Cornerstone Properties Limited v. Her Majesty the Queen, [1995] 2 CTC 2371, 95 DTC 614

Lamarre Proulx J.T.C.C.:—The appellant is appealing its income tax assessment for its taxation year ending February 1986.

The question at issue is whether the appellant has received the proceeds of disposition of a property, pursuant to a valid contract of sale that the appellant entered into as the owner of the property, or as an agent of a sister corporation, pursuant to a trust agreement entered with its sister corporation when the appellant sold or allegedly sold the property to her, at a date that was between the signature of the offer and the date of the closing of the sale.

Mr. Brian Holmes, president of the appellant, Mr. Collins, the appellant’s accountant and Mr. Harold Van Winssen, the appellant’s lawyer, testified for the appellant. Mr. Gary Jacob, lawyer, testified at the respondent’s request.

On April 23, 1985, an agreement of purchase and sale was signed between Kingston News Limited ("Kingston") and the appellant. The property being sold was located at 330 Bell Boulevard and the price agreed on in this agreement was $325,000. The purchaser was the actual tenant of the property. The appellant, the vendor, signed April 10, 1985 and the purchaser signed April 23, 1985. This latter date was the date mentioned in the agreement as being the last day where the agreement as an offer should be signed by the purchaser, otherwise the offer would become null and the deposit would have to be returned. The agreement also stipulated that the closing date of the sale would be June 3, 1985. That closing date remained and the closing took place on that date.

The agreement has been produced as Exhibit A-l, tab 3. Because it is the key document in this matter, I will reproduce its important clauses:

1. Purchaser submits with this offer...five thousand...dollars($)...5,000 by cheque payable to the vendor’s solicitors to be held by them in trust.

2. The parties hereby agree as follows:

(a) This agreement of purchase and sale shall be conditional until May 10, 1985 on the purchaser being able to assume, and amend the existing first mortgage against the subject property in favour of The Guaranty Trust Company of Canada dated September 29, 1983 and registered as Instrument Number 321030 to incorporate such terms and conditions as shall be satisfactory to the purchaser.

(b) In the event that the above-noted condition is not satisfied, or waived by the purchaser on or before May 10, 1985, then the vendor shall have the option to discharge the said mortgage in favour of The Guaranty Trust Company of Canada. Such option shall be exercisable by notice in writing from the vendor to the purchaser to be delivered to 330 Bell Boulevard, Belleville, Ontario, on or before May 25, 1985.

(c) In the event that the purchaser shall not be able to arrange to amend and assume the mortgage in favour of The Guaranty Trust Company of Canada, such amendments to be satisfactory to it, and the vendor shall not exercise its option to discharge the said mortgage by May 25, 1985, as aforesaid, then, notwithstanding any intermediate acts or negotiations, this agreement of purchase and Sale shall be null and void and the deposit paid hereunder shall be returned to the purchaser forthwith, without interest or deduction.

(e) This agreement shall be completed on June 3, 1985; provided however, that by notice in writing delivered on or before May 17, 1985, the vendor may extend the completion date to July 3, 1985.

Mr. Brian Holmes testified that he and his wife Doreen are the only shareholders of the appellant. They also owned 51 per cent of the shares of Quinte Machine & Steel Limited ("Quinte"). They were signatories to an agreement to purchase for a nominal fee the other outstanding shares of Quinte held by former employees. The latter wanted to sell their shares with the understanding that they would be reimbursed for the investments that they had made in Quinte.

Quinte had losses, where the appellant had profits. There was consultation with tax advisers, and it was decided that the best fiscal plan would be to roll the property of 330 Bell Boulevard from the appellant to Quinte and at the same time, proceed with a corporate reorganization. The corporate reorganization has no bearing on this case and therefore, it will not be discussed here. The agreements to transfer the property to Quinte were prepared by the appellant’s lawyers who had also prepared the agreement of purchase and sale.

The alleged transfer of property took place May 16, 1985. Many agreements were signed between the appellant and Quinte on that same date, and among them, a sale agreement and a trust agreement (they are Exhibits A-l, tabs 9 to 13, tab 13 being the trust agreement). The appellant became Quinte’s agent and its duty was to do everything in Quinte’s name, without revealing its mandate and without revealing that it had transferred the property to Quinte.

Mr. Holmes expressed the view that when the transfer of property was signed between the appellant and Quinte, the agreement of purchase and sale between Kingston and the appellant was dead and that therefore, the transfer of property between the sister corporations took place before the existence of the agreement of purchase and sale pursuant to which the proceeds of disposition were paid.

