Barnabe Estate v. Minister of National Revenue, 99 DTC 5387, [1999] 4 CTC 5 (FCA)

Sexton J.A. (Strayer J.A. concurring):

The main issue in this case is whether the Tax Court Judge was correct in holding that as a matter of law Louis Barnabe, before his death, did not complete a legal contract with Barnabe Grain Farms Ltd. to dispose of his farming assets under s. 85 of the Income Tax Act. With the greatest of respect, after reviewing the evidence in this case, much of which is uncontradicted, I have concluded that an oral contract was completed.

Louis Barnabe, until his accidental death on May 10, 1992, was a successful farmer in Manitoba. In late 1990, he began planning to transfer his farming assets, not including land, to a wholly owned corporation and by 1991 the corporation, Barnabe Grain Farms Ltd., was running the farming business. It paid all expenses and received the revenue from the business as well as having control and possession over the farming assets it rented from Barnabe.

In January of 1992, Barnabe met with his accountant, Dennis Fillion to discuss the transfer of his farming assets to Barnabe Grain Farms Ltd.: the corporation of which he was the only shareholder and sole director and which he had incorporated to take over the farming operations. Fillion advised Barnabe not to transfer the assets to the corporation until his 1991 tax return had been completed.

On May I 1992, Barnabe again met with Fillion to sign his 1991 personal income tax form and to review his affairs. Fillion testified that Barnabe decided to transfer the farming equipment to his holding company during the meeting and that Barnabe issued him instructions in that regard. He also testified that Barnabe signed the form necessary to complete the election necessary for a section 85 disposition (he signed an election in blank) which Fillion was to complete and register. Unfortunately, neither party made notes on what transpired in the meeting, the form was lost by Fillion and thus the election was not filed prior to Barnabe’s death.

The appellants in this appeal, Roger and Richard Barnabe, are the executors of Barnabe’s estate and have been officers of Barnabe Grain Farms Ltd. since the death of Barnabe. Fillion first advised the executors on May 20, 1992 that Barnabe had completed a contract to dispose of his farming assets. A new T-2057 Election Form was prepared and executed by the appellants and filed on January 29, 1993.

The appellants claim that Barnabe made a disposition under section 85 of the Income Tax Act at the May 1, 1992 meeting. Counsel for the appellants argues he made the decision to transfer all his assets at fair market value on that date. He also argues that the election made by the executors subsequent to Barnabe’s death was valid for the purposes of section 85.

Counsel for the respondent argues that Fillion’s testimony is not sufficient evidence to ground a finding that a contract had been completed and that in order for an election under subsection 85(6) to be valid, it had to be made prior to Barnabe’s death.

Legislative Framework

The following statutory provisions of the Income Tax Act are relevant in this appeal:

85(1) Where a taxpayer has, in a taxation year, disposed of any of his property that was eligible property to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation, if the taxpayer and the corporation have jointly elected in prescribed form and in accordance with subsection (6), the following rules apply:

(a) the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property shall be deemed to be the taxpayer’s proceeds of disposition of the property and the corporation.

85.(6) Any election under subsection (1) or (2) shall be made on or before the day that is the earliest of the days on or before which any taxpayer making the election is required to file a return of income pursuant to section 150 for the taxation year in which the transaction to which the election relates occurred.

Findings of the Tax Court Judge

The learned Tax Court Judge found that in order to have a valid election under section 85 it was necessary that the election be completed by Barnabe personally prior to his death. He found that a valid election had not been made in this case.

The Tax Court Judge concluded that there was no valid disposition of the farming assets to Barnabe Grain Farms Ltd. for the following reasons:

(a) there was no list which itemized the assets to be transferred;

(b) there was no enforceable contract between Barnabe and his corporation;

(c) the fair market value of the assets had not been determined;

(d) Barnabe Grain Farms Ltd. had not passed any corporate resolutions authorizing the company to enter the contract.

Issues

The appeal raises the following two issues:

1. Was there a valid election made by the appellants and Barnabe Grain Farms Ltd. to have the disposition of the farming assets governed by subsection 85(1) of the Income Tax Act?

2. Was there a valid disposition of Bamabe’s farming equipment on May 1, 1992?

Analysis

A. Election under section 85(6)

The Tax Court Judge found that in order for an election to be valid under section 85 the election must have been made by Barnabe personally. However, I accept the position of the appellants that the executors were capable of making a valid election after Barnabe’s death. They did so by preparing and executing a new T-2057 election form, which was filed on January 29, 1993.

Were the appellants entitled to file the joint election on behalf of Barnabe after his death? Under subsection 85(6), the person required to make the election is “any taxpayer”. Taxpayer is defined in subsection 248(1) of the Income Tax Act as including “any person whether or not liable to pay tax”. Subsection 248(1) further defines person as including inter alia “the heirs, executors, administrators or other legal representatives of such per- son, according to the law of that part of Canada to which the context extends.”

Thus the word “taxpayer” includes an executor. This is consistent with the form provided by Revenue Canada which permits the person signing the election as transferor to be inter alia an “authorized officer or authorized person”. Here, the authorized persons were the executors of the Barnabe estate. It is also clear that the officers of the company had the capacity to sign on behalf of the transferee.

The election was plainly filed within time. Subsection 85(6) of the Income Tax Act requires that an election be made before the earliest of the two dates on which each of the taxpayers making the election are required to file their return. Paragraph 150(1 )(a) of the Income Tax Act requires a corporation to file a return of income within six months after its year end. Paragraph 150(1)(d) requires a return of income to be filed for an individual by April 30 of the following year. Thus, Barnabe Grain Farms Ltd. was required to file its return of income by January 30, 1993 while the return of Barnabe was to be filed by April 30, 1993. Therefore, a joint election had to be filed by January 31, 1993 in order to comply with the requirements of subsection 85(6).

