Damka Lumber & Development Ltd. v. The Queen, 90 DTC 6101, [1990] 1 CTC 127 (FCTD)

Martin, J.: —In 1981 the plaintiff, Damka Lumber & Development Ltd. ("Damka"), sold approximately 14 acres of land in Coquitlam, British Columbia, to the Urban Transit Authority (“UTA”) of British Columbia for the sum of $8,500,000. The only issue in this matter is whether that amount was "the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given” so as to bring the plaintiff within the provisions of paragraph 44(1)(a) of the Income Tax Act and thereby take advantage of the special rules permitting the reduction or elimination of immediate taxation by the acquisition of specified replacement property within a given period of time.

For the purposes of this action the relevant portions of the sections of the Income Tax Act are as follows:

44. (1) Exchanges of property.—Where at any time in a taxation year (in this subsection referred to as the “initial year") an amount has become receivable by a taxpayer as proceeds of disposition of a capital property (in this section referred to as his "former property") that is either

(a) property the proceeds of disposition of which are described in subparagraph 13(21)(d)(ii), (iii) or (iv) or 54(h)(ii), (iii) or (iv), or

54. Definitions. —In this subdivision,

(h) "proceeds of disposition". —"proceeds of disposition" of property includes,

(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given,

13. (21) Definitions.—In this section, section 20 and any regulations made under paragraph 20(1)(a),

(d) "proceeds of disposition".—"proceeds of disposition” of property includes

(iv) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given,

Counsel spent a considerable amount of time in argument addressing the question of the form that a ''notice of intention” to take property would have to take and the weight which ought to be given to Interpretation Bulletins. This issue was raised because of the description of a "notice of intention” in Interpretation Bulletins IT-175, dated September 9, 1974, and IT-271R, dated May 16, 1980.

As there are no significant differences in these bulletins when they refer to notices of intention it will be sufficient to refer to paragraphs 4 and 5 of the more recent one:

Notice of Intention to Expropriate

4. After being notified of an intention to expropriate, the owner may negotiate the sale of his property to the expropriating authority before the expropriation. A “notice of an intention” to expropriate includes

(a) a formal notice of intention to expropriate given to the owner under the requirements of the applicable expropriation legislation;

(b) any notice which is sent or made available to the owner of the property by the expropriating authority which indicates the intention to expropriate if negotiations for the sale of the property are not fruitful and which describes in reasonably specific terms the property involved; this includes an information circular or letter published by the expropriating authority and sent to owners of properties; or

(c) verbal notice given to the owner by duly authorized representatives of the expropriating authority, for example, a person authorized to negotiate the sale of the property with the owner.

5. The owner must receive the notice of intention to expropriate before the sale of the property to the expropriating authority. Otherwise, an unsolicited sale of a property to the expropriating authority does not qualify for the special provisions mentioned in 2 above. Similarly, where the expropriating authority notifies the owner that it has abandoned its intention to expropriate his property, a subsequent sale of the property to the expropriating authority does not qualify for the special provisions.

The plaintiff claims that it received a verbal notice of intention to expropriate within the meaning of paragraph 4(c) of Interpretation Bulletin IT-271R. The defendant's position is that, notwithstanding the provisions of both Interpretation Bulletins referred to, a verbal notice of intention to expropriate does not constitute a notice of intention within the meaning of those portions of sections 13 and 54 to which I have already made reference.

Although this appears to be the position taken by counsel for the defendant in argument, that position, as I understand it, was based upon a ruling made by a Revenue Canada policy specialist who advised that the notice of intention contemplated by paragraph 4(c) of Interpretation Bulletin IT-271R was the formal notice required under provincial law where the land is in fact expropriated or the start of that process. The discovery evidence of the Revenue Canada auditor (Exhibit No. 35) went on to say that the policy specialist had also informed him that the verbal notice of expropriation means the verbal notice by the expropriating authority or its agent followed by written notice of the commencement of the intention or intention to commence expropriation and the actual commencement of expropriation proceedings.

As the difference between these two views does not affect my decision I will assume, for the purpose of this matter, that the defendant's submission is the less stringent one set out in Exhibit 35, i.e. a verbal notice of intention to expropriate is one contemplated by sections 13 and 54 of the Income Tax Act provided it is followed up with a written notice of intention and the actual commencement of expropriation proceedings.

In either case the plaintiff says that the interpretation urged by the defendant conflicts with the interpretation contained in the bulletins and submits that I should give effect to the broader interpretation contained in the bulletins.

In this respect it does not matter which of the three interpretations I apply to the facts because in my view the plaintiff has not succeeded in establishing that it received a notice of intent, verbal or otherwise, as contemplated by either section 13 or 54.

The plaintiff established that during the early part of 1981 there were rumours circulating in the area that a commuter rail service would likely be constructed between Port Coquitlam and downtown Vancouver. It was also rumoured that the plaintiff's property at Coquitlam (lot 99) would be required for the purposes of a station. Mr. Kashmir Singh Manhas, the 80-year- old president and moving force behind the plaintiff, said that everywhere he went people were saying that the government was going to take his property.