The witness said that on May 16, 1983, the appellant had not received a waiver of the condition respecting the mortgage enunciated in clause 2(a) of the agreement of purchase and sale, supra, and there was no intent by the appellant to exercise the option given to the appellant by clause 2(b) of the same agreement to discharge the said mortgage. Therefore, according to Mr. Holmes, the agreement had become null and void, in accordance with what was provided for in clause 2(c) of the said agreement. He suggested that what was executed on June 3, 1985 was a revived agreement that was in the nature of a new agreement. I will now reproduce the correspondence from the lawyers of the vendor and the purchaser before continuing with the testimony of these two lawyers:

A letter dated April 19, 1985, from Mr. Van Winssen addressed to Mr. Cam Inglis, president of Kingston reads as follows:

Kingston News Ltd. 330 Bell Blvd. BELLEVILLE, Ontario

Attention: Mr. C. Inglis

Dear Sir:

RE: Kingston News Ltd. purchase from Cornerstone Properties Ltd.

We acknowledge receipt of your cheque payable to Templeman, Brady, Menninga, Kort & Fairbrother in trust, which we received on April 16, 1985. We acknowledge that this cheque is to be held by us in trust pursuant to the terms of the agreement of purchase and sale which is attached to this letter.

We also confirm that our client, Cornerstone Builders Ltd. and yourself have agreed to the terms of the agreement of purchase and sale with the only revision being paragraph 2(e), which you agreed to with the writer prior to your leaving for holidays. We enclose four duly executed copies of the agreement of purchase and sale. Could you please execute same and return two executed copies to the writer.

We trust the aforegoing is satisfactory and this transaction will be completed in accordance with the agreement of purchase and sale without any problems. If you have any questions please feel free to contact the writer.

Yours very truly,

TEMPLEMAN, BRADY, MENNINGA, KORT & FAIRBROTHER

HAROLD VAN WINSSEN

On this letter, delivered to Mr. Jacob, there is a handwritten note of Mr. Cam Inglis, addressed to Mr. Gary Jacob, his lawyer, and which reads as follows:

Gary-Copies of final sale agreement for Belleville are attached. Things are scheduled to close June 3. Funds will be coming from Guarantee Trust and Bank of Commerce.... We have waived finance condition verbally to Harold Van W.

Thanks

Cam Inglis

389-7400 966-5103

Another letter, dated April 25, 1985 from Mr. Van Winssen to Mr. Jacob reads:

Messrs. Jacob, MacPherson, Hogan Barristers and Solicitors 25-237 Queen Street, Box 668 Kingston, Ontario K7L 4X1

Attention: Gary R. Jacob

Dear Sir:

Re: Cornerstone Properties Limited sale to Kingston News Limited-330 Bell Boulevard, Belleville

This shall confirm our telephone conversation of April 24, 1985 and our agreement that Kingston News Limited be inserted as [vendor] (sic) on the second page of the agreement of purchase and sale and signed by its duly authorized signing officer. We enclose herewith an amended agreement of purchase and sale to that effect.

This shall further confirm our agreement to extend the date to examine title to the property to May 15, 1985.

I trust the above is satisfactory and in order.

Yours very truly,

TEMPLEMAN, BRADY, MENNINGA, KORT & FAIRBROTHER

HAROLD VAN WINSSEN

On May 15, 1985, there is a letter from Mr. Jacob to Guaranty Trust Company of Canada:

Guaranty Trust Company of Canada Mortgage Department Suite 102 225 Metcalfe Street OTTAWA, Ontario K2P 1P9

Gentlemen:

RE: Kingston News Limited Purchase From Cornerstone Buildings Limited (85-205) 330 Bell Boulevard, Belleville, Ontario

We are solicitors for Kingston News Limited, which company is to purchase the above premises effective June 3, 1985. The agreement of purchase and sale provides that our client is to assume your first mortgage presently registered against the premises.

Please provide this office with a mortgage statement for assumption purposes calculated at June 3, 1985. Your assistance herein is appreciated.

Yours very truly,

JACOB MACPHERSON HOGAN

On May 17, 1985 a letter from Mr Van Winssen to Mr Jacob describes the final steps before the closing:

May 17, 1985 Messrs. Jacob, MacPherson & Hogan Barristers and Solicitors 235-237 Queen Street Kingston, Ontario K7K 1B5

Attention: Gary R. Jacob, Q.C.

