Lamarre
Proulx,
T.C.J.:—
The
hearing
of
these
appeals
by
three
taxpayers
for
their
1981
taxation
year
was
joined
on
the
consent
of
the
parties.
It
was
agreed
that
the
evidence
and
argument
would
apply
to
the
three
appeals
in
question.
These
are
appeals
relating
to
what
is
known
by
the
abbreviation
MURB
in
English
and
IRLM
in
French;
a
multiple
unit
residential
building,
that
is,
a
building,
in
this
case,
which
falls
into
class
32
of
Schedule
II
of
the
Income
Tax
Regulations.
The
restriction
described
in
subsection
1100(11)
of
the
Income
Tax
Regulations
(hereinafter
referred
to
as
the
"Regulations")
with
respect
to
the
source
of
revenue
in
respect
of
which
deductions
for
capital
cost
allowance
in
relation
to
rental
property
may
be
taken
does
not
exist
in
relation
to
Class
32
rental
property,
since
subsection
1100(14)
of
the
Regulations
excludes
from
the
definition
of
rental
property
in
subsection
1100(11)
property
which
falls
into
Class
32.
A
taxpayer
may
therefore
claim
capital
cost
allowance
in
excess
of
the
net
rental
income
for
a
Class
31
or
32
building
and
may
thus
use
capital
cost
allowance
to
generate
a
loss
which
may
be
deducted
from
his
income
from
other
sources.
In
order
to
fall
within
Class
31
or
32,
there
must
be
a
certificate
from
the
Canada
Mortgage
and
Housing
Corporation
stating
that
not
less
than
80
per
cent
of
the
floor
space
will
be
used
in
providing
self-contained
units
and
parking,
recreation,
service
and
storage
areas.
The
evident
intent
of
this
is
to
promote
construction
of
rental
residential
apartment
buildings.
The
point
in
issue
concerns
the
determination
of
the
proceeds
of
disposition
of
the
respective
ownership
shares
of
each
of
the
appellants
in
a
Class
32
building.
We
have
seen
that
the
advantage
of
purchasing
a
MURB
as
opposed
to
another
rental
building
is
that
the
eligible
capital
cost
allowance
may
be
deducted
from
income
other
than
rental
income.
On
the
other
hand,
in
accordance
with
the
provisions
of
the
Income
Tax
Act,
there
is
recapture
of
the
capital
cost
allowance
on
resale
as
in
the
case
of
any
disposition
of
depreciable
property.
These
appeals
concern
more
specifically
the
application
of
sections
13
and
54(h)
of
the
Income
Tax
Act,
S.C.
1970-71-72,
c.
63.
The
Facts
In
December
1979
the
appellants
purchased
shares
of
14
percent,
7
percent
and
24
per
cent
respectively
from
Pierre
Lavallée
in
the
multiple
unit
residential
property
located
in
Longueuil
known
as
"Les
Jardins
Chambly”.
The
purchase
price
was
$2,016,000,
and
was
composed
of
the
following
amounts:
(1)
$1,826,000,
broken
down
as
follows:;
(a)
$
36,000-land
(b)
$1,700,000—buildings
(c)
$
50,000—equipment
(d)
$
40,000—parking
(2)
$190,000,
broken
down
as
follows:
;
(a)
$
20,000—
advertising
attributable
to
rental
of
the
buildings
for
a
5-year
period,
and
(b)
$
170,000—
for
management
fees
for
the
building
and
to
guarantee
cash
flow.
Payment
was
made
in
the
following
manner:
(1)
$1,493,833.81
in
mortgages,
and
(2)
$
522,166.19
from
the
purchasers.
With
respect
to
the
payment
of
the
$522,166.19
to
be
made
by
the
purchasers,
it
was
in
large
part
carried
by
the
vendor
in
the
form
of
promissory
notes
signed
by
the
purchasers
to
the
order
of
the
vendor.
Thus,
in
the
case
of
Gilles
Ally,
at
the
time
of
sale
he
paid
out
$22,839,
and
paid
the
difference
by
a
promissory
note
to
the
order
of
the
vendor
in
the
amount
of
$15,225.