On March 12, 1981, he received a call from Mr. Arthur Lee Andrews who asked for and was given an appointment to meet with Manhas. Andrews arrived and met with Manhas and his two adult sons later that same day. He brought with him a formal letter of introduction from his own company, Pacific Strata Realty Ltd. ("Pacific"), confirming that Pacific had been retained by a reputable and substantial client to negotiate a purchase of lot 99. The letter also advised the plaintiff that for personal reasons Pacific’s clients had asked to remain anonymous.

Andrews then produced a draft offer of purchase and sale on what appears to be the usual real estate agent's form under the terms of which Pacific offered to purchase lot 99 for $5,900,000. He also produced and either gave a copy to Manhas or let him see his copy of an appraisal of lot 99, dated March 11, 1981, which had been prepared by an independent appraisal firm for the British Columbia Development Corporation. This was done, presumably, in an effort to convince Manhas that the undisclosed purchaser was making a fair offer for the property.

The witnesses all agree that Manhas rejected Pacific’s offer out of hand. Manhas said he wanted to develop the property, not to sell it. Andrews, who was being pressed by the UTA to acquire the property for it on an urgent basis, was anxious to induce Manhas to sell. He says he may have said that his clients were determined to have the property, that his clients would pay cash and would pay market value or even above market value. Andrews also told Manhas that it would be in his best interests to make a counter offer. In this respect Andrews indicated to Manhas that his clients would probably go to $7,000,000 and would even likely entertain an offer for $7,500,000.

Manhas said he escorted Andrews to his car and after Andrews was in the car he asked him if it was the British Columbia government which was trying to buy his property. Manhas says Andrews told him that it was.

Andrews admits that Manhas put the question to him and that he did not admit or deny that the British Columbia government was involved. Andrews says this question put him in a difficult position. He was under instructions of confidentiality but at the same time he did not feel he should lie to Manhas.

When I consider Manhas' age, the fact that this incident took place about eight years ago, and the fact that Manhas does not have an excellent command of English I can see how he might interpret Andrews' non responsive attitude to his question as a confirmation of his suspicions. Added to this is the fact that the appraisal, which had been completed the day before for British Columbia Development Corporation, would reinforce Manhas' suspicions that the government was behind Andrews. Notwithstanding that evidence I am satisfied that Andrews did not tell Manhas that it was the British Columbia government or any government body which was behind the attempted acquisition.

Manhas thought about the matter overnight. He says he was convinced Andrews was representing the government and that if he did not make a counter offer to sell the property the government would take it over. There was a certain justification for Manhas' attitude in this respect for he had already gone through, with the British Columbia government, two expropriations of properties adjacent to the property under consideration. Both of these expropriations required about a year of negotiations before he was paid. His attitude in this case appeared to have been to set a price representing the highest amount he could possibly hope to get if he had to go through negotiations following an expropriation and then to bargain down a little to complete the deal and get his money quickly. This was sound strategy. He had proved to be a shrewd bargainer with government authorities in the two previous expropriations and, no doubt, he was equally confident that, if necessary, he could do correspondingly as well again.

By morning Manhas instructed one of his sons to call Andrews and offer to sell the property for $8,500,000. To Manhas' surprise Andrews arrived a few hours later and accepted his offer. Manhas says he was lucky and surprised and that never in his life had he seen a deal like that when one gets what one asks for. He also said he did not think he could have gotten that price on an expropriation.

There are some discrepancies in the evidence on which date the $8,500,000 offer was accepted but it is of no importance. Both sides agree that a day or two after the first meeting of March 12,1981 the deal was struck and that the rest of the negotiations was just tying up loose ends. In fact it is in tying up one of these loose ends that the matter of the expropriation first raised its head.

Manhas, on the advice of his accountant, sought the advice of a tax lawyer who was aware of the provisions of the Income Tax Act which are under consideration in this matter. Basing his advice on the assumption, among others, that Andrews gave the plaintiff, at some time in 1981 prior to April 9, 1981, verbal notice of the UTA's intention to expropriate the land pursuant to statutory authority, the tax lawyer advised Manhas that he could take advantage of the replacement property provisions of section 44 of the Income Tax Act and, in his letter of July 9, 1981, he urged Manhas to

1. Obtain from Mr. L. Andrews written evidence of orally receiving notice of UTA’s intention to expropriate your property. Such evidence should include reference to the fact that PACIFIC STRATA REALTY LTD. (“PACIFIC”) acted as the duly authorized representatives of the UTA with respect to the acquisition of the property;

Manhas did request Andrews to provide him with the letter suggested by his lawyer. Andrews may have given Manhas some encouragement that he would do so but eventually he did not. His views on the matter were set out in his letter of July 21, 1981 written to his own lawyer in the following terms:

However, with regard to this deal our friend, Karm, has asked one additional favour of me. He has asked that I give them a letter outlining the circumstances of the transaction from my point of view. It would appear that there's some tax benefit to them if they can substantiate their allegation that it was a forced sale and had they not entered into the contract, they would have been expropriated. In actual fact, I did not at any time indicate that the purchaser was in a position to expropriate, however, I did say in the course of conversation, that I was sure the purchaser would complete, and would end up buying this property.