Dear Sir:

Re: Cornerstone Properties Limited sale to Kingston News 330 Bell Boulevard, Belleville

Without admitting the validity of any requisitions submitted to us and specifically denying your right to make any further requisitions with respect to the title to the subject property we would like to reply as follows:

1. Instrument Number 339084 being a mortgage to the Royal Bank of Canada should be discharged on or before closing. We have forwarded a discharge to the Royal Bank of Canada for execution and are awaiting return of a registrable and executed discharge.

2. Please satisfy yourself with respect to compliance with the terms of the said Agreement. We will be corresponding with the Corporation of the City of Belleville with respect to the possibility of obtaining a quit claim of the said agreement in respect of any right or option of the Corporation of the City of Belleville to purchase the said property.

3. Articles of amendment changing the name from Cornerstone Builders Limited to Cornerstone Properties Limited have been registered with the Ministry for Consumer and Commercial Relations on February 25, 1985 and in the Registry Division for the County of Hastings (No. 21) on February 26, 1985 as instrument number 339137.

4. We will be delivering on closing an affidavit of an officer of Cornerstone Properties Limited to the effect that Cornerstone Properties Limited is not a non-resident of Canada within the meaning of section 116 of the Income Tax Act of Canada, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). We would note that this is a commercial property and affidavit of evidence as to the contravention of the provisions of the Family Law Reform Act is consequently not required in respect of a conveyance from a corporation.

We enclose herewith a copy of the draft transfer for your perusal and comments.

Please note that the funds on closing are to be payable to Templeman, Brady, Menninga, Kort & Fairbrother in trust and an appropriate direction to that effect will be delivered to you.

Yours very truly, TEMPLEMAN, BRADY, MENNINGA, KORT & FAIRBROTHER

HAROLD VAN WINSSEN

A letter dated May 28, 1985 from Mr. Jacob to Mr. Van Winssen reads:

Messrs. Templeman, Brady, et al Barristers & Solicitors P.O. Box 234 Suite 200, 205 Dundas Street East BELLEVILLE, Ontario K8N 5A2

Attention: Harold Van Winssenn, Esq.

Dear Sir:

Re: Kingston News Limited purchase from Cornerstone Properties Limited (85-205) 330 Bell Boulevard, Belleville

Thank you for your letter of May 17 with enclosure. The draft transfer is satisfactory as to form.

Please consider this letter as a waiver of the condition with respect to financing. It is our client’s intention to assume the existing first mortgage. We would appreciate receipt of a statement of adjustments and in this regard the only items warranting adjustment would appear to be the first mortgage and prepayment of the last month’s rent under the lease between our respective clients.

We have written to Corporation of the City of Belleville to ascertain whether the improvements to the property meet with municipal approval pursuant to the provisions of instrument #189660. Once a response is received, we shall advise you whether the contents of the same are satisfactory to us.

We wish to afford to our client the protection provided by section 49(2la) of the Planning Act, 1983. In this regard, would you and your client please complete the applicable statements in box 13 of the transfer.

Yours very truly,

JACOB MACPHERSON HOGAN

The evidence of Mr. Van Winssen, the then junior lawyer who assisted in the preparation of the documents for the vendor was to a certain extent to the same effect, as the testimony of Mr. Holmes, albeit not as categorical. He did not recall if he had received verbally a waiver of the condition expressed in clause 2(a) of the afore cited agreement. Mr. Van Winssen testified to the effect that the deal of May 16, 1985 was dead because the said condition had not been satisfied on May 10, 1985. He said that he had discussed, on May 17, a day after the purported sale to Quinte, the waiver of this condition with Mr. Gary Jacob, the lawyer for Kingston, at the request of his client and that he received a verbal confirmation from Mr. Jacob that it was waivered. But Mr. Van Winssen asked for it in writing. This explains the note in Mr. Jacob’s letter dated May 28, 1985.

In cross-examination Mr. Van Winssen agreed that since he had been writing directly to Mr. Cam Inglis on April 19, 1985, he had had personal dealings with him. Then, on April 25, Mr. Van Winssen communicated directly with Mr. Jacob. He said that he did not recall why he came to write to Mr. Jacob directly.

Mr. Gary Jacob testified that he had received, from Mr. Cam Inglis, Mr. Van Winssen’s letter dated April 19, 1985, addressed to Mr. Cam Inglis, with the handwritten note, supra, on it, at the latest April 24, 1985. He said that according to his file, the real estate file had been sent that day to their office title clerk and in no circumstances would have been sent to the title clerk if the agreement had still been conditional. He took the endorsement that he received from Mr. Inglis to mean that Mr. Inglis was satisfied with respect to the condition and was ready to proceed. According to Mr. Jacob the closing was in relation to the transaction contemplated by the agreement of purchase and sale produced as Exhibit A-l, tab 3.