The
same
was
true,
pro
rata,
for
the
two
other
appellants
in
this
case.
The
purchase
of
this
building
had
taken
place
specifically
in
response
to
a
prospectus
by
the
vendor,
Pierre
Lavallée.
This
prospectus
indicated
in
the
first
point
on
the
first
page:
[Translation]
“Goal
of
the
investment:
to
obtain
the
best
legal
means
of
reducing
and
deferring
income
tax
by
purchasing
a
building
complex.
In
addition
to
tax
savings,
this
investment
will
result
in
a
cash
flow
surplus."
In
the
description
of
“10
benefits
of
having
a
tax
shelter",
benefit
No.
7
reads
as
follows:
[Translation]
“Guarantee
of
operating
funds.
Our
firm
guarantees
the
project's
operating
funds,
which
means
that
if
the
project
does
not
cover
its
expenses,
our
firm
undertakes
to
make
up
the
deficit.”
With
respect
to
the
management
aspect,
there
is
a
series
of
letters
and
replies
that
it
would
be
boring
to
set
out
here,
and
which
are
not
essential
to
discuss
in
order
to
decide
the
issue
in
this
case.
The
evidence
disclosed
that
the
appellants
were
seduced
by
the
possibilities
of
tax
savings
and
of
income,
and
the
advantages
of
resale.
There
was
also
the
aspect
of
the
guarantee
of
operating
funds.
Not
a
cent
had
to
be
put
in,
the
manager
undertook
to
make
up
the
difference.
Attractive
financial
gains
and
tax
savings.
The
guaranteed
cash
flow
meant
for
the
appellants
that
if
the
project
did
not
cover
its
expenses
the
deficits
would
be
absorbed
by
the
manager.
The
appellants
had
no
experience
in
rental
building
management
and
had
no
intention
of
being
involved
in
it,
and
they
did
not
in
fact
get
involved.
The
appellants
quickly
became
dissatisfied
with
Pierre
Lavallée's
management
for
various
reasons,
but
particularly
because
he
had
claimed
operating
deficits
from
them,
contrary,
in
their
opinion,
to
the
promises
made
in
the
prospectus.
Upon
this
demand
being
made
to
the
appellants,
to
cover
the
operating
deficit,
they
stopped
their
payments
on
the
promissory
notes
and
asked
a
firm
of
accountants
in
Montreal,
Maheu,
Noiseux,
Roy
et
Associés,
to
prepare
a
report
for
them
on
the
operation
of
the
building.
This
report
was
produced
on
July
14,
1981.
To
counteract
the
stopping
of
payments
on
the
promissory
notes
and
the
refusal
to
cover
the
operating
deficits,
Pierre
Lavallée
brought
two
actions
against
the
appellants
on
August
25,
1981:
one,
for
payment
on
the
promissory
notes,
and
the
other,
for
payment
of
the
operating
deficit,
that
is,
the
expenses
that
could
not
be
covered
by
the
income
generated
by
the
buildings.
At
the
same
time,
in
August
1981,
an
action
for
payment
of
land
transfer
fees
was
commenced
by
the
City
of
Longueuil
as
plaintiff
against
Pierre
Lavallée
as
defendant
and
the
appellants
as
mis-en-cause.
After
long
and
apparently
tumultuous
discussions,
the
appellants
resold
their
respective
shares
to
Mr.
Lavallée
on
December
14,
1982
for
the
price
of
$1
plus
assumption
by
the
purchaser
of
the
balance
of
the
mortgages
owing
by
the
appellants.
The
effect
of
this
sale
at
this
price
was
to
cause
a
terminal
loss
to
the
appellants.
The
Law
The
respondent
contests
part
of
this
consideration,
that
is,
the
$1.
He
states
that
this
consideration
should
be
increased
by
the
amount
of
the
balance
owing
on
the
promissory
notes
and
the
operating
losses
that
had
been
claimed
and
assumed
by
the
manager
despite
himself.