The election was filed on January 29, 1993. I therefore conclude that there was a valid election that was filed within the proper time.

B. Was a valid disposition made?

1. Enforceable contract

I cannot accept the reasons set out by the Tax Court Judge for rejecting the claim that a contract of disposition had been completed. Fillion’s evidence of the May 1, 1992 meeting remains uncontroverted and the Tax Court Judge did not suggest that he disbelieved Fillion. The following testimony offered by Fillion is convincing of the appellants’ position:

Q Now I just want to get into your discussion, particularly with respect to the depreciable, the transfer of the depreciable assets, that issue. And you said that you felt it was -- I just want you to go through that again to make sure that we have it. What was your advice to Mr. Barnabe first?

A My advice to Mr. Barnabe was to transfer the assets --

Q And had -

A — and Mr. Barnabe said yes.

Q All right. And by your understanding was he making the decision at that time to transfer the assets?

A Yes, the decision was made at that time.

Q Now based upon the discussions you have told us about with Mr. Barnabe on May I, 1992, what was your understanding as to the date the transfer of the assets was effective?

A May 1st.

Q Of what year?

A Of 1992. [1]

It is clear from this evidence that a firm decision had been taken by Barnabe to transfer all of the farming assets to the company on May 1, 1992. The next passage establishes that all that remained to be done was to complete the formal paper work to evidence this decision, and to determine the “fair market value” of the assets:

A Thank you. Now how was it to be determined which equipment was being transferred to the corporation?

A It was all the equipment.

Q All of the farming equipment that he owned?

A All the farming equipment and buildings.

Q Was there ever any intention to exclude any of the farming equipment?

A No, there wasn’t.

Q Now on May 1st, did you have a list of the farming equipment that was owned by Louis Barnabe?

A I had a list we were maintaining on file.

Q What, if anything, did Mr. Barnabe have to do with respect to verifying that list?

A He had to verify the list, yes, and then also we had to, he had to - fair market values had to be established.

Q Other than that, did you require any additional information from Mr. Barnabe in order to do your calculations?

A No. [2]

Thus all farming assets were transferred at fair market value.

The fact that Barnabe could conceivably have changed his mind and decided to rescind the transfer is of little consequence. It is trite law that parties to any contract can always agree to rescind a contract they have signed. Moreover, there is simply no evidence which suggests that Barnabe in- tended to rescind the contract. Rather, the other evidence confirms that Bar- nabe’s intent was to formalize the disposition.

At this point, it is useful to summarize the overt steps taken by Barnabe which buttress Fillion’s evidence that a decision had been taken to transfer the farming assets:

1) In June of 1990, Barnabe explained to the lawyer who eventually acted in the incorporation of Barnabe Grain Farms Ltd. that the purpose of incorporating the company was to create a one-man corporation to take over the farming operations previously run by him personally. Barnabe told his lawyer that the corporation was to acquire the inventory and machinery owned by Barnabe and carry out his obligations regarding farmlands leased from others. [3]

2) On December 28, 1990 Barnabe incorporated Barnabe Grain Farms Ltd. with himself as the only officer, director and shareholder. The farming business was carried on by the corporation in 1991.

3) Barnabe Grain Farms Ltd. paid all the expenses and received all the revenue from the farming business. It had possession and control of the depreciable assets and paid all expenses associated with them. Further, the corporation paid rent to Barnabe for the use of the farm assets in 1991. [4]

4) There is uncontroverted evidence to the effect that Barnabe executed a blank election form T-2057 on May 1, 1992 in his personal capacity and on behalf of Barnabe Grain Farms Ltd.. This is the form of joint election governing the transfer of assets under subsection 85(1) of the Income Tax Act. Unfortunately, Fillion misplaced this form. [5]

5) On May 4, 1992, Barnabe met with his insurance broker to renew the insurance for the farm and the insurance on the depreciable assets. The insurance premium was paid with a cheque from the corporation. At that time, Barnabe advised his insurance broker that his farming business was now being run by the corporation.

In my view, Barnabe’s actions support the uncontradicted evidence of Fillion that he contracted to dispose of his farming assets to the corporation on May I, 1992. Thus this case can be distinguished from the recent case of Nesis v. R. [6] where the taxpayer could not establish that a contract was completed in November of 1987 when the first overt act evidencing the contract was made in September of 1988.

In principle, I should state that I agree with the following statement made by Bonner J.T.C.C. at page 1949 of Nesis:

A contractual commitment between a shareholder and a closely held corporation is not formed by a decision in the mind of the shareholder unless that decision is accompanied by some overt corporate act. [7] /

However, on the facts of the instant case, there is sufficient evidence of overt acts made by the corporation, such as the act of signing the joint election form. Although it is unfortunate that this election form was lost, the Tax Court Judge did not indicate that he did not find Fillion’s evidence creditable on this point.

The decision of this Court in Rose v. Minister of National Revenue is also easily distinguished on the facts of that case. In Rose, Chief Justice Jackett concluded:

the appellant has failed to make out that case because it has not established that the contract between the partnership and Central Park Estates Limited for the management of the apartment blocks was executed before that corporation sold their blocks. [8]

Since there was no evidence demonstrating that the partnership ever authorized the five directors to carry on the business and since there was nothing in the partnership articles as to how the partnership was to be carried on, the Court concluded that some documentation was required to sustain the appellant’s position. In our case, the oral evidence and the other overt measures taken by Barnabe demonstrate the existence of a contract despite the inability to produce documentation of the transaction.

The testimony of Fillion to the effect that a transfer was made distinguishes this case from many of the others in this area in which the absence of evidence is obvious. For example, R. v. Neudorf?, [9] which applies Rose, can be distinguished on the basis that the present case does not involve the ex posto facto arrangement of affairs for tax gains. Rather the evidence here plainly demonstrates that Barnabe had intended to transfer the equipment for more than a year prior to his death, and that on May 1, 1992, he finally did so.

