'agrandissement de l'ordre de SIX MILLIONS DE DOLLARS (6 000 000 $) à l'édifice connu sous le nom de Place Versailles, lesquels travaux débuteront au plus tard. . . .

Counsel for the appellant and counsel for the respondent referred the Court to the following cases:

B.P. Australia v. Comr. of Taxation, [1965] 3 All E.R. 209, [1966] A.C. 244;

Edmonton Plaza Hotel (1980) Ltd. v. The Queen, [1987] 2 C.T.C. 153, 87

D.T.C. 5371 (F.C.T.D.);

Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2

C.T.C. 111, 85 D.T.C. 5373;

MHL Holdings v. The Queen., [1988] 2 C.T.C. 42, 88 D.T.C. 6292 (F.C.T.D.);

M.N.R. v. Algoma Central Railway, [1968] S.C.R. 447, [1968] C.T.C. 161, 68

D.T.C. 5096; and

Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7, 79 D.T.C.

5458 (F.C.T.D.).

Appellant's submission

Counsel for the appellant based his case on the Oxford case, supra, and stated that the payments were made to promote the business of the shopping centre by enhancing its popularity and not to acquire assets of an enduring nature.

He quoted Thurlow, A.CJ. at page 15 (D.T.C. 5464):

The money was not paid for changes in or additions to the appellant's premises or the buildings thereon or in connection with the structure of the appellant's business. Rather, it was paid to induce the city to make changes on city property that could be beneficial to the plaintiff in achieving its object of promoting its business by enhancing the popularity of its shopping centre.

The need or occasion for the expenditure, in my view, was the undesirable effects which traffic congestion was causing and could be expected to cause on the popularity of the shopping centre and on its prospects for competing with a rival shopping centre to be constructed some three miles distant. It thus appears to me to have arisen out of and to be incidental to the carrying on of the plaintiff's business rather than to the premises on which the business was carried on. It was, as I see it, just one of the broad range of needs or demands which arise in the course of running such a business and which, for the success of the operation, must be met or provided for out of the revenues of the business.

Respondent's submission

Counsel for the respondent submitted that the facts of the case at bar were different from those of the Oxford case, supra, in that, in the latter case, the exchange took place on the initiative of the City of Calgary to solve a problem of congested traffic, there were six agreements and the payments in lieu of tax for local improvements were not related to the acquisition of lands by the taxpayer. In this appeal, the sums paid to the City were directly related to the acquisition of land to expand a parking lot and therefore the advantage obtained was the acquisition of an asset of an enduring nature.

Analysis

In Oxford, supra, there were, indeed, six agreements. The first agreement provided for the sale by Oxford to the City and by the City to Oxford, of lands at the price of $85,000 per acre. The other agreements were described by Mr. Justice Thurlow as such at page 9 (D.T.C. 5459):

Another agreement related to the demolition by the plaintiff of an existing service station on its premises and the construction of a new one at a different location in consideration of $235,000 to be paid by the city. Another related to the construction of the “fly-over” and gave the plaintiff the right, during an option period, to require the city to construct the “fly-over” on certain agreed terms as to payments to be made by the plaintiff. Another agreement conferred on the city an option to buy from the plaintiff at an agreed price per acre, equal to that in the first mentioned agreement, land of the plaintiff that would be required for the construction of the "fly-over". By a further agreement, Oxlea agreed to donate to the city a parcel of land to the westward of the realigned 5th Street S.W.

The last agreement provided that an amount of $490,050 would be paid in lieu of paying local improvement rates and taxes that might have been assessed against Oxford, supra, at page 9 (D.T.C. 5459-60):

AND WHEREAS the cost of such changes as a foresaid might result in Chinook and Oxlea being liable to the City for local improvement rates and taxes arising by reason of such changes and in lieu of making payment of such local improvement rates and taxes that might be payable Chinook and Oxlea have agreed to pay to the City the sums of money and at the times hereinafter provided;

After a review of the case law on the subject, Mr. Justice Thurlow made the following determination at page 14 (D.T.C. 5463-64):

For if, as I think, the expenditure can and should be regarded as having been laid out as a means of maintaining, and perhaps enhancing, the popularity of the shopping centre with the tenants’ customers as a place to shop and of enabling the shopping centre to meet the competition of other shopping centres, while at the same time avoiding the imposition of taxes for street improvements, the expenditure can, as it seems to me, be regarded as a revenue expense notwithstanding the once and for all nature of the payment on the more or less long term character of the advantage to be gained by making it.

Nor do I think the uestion is resolved and the expenditure characterized as capital simply because the agreement was one of several related agreements some of which plainly dealt with matters of a capital nature and which altogether made up a single complex transaction. If there had been but a single agreement in which the expenditures were not segregated or severable, the easily recognizable capital nature of what was involved in the other agreements might well have served to characterize the whole. But I do not think that the same result follows where the particular expenditure has been carefully segregated in a separate agreement which demonstrates what the particular expenditure was for.

I do not want to emphasize the aspect that in the present case, there was one agreement rather than a few separate agreements. I do however, have to reach the conclusion that the direct purpose of the payments in the case at bar was to expand the parking capacity of Place Versailles. The payments were not made to satisfy the City's needs in remedying a problem of congested traffic, payments that pointed to business operation in the sense that they had to be made to remain in business as this was the case in Oxford, supra, but were made for the purpose of the appellant's operating structures by acquiring land to expand the surface allocated to parking.

It is also probably quite true that if the expenditure had taken the form of local improvement taxes staggered on a certain period of time, these latter would have been current expenses. In this respect, it must be said that it is not, here, only a question of form (though it has become trite law that form matters), but a question of substance. The amount in question is not a tax.

It is no doubt true that the ultimate goal of this expenditure was to enhance the popularity of Place Versailles. But in Algoma Central Railway v. M.N.R., [1967] 2 Ex. C.R. 88, [1967] C.T.C. 130, 67 D.T.C. 5091, Mr. Justice Jackett stated the following at page 94 (C.T.C. 136, D.T.C. 5095):

In all these cases, and in the other cases referred to in the various decisions to which reference was made during the argument, the advantage” that was held to be of an enduring benefit to the taxpayer's business was the thing contracted for or otherwise anticipated by the taxpayer as the direct result of the expenditure. In all such cases it was the "advantage" so acquired that, it was contemplated, would endure to the benefit of the taxpayer's business. . . .

[Emphasis added.]

In this instance the direct advantage is the acquisition of the former Pierre Corneille Street, that is to say, acquisition of land. This land, used in the expansion of a parking lot, is an asset of an enduring nature, contrary to what was happening in the case of land purchased solely for the purpose of extending the perimeter of an open pit mine as in the Johns-Manville Canada Inc. case, supra.

The appeal is dismissed with costs.

Appeal dismissed.