According
to
the
respondent,
for
the
years
1979
to
1981
the
operating
deficit
before
capital
cost
allowance
was
on
the
order
of
$115,448,
which
was
absorbed
by
the
purchaser
at
the
time
of
the
sale
in
1981.
The
appellants’
share
would
be
about
$77,000.
This
share
should
be
included
in
calculating
the
proceeds
of
disposition
of
the
buildings.
Counsel
for
the
appellants
argued
in
respect
of
the
notes
that
it
had
to
be
determined
whether
there
were
two
or
a
single
transaction
at
the
time
the
appellants
purchased
the
buildings.
In
his
opinion,
there
were
two
transactions
that
were
closely
related
but
at
the
same
time
completely
separate.
They
were
different
because
they
are
set
out
in
legal
documents
having
totally
different
consequences.
The
promissory
notes
were
the
subject
of
novation
and
do
not
form
part
of
the
unpaid
portion
of
the
purchase
price.
On
this
point
counsel
for
the
appellants
cited
Corinne
Chamberland,
[1988]
R.J.Q.
1159,
in
which
the
Quebec
Court
of
Appeal
held
that
a
deed
of
sale
which
does
not
state
that
the
payment
was
made
by
a
negotiable
instrument
has
the
effect
of
a
receipt
for
the
sale
price.
Counsel's
argument
is
that
if
the
notes
are
not
part
of
the
sale
price,
they
can
also
not
be
part
of
the
consideration
for
the
resale
price.
Counsel
for
the
appellant
also
referred
me
on
this
point
to
the
contract
of
sale
in
which
Pierre
Lavallée
became
the
owner
of
the
building.
The
sale
price
is
$1
plus
assumption
by
the
purchaser
of
the
mortgages.
No
other
amount
or
provision
concerning
the
receipts
is
stated
in
this
deed
of
sale.
In
my
opinion,
I
do
not
have
to
decide
whether
or
not
there
was
novation
in
order
to
determine
the
true
consideration
for
the
transfer
of
the
property,
or
in
other
words
the
true
proceeds
of
disposition.
First,
the
contract
of
sale,
while
it
was
a
validly
made
deed,
is
not
binding
on
third
parties,
and
secondly,
there
is
settled
case
law
to
the
effect
that
in
order
to
determine
the
proceeds
of
disposition
we
must
not
stop
at
the
simple
transaction
in
the
deed
of
sale,
but
we
must
include
the
series
of
transactions
which
led
to
the
transfer
of
the
property.
Third
parties
are
not
bound
by
a
validly
made
deed
and
may
prove
on
the
basis
of
other
documents
and
even
through
witnesses
that
the
contract
that
was
actually
entered
into
differed
from
the
contract
set
out
in
the
deed.
On
this
point,
see
Precis
de
la
preuve,
Léo
Ducharme,
3rd
ed.,
p.
207,
No.
451.
In
the
present
circumstances,
in
order
to
determine
the
nature
of
the
contract
actually
entered
into,
we
must
refer
to
the
agreement
between
the
parties
as
described
in
the
offer
to
purchase.
The
offer
to
purchase
provided
for
this
payment
of
$1
plus
the
assumption
of
the
balance
of
the
mortgages.
However,
in
the
conditions
of
the
offer
to
purchase
we
find
an
addendum
to
Article
2.12
containing
this
condition:
[Translation]
The
purchaser
shall
remit
to
the
vendors
the
originals
of
the
notes
dated
December
20,
1979,
and
the
cheques
in
his
possession.
The
appellants
were
indebted
in
the
amount
of
the
residual
value
of
the
promissory
notes
and
the
vendor
was
the
creditor
for
the
same
amount.
By
the
transfer
of
ownership,
the
notes
were
returned
and
the
debt
extinguished.