It is accepted that in Manitoba the contract of disposition need not be made in writing and it is trite law that an oral contract is enforceable. [10] I now turn to address the other difficulties raised by the Tax Court Judge

i) Listing of Assets

The Tax Court Judge held that the lack of a finalized list of assets to be transferred was support for his finding that a disposition had not been completed. However, from Fillion’s testimony, it is clear that all the farming assets were to be transferred and therefore I do not place any significance on this point.

ii) Valuation of assets

The following passage reinforces the passage reproduced in paragraph 18 in establishing that the price for the assets was set at fair market value:

Q. Now I gather that it would be normal, or perhaps I will ask you in your experience, under Section 85 rollover, does the transfer have to occur at fair market value?

A. The transfer has to occur at fair market value, but the elected amount-

Q. I appreciate there is an allocation of that. Is it common or uncommon for the fair market value of the assets to be determined or finalized at a date after the effective date of the agreement.

A. Very common.

Q. Now in the agreements that you have been involved in, the rollovers, is there normally a price adjustment clause?

A. Yes, there always is.

Q. And what is the purpose of that price adjustment clause?

A. The purpose is to be able to review the fair market value should Revenue Canada question it.

Q. So would it be fair to say then that the fair market value can even change, depending upon the circumstances, after the agreement is signed?

A. Yes, it can. [11]

In my view, by fixing the consideration at “fair market value”, the price term was sufficiently clear to be accepted as a valid term of the contract. It is settled law that it is possible to have a binding agreement of purchase and sale where the price is set at the fair market value. The price need not be actually identified in a specific amount. In this connection, I refer to the remarks made by Major J., when rendering the unanimous judgment of the Supreme Court in Mitsui & Co. (Canada) v. Royal Bank:

The parties had previously agreed that the option exercise price was to be the “reasonable fair market value” of the helicopters. That price is not uncertain. It is not subject to further negotiation; it is not an “agreement to agree”. The price has been set to be the reasonable fair market value. As noted by the British Columbia Court of Appeal in Re Nishi, an option to purchase at “fair market value” is enforceable. This is not a situation where the price or some other material term of the option has yet to be agreed upon. The law recognizes that agreements to purchase property in the future at a “reasonable price” or at “fair market value” are valid and enforceable. [12]

The uncontradicted evidence of Fillion was that it is common practice when transferring assets pursuant to section 85 of the Income Tax Act to determine fair market value after the agreement to transfer is made. [13] I accept his evidence that agreements to transfer assets pursuant to section 85 normally have price adjustment clauses which provide for the adjustment of the allocated values after the fact, in the event that the allocated value is not equal to fair market value. Revenue Canada has recognized the effectiveness and validity of such clauses. [15]

It is clear from Fillion’s evidence that the finalization of the list of assets to be transferred and the determination of fair market values for the assets were purely “housekeeping measures” that were simply required to document the agreement which had been already concluded on May 1, 1992. This situation is similar to Kozan v. Minister of National Revenue where Goetz J.T.C.C. found:

The registration of title was delayed to March 1980, but what had to be done in 1980 were, under the circumstances, mere housekeeping measures, to wit, the obtaining of the Official Guardian’s Certificate and transmission of title. Both treated this as an assured event. Both acted, in every way, as if the disposition was completed in 1979. It is clear then, that the Minister’s reassessments for the 1979 and 1980 taxation years were correct, [16] 16

Finally, this is not a case of the type typified by Paxton v. R. [17] where the price was not agreed upon, since it is clear in the present case that the price was set at “fair market value”.

iii) Consideration

Since the assets were to be transferred at fair market value, it is obvious that the consideration which would be received by Barnabe for the disposal of the assets could be ascertained. The critical question is not whether Barnabe received consideration but rather whether there was an enforceable contract such that Barnabe was entitled to receive the proceeds of the disposition. This Court decided in Dale v. R. [18] '8 that there is no requirement that a party actually receive the consideration for a disposition to have taken place. Simply put, an agreement, such as the one here, that entitles a party to payment in the future satisfies section 85.

iv) Need for Corporate Resolutions

I do not believe that corporate resolutions were necessary to effect the disposition made in this case. Subsection 15(1) of the Manitoba Corporations Act^ [19] provides that “a corporation has the capacity and subject to this Act the rights, powers and privileges of a natural person.” It is obvious that a natural person has the right to make an oral contract and it follows therefore that in Manitoba a corporation has the same right.

Finally, Robertson J.A., with Strayer J.A. concurring, held in Paxton: “it follows that this Court is not preoccupied with the form of transfers in the context of the roll-over provisions of the Act.” [20] In that case the question was whether the evidence supported the existence of an enforceable oral contract. After reviewing the evidence, the majority found that it did not, particularly since no price had been established. In the instant case, the price was set at fair market value by agreement of the parties and thus Paxton is easily distinguishable.

Conclusion

In light of the uncontradicted evidence of Barnabe’s accountant and the supporting facts, I conclude that a valid disposition was made under section 85 of the Income Tax Act. I also conclude that the election made by the executors pursuant to subsection 85(6) was valid. Thus, the appeal should be allowed with costs to the appellants.

Robertson J.A. (dissenting):

In his fourth edition of The Law of Contracts, Professor Waddams notes that occasionally the question arises as to whether a person can contract with himself or herself. [21] This is one of four cases heard in this Court in the last twelve months concerning the legal ability of a person to do precisely that. [22] In each instance, the issue arose in the context of the Income Tax Act. But, as is so often the case, these cases have little to do with tax law and more to do with common law principles surrounding the formation of a legally enforceable contract. The present appeal stems from the application of section 85 of the Act.