Asked as to why he put in writing the waiving of the condition in his letter of May 28, 1985 to Mr. Van Winssen, Mr. Jacob said the following at page 103 of the transcript:

Q. Now, I direct your attention to the first sentence in the second paragraph. Now, you stated just a few minutes ago that it was your understanding that the offer, the agreement of purchase and sale, was unconditional at the time you started to work on it?

A. It came unconditional so far as I’m concerned on April 24 at the latest.

Q. All right. Sir, why are you waiving it on May 28 in writing?

A. All I can suggest is it was an attempt to finish off papering of the file because at that point in time, there was nothing in writing to indicate that the condition had, in fact, been waived other than the memorandum from Mr. Inglis. So I don’t know whether I took it upon myself to complete my file by that paragraph or whether Mr. Van Winssen may have called me and said, "Look, let’s tidy it up, put it in writing." I don’t know.

Q. That’s what you said, you were operating under the understanding that the condition was waived on....

A. Oh, yes. Oh, yes.

Q. This letter dated May 28, does it relate to any particular agreement?

A. Again, the agreement at tab 3.

Counsel for the appellant relied on the following points, and I quote from the notice of appeal:

The appellant is entitled to arrange its corporate affairs so as to minimize the tax payable within the corporate group.

The appellant states that the conveyance of the subject lands from the appellant to Quinte Machine and Steel Ltd. was a valid conveyance of the subject lands and that at all material times, Quinte Machine and Steel Ltd. was the true owner of the subject lands and it was therefore entitled to receive the proceeds of disposition from that property.

The appellant therefore states that the proceeds of disposition from the sale of the subject lands to Kingston News Ltd. belong to Quinte Machine and Steel Ltd. and should be included in the computation of the income for Quinte Machine and Steel Ltd. for its year ending March 31, 1986.

Counsel for the respondent relied on the following points and I quote from the amended reply to the notice of appeal:

The issue to be decided in this appeal is whether the property was, for purposes of the Income Tax Act, sold to Kingston News Ltd. by the appellant or by Quinte Machine and Steel Ltd.

He submits that the purported conveyance to Quinte Machine and Steel Ltd. was legally ineffective, with the results that the appellant remained the legal and beneficial owner of the property, and, therefore, the proceeds of disposition were properly includable in computing the income of the appellant.

He submits in the alternative that the transfer of the property by the appellant to Quinte Machine and Steel Ltd. was a sham.

Counsel for the appellant referred to the decision of the Supreme Court of Canada in Stubart Investments Ltd.. v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, and quoted the following passages at pages 540-41 (C.T.C. 296; D.T.C. 6306):

The issue in this case is whether a corporate taxpayer, with the avowed purpose of reducing its taxes, can establish an arrangement whereby future profits are routed through a sister subsidiary in order to avail itself of the latter corporation’s loss carryforward.

at page S.C.R. 545-46 (C.T.C. 298, D.T.C. 6308):

The simple question, therefore, is whether a corporate group can avail itself of a tax loss in one of the family subsidiaries by rerouting the income from another corporate member into that subsidiary. Clearly, the corporation can do so by buying assets from any business, corporate or unincorporate, and putting these profit-generating assets into a company with an accepted loss position.

A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a façade of reality quite different from the disguised reality.

At page 572 (C.T.C. 313, D.T.C. 6320):

The element of sham was long ago defined by the courts and was restated in Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518. Lord Diplock, at page 528, found that no sham was there present because no acts had

been taken:

...which are intended by them to give to third parties or to the courts the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.

From the same decision, counsel for the respondent quotes the following passages:

at pages S.C.R. 546 (C.T.C. 298-99, D.T.C. 6308-09):

The Court also found that the taxpayer announced its purpose from the outset, entered into legally binding contracts of implementation, registered several closing documents in public registries in the provincial registries of Ontario and Quebec, and in federal registries in Ottawa, and entered into an enforceable security arrangement between Grover and the Bank of Nova Scotia. It was further determined by the Court of Appeal that every step required to create legally binding relationships with reference to transfer of the corporate assets of the appellant, including its trade marks, and to the retirement of its indebtedness to the Bank of Nova Scotia, was taken by the appellant.

At page S.C.R. 572 (C.T.C. 313, D.T.C. 6320):

There has been no suggestion of backdating or buttressing the documentation after the event.