Perhaps I will be able to draft out a brief statement that I can feel comfortable with and we can discuss it then. I have no objection to helping them but I certainly don't want to get involved with another hassle with the tax department over somebody else's tax obligation. In any event I'll give you a call.

In addition to the reasons Andrews gave to his own lawyer at the time for not wanting to write such a letter he knew that the UTA had no authority to expropriate. In this respect it is not disputed that the UTA did not have statutory authority to expropriate land and in fact did not receive such authority until some time in 1982, well after the date on which it purchased the property from the plaintiff.

There was some evidence that in his negotiations with Manhas, Andrews at one point said that if Manhas did not sell his clients would take over the land anyway. Andrews denies that he ever said that. He says the most he would have said is that his clients were determined to get the property. Even Manhas, when he claims that Andrews said his clients would take over the property anyway, followed up with claiming that Andrews said his clients would buy the land, that they were going to pay Manhas the price and that they were going to pay him $7,000,000 or even $7,500,000.

I can accept that Manhas suspected and even believed that the British Columbia government or one of its agencies were behind the proposed acquisition of his property. I can accept as well that he believed if he did not offer to sell the property it would be expropriated and, further, that if Manhas had not come to an agreement on the purchase price that the property would have in fact been expropriated.

All that, however, is a far cry from Andrews having given to Manhas a notice that the UTA intended to expropriate the property. The urgency with which the UTA wanted the property is admitted but its energy and directions to Andrews were addressed totally to the purchase of the property and not to its expropriation. When Andrews himself related the $8,500,000 offer to UTA he reported that, in his view, it was above market value and he suggested an expropriation. The UTA's reaction to that report was to instruct Andrews to immediately get back to Manhas and accept his offer.

I am satisfied that in Andrew's dealing with Manhas there was nothing said or done by Andrews which could amount to his giving to Manhas a notice of his clients’ intention to expropriate or to cause to be expropriated lot 99 so as to bring the plaintiff within the meaning of the phrase as contemplated by subparagraphs 54(h)(iv) and 13(21)(d)(iv) of the Income Tax Act.

This finding is made notwithstanding the evidence of David Gibson, a former employee of the UTA. He gave evidence with respect to the proposed commuter rail service during the period preceding and immediately following the acquisition of the plaintiff’s land. He said it was apparent that lot 99 was ideal for the Coquitlam Centre Station. Although the UTA did not have the power to expropriate the land, the British Columbia Development Corporation did and if the plaintiff would not have sold his land willingly it appeared to be Gibson’s view that the British Columbia Development Corporation would have been asked to acquire the land by way of expropriation.

Later in his evidence he acknowledged that the British Columbia Development Corporation had been engaged by the UTA as its agent to acquire the property because the UTA officials thought that the British Columbia Development Corporation could get the land for a better price and as well because the British Columbia Development Corporation had powers of expropriation. The evidence is not completely clear just what the British Columbia Development Corporation did to acquire the plaintiff's property apart from having an appraisal done and, perhaps, having a Mr. Davis meet with Manhas.

Certainly there was no evidence that the British Columbia Development Corporation even considered an expropriation. When its modest effort to acquire the property was rebuffed the UTA brought in Andrews immediately. Gibson himself said he was told that if the British Columbia Development Corporation could not acquire the property for a fair price that the UTA would bring in "the Hammer". Gibson understood by that reference that the British Columbia Department of Highways would be asked to expropriate the land in such an event.

Apart from being largely hearsay evidence on Gibson's part I do not find it very convincing evidence of an intention to expropriate let alone evidence that the plaintiff was given notice of an intention to expropriate. I note that when the British Columbia Development Corporation was rebuffed by the plaintiff there is no evidence that the British Columbia Development Corporation, which the UTA allegedly retained because of its powers of expropriation, was even asked to expropriate.

Furthermore, assuming that the appraisal prepared for the British Columbia Development Corporation at $5,900,000 proximated a fair price, and if Gibson's evidence was accurate, "the Hammer" would have been called in to expropriate the property rather than pay the $8,500,000 demanded by the plaintiff. The fact that the UTA paid more than two and a half million dollars over what it had been advised was fair market value for the property, rather than request any government agency to expropriate it, tends to show that the relevant officials of the UTA had in mind from the beginning a purchase rather than an expropriation of the plaintiff's land.

It follows from what I have said that the plaintiff’s appeal is dismissed. The defendant will have her costs.

Appeal dismissed.