Section 85 of the Act permits a taxpayer to defer the payment of capital gains where property is transferred from an individual to a corporation in return for shares in that corporation. As would be expected, a taxpayer must effect a “disposition” of property to obtain the benefit of that section. In the present case, Louis Barnabe died prior to effecting an actual transfer of his depreciable farm equipment to a company which had been formed for that very purpose. That he intended to effect such a transfer prior to his death is not in dispute. But intention alone is insufficient compliance with section

85. Accordingly, the only way in which the appellants, Mr. Barnabe’s legal representatives, are able to claim the benefit of that rollover provision is by establishing that a binding contract for the sale and purchase of the farming equipment was concluded prior to Mr. Barnabe’s death. Moreover, the appellants must establish that Mr. Barnabe entered into a contract with himself in his personal capacity and in his capacity as the sole director, officer and shareholder of his farming corporation. To exacerbate matters, the appellants argue that the alleged contract is an oral one. The only evidence to support the existence of such a contract consists of the testimony of Mr. Barnabe’s accountant, Mr. Fillion. Mr. Fillion’s recollection of the alleged oral contract flows from a meeting he had with Mr. Barnabe nine days before the latter’s death. Finally, the appellants must overcome the fact that the contract is silent as to at least three material terms; namely, the farming assets that were to be conveyed to the farming corporation, their fair market value, and the consideration which Mr. Barnabe was to receive from his farming corporation in return for the unidentified farming assets. It is the appellants’ position that those material terms can be supplied by reasonable implication.

With great respect, I cannot subscribe to my colleagues’ opinion that Mr. Barnabe’s estate is entitled to the tax advantages flowing from section 85; therefore, I would dismiss this appeal, as did the learned Tax Court Judge, but on slightly different grounds.

At the outset, I note that my colleagues appear to take the position that, on May 1, 1992, Mr. Barnabe actually disposed of his assets to his farming corporation. With great respect, I understand the appellants’ argument to be that a binding contract was entered into on May 1, 1992 between Mr. Barnabe in his personal capacity and in his capacity as sole director, officer and shareholder of his holding corporation. There could be no actual transfer until such time as the assets were transferred to the holding corporation and, in return, shares in that entity issued to Mr. Barnabe. As I understand the facts, the actual transfer did not occur until after Mr. Barnabe’s death. The following analysis proceeds on this understanding.

It is my respectful position that his appeal cannot succeed for any one of four reasons. First, Mr. Fillion’s evidence does not establish that Mr. Barnabe intended to contract with himself and in his representative capacity. What it does establish is that Mr. Barnabe instructed his accountant to effect a rollover of his farming assets to a holding corporation. Second, it does not make any commercial sense that Mr. Barnabe would wish to enter into a binding executory contract (one which has yet to be fully performed) unless he knew he was going to die prior to completing the actual transfer of assets. It is common ground that Mr. Barnabe’s death was accidental. Third, the idea of an oral contract with oneself is antithetical to a fundamental principle underlying contract law. In my opinion, this is one instance where the law demands that such contracts be reduced to writing. Fourth, assuming that I am in error on each of these points, it is my opinion that the alleged oral contract fails to satisfy the “certainty of terms” requirement of contract law. This is not a case where the Court can or should supply miss ing and essential terms. It is a case in which this Court is being asked to construct a contract. I shall deal with each of my objections in turn.

My first objection is that the evidence does not support a finding that Mr. Barnabe contracted with himself in his personal and representative capacity. The appellants argue that Mr. Fillion’s testimony makes it clear that the conversation between Mr. Barnabe and Mr. Fillion establishes that the former intended to enter into a contract with himself in his individual capacity and in his capacity as sole director, officer and shareholder of the farming corporation. Moreover, the appellants maintain that, based on that conversation, Mr. Fillion understood that Mr. Barnabe was entering into a contract with his farming corporation on the following basis: “I [Louis Barnabe] am selling to you [the farm corporation] all my depreciable assets at fair market value.” This is how counsel for the appellants formulated the contract during oral argument before the Court.

Did Mr. Barnabe enter into a contact with himself in his personal and corporate capacities? Reproduced in Schedule “A” to these reasons are those portions of the transcript relating to Mr. Fillion’s evidence as to the conversation which took place between himself and Mr. Barnabe on May 1, 1992. Based on Mr. Fillion’s evidence, I accept that a contract was entered into, but not between Mr. Barnabe in his individual and corporate capacities. If any contract was formed on May 1, 1992 it was between Mr. Fillion and Mr. Barnabe. That contract imposed an obligation on Mr. Fillion to effect a transfer of Mr. Barnabe’s farming assets to his holding corporation in order to comply with and take advantage of section 85 of the Act. After all, it was Mr. Fillion who advised Mr. Barnabe not to effect such transfer until after the 1991 taxation year (April 30, 1992).

The issue before us is not whether Mr. Fillion gave credible evidence as to his belief that Mr. Barnabe entered into a contract with himself in two different capacities. Mr. Fillion’s belief in this regard is irrelevant. Rather, the issue is whether the court is satisfied that such a contract was formed. It is a fundamental precept of contract law that the test as to whether a “bargain has been struck” is an objective one. Thus, contract formation is not dependent upon an inquiry into the parties’ subjective intentions. Neither is it a question as to what a third party, such as Mr. Fillion, believes to have been a party’s intention. In the present case, the Court can only evaluate what was said between Mr. Fillion and Mr. Barnabe in order to determine if a contract was made. Based on my reading of the relevant portions of the transcript, it is clear is that Mr. Barnabe gave Mr. Fillion instructions to effect the section 85 rollover, but only after Mr. Barnabe confirmed which assets would be transferred to the farm corporation. More importantly, the transcript does not reveal what was actually said by Mr. Barnabe to Mr. Fillion. After all, it is the court which determines whether a contract was formed, not a witness whose evidence is self-serving.

