Rodrique Blouin, Roland Dubeau, Emile Larochelle and James Racine v. Her Majesty the Queen, [1995] 2 CTC 412, [1995] DTC 5536

Noel J .:-Each of the appeals set out in the style of cause raises the same point, and they were heard jointly on common evidence. The issue is the legal effect, from an income tax perspective, of two certificates issued by the Central Mortgage and Housing Corporation (hereinafter referred to as ”CMHC") relating to two properties acquired by the plaintiffs.

The evidence before me is limited to the content of an agreed statement of facts and the nine documents appended thereto. This evidence establishes that on December 23, 1980, Messrs. Dubeau, Blouin, Larochelle and Racine acquired two properties, situated at 1940 and 1950 Place Côté, Duberger, Quebec, as undivided coproprietors, for the amount of $1,715,000. A certificate was issued by CMHC on October 8, 1980 for each of these two properties, confirming that the installation of the base supports of the buildings had been commenced before December 17, 1979, and that, according to plans and specifications, not less than 80 per cent of the floor space would be used for domestic establishments. The offer to purchase which the plaintiffs had signed was conditional on the vendor obtaining these certificates.

The two properties in question were acquired by the plaintiffs from Les Entreprises Devalro Inc. (hereinafter referred to as "Devalro”). It was that company, through its director Daniel Perreault, which had obtained the commencement of work certificates from CMHC. It appears that these certificates were obtained fraudulently, by representing on the basis of false cement pouring invoices that the installation of the base supports of the properties in issue had been commenced in December 1979, when in reality the work had only been commenced in March 1980. In November 1986, Devalro and Daniel Perreault were convicted of tax evasion for having obtained the issuance of the CMHC certificates by false representations.

Relying on the certificates issued by CMHC, the plaintiffs claimed the capital cost allowance for these properties under paragraph 20(1 )(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), assuming that they were Class 31 properties under Schedule II to the Regulations. By notices of reassessment issued against each of the plaintiffs, the Minister of Revenue refused to include the properties in Class 31, and relegated them to Class 3 of Schedule II of the Regulations, thereby reducing the capital cost allowance claimed ny the plaintiffs, and the amount of their rental losses, for the years in issue. [1]

These reassessments were confirmed, and each of the plaintiffs appealed to this Court, on the sole ground that, having regard to the certificates issued by CMHC, they were entitled to capital cost allowance under Class 31.

A Class 31 property is defined in Schedule II to the Regulations as follows:

Property that is a multiple-unit residential building in Canada that would otherwise be included in Class 3 or Class 6 and in respect of which

(a) a certificate has been issued by Canada Mortgage and Housing Corporation certifying

(i) in respect of a building that would otherwise be included in Class 3, that the installation of footings or any other base support of the building was commenced

(A) after November 18, 1974 and before 1980, or

(B) after October 28, 1980 and before 1982,

as the case may be, and

(ii) in respect of a building that would otherwise be included in Class 6, that the installation of footings or any other base support of the building was commenced after December 31,1977 and before 1979,

and that, according to plans and specifications for the building, not less than 80 per cent of the floor space will be used in providing self-contained domestic establishments and related parking, recreation, service and storage areas;

(b) not more than 20 per cent of the floor space is used for any purpose other than the purposes referred to in paragraph (a);

(c) the certificate referred to in paragraph (a) was issued on or before the later of

(i) December 31, 1981, and

(ii) the day that is 18 months after the day on which the installation of footings or other base support of the building was commenced; and

(d) the construction of the building proceeds, after 1982, without undue delay, taking into consideration acts of God, labour disputes, fire, accidents or unusual delay by common carriers or suppliers of materials or equipment.

On reading this definition, it may be seen that:

1. CMHC’s exercise of its power to certify is conditional on there being a multiple-unit residential building that would otherwise be included in Class 3 or 6;

2. the prerequisites set out in paragraphs (b) and (d) are continuous in time and must be present independently of the issuance of the certificate by CMHC;

3. as for the rest, it is the issuance of the certificate by CMHC within the prescribed time, confirming that the two prerequisites that are subject to its delegated power are present, [2] that operates to transform a Class 3 or 6 residential property into a Class 31 property.

In the case at bar, the fact that the conditions to which I referred in the first two paragraphs, supra, were met is not in issue. However, in addition to confirming the percentage of the floor space used, certificates [3] nos. 37033 and 37034, issued by CMHC on October 8, 1980, attest to the fact that for each building:

The footing or any other base support for the building hereinbefore described commenced on December 17, 1979....

[Translation.]

It is this portion of the CMHC certificates which turned out to be false, since the installation of the base supports was only commenced in March 1980. This was determined in a legally conclusive manner on November 7, 1986, when Devalro and one of its directors were convicted of falsely representing the date when the work began to CMHC and of thereby securing a tax advantage for the plaintiffs to which they would not have been otherwise entitled.

The question that arises relates to the legal effect of the CMHC certificates in the circumstances of this case. There is no doubt that until the point in time when the fraud was discovered, the certificates retained their full legal effect, as regards both the Minister and the plaintiffs. However, how are they to be treated once it is established that the facts certified are false: are they void ab initio, and hence treated as an absolute nullity, or do they still have effect notwithstanding the falsity of one of the essential facts that they certify?

The question is of considerable importance for a person who, in good faith, acquires a property on the faith of such a certificate, and that is the perspective from which the effect of the certificates must be considered as the Minister is not questioning the bona fides of the plaintiffs. The agreed statement of facts entered by the parties indicates that the plaintiffs were unaware of Devalro’s fraudulent activities in obtaining the certificate. [4]

Under the Regulations, it is the issuance of the certificate, and not the fact that the property meets the requirements on which the certificate is based, which has the effect of converting a Class 3 or 6 property into a Class 31 property. In the case at bar, CMHC issued the certificate on the basis of the material submitted to it, as it was entitled to do. Under its enabling legislation, CMHC is given the powers required to perform the functions vested in it by any other Act or order in council, [5] which includes the power to establish the conditions precedent to the issuance of the certificates in issue. In this respect, the agreed statement of facts confirms that the certificates were issued in accordance with the established procedure. [6] Thus the certificates were issued by CMHC in the proper exercise of its power to certify. Parliament has chosen to invest these certificates with formal validity in that their mere issuance has the effect of transforming a Class 3 or 6 property into a Class 31 property and once issued, they are intended to stand as evidence of this legal transformation in the eyes of all concerned. Keeping this in mind, and since the certificates were issued by CMHC in the proper exercise of its delegated power, I do not believe that the Minister can disregard their legal effect as against a bona fide purchaser.

While I have reached this conclusion without major detour, counsel for the Minister raised a number of arguments which compel me to take the analysis further. First, he argued vehemently that the legal maxim fraus omnia corrompit applied. Relying on that maxim, he invited me to find that the CMHC certificate was void against the world. While it is true that a person who commits a fraud, and the people who participate in it, may not derive any benefit therefrom, and that in so far as these persons are concerned, fraud does vitiate everything, the same does not hold true for a third party acting in good faith. One needs only to refer to the provisions of the Civil Code governing the rights of persons who in good faith acquire property belonging to someone else, to observe that this maxim does not have the absolute effect attributed to it by counsel for the Minister.

Along the same line, he cited another maxim, which holds that no one may give that which he does not have, [7] and argued that in this respect, Devalro, as the author of the fraud, could not transmit valid certificates to the plaintiffs since the certificates were not valid in its hands. Although the certificates were addressed to Devalro, they were not addressed to it in its personal capacity, but as the first owner of the property. I do not believe that it can be said that these certificates were then transmitted to the plaintiffs by Devalro in the sense of the maxim cited by counsel. Under the Regulations, a certificate relates to the property in respect of which it is issued, and it is binding regardless of the identity of the owner. Like a municipal tax bill, it is not transmitted from one owner to another when there is a sale, but is attached to and remains with the property to which it relates.

Along another line, counsel for the defendant correctly argued that only the Minister has the responsibility of establishing the income tax payable under the Act. He added that, in so doing, the Minister has the power to rely on the facts of which he is aware or which he assumes to exist, and that he cannot be bound by a false or inaccurate determination of facts by his officers or his agents. In support of this argument, counsel cited the abundant case law holding that the Minister is not bound by the decisions of his officers when those decisions are contrary to the law.

This jurisprudence is based on the principle of the rule of law. In Woon v. M.N.R., [1950] C.T.C. 263, [1951] Ex. C.R. 18, Cameron J. referred to Phipson on Evidence, 8th edition, for the expression of this rule. That text states, at page 667:

Estoppels of any kind, however, are subject to one general rule: they cannot override the law of the land.

Applying that principle, Cameron J. disposed of the case before him as follows, at page 271, (Ex. C.R. 25):

I think it is quite clear that the "ruling" said to have been made in this case, was made without authority and was not in any way binding upon the Crown.

In M.N.R. v. Lakeview Golf Club Ltd., [1952] C.T.C. 278, 52 D.T.C. 1164, the same judge stated, at page 284, (D.T.C. 1167):

I cannot agree that such an "understanding"...can be of any assistance to the respondent, and an estoppel cannot override the law of the land…

Lastly, in Inland Industries Ltd. v. M.N.R., [1974] S.C.R. 514, [1972] C.T.C. 27, 72 D.T.C. 6013, Pigeon J. applied the same rule, at page 523, (C.T.C. 31, D.T.C. 6017) as follows:

However, it seems clear to me that the Minister cannot be bound by an approval given when the conditions prescribed by the law were not met.

One may also refer to Stickel v. M.N.R., [1972] C.T.C. 210, 72 D.T.C. 6178 (F.C.A.) in which Cattanach J. reaches the same conclusion.

The Minister is therefore not bound by the decisions of his officers or agents when those decisions are contrary to the law. However, this is not the case here. The certificates were issued by the CMHC in the course of the proper exercise of its delegated power. Parliament chose to rely on CMHC to issue this type of certificate, and to confer on these certificates the legal effect provided in the Regulations. When this delegated power is exercised in accordance with the Act, it is binding on both the Minister and the taxpayers who have an interest in the property in issue.

I note that when Parliament conferred this delegated power on CMHC it could not have been unaware of the possibility that a certificate might be issued on the basis of incorrect or falsely represented facts. Nonetheless, no power to revoke was inserted in the Act or the Regulations, although, based on my brief review of the Act, such a power does exist in relation to a variety of formal certificates of the same nature issued by another arm of the government under the Act or the Regulations thereunder. [8] If Parliament chose not to provide a power to revoke the certificates in issue, it must be because such certificates were intended to conclusively establish the existence of the conditions required for their issuance.

This legislative approach may be explained by the fact that when Parliament created Class 31 on November 18, 1974, it was seeking to establish a scheme which would provide certainty as to what properties would qualify. [9] The Minister of Finance at that time wished to create a significant and, more importantly, an effective incentive to promote the construction of multiple-unit residential buildings. [10] To that end, he permitted Canadian taxpayers to deduct the capital cost allowance relating to such buildings against all income, regardless of its source. While the tax advantage thus created was generous, the investments sought required that those interested taxpayers commit themselves to making substantial real estate investments. A system that would have permitted the Minister to retroactively cancel the tax incentive that had been created even as against bona fide investors would simply not have allowed the Minister to achieve the desired goal.

This is the context in which Parliament entrusted CMHC with the task of attesting to the existence of a Class 31 building, by the simple issuance of a certificate, with no power of review. In so doing, Parliament gave the certificate a formal and definitive effect in respect of the building in question intended to be binding on all those concerned.