The
amount
and
validity
of
the
notes
are
certain
and
have
not
been
disputed,
and
so
I
cannot
do
otherwise
than
conclude
that
the
return
of
the
promissory
notes
was
part
of
the
consideration
for
the
sale
of
the
building
and
that,
accordingly,
the
amount
of
these
notes
was
part
of
the
purchase
price
for
these
buildings.
The
facts
herein
were
further
corroborated
by
the
testimony
of
Mr.
Lavallée,
the
owner
of
these
buildings.
Counsel
for
the
appellants
also
based
his
argument
that
the
offer
and
deed
of
sale
must
be
completely
dissociated
on
the
existence
of
a
document
that
was
signed
before
the
deed
of
sale,
and
which
reads
as
follows:
[Translation]
The
parties
each
release
the
other
mutually,
completely
and
finally
from
all
claims
that
they
have,
had
or
may
have
had
against
each
other
with
respect
ot
their
purchase,
possession
and
disposition
of
the
buildings
that
are
the
subject
of
an
offer
of
purchase
by
Pierre
Lavallée
to
the
appellants—subject
to
performance
of
the
conditions
set
out
in
the
following
documents:
A.
Offer
to
purchase
accepted
on
September
30,
1981
and
addendum
B.
.
.
.
C.
.
.
.
The
undersigned
renounce
all
claims
of
any
nature
whatsoever
that
might
arise
in
any
manner
whatsoever
including
increased
damages,
any
error
of
fact
or
of
law,
these
presents
constituting
a
transaction
within
the
meaning
of
Articles
1918
et
seq
of
the
Civil
Code
of
the
province
of
Quebec.
On
this
point,
counsel
for
the
appellants
submits
that
this
transaction
terminated
all
claims
by
both
sides,
including
the
debt
on
the
promissory
notes,
and
accordingly
that
it
is
this
transaction,
and
not
the
offer
to
purchase,
that
must
be
considered
in
seeking
the
source
which
extinguished
the
debt
on
the
promissory
notes.
However,
the
transaction
refers
to
the
offer
to
purchase
and
addendum,
and
it
is
this
addendum
that
resulted
in
the
promissory
notes
being
returned
to
their
issuers.
This
argument
therefore
does
not
change
my
decision
in
respect
of
the
inclusion
of
the
residual
value
of
the
promissory
notes
in
the
proceeds
of
disposition
of
the
buildings.
Counsel
for
the
appellants
also
argued
that
paragraph
54(h)
of
the
Act
does
not
allow
for
inclusion
of
the
remission
of
debts
on
the
promissory
notes
as
part
of
the
proceeds
of
disposition
because
(a)
this
remission
was
not
part
of
the
sale
price
and
(b)
it
is
not
included
in
the
provisions
of
subparagraph
54(h)(vii).
It
may
be,
as
submitted
by
counsel
for
the
appellants,
that
this
remission
should
not
be
included
within
the
meaning
of
subparagraph
54(h)(vii),
since
this
subparagraph
seems
to
provide
for
cases
of
sale
under
a
clause
in
a
mortgage.
This
is
not
the
case
here.
With
respect
to
the
argument
that
the
remission
of
the
debt
in
question
cannot
be
covered
by
the
provisions
of
any
subparagraph
of
paragraph
54(h),
I
am
of
the
opinion
first
that
para
graph
54(h)
is
not
drafted
so
as
to
be
exhaustive,
and
second,
I
have
already
explained
why
in
my
opinion
the
remission
of
this
debt,
which
is
one
of
the
conditions
for
the
transfer
of
ownership,
must
be
calculated
in
the
sale
price.
In
order
to
determine
the
sale
price,
what
we
must
look
for
is
the
true
consideration
for
the
transfer
of
ownership.
In
order
to
find
what
this
consideration
was,
we
must
examine
the
sequence
of
events
which
led
to
the
transfer
of
ownership.
The
following
cases,
cited
by
counsel
for
the
respondent,
all
support
my
conclusions:
Estate
of
Rose
Pinkus
v.
M.N.R.,
[1969]
Tax
A.B.C.
1146;
69
D.T.C.
787;
[1971]
C.T.C.
767;
71
D.T.C.