In order to accept the appellant’s argument, it must be presumed that both Mr. Barnabe and Mr. Fillion were cognizant of the fact that it is possible to contract with oneself, if one is acting in both a personal and representative capacity. While Mr. Barnabe was a successful farmer, it is difficult to imagine that a man so closely connected to the earth would have been able to familiarize himself with the metaphysical landscape of classical contract law principles. While I dare not speculate as to the scope of Mr. Fillion’s understanding of such principles, in my brief exposure to tax law, I have always found accountants to be most imaginative in seeking to promote the interests of their clients. There are limits to such imagination, and this case transcends them. I acknowledge that according to accepted contract principles it matters not whether a defendant appreciated that a promise would give rise to legal obligations. The test as to whether there was an intention to create a legal relationship is an objective one, of which more will be said below. However, in the present case there is simply no objective evidence of intention.

My second objection to my colleague’s decision is based on the fact that it would not have made commercial sense for Mr. Barnabe to enter into a binding executory contract, unless he knew that he was going to die prior to the actual transfer of his farming assets. I recognize that this objection is not self-evident.

Most of the contractual arrangements we enter into on a daily basis are not executory contracts, that is, they do not require full performance until a later date. Usually, there is no gap between the time a contract is formed and the date it is executed. Offers and acceptances are immediately followed by an exchange of money in return for goods or services. Contract formation and execution occur simultaneously. However, there are occasions when the exchange of promises must remain executory because of the parties’ inability to fulfil their obligations at the time of contract formation. In spite of the parties’ inability to perform fully at the time the executory contract comes into existence, these types of contracts protect the parties’ reliance and expectation interests. Contracts for the purchase and sale of a home typically fall within this category. For example, the purchaser under an executory contract for the sale of a home will seek to ensure that the property is not sold by the vendor to a third party. The threat of damages or an order for specific performance in the event of a breach of this condition is well understood. In addition, the parties’ reliance interests must be protected. Because each party will incur costs in order to live up to its contractual obligations on the closing date, the executory contract is necessary to ensure that these reliance interests are protected in the event of a breach.

Accepting that the purpose of an executory contract is to protect the parties’ expectation and reliance interests, one has to question whether such considerations could have underscored Mr. Barnabe’s decision to contract with himself. In my view, the answer is self-evident. Mr. Barnabe did not have to concern himself with the protection of reliance and expectation interests. If he decided to sell some of his farming assets to a third party prior to transferring them to his farming corporation, no one could complain. The same holds true in regard to any possible reliance expenditures incurred prior to the actual transfer taking place. Neither of the contracting parties (so to speak) were in a position to complain if the alleged oral contract was subsequently altered or cancelled. In summary, there was no need for Mr. Barnabe to enter into an oral contract with himself unless he anticipated his demise and was concerned that his estate would not be able to obtain the tax benefits of section 85 of the Act. As noted earlier, his death was accidental.

My third, and related, objection is that the law cannot countenance oral contracts with oneself because they are antithetical to basic contract law principles. In my view, such contracts should be reduced to writing if they are to have any binding force and legal significance. It may seem paradoxical to some that a court would advocate a writing requirement when law reform commissions have been promoting the abolition of the Statute of Frauds (unsuccessfully, except in Manitoba). Nevertheless, it seems logical to me that contracts involving one person acting in two different capacities should be reduced to writing if a fundamental principle of contract law is to be respected.

As noted earlier, it is a fundamental precept of contract law that the test as to whether a bargain has been struck is an objective one. The objective principle of contract formation is clearly articulated by Professor Waddams: [23]

[t]he principal function of the law of contracts is to protect reasonable expectations engendered by promises. It follows that the law is not so much concerned to carry out the will of the promisor as to protect the expectation of the prom- isee. This is not, however, to say that the will of the promisor is irrelevant. Every definition of contract, whether based on agreement or on promise, includes a consensual element. But the test of whether a promise is made, or of whether assent is manifested to a bargain, does not and should not depend on an enquiry into the actual state of mind of the promisor, but on how the promisor’s conduct would strike a reasonable person in the position of the promisee. If A makes an offer to B, which is accepted by B within a reasonable time, A will be bound even though A might secretly have changed her mind in the interval between offer and acceptance. This is not a rule of evidence merely. The result would be the same if A called convincing evidence to prove that she really had changed her mind. To avoid liability she ought to have communicated her change of mind to B and if she has failed to do so she cannot complain that she is held to the interpretation reasonably ascribed to her conduct.

The objective principle of contract formation is not a mysterious or arbitrary rule but an inevitable result of the law’s attempt to protect reasonable expectations.

In my opinion, an oral contract with oneself is antithetical to the objective principle of contract formation. How can one realistically maintain that a binding contract exists when it is subject to dissolution or alteration at the whim of an individual? To the extent that the law is prepared to accept that a person may contract with himself or herself, then objective evidence is needed to demonstrate an intention to be bound. If the taxpayer or the taxpayer’s estate wishes to obtain a benefit from the Minister on the basis of a binding commitment, then objective evidence of such commitment is required. It is not sufficient to rely on the recollections of a third party, Mr. Fillion, who after all was saddled with the responsibility of ensuring compliance with the Income Tax Act. I should point out that the writing requirement would not apply to cases where a person acting in a dual capacity enters into a contract with a third party. That type of contract can be established by viva voce evidence, as is true of most bilateral contracts (the general exception being contracts for the purchase and sale of land). But in cases such as the one before us, if a person wishes to establish on an objective basis an intention to create legal relations with himself or herself, then it is incumbent on that person to adduce documentary evidence to satisfy the objective requirement of contract formation. It is simply unfair for taxpayers to lay claim to tax benefits available under the Act when in fact they are unable to offer objective evidence that there has been compliance with the conditions precedent imposed by Parliament.