Finally, counsel for the Minister drew my attention to a portion of a passage from the recent decision of the Court of Appeal in Vaillancourt v. Canada, [1991] 2 C.T.C. 42 (Eng.) 91 D.T.C. 5352 (Fr.) in support of the argument that the Minister is always entitled to go beyond the CMHC certificate and to ignore its legal effects irrespective of the circumstances. In that appeal, one of the questions raised by the Minister was whether the purpose of the building covered by the certificate was residential. The entire passage relating to that question reads as follows, at page 51-52, (D.T.C. 5359):

Question two: whether purpose of building residential

Counsel for the respondent argued, with the support of dictionary definitions, that a residential building "is a place where someone habitually resides" and which "is used to accommodate its occupants more or less permanently, as opposed to a place lived in for short periods". He also relied on the expression "logements autonomes" used in paragraph (a) of Class 31, the equivalent of which in the English version is "self-contained domestic establishment", which is itself defined in subsection 248(1) of the Act as meaning "dwelling house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats". The problem is that the Act has defined "self- contained domestic establishment", but in French defined not "logement autonome", which is the expression used in Class 31, but "établissement domestique autonome", so that it is not clear that the intention in Class 31 was to refer to the same situation as that referred to in subsection 248(1). In any case, I consider that the French and English wordings of Class 31 lead to the same interpretation.

Counsel for the respondent also tried to show that in the case at bar the appellant submitted no evidence that the units were occupied by persons who were making them their habitual place of residence, rather than temporary occupants.

I note at the outset that the requirement of "logements autonomes" is an objective one in the case at bar, determined first in the CMHC certificate and second in the plans and specifications for the building approved by the CMHC As a question of fact, therefore, this requirement precedes construction of the building. Once the plans and specifications have been approved and the certificate issued by the CMHC, the building qualifies of itself and I do not think that in the absence of any allegation of bad faith or deceit the Court can impose on the taxpayer the burden of establishing that the intended use of the building is not or is no longer in fact what it was on paper. In the case at bar, the Department had the burden of showing that the certification was wrongly issued or the intended use of the building had been changed. It did not discharge that burden.

[Emphasis added.]

Counsel for the Minister relied on the last two sentences of this passage in arguing that the Minister was entitled to go beyond the CMHC certificate and ignore the effects thereof. Two comments must be made on this point. First, the Minister’s argument in that case was that the building was used for non-residential purposes. The requirement concerning the use of the building for residential purposes in the proportions originally certified by CMHC is an ongoing one which the Minister is always entitled to raise for a given taxation year, regardless of the issuance of a certificate. [11]

Second, CMHC’s power to certify may only be exercised in respect of a building which is a Class 3 or 6 residential building to start with, so that if it can be shown that a building was not designed for residential purposes, the Minister remains entitled to establish that CMHC exceeded its statutory authority in issuing the certificate. This is in fact what the Minister tried to do in Vaillancourt, by arguing that the building was designed for hotel rather than residential purposes, and it is in this context that Décary J.A. concluded that the Minister had not succeeded in showing that the certificate had been wrongly issued. I do not believe that in so doing the Court of Appeal intended to suggest that the Minister could disavow the CMHC certificate regardless of the circumstances.

In the case at bar, CMHC’s exercise of its lawful power was not questioned. The certificate was issued within the legal framework designed and implemented by Parliament, after CMHC determined, based on supporting evidence, that each and every one of the prerequisites for issuance thereof was present. It was then discovered that one of the prerequisites was in fact not present. Before this discovery, the plaintiffs acquired the buildings in question in good faith, relying on the CMHC certificate. It was Parliament, with the evident aim of establishing a degree of certainty in terms of the tax consequences of such a purchase, which first gave CMHC the authority to issue the certificate, and then attached to the issuance of that certificate the legal effect set out in Class 31 of Schedule II, with no power of review. To allow the Minister to set up the invalidity of the certificate, based on facts established after it was issued, against taxpayers acting in good faith would be contrary to the intention of Parliament when it promulgated Class 31 of Schedule IT.

For these reasons, the plaintiffs’ appeal is allowed, the assessments are set aside and reassessments will be made, giving effect to the certificates issued by CMHC with respect to the two properties in issue.

Appeal allowed.