Counsel for the respondent also referred to a decision of the Federal Court of Appeal in The Queen v. Daly, [1981] C.T.C. 132, 81 D.T.C. 5197, where Heald J. said the following at page 279 (D.T.C. 5204):

In a case of this kind, where it is acknowledged that what is sought by a certain course of action is a tax advantage, it is the duty of the Court to examine all of the evidence relating to the transaction in order to satisfy itself that what was done resulted in a valid, completed transaction. In my view, the proper approach for the Court to take is concisely stated by Urie J. in the case of Atinco Paper Products v. The Queen, [1978] C.T.C. 566, 78 D.T.C. 6387, at pages 577-78 (D.T.C. 6395) as follows:

I do not think that I should leave this appeal without expressing my views on the general question of transactions undertaken purportedly for the purpose of estate planning and tax avoidance. It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that this Court is not the watch-dog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is, correct in form, but, in fact, are in all respects legally correct, real trans- actions. If this Court, or any other court, were to fail to carry out its elementary duty to examine with care all aspects of the transactions in issue, it would not only be derelict in carrying out its judicial duties, but in its duty to the public at large. It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be a strict or liberal view taken of a transaction, or series of transactions which it is hoped by the taxpayer will result in minimization of tax. The only course for the Court to take is to apply the law as the Court sees it to the facts as found in the particular transaction. If the transaction can withstand that scrutiny, then it will, of course, be supported. If it cannot, it will fall. That is what happened here.

Applying that test and scrutinizing everything that the taxpayer has done in this case, it is my view that, at all material times, a valid contract of employment subsisted between the respondent and CKOY under which the respondent earned the fees paid for his services and thus they were properly included in his income by the income tax reassessments here in issue. It is my opinion, with deference, that the learned Trial judge did not scrutinize everything that the taxpayer did in this case. I refer particularly to the employment contracts of 1962 and 1967, supra, and the evidence of the respondent himself referred to supra, as to how he considered and dealt with those contracts after the oral arrangements of June-July 1964. In such circumstances, it is my opinion that an appellate court is obliged to reverse the decision of a Trial judge where a fair consideration of the totality of the evidence produces a different result.

From these two decisions, (Stubart and Daly) and from others on the same subject, such as Atinco Paper Products cited in the Daly decision, supra, Rose, A. v. M.N.R., [1973] C.T.C. 74, 73 D.T.C. 5083 (F.C.A.), and Transport Desgagnés Inc. v. M.N.R., [1991] 1 C.T.C. 2073, 91 D.T.C. 264 (T.C.C.), at page 2081 (D.T.C. 270), I understand that the steps to follow in matters of tax avoidance, is first to determine the agreement for which the proceeds are paid. Then, it has to be determined whether the agreement consisted in an ex post facto arrangement or was prospective in nature. If it is an ex post facto, it cannot succeed. If the arrangement is prospective, are its effects prevented by some provision of the Act? All these questions would not be needed if there was a finding that the arrangement constituted a sham.

In my analysis of the legal situation in the present matter, I Ido not have to go very far in these various steps. I will stop at the first one. It is my view that the agreement of purchase and sale, entered into on April 23, 1985, was and remained a valid contract and it is pursuant to it that the appellant obtained the payment of the proceeds of disposition. There is no evidence before me whatsoever that the agreement of purchase and sale became void at one point and that the parties entered into a new one. On May 16, 1985, when the purported sale to Quinte was made, the lawyers of both parties were actively working on the deal pursuant to the agreement as is evidenced by the correspondence between the lawyers and the description of the work done by them in these letters. The deposit of $5,000 had not been returned nor asked for. There were still nine days left before the date mentioned in clauses (b) and (c) of the agreement that is, May 25. Even all the work done to transfer the property to Quinte is ample proof that the deal was well alive. The testimony of Mr. Jacob is that the agreement was unconditional as to April 24, 1985 and I have no reason to doubt this statement which is corroborated by his client’s handwritten note. In conclusion, there is no evidence at all of a revived agreement or that the agreement of April 23, 1985 had become null and void as of May 16, 1985.

When the appellant entered into the agreement, its quality was that of the owner of the property and not as a trustee of Quinte and it cannot, in matter of tax avoidance, as it has been found by a long standing case law, retroactively change the capacity in which it entered the agreement. I do not have to consider whether the agreements of sale and trust between the appellant and Quinte were valid because the payment was not made pursuant to these agreements, but was made pursuant to the one and unique agreement of purchase and sale.

The appeal is dimissed with costs.

Appeal dismissed with costs.