Assuming that I am in error with respect to these three objections, my fourth objection is that the oral contract alleged by the appellants fails to meet the requirement of “certainty of terms”. Counsel for the appellants takes the position that the current list of farming assets to be transferred, a statement as to their fair market value, and an “agreement” as to what Mr. Barnabe’s holding corporation would convey in return should be supplied by inference by this Court. The Supreme Court’s decision in Mitsui & Co. (Canada) v. Royal Bank^ [24] is cited as legal authority for this proposition. However, I cannot subscribe to this argument.

Attached as Schedule “B” to these reasons is a copy of the contract drafted after Mr. Barnabe’s death outlining the full extent of the contractual obligations (twelve clauses) that were supposedly assumed by Mr. Barnabe and his farming corporation on May 1, 1992. Having regard to the terms of that ex post facto contract, can it realistically be said that everything contained in that document arises by reasonable inference from Mr. Barnabe’s conversation with Mr. Fillion? I think not! The contract is five pages in length, plus eight pages of schedules, and effects the sale of over $700,000 in assets in exchange for shares in the holding corporation and the assumption by that corporation of existing liabilities relating to those assets.

I recognize that the extent to which courts are prepared to supply missing terms to a contract has always been controversial. I also recognize that courts have frequently supplied important terms on which the parties have failed to agree in order to give business efficacy to a transaction. This is certainly true in respect to price. More often than not, however, these cases can be rationalized on one of two bases. The first involves parties who have been contracting on an ongoing basis without regard to legal formalities. Typically, a purchaser and supplier of goods develop a commercial relationship where the terms are fixed by reference to past practice. The second involves contracts where there has been full or partial performance by one of the contracting parties while the other party resists performance of a contractual obligation on the ground that the contract lacks certainty of an essential term, usually price. Mitsui & Co. (Canada) falls into this second category.

In Mitsui & Co. (Canada), a helicopter lease contained an option for the lessee to purchase the helicopter at “the reasonable fair market value of the helicopter as established by the lessor”. The question was whether the lease created a true option. The Supreme Court held that a contract to sell goods at fair market value was a valid and enforceable contract and that the lessor would be obliged to act in good faith in establishing that value. In my respectful opinion, the true significance of Mitsui & Co. (Canada) is that the fact that the lessor was entitled to determine the fair market value did not lead to the conclusion that the option was unenforceable on the ground that it constituted an agreement to agree. According to the English authorities, including Sudbrook Trading Estate Ltd. v. Eggleïon, [25] which were relied on by the Supreme Court in Mitsui & Co. (Canada), an agreement to pay fair market value is unenforceable unless the parties have agreed to an arbitration clause by which to settle differences of opinion as to value. For the purposes of this appeal, what is significant about Mitsui & Co. (Canada) is that the Supreme Court was willing to recognize an enforceable option because all of the conditions precedent to its exercise had been satisfied, and in spite of the fact that the contract contained no arbitration clause. To deny the lessee the right to enforce the option on the ground that it did not constitute an enforceable contract would lead to an allegation of unjust enrichment on the part of the lessor. However, if a pre-existing contractual relationship had not existed between the parties, and they had simply agreed to purchase and sell the helicopter at fair market value as determined by the lessor, then it is unlikely that the Supreme Court would have held that there was a binding contract. The idea that the lessor would be under an obligation to act in good faith in setting the sale price is nothing more than an invitation to commence litigation.

In my opinion, cases such as Mitsui & Co. (Canada) are of no assistance to the appellants. Unquestionably, Mitsui & Co. (Canada) represents a significant development in contract law by providing the certainty necessary to establish a binding contract by drawing reasonable inferences as to the parties’ so-called “intention”. The appellants, however, have not asked this Court to draw inferences; rather, they have requested that we construct a contract, which lacks at least three material terms. To my knowledge, there is no judicial precedent for the position adopted by my colleagues. Nor have I been persuaded that this is a proper case in which to advance the law.

Counsel for the appellants, Mr. Kroft, has successfully convinced my colleagues to adopt a fair result, and for this he should be congratulated. Regrettably, I cannot subscribe to their understanding of contract law. In my respectful view, it would have been preferable for the appellants to argue, and for the majority to have accepted, that a clear intention to transfer assets constitutes sufficient compliance for purposes of obtaining the tax advantages available under section 85 of the Income Tax Act, rather than persisting with the belief that a binding contract had been concluded prior to Mr. Barnabe’s death.

I would dismiss the appeal with costs.

Appeal allowed.

Schedule “A”— Transcript of Proceedings Examination in Chief Denis Fillion (Appeal Book, pages 43 - 45)

By Mr. Kroft (Counsel for the Appellants)

A Then on May 1 of 1992, we had finalized or finished his personal tax return and we had ascertained that the personal revenue, personal farm income had come in, the bulk of it at least, and we sat down with Mr. Barnabe, well, we sat down with Mr. Barnabe, we discussed it and Mr. Barnabe told us to go ahead to do the transfer.

Q All right. Now I just want to spend some time on this point because it is partly what this case is about. You are saying you met with Mr. Barnabe on May 1 ?

A That’s right.

Q And where did you have that meeting?

A At our office.

Q What was the purpose of the meeting?

A The purpose of the meeting was for him to sign his 1991 personal tax returns.

Q Okay.

A And to also do the corporation planning, like I stated, the transfer of assets. There was also talk of how to get other people involved in the company.

Q Now you had testified that this occurred on May 1 . I can’t remember where, but somewhere there was a letter where you had referred to on or about April 30 that you wrote to Revenue Canada?

A That’s right.

Q I just want to make sure we have the date right. Are you able to recall that it happened on May 1 .

A Yes, I am.

Q And on reflection, how are you able to recall that?

A Well, I know that April 30 is the last day of the, to file personal tax returns, and I know Mr. Barnabe hadn’t come in on the eve. Then he came in -- May 1 is the day we traditionally take as a day off, and Mr. Barnabe was at our door very early in the morning. Our office at the time was in our house, so it was very -- we couldn’t walk away from our office.