5492;
M.N.R.
v.
Robert
P.
Ouellette
and
John
E.
Brett,
[1971]
C.T.C.
121;
71
D.T.C.
5094;
Gaétan
Brodeur
v.
M.N.R.,
[1987]
2
C.T.C.
2049;
87
D.T.C.
351;
Victory
Hotels
Ltd
v.
M.N.R.,
[1962]
C.T.C.
614;
62
D.T.C.
1378;
Lord
Elgin
Hotel
Limited
v.
M.N.R.,
36
Tax
A.B.C.
268;
64
D.T.C.
637;
[1969]
C.T.C.
24;
69
D.T.C.
2340;
Claude
Bel
le-Isle
v.
M.N.R.,
[1964]
C.T.C.
40;
64
D.T.C.
5041;
[1966]
C.T.C.
85;
66
D.T.C.
5100;
Jean-Marie
Gagné
v.
M.N.R.,
41
Tax
A.B.C.
398;
66
D.T.C.
533;
William
S.
Pitch
v.
M.N.R.,
[1970]
Tax
A.B.C.
176;
70
D.T.C.
1121;
Chibougamau
Lumber
Limitée
v.
M.N.R.,
[1973]
C.T.C.
2174;
73
D.T.C.
134.
With
respect
to
the
operating
deficits
of
$77,000
which
the
manager,
Pierre
Lavallée,
had
claimed
from
the
owners,
which
claim
was
settled
by
the
sale
of
the
building
to
the
owner,
the
validity
of
including
these
deficits
in
the
sale
price
of
the
building
appears
to
me
to
be
more
uncertain.
A
purchase
price
is
determined
by
mutual
agreement.
On
this
effect,
see
Les
Obligations,
Jean-
Louis
Baudouin,
Les
Éditions
Yvon
Blais,
p.
84,
No.
99,
La
Vente,
Michel
Pourcelet,
Les
Editions
Themis
Inc,
4th
ed.,
p.
8.
There
was
a
mutual
agreement
to
give
mutual
releases
from
all
claims,
as
set
out
in
the
addendum
to
Article
2.13
of
the
offer
to
purchase,
which
reads
as
follows:
[Translation]
Article
2.13:
The
purchaser
and
the
vendors
shall
each
release
the
other
from
all
claims
that
they
have
or
may
have
between
them
with
respect
to
the
undivided
right
of
ownership
that
has
existed.
However,
with
respect
to
the
value
to
be
assigned
to
this
mutual
release,
I
am
of
the
opinion
that
it
is
not
possible
to
determine
it
in
the
circumstances
of
this
case.
If
the
parties
had
considered
it
advisable
to
put
a
value
on
this
consideration
in
Article
2.13,
it
was
for
them
to
do
so.
The
evidence
has
shown
that
there
was
no
agreement
between
the
parties
as
to
the
amount
and
merits
of
these
mutual
claims.
Both
sides
have
always
argued
that
they
did
not
owe
anything
and
the
legal
actions
in
this
respect
are
evidence
that
there
was
no
agreement
as
to
the
validity
of
these
claims.
Moreover,
the
clause
does
not
say
that
the
purchaser
releases
claims
that
he
has
against
the
vendors,
as
in
the
case
of
the
promissory
notes;
rather,
we
read
that
mutual
releases
are
given:
"The
purchaser
and
the
vendors
shall
each
release
the
other
from
all
claims
that
they
have
or
may
have
between
them."
Since
the
claim
did
not
proceed
in
court
and
the
resale
of
the
building
put
an
end
to
all
such
claims,
I
consider
that
it
is
not
for
me
to
put
any
value
on
these
mutual
releases,
and
in
any
event
I
could
not
do
so.
For
the
foregoing
reasons,
the
appeal
is
allowed
in
part,
without
costs,
and
the
matter
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment
on
the
basis
that
no
amount
may
be
included
in
the
proceeds
of
disposition
in
relation
to
the
operating
deficits.
Appeal
allowed
in
part.
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