Q Do you have any notes of that meeting on May 1 ?

A No, I don’t. Being a day off, I didn’t write down any notes on that day.

Q But do you have a specific recollection of the meeting?

A Yes, I do.

Q Okay. Was anyone else present?

A Not in the office, no.

Q Now I just want to get into your discussion, particularly with respect to the depreciable, the transfer of the depreciable assets, that issue. And you said that you felt it was — I just want you to go through that again to make sure that we have it. What was your advice to Mr. Barnabe first?

A My advice to Mr. Barnabe was to transfer the assets —

Q And had —

A — and Mr. Barnabe said yes.

Q All right. And by your understanding, was he making the decision at that time to transfer the assets?

A Yes, the decision was made at that time.

Q Did you have him sign any documents with respect to that?

A I had him sign a blank T2057 and the purpose of that is just to, that when the documentation is all — the mathematical calculations are all done, this form is there. It is signed. We can file it in right away, instead of waiting until the last days when it’s due.

Q Have you been able to locate that form?

A No, we haven’t.

Q Now that T2057 form that you just mentioned, is that the joint election under the Act?

A That’s the joint election, yes.

Q Now based upon the discussions you have told us about with Mr. Barnabe on May 1, 1992, what was your understanding as to the date the transfer of the assets was effective?

A May 1 .

Q Of what year?

A Of 1992.

Q Thank you. Now how was it to be determined which equipment was being transferred to the corporation”?

A It was all the equipment.

Q All of the farming equipment that he owned?

A All the farming equipment and buildings.

Q Was there ever any intention to exclude any of the farming equipment?

A No, there wasn’t.

Q Now on May 1 , did you have a list of the farming equipment that was owned by Louis Barnabe?

A I had a list we were maintaining on file.

Q What, if anything, did Mr. Barnabe have to do with respect to verifying that list?

A He had to verify the list, yes, and then also we had to, he had to — fair market values had to be established.

Q Other than that, did you require any additional information from Mr. Barnabe in order to do your calculations?

A No.

Q All right. Now had Mr. Barnabe not died on May 10, 1992, tell us in the normal practice what would have happened next with respect to your work on this transaction?

A Next he would have brought us, he would have walked around his yard and brought us a list of equipment. We would have verified it against our list and done the mathematical calculations and prepared the forms.

Q Had Mr. Barnabe not died, what would have been the effective date of the transaction?

A May 1 .

Q Did you have any further discussion with Mr. Barnabe on this issue before he died?

A No.

Q And on what date did Mr. Barnabe die?

A May 10 .

Q Okay. Now I take it — well, let me ask you, today how many Section 85 rollovers would you have been involved in in your personal capacity”?

A Forty to fifty I would think.

Q Would you describe it as uncommon or common to have the written agreement, an election form prepared and executed after the effective date of the transaction?

A It’s always done after the effective date.

Q Would the effective date in your practice normally be the date the decision is made or the date the paperwork is signed off?

A The date the decision is made.

Schedule “B”— (Appeal Book, pages 104 - 116)

Undated Agreement between Louis Barnabe and 2674859 Manitoba Ltd.

THIS AGREEMENT MADE as of the 1 day of May, 1992 and formally signed on the day of, 199.

BY AND BETWEEN: LOUIS D. BARNABE (hereinafter called the “Vendor), OF THE FIRST PART, - and - 2674859 MANITOBA LTD. a corporation incorporated pursuant to the laws of Manitoba, (hereinafter called the “Purchaser”), OF THE SECOND PART.

WHEREAS:

A. Prior to May 1, 1992, the Vendor carried on the business of farming in Letellier, Manitoba and was the owner of certain equipment and machinery and buildings (excluding the principal residence) used by him in the said farming business, as more particularly described in Schedule“A” attached hereto (hereinafter collectively referred to as the “Purchased Assets”)

B. On or before May 1, 1992, the Vendor and his accountant, Denis G. Filion, met to discuss the transfer of the Purchased Assets from the Vendor to the Purchaser, on the terms and conditions as herein set forth;

C. On or before May I, 1992, the Vendor and the Purchaser agreed that, effective from May I, 1992, the Purchased Assets were to be transferred to the Purchaser;

D. Prior to the formal execution of this Agreement, the Vendor died; E. It is necessary for the Executors of the Estate of the Vendor to sign this Agreement on his behalf;

F. It is the intention of the parties hereto that the parties make a joint election in accordance with the provisions of Section 85 of the Income Tax Act (Canada) with respect to the Purchased Assets as hereinafter provided;

G. The consideration payable for any asset the disposition of which, but for the payment of the purchase price thereof in the form of shares of the Purchaser, would result in a liability for tax pursuant to The Retail Sales Tax Act of Manitoba (the “Sales Tax Act”) shall be limited to Class B shares of the Vendor.

NOW THEREFORE THIS AGREEMENT WITNESSETH in consideration of the covenants and agreements herein provided, the parties hereto hereby covenant and agree as follows:

1. The preamble hereto shall be deemed to be included in and form an integral part of this Agreement as if same was hereinafter set forth in its entirety.

2. Subject to the terms and conditions hereof and to the provisoes hereto, the Vendor hereby sells to the Purchaser and the Purchaser hereby purchases from the Vendor, all as of the 1 day of May, 1992 (the “Closing Date”) the Purchased Assets free and clear of all liens, charges, encumbrances and security interests of any kind and nature whatsoever (except as outlined in Schedule B attached hereto), for $697,500.00, (such amount being hereinafter referred to as the “Purchase Price”). The purchase price for each of the Purchased Assets shall be as set forth in Schedule A hereto.

3. The Purchase Price shall be payable by the Purchaser to the Vendor on the Closing Date as follows:

(a) by the Purchaser assuming the debts and liabilities of the Vendor in the aggregate amount of $36,000.00 as more particularly described in Schedule B attached hereto;

(b) by crediting the shareholder loan account the Vendor Shall have with the Purchaser with an amount of $184,114.00; and

(c) by the issuance by the Purchaser to the Vendor, as fully paid, of 477,386 retractable Class B shares in the capital stock of the purchaser.

4. The Vendor and Purchaser hereby acknowledge that the sale and purchase of the Purchased Assets is being made pursuant to and in accordance with the provisions of Section 85 of the Income Tax Act (Canada) and accordingly the Vendor and Purchaser hereby agree jointly to elect in prescribed form and within the time referred to in subsection (6) of said Section 85 on each group or class of depreciable properties of a prescribed class of the Vendor sold to the Purchaser, an amount estimated to be the aggregate of all amounts each of which is an amount in respect of a depreciable property of the class that is equal to the undepreciated capital cost of all depreciable capital property of that class that are sold to the Purchaser, calculated as if each of such depreciable properties sold to the Purchaser constituted a separate class of property; and, with respect to each such item (or group or class of items) of Purchased Assets, the respective amount has been agreed upon to be, and to be deemed to be, the Vendor’s proceeds of disposition of that item (or group or class of items) of the Purchased Assets and the Purchaser’s cost thereof. Such elected amounts as determined by the parties after consulting with their accountant are more particularly described in Schedule A hereto.

5.

(a) The Vendor and the Purchaser further agree that should the Minister of National Revenue determine that the fair market value of any of the Purchased Assets being purchased and sold hereunder is greater than or less than the amount determined in accordance with the terms hereof, the value as determined by the Minister of National Revenue if accepted by the parties hereto, or if not accepted then as finally determined in accordance with the assessment, objections to assessment and appeal procedures which may be made or taken pursuant to the provisions of the Income Tax Act (Canada) after such determination, shall thereupon govern and the purchase price and consideration as agreed to herein shall be adjusted to reflect the fair market value so determined.

(b) The provisions of subparagraph 5(a) shall apply mutatis mutandis to the determination of the cost amount of the Purchased Assets.

I. Notwithstanding anything herein contained, the parties acknowledge that, in allocating the consideration among the Purchased Assets:

(a) (i) the non-share consideration shall not exceed the cost amount of any particular asset; and

(ii) the consideration payable for any asset the disposition of which results in a liability for tax pursuant to the Sales Tax Act shall be limited to Class B shares;

(b) the accountant of the parties shall be retained and is hereby retained to attend to the necessary allocations envisaged by this paragraph;

7. (a) The Vendor represents and warrants to the Purchaser that

(i) there is no contract, option or any other right of another binding upon or which at any time may in the future become binding upon the Vendor to sell, transfer, assign, pledge, charge, mortgage or in any other way dispose of or encumber any of the Purchased Assets other than pursuant to the provisions of this Agreement;

(ii) the Vendor is not a non-resident person within the meaning of Section 116 of the Income Tax Act (Canada).

(a) The Purchaser represents and warrants to the Vendor that:

(i) the Purchaser has good and sufficient power, authority and right to enter into and deliver this Agreement and to complete the transactions to be completed by the Purchaser contemplated hereunder;

(ii) neither the entering into nor the delivery of this Agreement nor the completion of the transactions contemplated hereby by the Purchaser will result in the violation;

A. any of the provisions of its constating documents or by-laws;

B. any agreement or other instrument to which the Purchaser is a party or by which the Purchaser is bound; or

C. any applicable law, rule or regulation.

(c) The representation and warranties of the Vendor and of the Purchaser shall survive the completion of the sale and purchase of the Purchased Assets herein provided for and shall continue in full force and effect for the benefit of the party to whom the representation and warranty was made.

8. The purchase and sale of the Purchased Assets shall be closed on the Closing Date, at which time:

(a) the Vendor shall deliver to the Purchaser all such transfers, assignments and documents as the Purchaser may reasonably request to transfer ownership of the Purchased Assets to the Purchaser, free and clear of all liens, charges, encumbrances and security interests of any kind and nature whatsoever (except as set forth in Schedule B attached hereto):

(b) the Purchaser shall assume the debts and liabilities of the Vendor referred to in subparagraph 3(a) hereof; and

(C) the Purchaser shall issue to the Vendor 477,386 retractable Class B shares in the capital stock of the Purchaser, as fully paid.

9. It is hereby agreed between the parties hereto that, notwithstanding the fact that a retraction clause relating to the Class B shares is not included in the articles of the Purchaser, the holder of the Class B shares that are issued pursuant to this agreement shall have the following absolute and irrevocable contractual right of retraction:

The Corporation shall, at the request of any holder of Class B shares, repurchase at any time the whole or from time to time any part of the Class B shares of such holder on payment subject to the provisions of s. 34(2) of the Act, as now enacted or as the same may from time to time be amended, re-enacted or replaced (and in the case of such amendment, re-enactment or replacement, any references herein shall be read as referring to such amended, re-enacted or replaced provisions), for each Class B share to be repurchased, of an amount equivalent to the amount paid thereon together with all dividends declared and remaining unpaid on such Class B share. The amount paid thereon shall be $1.00 per Class B share.

10. The Vendor and the Purchaser agree that on the issuance of the 477,386 Class B shares of the Purchaser, the Purchaser shall by virtue of subsection 26(3) of The Corporation Act (Manitoba) add to the stated capital account maintained for its Class B shares an amount equal to $26,344.00.

11. This Agreement shall enure to the benefit of and be binding upon

the parties hereto and their respective successors and assigns.

12. This Agreement shall be governed by and construed in accordance with the laws of the Province of Manitoba and the laws of Canada applicable therein.

IN WITNESS WHEREOF this Agreement has been executed as of the day CLASS 10 ASSETS

$155,655.00

Tractors: