Robert J. McMynn and Joanne J. McMynn v. Her Majesty the Queen, [1995] 1 CTC 2417, 95 DTC 329

Rowe D.J.T.C.C.:—This appeal was heard under the General Procedure of this Court.

The appellant appeals from an assessment of income tax for his 1985 to 1989 taxation years, inclusive. The appellant, either individually or as a tenant-in-common with his spouse, Joanne J. McMynn purchased new buses and he claimed a deduction for tax investment credits and also claimed refundable tax investment credits in the taxation years under appeal. A portion of the investment tax credits earned in respect of new buses purchased prior to 1985 was carried forward to 1985.

The appellant’s wife, Joanne J. McMynn, appeals from an assessment of income tax for her 1985 to 1989 taxation years, inclusive. She also claimed a deduction for investment tax credits and claimed refundable investment tax credits, a portion of which related to new buses purchased prior to 1985, carried forward to 1985. It was agreed by counsel that the evidence taken on the appeal of Robert J. McMynn would apply to her appeal — 92-2187.

The Minister of National Revenue (the ’'Minister”), in assessing the appellants for the years under appeal, disallowed the deduction for investment tax credits on the basis the appellants had not acquired any ’’qualified transportation equipment” within the meaning of subsection 127(9) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”) and therefore were not entitled to a deduction under subsection 127(5) of the Act. The Minister’s position is that the appellants are individuals, not a corporation, and the buses acquired by them were leased out to International Stage Lines Inc. (ISL) and other companies and the appellants were not in the business of transporting passengers, property or passengers and property. The buses, therefore, were not "qualified transportation equipment" as defined by subsection 127(9) of the Act.

The appellant’s position is that the purchase of the buses, either individually by Robert J. McMynn, or as tenant-in-common with Joanne J. McMynn, meet the requirements of the relevant provisions of the Act resulting in the ability to qualify for the investment tax credits as claimed.

It was agreed that the new buses are "prescribed equipment" within the meaning of the Act, were used in Canada, and also that Joanne J. McMynn, during the years under appeal, earned employment income. By agreement of counsel, a book of documents, tabbed 1-35, inclusive, was filed as Exhibit A-1. Mrs. McMynn did not testify and where the term, "the appellant" (singular) is used in these reasons, it refers, unless stated otherwise, to Robert J. McMynn.

Robert J. McMynn testified he resides in Vancouver, British Columbia, and is a businessman. In 1970, he began working, during the summer, as a bus driver with the City of Victoria. In 1973, he obtained fulltime employment as a bus driver with Pacific Stage Lines, a Crown corporation of the Province of British Columbia. In 1978, a new administration decided to privatize the bus company and he, George Pullman and another individual purchased, from the Crown corporation, the tour and special movements portion of the operation and incorporated ISL to carry on the business. In January, 1979, he leased a bus and drove it himself and ISL ordered five new buses from a manufacturer in Winnipeg but the financial institution with which the company was dealing, would not lend it the money to pay for the order. ISL had put up a $15,000 deposit towards the purchase but the net worth of the company at the time was only $25,000. The appellant stated that he came up with the idea that individuals would buy the buses and he and members of his family did so and leased them to ISL on a long-term lease. George Pullman purchased a bus in his individual capacity and entered into a similar leasing arrangement with ISL but other shareholders in ISL did not choose to participate in this arrangement. The bus business operated by ISL did very well and the appellant maintained his employment as a bus driver with Pacific Stage Lines until he left in 1980 to become general manager of ISL. In 1981, ISL acquired three new buses, and two used ones, which it financed through corporate resources, and the appellant and two of his fellow shareholders each purchased a new bus which each then leased to ISL. At that point, ISL had about 25 shareholders and the appellant, being a minority shareholder, did not want to sign a personal guarantee so that ISL could purchase all six buses in the corporate name. In 1984, ISL owned five one-year old buses and wanted to sell them and buy new ones. Rather than selling these buses, the appellant wanted ISL to rent them to other bus companies, including one in Kitchener, Ontario. George Pullman and other shareholders in ISL who owned buses in their individual capacity wanted to sell their buses but the appellant adhered to the belief that renting or leasing buses was a viable concept. He attended trade shows and otherwise promoted his idea. By 1988, he owned 32 buses which he had leased out to various businesses across Canada, including five buses leased to ISL. Some buses are rented out for a relatively short period of time to satisfy transportation needs of various business entities during peak periods. An example of the nature of his business is the annual leasing, by Greyhound, of 14 buses for a three- week period during the Christmas holiday season. Often, the appellant would drive buses from one location to another, ensure the buses were in good operating condition and would spend time with the users of the equipment. He stated that a great deal of time is devoted to transacting business over the telephone and he travels on business about 200 days a year, attending trade shows, meetings of bus associations, and transportation marketplaces. The business concept pursued by him is workable because bus companies have peak periods, whether a summer season, holiday season or merely a long weekend, and it is advantageous to these organizations to be able to rent buses rather than purchase them — at a cost, per unit, of $330,000 to $400,000 — and use them for only short periods of time. The appellant stated that, during the summer of 1994, a customer was renting 20 buses from him in order to meet peak demands and did not have to tie up the large amount of capital needed to buy large 47-55 passenger buses. At present, the appellant has 105 buses rented out or leased across Canada. At the beginning and end of each rental period, he inspects the vehicle and ensures that the customer meets all safety standards of the jurisdictions in which the equipment will be operated. In the event a bus is leased on a short-term basis, then he warrants all major components on the vehicle. Filed as Exhibit A-l, was a book of documents containing, inter alia, some of the leases and rental agreements entered into by him, or his wife, with various entities. The appellant stated that he and his wife attempt to match purchases of buses in each of their names but sometimes will purchase the vehicles jointly. Mrs. McMynn is active in the business.

In August 1988, the appellant sold out his interest in ISL and since then has worked in the bus rental business owned by him and his wife in their personal capacity as opposed to operating by means of a corporation. Their customers include large bus lines, hockey teams, tour operators, and small bus companies with only two or three vehicles in the fleet. Out of a total of 105 buses rented out or leased, 55 are on a short-term basis of less than two years. He attempted to anticipate demand for the 1994 season, and purchased 10 new buses to fulfil the market requirements, which he now anticipates may not be sufficient. The appellant stated he was well aware of the investment tax credit and factored that benefit into formulating overall lower rental rates, which vary, depending on the season and demand. In 1985, ISL was audited by Revenue Canada and various shareholders, including himself, were also informed of an impending audit of their personal tax returns. He had not filed a personal tax return since 1981 and as a result had to prepare and file returns of income for four years. He had not been overly concerned about the failure to file as he was subject to deduction from employment income and felt that he would be entitled eventually to interest on the overpayment as he was not in a deficit situation at the end of each year.

In cross-examination, the appellant stated that in 1988, there were 32 buses in the name of himself and/or his wife, of which five were leased to ISL. He was referred to Tab 29, in Exhibit A-l, a lease with Trentway- Wagar Inc. on four buses for a ten-year term, which he explained could be terminated, in a practical sense, at any time should the lessee encounter financial difficulties. On this lease, because the vehicles were covered by a warranty issued by the manufacturer, he did not provide any additional warranty coverage. The initial leases of buses to ISL were on a five to ten year term but after 1984, the buses, now five years old, were then leased out on a short-term basis. In 1988, he and his wife purchased 21 new buses, of which nearly 50 per cent were leased out for the short term. At one point, he and his family owned 21 per cent of ISL and, from 1980 until leaving ISL in 1988, he was the general manager and comptroller. In the mid-1980’s, he began leasing buses to Greyhound on the basis of a certain rate per mile, to a maximum of 6,000 miles per month, after which an additional fee was charged.

Counsel for the appellants submitted that the buses were new and met the definition of "prescribed equipment" pursuant to the Act. At issue, was whether the buses, under the circumstances in which they were used, met the definition of "qualified transportation equipment" so as to permit the appellants to take advantage of the resulting investment tax credit. Counsel agreed the appellants were not operating the business as a corporation, and that the buses were leased out to others who were deriving income from their use. However, in the context of the purpose of the investment tax credit legislation and the wording of the language of the relevant provisions of the Act, the appellants qualify for the investment tax credit.

Counsel for the respondent submitted that the appellants themselves were not in the business of transporting passengers, property or passengers and property but in fact were deriving income from renting or leasing the buses to others. Unfortunately for the appellants, in counsel’s submission, the leasing of the equipment is required to be undertaken by a corporation in order to become eligible for investment tax credits and the appellants, throughout the years under appeal, operated the business in their personal capacity.

Pursuant to subsection 127(5) of the Act, an investment tax credit is provided for and the credit is further specified by subsection 127(9) of the Act. Since there is no dispute that the buses were "prescribed equipment", the issue is whether or not the new buses purchased by the appellants, and the manner in which they were put to use, meet the definition of "qualified transportation equipment", which, in subsection 127(9) is defined as follows:

"qualified transportation equipment". — "qualified transportation equipment" of a taxpayer means prescribed equipment acquired by him after November 16, 1978 and before 1989 that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(a) to be used by him principally for the purpose of transporting passengers, property or passengers and property, in Canada or to and from Canada, in the ordinary course of carrying on a business in Canada other than a business

(i) the income from which is exempt from income tax by virtue of any provision of this Act, or

(ii) the income from which is not included in his income or, in the case

of a non-resident person, his taxable income earned in Canada, or

(b) to be leased by the taxpayer, if

(i) the equipment is leased by the taxpayer in the ordinary course of Carrying on a business in Canada, the income from which is other than income referred to in subparagraph (a)(i) or (ii), to a lessee who can reasonably be expected to use the equipment principally for the purposes and under the circumstances referred to in paragraph (a), and

(ii) the taxpayer is a corporation whose principal business is a business described in subparagraph (d)(i) of the definition “qualified property" or is a taxpayer whose principal business is passenger, property or passenger and property transport;

Since the appellants are not a corporation whose principal business is a business described in subparagraph (d)(i) of the definition "qualified property", the question to be answered is whether the appellants fit within the category created by the last part of subparagraph (b)(ii) of the definition "qualified transportation equipment" on the basis each is "a taxpayer whose principal business is passenger, property or passenger and property transport". The only other way in which the appellants could fit within the definition is if they were found to be using the buses principally for the purpose of transporting passengers, property or passengers and property, in Canada, or to and from Canada, in the ordinary course of carrying on a business in Canada.

In Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79, 85 D.T.C. 5310, the Federal Court of Appeal considered the issue of a taxpayer corporation engaged in the business of building logging roads and performing related site services under contract with owners of logging rights, and an investment tax credit claimed on equipment purchased for such use. MacGuigan J.A., writing for the Court, set forth in his reasons the basis for the judgment of the trial judge, the wording of the subsection under analysis, and arrived at certain conclusions in allowing the appeal. At pages 80-85 (D.T.C. 5311-14), MacGuigan J.A. stated:

The Trial Division, [1982] C.T.C. 415, 83 D.T.C. 5016, upheld the reassessment and dismissed the appeal. The heart of the decision is as follows at page 418 (D.T.C. 5018):

It is trite law that the exempting provisions of a taxing statute must be construed strictly and the taxpayer must fit his claim squarely within the four corners of any exemption if he is to benefit from it. He must show clearly that "every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with. (See Thorson J. in Lumbers v. M.N.R., [1943] C.T.C. 281, 2 D.T.C. 631 (Ex. Ct.).)

If Parliament had intended to extend the tax benefit to all subcontractors in the industry, it would have said so. By any definition, "logging" is the sum total of all the operations leading to the felling of timber and the transporting of logs out of the forest. In my view, the construction of logging roads, by itself, is not "logging", any more than the building of fishing wharves is "fishing", or the erecting of barns constitutes "farming", where those operations are carried out by independent contractors who have no general interest in logging, fishing, or farming, but are specialists in their limited fields.

[Statutory provisions]

The investment tax credit is provided for by subsection 127(5) and the credit is further specified by subsection 127(9) of the Act. However, what is in issue in this case is subsection 127(10) of the Act, which is as follows:

127(10) "Qualified property".- For the purposes of subsection (9), a "qualified property" of a taxpayer means a property (other than a certified property) that is

(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be by him primarily for the purpose of

(i) manufacturing or processing of goods for sale or lease.

(ii) operating an oil or gas well or processing heavy crude oil recovered from a natural reservoir in Canada to a stage that is not beyond the crude oil stage or its equivalent,

(iii) extracting minerals from a mineral resource,

(iv) processing, to the prime metal stage or its equivalent, ore (other than iron ore) from a mineral resource,

(iv.l) processing, to the pellet stage or its equivalent, iron ore from a mineral resource,

(v) exploring or drilling for petroleum or natural gas,

(vi) prospecting or exploring for or developing a mineral resource.

(vii) logging,

(viii) farming or fishing,

(ix) the storing of grain, or

(x) producing industrial minerals, or (d) to be leased by the taxpayer, to a lessee (other than a person exempt from tax under section 149) who can reasonably be expected to use the property in Canada primarily for any of the purposes referred to in subparagraphs (c)(i) to (x), but this paragraph does not apply in respect of property that is a prescribed property for the purposes of paragraph (b), unless

(i) the property is leased by the taxpayer in the ordinary course of Carrying on a business in Canada and the taxpayer is a corporation whose principal business is

(A) leasing property,

(B) manufacturing property that it sells or leases,

(C) the lending of money,

(D) the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing part or all of the sale price of merchandise or services, or

(E) selling or servicing a type of property that it also leases, or any combination thereof, and

(ii) use of the property by the first lessee commenced after June 23, 1975.

[Crown's position]

The respondent admits that the building of roads is essential to the logging industry, that because it requires expertise and efficiency it is in many instances contracted out by major operators, that each of the functions performed by the appellant is an integral part of logging in British Columbia, and that the logging industry views equipment used to perform such functions as being used for the purpose of logging whether used by the operator of the site or some other person under contract, but maintains that the appellant is nevertheless properly described as a road builder in the logging industry, that in fact it did so describe itself in its income tax returns in the relevant years, and that the equipment in issue was not acquired by the appellant for use by him for the purpose of logging.

The essence of the respondent’s contention is that the investment tax credit provisions are exemption provisions, that the appellant cannot benefit from them unless it can bring itself clearly within these provisions, and that here at best it does not clearly fall within them.

[Principles of interpretation]

The Supreme Court of Canada in recent tax decisions has cleared out a great deal of the underbrush that previously surrounded tax law. For example, in Winnipeg v. Morguard Properties Ltd., [1983] 2 S.C.R. 493, 3 D.L.R. (4th) 1, 50 N.R. 264, at page 509 (D.L.R. 13, N.R. 282-83), dealing with tax provisions that derogate from taxpayers’ rights, Estey J. said for the Court:

In more modern terminology the courts require that, in order to adversely affect a citizen’s right, whether as a taxpayer or otherwise, the legislature must do so expressly. Truncation of such rights may be legis- latively unintended or even accidental, but the courts must look for express language in the statute before concluding that these rights have been reduced. This principle of construction becomes even more important and more generally operative in modern times, because the legislature is guided and assisted by a well-staffed and ordinarily very articulate Executive. The resources at hand in the preparation and enactment of legislation are such that a Court must be slow to presume oversight or inarticulate intentions when the rights of the citizen are involved. The legislature has complete control of the process of legislation, and when it has not for any reason clearly expressed itself, it has all the resources available to correct that inadequacy of expression. This is more true today than ever before in our history of parliamentary rule.

Similarly, in Stubart Investment Ltd. v. Canada, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, D.T.C. 6305, at pages 575- 76 (C.T.C. 314, D.T.C. 6322), the Supreme Court, again speaking through Estey J., expressed its point of view with respect to allowance or benefit provisions in tax statutes:

Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by government to attain selected economic policy objectives. Thus, the statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect a specific activity....

Indeed, where Parliament is successful and a taxpayer is induced to act in a certain manner by virtue of incentives prescribed in the legislation, it is at least arguable that the taxpayer was attracted to these incentives for the valid business purpose of reducing his cash outlay for taxes to conserve his resources for other business activities. It seems more appropriate to turn to an interpretation test which would provide a means of applying the Act so as to affect only the conduct of a taxpayer which has the designed effect of defeating the expressed intention of Parliament. In short, the tax statute, by this interpretative technique, is extended to reach conduct of the taxpayer which clearly falls within "the object and spirit" of the taxing provisions. Such an approach would promote rather than interfere with administration of the Income Tax Act, in both its aspects without interference with the granting and withdrawal, according to the economic climate, of tax incentives....

Where the taxpayer sought to rely on a specific exemption or deduction provided in the statute, the strict rule required that the taxpayer’s claim fall clearly within the exempting provision, and any doubt would there be resolved in favour of the Crown. See Lumbers v. M.N.R., [1943] C.T.C. 281, 2 D.T.C. 631 (Ex. Ct.), aff d [1944] S.C.R. 167, [1944] C.T.C. 67, 2 D.T.C. 652; and W.A. Sheaffer Pen Co. v. M.N.R., [1953] C.T.C. 345, 53 D.T.C. 1223. Indeed, the introduction of exemptions and allowances was the beginning of the end of the reign of the strict rule.

Professor Willis, accurately forecast the demise of the strict inter- pretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable....

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed., (1983), at page 87, E.A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

[Application of test]

Applying this test to subparagraph 127 (10)(c)(vii) of the Act, what do we find? The respondent maintains that the phrase "by him" implies that the taxpayer claiming the benefit has to use the equipment for the purpose of logging, but in fact the location of the phrase makes it clear that it is the use of the equipment that has to be by the taxpayer claiming the benefit, not that the purpose of logging has to be uniquely his. It suffices if the ultimate purpose, as defined by the overall contractor, is that of logging.

Indeed, the reason for the phrase "by him" seems to be, as contended by the appellant, to differentiate actual use by a purchaser of equipment (covered by paragraph (c)) from use by a lessee (covered by paragraph (d)). The criterion of qualification under paragraph (d) is a particular-kind-of business test, whereas that under paragraph (c) is one of overall purpose.

No additional indicia of legislative intent appear from the French-language version.

Taking a broader look at the provision, we have what appears from the text to be an inducement to taxpayers to undertake or augment specific activities, viz, those listed in paragraph (c). From that point of view, it would be a matter of indifference whether the increased activity was that of a logging company itself or of a subcontractor: in both cases the increase in investment and economic activity would be the same.

I believe that this interpretation is required by the decision of this Court in Bunge of Canada Ltd. v. Canada, [1984] C.T.C. 284, 84 D.T.C. 6276 and that of the Exchequer Court in Hollinger North Shore Exploration Co. v. M.N.R., [1960] C.T.C. 136, 60 D.T.C. 1077, upheld by the Supreme Court of Canada, [1963] C.T.C. 51, 63 D.T.C. 1031.

In the Bunge case this Court held that new equipment which discharged grain from grain elevators into ships docked at a wharf situated about 200 feet from the elevators was equipment used primarily for the purpose of the storing of grain and so entitled to an investment tax credit under subparagraph 127 (10)(c)(ix) of the Act. Pratte J. said for the Court at page 285 (D.T.C. 6277) that "the discharge of grain from a silo appears to me to be a necessary and integral part of the storing of the grain".

The Hollinger case is, if anything, even more in point even though the question was whether royalty income received by a company from another company to which it had sublet all mining rights on a tract of land was income derived from the operation of a mine. Thurlow J. said at page 140 (D.T.C. 1078-79):

[T]he exemption provided is given by reference to the derivation of the income rather than by reference to the kind of corporation or the nature of the business or activity, if any, which it carries on. The word "corporation" is not qualified by any adjective such as "operating" or "mining" which might have lent colour to the Minister’s suggestion, nor is the word "operation" or the word "mine" followed by the words "by the corporation" or any wording to the like effect indicating the benefit of the section is to be limited to cases wherein the corporation taxpayer is the operator or an operator of the mine. The ordinary meaning of the words "income derived from the operation of a mine" is, in my opinion, broader than that contended for and, had Parliament intended that their meaning should be limited in the manner suggested, the appropriate words to so limit it would, I think, have been included in the section. In their absence, I see nothing in the language used or in the subject matter being dealt with to warrant reading the subsection as if such words were present.

Here, the words "primarily for the purpose of logging" are not followed by the words "by him" or otherwise qualified so as to limit the benefit of the section to cases wherein the corporation taxpayer itself has the timber or cutting rights. Not only was the appellant’s equipment used to carry out an integral part of logging, but owners of such rights are required by law in British Columbia to obtain approval from the Forest Service of a five-year development plan and a two-year logging plan, including in both cases proposed road designs. Moreover, since road building is one of the most expensive parts of the total logging operation, owners subcontract to road building companies for the sake of their own cost efficiency. It is impossible to regard the work of such road builders, whose total operation is dedicated to building roads for logging, as isolated from the totality of the logging industry. Their work is dedicated, and their equipment is used by them, primarily for the purpose of logging.

[Purpose of provision]

I am strengthened in this conclusion by the clear indication of the evil sought to be remedied found in the parliamentary debates, of which as public documents this Court can take judicial notice. While the rule still remains that legislative history is not admissible to show the intention of the legislature directly, the Supreme Court of Canada has nevertheless increasingly looked to legislative history for related purposes, not only in constitutional cases (Re Anti-Inflation Act, [1976] 2 S.C.R. 373, 68 D.L.R. (3d) 452, Re Objection by Quebec to a Resolution to Amend the Constitution, [1982] 2 S.C.R. 793, 140 D.L.R. (3d) 385,), but also in relation to the interpretation of statutes generally. So in R v. Vasil, [1981] 1 S.C.R. 469 121 D.L.R. (3d) 41, the Court referred to Hansard in order to determine that Canada adopted not only the text of the British Royal Commission’s draft criminal code of 1879 but also its reasons. The present rule would thus appear to be that Hansard may be used, like the report of a commission of enquiry, in order to expose and examine the mischief, evil or condition to which the legislature was directing its attention: Mor guard, supra, at pages 498-99 (D.L.R. 4-5, N.R. 269-70).

Here, the budget statement of the then Minister of Finance on June 23, 1975, describes the perceived need to which this amendment to the Act was the response (Debates of the House of Commons, June 23, 1975, 7028):

Measures to Sustain Business Investment

If our economy is to remain productive and competitive and capable of providing jobs, we must ensure that we have modern capital facilities with which to work. We must guard against any slowdown in investment. I have been pleased that capital investment has continued to expand in present circumstances and I want to do what government can do to ensure that this expansion continues.

It is well known that our policies have sought to encourage a strong manufacturing sector. We have provided long-term tax incentives to assist our manufacturers and processors to compete in domestic and foreign markets. The evidence presented in the final report on these tax measures demonstrates their effectiveness. But new and broader initiatives are needed under current economic circumstances.

I am therefore proposing to introduce an investment tax credit as a temporary extra incentive for investment in a wide range of new productive facilities. The credit will be five per cent of a taxpayer’s investment in new buildings, machinery and equipment which are for use in Canada primarily in a manufacturing or processing business, production of petroleum or minerals, logging, farming or fishing. The cost of new, unused machinery and equipment acquired after tonight and before July, 1977, will be eligible.

[Emphasis added.]

The evil aimed at is clearly stated to be "any slowdown in investment". Such an evil would be removed by appropriate activity regardless of its source, and would be best achieved by encouraging the logging industry in its integral totality. Indeed, in the light of the fact that subcontracting is general in the logging industry, any other interpretation of the text would considerably lessen the potential investment incentive in that industry and so less effectively remove the identified danger of economic slowdown.

In Labrador Offshore Shipping Co. v. Canada, [1990] 1 C.T.C. 134, 90 D.T.C. 6096, Martin J. of the Federal Court-Trial Division considered the matter in which the taxpayer acquired a diving support vessel and chartered it to Petro-Canada the same day for use in offshore exploration and drilling for petroleum. On the basis the charter agreement had been executed in Nova Scotia, the taxpayer sought the investment tax credit, notwithstanding the vessel was not used for the required purpose within the geographical area defined by the legislation. At pages 138-41 (D.T.C. 6099-100) of his reasons, Martin J. stated:

The plaintiff does not seek to bring itself within the terms of subparagraph 127(9)(a. 1 ) through Petro-Canada’s use of the vessel. Petro-Canada’s use of the vessel on the Eastern Canadian offshore (in Canada) is the basis on which the parties agreed that the vessel is constituted qualified property within the meaning of subsection 127(10).

What the plaintiff submits is that the plaintiff acquired the vessel for its, as opposed to Petro-Canada’s use, that it acquired the vessel for its use in Nova Scotia, and that the act of leasing the vessel to Petro-Canada, which lease was executed in Nova Scotia, constituted the plaintiffs use of the vessel in Nova Scotia. As the entire act of executing the lease took place in Nova Scotia the plaintiff says that its use of the vessel was primarily in Nova Scotia.

In support of this position counsel for the plaintiff cites the well-known quote of Estey J. in Stubart, supra, to the effect that there should be a broader interpretation of the Income Tax Act so as to permit conduct of the taxpayer which falls within the spirit and object of the Act and which is not designed to defeat the expressed intention of Parliament.

Counsel also cited excerpts from budget speeches to show that the ITC legislation was introduced as an incentive for investment in machinery and equipment used in the production of petroleum which legislation was intended to create employment, foster regional growth and help venture enterprises. When the rate of the ITC was increased in 1978 to the 20 per cent rate which the plaintiff now seeks to have applied, the then Minister of Finance said it was for the purpose of giving increased support to regional development.

Counsel then went on to say that because the ITC provisions of the Act are not clear, and because there are two possible meanings, I should apply the meaning most favourable to the plaintiff (Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373 at page 67 (C.T.C. 123, D.T.C. 5381), and Mother's Pizza Parlour (London) Ltd. v. The Queen, [1985] 1 C.T.C. 361, 85 D.T.C. 5271 at page 367 (D.T.C. 5275).

Counsel concluded that the acquisition and leasing of the "Balder Challenger" created the type of regional activity for which the ITC legislation was introduced and, given a broad interpretation of the Act to encourage the activity sought to be encouraged by Parliament, there was no reason why subparagraph 127(9)(a.l) could not be interpreted so as to find that the leasing of the vessel to Petro-Canada in Halifax constituted a use of the vessel primarily in Nova Scotia.

[Analysis]

The argument put forth by counsel is almost convincing. The fatal weakness in it, in my view, is that to accept it in this matter would require me to find that the phrase ’’property acquired primarily for use in Nova Scotia" is unclear and capable of two meanings one of which would include the leasing of the vessel to Petro-Canada.

I note the observation of Rouleau J. in Mother's Pizza Parlour, supra, that subsection 127(10) is a provision whose meaning is less than clear. However in this matter there is no difficulty with subsection 127(10). The parties have agreed that the vessel is "qualified property" within the meaning of that subsection. What has to be interpreted in this action is the meaning of the phrase "property acquired primarily for use in Nova Scotia".

In my view the use contemplated under the provisions of subparagraph 127(9)(a.l) does not include the leasing of the vessel by the plaintiff. A lease of a property or a vessel is granting the use of the property, usually the exclusive use of the property, to the lessee. By the act of leasing the owner or lessor parts with the use or the right to use the property or equipment under consideration. It is true, but imprecise, for a lessor to say that he used his vessel to earn rent when he leases it. In fact, in such circumstances, it is not the lessor who uses the vessel but it is the lessee who uses it for his own purposes. The lessor gives the right to use the vessel to the lessee in consideration for the rent to be paid to the lessor by the lessee.

This is but the same principle followed in the imposition of municipal business taxes based on the assessed value of property used in the taxpayer’s business. The landlord carries on the business of leasing property and, in a loose sense, uses the property in carrying on his business. However, at least in the jurisdiction with which I am familiar, the landlord’s business tax is not based upon the assessed value of the property which he leases because, in the accurate legal sense, that property is used by the tenant and not the landlord and it is the tenant, if he carries on a business using that property, who will be liable for the business tax.

Counsel was able to find one case in which a court found that a lessor was using property even though it was leased. In Funtronix Amusements Ltd. v. M.N.R., [1989] 2 C.T.C. 2296, 89 D.T.C. 545, Garon J.T.C.C. of the Tax Court of Canada found the taxpayer owner of electronic video games, which had been placed in amusement arcades owned by others and played and operated by persons patronizing the arcades, to be using the machines to gain income. Revenue Canada had argued that the individual patrons who played the machines from time to time were the users of them.

Garon J.T.C.C. concluded his observations with these remarks at page 2298 (D.T.C. 547):

According to the language of the Act, in a lease context, the lessor is using the property for the purpose of gaining income therefrom although during the term of the lease the day-to-day enjoyment of the property is that of the lessee. Likewise, the same leasehold premises may also be "used" in certain circumstances by the lessee for the purpose of gaining income therefrom.

In support of his conclusion the judge referred to sections 13 and 45 of the Income Tax Act which sections establish particular rules for the computation of income for the purposes of that particular division of the Act. They do not apply to subparagraph 127(9)(a. 1).

As well the facts in Funtronix were substantially different from those in the present case. In that case there had been no lease of the equipment to anyone. The owner taxpayer maintained complete control over the equipment. The players or temporary users of the equipment had a bare licence to use them for a few moments in payment of a deposited coin. The judge seemed to recognize this when he followed the above-quoted conclusion with the following observations at pages 2298-99 (D.T.C. 547):

The matter could also be looked at from another angle. In effect, the evidence clearly showed that the appellant was the user of the property in the sense that it had access to such equipment at all times and could alter the computer programs stored in such equipment. In fact, it has been established that these video games depreciate very quickly and in order to earn revenue from such games, there was a requirement for the appellant to change or alter the computer programs from time to time. It is not disputed that the appellant could alter the computer programs by simply changing what is referred to as the EPROM unit (the acronym EPROM stands for erasable programmable read only memory). This was certainly in my view, an important use of the equipment by its owner.

I therefore conclude that the appellant was within the purview of paragraph (b) of the definition of ’’general-purpose electronic data processing equipment” set out in subsection 1104(2) of the Income Tax Regulations a "user" of the subject equipment.

I do not find that the Funtronix decision is authority for the proposition that the use contemplated by subparagraph 127(9)(a. 1) is or could be the leasing of the vessel to Petro- Canada. In my opinion the use contemplated by subparagraph 127(9)(a. 1) is the physical use of the property in this case the vessel "Balder Challenger”. Because the use of the vessel did not take place in Nova Scotia, or in any of the other areas named in subparagraph 127(9)(a. 1), the plaintiff is not entitled to avail itself of the benefits of that subparagraph.

[Conclusion]

By its ITC legislation Parliament intended to confer benefits on regions of slow economic recovery and high unemployment. By subparagraph 127(9)(a. 1) Parliament designated the provinces and region named therein as the geographical areas which would be entitled to the highest rate of benefit by allowing the ITCs on qualified property used in those provinces and that region. The fact that a vessel which was not primarily used in any of those provinces or that region would have qualified for the increased benefit if it had been so used is not sufficient to stretch the plain meaning of the words of subparagraph 127(9)(a. 1) to find that the leasing of the "Balder Challenger" to Petro-Canada for its use outside of the areas referred to in that subparagraph constitute a use of the vessel in any one of those areas.

For the reasons given the plaintiff’s claim will be dismissed with costs.

In the present appeal, the appellants attempt to meet paragraph (a) of the definition of "qualified transportation equipment" by relying on the reasoning of MacGuigan J.A. in Lor-Wes Contracting, supra, which, by extension to their situation, would not require the actual use by them of the buses. Similar to the wording in Lor-Wes, where the phrase "by him" did not follow the word "logging", the language in paragraph (a) is as follows:

to be used by him principally for the purpose of transporting passengers, property or passengers and property....

[Emphasis added. I

There is little difference in my view between the situation in Lor-Wes, supra, where the use of the equipment to build roads to the logging site was seen as integral to the purpose of logging, and the situation in the present appeal where the appellants, although not engaged in the actual transporting of passengers and/or property, were purchasing equipment and leasing it out to others who were carrying out the physical act contemplated by the investment tax scheme. Counsel for the appellants submitted a portion of a budget paper, Notice of Ways and Means motions and supplementary information on the budget, dated November 16, 1978, issued by the Department of Finance, in which the following appeared:

Removal of Expiry Date

The current credit applies to investments made before July 1, 1980. The budget proposes to extend the credit indefinitely. This will eliminate uncertainty in long-term investment planning and will provide for the continuation of this significant investment incentive. (page 31)

Major new investments are required in transportation in order to improve productivity and contain cost increases. To achieve this it will be important to rely upon the market mechanism and the ability of carriers themselves to respond to new possibilities for productivity improvement and to meet new capacity requirements when they emerge. (page 32)

Inclusion of intercity bus transport in the credit will assist the development of better services with more modern equipment. It will be important in those areas of the country where the size and distribution of the population makes the bus an attractive and flexible mode of transport. (page 33)

An examination is required of the language found in latter part of subparagraph (b)(ii) of the definition, "qualified transportation equipment", as follows:

Or is a taxpayer whose principal business is passenger, property or passenger and property transport;

On the evidence, I did not encounter any difficulty in determining that the appellants were deriving income from business, albeit the leasing business, as opposed to gaining income from property. The language of the subparagraph quoted above is such that the words "passenger, property or passenger and property" modify the noun, "transport". In this context, "transport" can be taken to refer to a broad industry involving various modes of transportation, including the use of buses. The broader definition of "transport" in the passive sense as a noun permits use of the prescribed equipment by others who are engaged in the overall business of transporting (gerundial - use as a verbal noun) passengers and/or property and does not require the taxpayer to be the one actually involved in the active, physical transporting of the passengers and/or goods, any more than the taxpayer had to be physically involved in the actual harvesting of trees in order to be engaged in logging, in accord with the reasons of MacGuigarAJ. in Lor-Wes, supra. The appellants were leasing buses to individuals or corporations involved in transporting passengers and/or property. They were not leasing or renting the buses to people for use as mobile homes or for the storage of turnips. Some representative rental or lease agreements were filed at Tabs 29-35, inclusive, and these documents, together with the evidence of Robert J. McMynn establish that the buses were used by motor vehicle carriers who were subject to government regulation. By 1988, the appellants had purchased and rented out 32 buses. That number has now grown to more than 100. If the purpose of the legislation was to stimulate investment in the transportation industry and, in this instance, the purchase of new buses for use in Canada, then it achieved the stated goal. As explained by the appellant, it is not practical for a bus business, especially one of modest assets, to tie up large amounts of capital in order to have on hand a large number of buses merely to satisfy peak demand of short duration. By being able to rent or lease buses, these companies are then able to engage in some long-range planning on the basis that the proper equipment can be obtained by rent or lease in order to match the demand and free up capital for expansion of routes or service. Although the precise words were not present in the budget paper, supra, as were used in Lor-Wes, supra, namely, to avoid a "slowdown in investment", the explanation given is such that the intent of the legislation can be seen to be geared towards stimulating major new investment in equipment without any expiry date contemplated for the investment tax credit.

I wish to make it clear that I am well aware that the appellants were not a corporation in the leasing business as referred to in subparagraph (b)(ii) of the definition "qualified transportation equipment". However, merely because this aspect of leasing was covered in that context does not preclude an individual, engaged in leasing the prescribed equipment, from satisfying the definition for the reasons earlier stated. Certainly, the objective of Parliament was met by the appellants, in combination with the end-user, and the new equipment was purchased by the appellants for that specific purpose. It is not as though a convoluted process is required in order that the objectives of the legislation be met. Rather, the plain language of the definition is capable of supporting these conclusions. Indeed, I would not be willing to go beyond the wording of the relevant provisions to ferret out some ulterior, noble purpose of Parliament, were that not the case. In my view, the decision of Martin J. in the Labrador Offshore Shipping, supra, flowed from the appreciation that the legislation contained a precise geographical definition in which the investment tax credit could apply, and was incapable of extension by any interpretation of the words used.

The appeals of both appellants are allowed, with one set of costs on a party-party basis. The assessments of each appellant for the taxation years 1985-89, inclusive, are referred back to the Minister for reconsideration and reassessment on the basis that the buses acquired by them were ’’qualified transportation equipment" as defined in subsection 127(9) of the Act.

Appeals allowed.

Byron Alexandroff, Cedar Glen Heights Realty Corp.,

[Indexed as: Alexandroff (B.) v. Canada]

Tax Court of Canada (Christie A.C.J.T.C.C.), December 5, 1994 (Court File Nos. 92-2158-60, 2162-64, 2166-68, 2170, 2172, 2174-75,

2177-78).

Income tax-Federal-Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1-Whether

The shares of a numbered company were equally divided among three individuals, A, U and S, who were real estate agents and/or real estate brokers. On November 8, 1985, the numbered company entered into an agreement to purchase a shopping centre, which was described as a neighbourhood plaza consisting of 14 stores with total rental space of about 42,000 square feet ("the property"). The numbered company agreed to purchase the property as trustee for a limited partnership. The purchase price for the property was $2,950,000 with $700,000 being paid in cash on closing. The limited partnership was formed on November 8, 1985 with the numbered company, the general partner, acting as manager of the property. The eight units in the partnership were owned by 26 limited partners. The purchase of the property closed as scheduled on April 22, 1986. During 1985 and 1986, S Ltd., an affiliate of a major developer, had been developing a three building condominium complex adjacent to the property. In order to facilitate the erection and construction of the condominium property, S Ltd. approached the limited partnership for permission to encroach below grade under the property. On June 28, 1986, the limited partnership and S Ltd. entered into an agreement which allowed S Ltd. to encroach beneath the property in consideration of $27,500 and an undertaking from S Ltd. to rectify any damages suffered. At or about the time of the encroachment by S Ltd., the property experienced numerous structural problems, many of which were caused by the encroachment. On July 27, 1987, the limited partnership commenced an action against S Ltd. with respect to the encroachment. In September 1987, the partnership received an unsolicited offer to purchase the property for $3,830,000. The limited partners, feeling that the property was becoming a very cumbersome responsibility, decided to accept the offer and sell the property. The sale was completed on December 17, 1987 in accordance with the agreement with the result that each unit of the limited partnership earned a net profit of $81,290. The unit holders reported the profit as a capital gain while the Minister assessed on the basis that the profit was business income.

HELD:

The relevant date was November 8, 1985, the date when the agreement of purchase and sale was entered into. The issue was to determine the intention of the three controlling minds, A, U and S, on that date. In this regard, the whole of the relevant evidence led to the conclusion that the only motivating intention of the purchasers was to acquire the property as an income-producing asset. The gain was therefore on capital account. Appeal allowed.

A. Lome Greenspoon for the appellant.

Elizabeth Chasson and Margaret J. Nott for the respondent.

Cases referred to:

Wamford Court (Canada) Ltd. v. M.N.R., [1964] C.T.C. 175, 64 D.T.C. 5103;

O & M Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2207, 85 D.T.C. 535.

Christie A.C.J.T.C.C.:-The issue in this appeal is whether the appellant’s share of the profit on the disposition of the Swansea Shopping Centre, also sometimes known as the Southport Shopping Centre, 34 Southport Street, Toronto (’’the property"), is a capital gain or business income. [1] In his return of income the appellant reported his share as a capital gain. The respondent reassessed on the basis that it was business income. The agreement to acquire the property was made on November 8, 1985, and it was disposed of on December 17, 1987. It was therefore held for some 25 months and one week.

The shares of 644503 Ontario Ltd. ("the numbered company") were equally divided among Mr. Bryon Alexandroff, Mr. Larry Ungerman and Mr. Paul Slavens. Slavens owned the shares of Paul Slavens Real Estate Ltd. (’’Slavens Real Estate”). It was engaged in the real estate brokerage business. Ungerman operated his own real estate brokerage business. In 1985 Alexandroff was employed as a sales representative by Slavens Real Estate. In 1986 he acquired a real estate brokers licence and in July of that year he was employed as such by Slavens Real Estate.

On November 8, 1985, the numbered company entered into an agreement of purchase and sale as purchaser of the property: "In trust for a company incorporated or to be incorporated or other legal entity". The vendor was H. L. & M. Marcus Investments Inc. ("Marcus"). Slavens Real Estate is described in the agreement as "agent". The purchase price was $2.95M. The existing mortgage of $1.45M with interest at ten per cent was to be assumed. It became due on October 4, 1989. In the meantime only monthly interest of $12,083 was payable. Also the vendor was to take back a second mortgage of $0.8M at ten per cent. This mortgage agreement was to run for five years from the date of closing with the right to pay all or any part of the principal at any time without notice or bonus. The balance of the purchase price ($0.7M) was to be paid on closing. A deposit of $0.1M made on entering into the agreement of purchase and sale was to be credited to the $0.7M on closing. The agreement was to be completed on April 22, 1986.

On November 8, 1985, a limited partnership named Swansea Shopping Centre Ltd. Partnership ("the limited partnership") was formed under the Limited Partnership Act of Ontario by the filing of the required declaration with the Registrar of Partnerships under section 3 of the Partnership Act of Ontario. The declaration filed with the Registrar of Partnerships specified that the numbered company was the general partner and Slavens was recorded as the initial limited partner. There were only two partners in the limited partnership, namely, the numbered company and Slavens. This was followed by a limited partnership agreement ("the partnership agreement") made on April 15, 1986. The parties to the agreement were the numbered company referred to as the "general partner" of the first part; Slavens referred to as the "original limited partner" of the second part and: "Each party who from time to time executes this agreement or a counterpart thereof as a subscriber for one or more limited partnership units and who is accepted as a limited partner, (hereinafter individually called a ‘limited partner’ and collectively called the ‘limited partners’)" of the third part.

The stated purpose of the limited partnership in clause 2.05 of the partnership agreement is owning and operating the property for income purposes. Clause 3.01 provided that the interest of the limited partners in the limited partnership shall initially be divided into eight units. Included in clause 5.01 is this: "The general partner will control and have responsibility for the business of the limited partnership and do or cause to be done in a prudent and reasonable manner any and all acts necessary, appropriate or incidental to the business of the limited partnership. Notwithstanding anything herein contained, the general partner shall not cause the limited partnership to sell or otherwise dispose of all or substantially all of its assets without the approval of the limited partners expressed by a special resolution". A special resolution is defined by reference to the definition of another phrase. Suffice it to say for present purposes that it was a resolution passed at a meeting of limited partners by affirmative vote representing at least 75 per cent of the total outstanding units or a written resolution signed by persons representing at least said 75 per cent. Included in clause 5.03 is this: "No limited partner may take part in the control of the business of the limited partnership nor may any limited partner have the power to sign for or to bind the limited partnership; however, a limited partner may from time to time examine into the state and progress of the business of the limited partnership". Clauses 5.07, 10.01 and 10.02 provide:

5.07 The limited partners hereby acknowledge and agree that the general partner has entered into irrevocable arrangements with Paul Slavens Real Estate Ltd., or any affiliate or subsidiary designated by it, whereby it will, because of its knowledge of the property, have the right to act as leasing agent, and when applicable, as sales agent for the limited partnership and to have any listing, whether for lease or sale, in connection therewith, in the event of leasing of available space or any sale of the Swansea Shopping Centre Project comprising the business of the limited partnership and shall be entitled to payment in the amount and on the terms usually paid to independent leasing or sales agents operating in the city of Toronto performing similar functions.

10.01 Each subscribing limited partner shall provide by way of initial capital contribution, for each unit acquired, the sum of $100,000, the sum of $12,500 which was delivered at the time of delivery of the subscription and the balance by cash or certified cheque on or before April 15, 1986.

10.02 Each subscribing limited partner shall further provide by way of capital contribution, for each unit acquired, the further sum of $100,000 such amount to be paid by way of delivery of a promissory note issued in favour of H.L. &

M. Marcus Investments Inc., in relation to the acquisition of the property known as the Swansea Shopping Centre, forming the business of the limited partnership, such promissory note to be issued on the terms and conditions of the draft note appended hereto as Schedule A, and to be collaterally secured by a second mortgage issued by the limited partnership on the Swansea Shopping Centre project property, such second mortgage to be delivered on terms and conditions reasonably acceptable to the general partner.

The limited partners who signed the partnership agreement are: Jill Lustig, Paul Slavens (in trust), Bryon Alexandroff (in trust), Michael Lyons (in trust), Larry Ungerman, Richard Pasternac, Samuel Cohen (in trust) and Ronald Appleby (in trust). All except Slavens, Cohen and Appleby are appellants in these proceedings. The beneficiaries of the trusts were individuals and corporations who also became limited partners. The eight units were subscribed for and issued to these signatories. In total there were 26 limited partners. The appellants are 15 of them. Slavens held 3/4 of a unit. Among the appellants, Alexandroff held 3/4 of a unit and Ungerman held 1/4 of a unit. The holdings of the other thirteen appellants ranged from 1/2 to 1/25 of a unit.

In accordance with the partnership agreement the subscription price per unit was $200,000, one-half of which was payable by cash or certified cheque and $100,000 by way of promissory note with interest at ten per cent in favour of Marcus to be collaterally secured by a second mortgage on the property. The purchase of the property closed as scheduled on April 22, 1986. The source of the following ten paragraphs is a partial agreed statement of facts filed with the Court:

The first mortgage was assumed by the limited partnership from the vendor on closing and had a maturity date of October 4, 1989. The mortgagor was entitled to prepay the mortgage at any time without notice or bonus. In accordance with the terms of the first mortgage, the limited partnership only paid interest on the mortgage. The limited partners directed the limited partnership to pay interest on their behalfs on the individual promissory notes out of surplus cash flow from the property.

The general partner investigated replacement long-term first mortgage financing in or about the end of 1986 and the beginning of 1987. No refinancing was arranged.

The general partner, pursuant to its appointment as manager of the property under the agreement carried out its duties which included leasing of the premises and renewal of leases, arranging for repairs and maintenance to the property, dealing with tenant problems, collection of rents, including collection of present and past percentage rents that had not been pursued by the previous owner.

During 1985 and 1986, South Kingsway Village Ltd. ("SKVL") [2] an affiliate of Tridel, a major developer and builder in the Toronto area, had been developing a three-building condominium complex adjacent to the property. In order to facilitate the erection and construction of the condominium property, SKVL wished to construct and install an underground system of rock anchors and tie-back cables to assist in supporting the shoring of its development and approached the general partner for permission to encroach below grade under the property for such purpose. The limited partnership entered into an encroachment agreement dated June 28, 1986 with SKVL whereby the limited partnership agreed to allow SKVL to encroach beneath the property in consideration of $27,500 and an undertaking from SKVL to rectify any damages suffered.

At or about the time of the encroachment by SKVL the property experienced, inter alia, the following:

(a) settlement of floor slabs;

(b) gaps in the opening in the floor slabs and the partitions;

(c) cracking of the partitions;

(d) distortion of the door frames;

(e) hair line separation between mortar and bricks;

(f) ceiling tiles out of position and damaged;

(g) settlement of the parking area, breaking up the surface and the formation of potholes;

On March 24, 1987 the limited partnership returned $48,000 to the limited partners, in the aggregate, as a return of capital.

On July 27, 1987 the general partner on behalf of the limited partnership commenced an action against SKVL with respect to the encroachment.

On or about September 12, 1987, the general partner received an offer to purchase the property on an "as is where is" basis for $3,830,000. The sale was completed on December 17, 1987. After expenses of the sale, including legal fees and real estate commissions (of which Paul Slavens Real Estate Limited earned one-half or $76,600) the net profit per limited partnership unit was $81,290.

Prior to the sale of the property, the business relationship among the three principals of the general partner had deteriorated. Fourteen days after the sale of the property, the limited partnership was wound up and no other property was acquired by the limited partnership.

The action against SKVL was settled in or about April 1991 by the payment of $25,000 to the general partner.

The witnesses at trial were Alexandroff; Mr. Ronald S. Steinberg, husband of the appellant Donna Steinberg; Mr. Michael D. Lyons, an appellant; Mr. Richard M. Pasternac, an appellant; Dr. William J. Clark; Mr. John J. Busbridge. Clark gave expert evidence about the condition of the property in June 1987 and Busbridge gave the same kind of evidence regarding an examination in February 1987 into the cause of ground movement related to the property. Counsel for both parties agreed that the motivating intention of Alexandroff at the time the property was acquired from Marcus is also attributable to Ungerman, Slavens and the numbered company. It was further agreed that the evidence of Steinberg, Lyons and Pasternac is reflective of the position of the appellants other than Alexandroff and Ungerman.

Alexandroff is a 1970 graduate from the University of Toronto in industrial engineering, but he has not practised that profession. He became a real estate agent in the mid-19703. His employment by Slavens Real Estate has already been referred to. Since 1988 he has had his own real estate brokerage company, Alexandroff Real Estate Ltd.

He referred to the property as a neighbourhood plaza consisting of 14 stores with total rentable space of about 42,000 square feet. In 1987 the "major tenants or anchor tenants" were Mr. Grocer (Dominion Stores), Canadian Imperial Bank of Commerce, Shoppers Drug Mart. Alexandroff was familiar with the property, having sold it to Marcus and he had been subsequently involved in leasing some space for Marcus. He later became involved on behalf of Marcus in seeking a purchaser of the property and thereby became familiar with the leases pertaining to it. He was aware that additional residential units were being developed in the area of the property. Around the end of 1985 he spoke to Slavens and to Ungerman, an associate and long-time friend, about organizing a group to acquire the property. He gave this answer to a question put to him by his counsel:

Q. What was the role that each of the three of you was to play in this group?

A. Each of us had individual talents. I was familiar, obviously, with leasing in the plaza and was interested in getting a little bit more involved in management. Mr. Slavens, administering a real estate brokerage company, had good administrative skills and financial skills. Mr. Ungerman was qualified in the property management and sort of technical side of maintaining properties through some family properties that he owned.

Alexandroff had no prior involvement with a purchase group or syndicate of this kind.

Mr. Ron Appleby, a Toronto lawyer, joined Alexandroff, Slavens and Ungerman in organizing the investors. He was brought in because of "his expertise as a lawyer in helping structure deals of this nature". These were the criteria applied in selecting investors: "Basically they would have to have the requisite amount of money, dollars. They should have some interest in investing in income- producing property. They should be-as you formulate a group, we kept trying the names on each of us to make sure we had a homogeneous group, people from our same community and people who had common interests, who knew each other and didn’t have a problem with each other". Lyons was brought in by Alexandroff who told him the property was being acquired for income-producing purposes. There was no discussion about resale. Cohen came in through Appleby, Lustig through Slavens, Richard Pasternac through Ungerman.

There is in evidence documents prepared by Alexandroff pertaining to projections of income for the property. They are undated and there is no oral evidence about the date of preparation, but I infer from other evidence that they were prepared in 1985. It shows income as follows: 1986-$263,815; 1987-$263,815; 1988-$292,915; 1989-$313,915. The following is taken from the documents just referred to:

On the reasoning that follows Alexandroff concluded that the return on the $800,000 paid in cash or by cheque for the acquisition of the eight units would be in the order of five per cent per annum in respect of 1986: income $263,815-interest on the first and second mortgage $225,000 = $38,815 which is 4.85 per cent of $800,000. His percentages for 1987, 1988, 1989 were 5, 9, 10 1/2 respectively. [4] In this regard it should be borne in mind that the parties agreed that for the purposes of these appeals all of the leases were to be regarded as ’’net-net leases". [5]

After the agreement of sale and purchase was executed, unsolicited offers were made for the property. They were rejected. This also occurred after closing.

After the property was acquired the general partner carried out its management functions through Alexandroff, Ungerman and Appleby. Minutes of management meetings held on June 24 and July 22, 1986, are in evidence. The topics discussed were simply what one would expect at that kind of meeting; e.g., rents, repairs, tenant and parking lot problems. Mr. Grocer had written about potential vehicle damage because of a nearby pothole. There was talk about a "new skin" for the parking lot.

On September 18, 1986, there was a meeting of the partners and one of the topics discussed was the possibility of future acquisitions.

There is in evidence a letter from New York Life discussing a loan of $2,050,000 to be secured by a mortgage on the property. The term mentioned is seven to ten years with interest at the rate of 10.750 per cent. Other letters relating to the same subject are also in evidence. The term of the proposed loan increased to ten years.

Nothing came of this. Alexandroff said: "We had other things on our mind as well. It just fell off the table". There was also correspondence about a loan with Financial Trust which also came to naught. The mortgagee on the first mortgage on the property was Widpar Financial Group Inc. who by letter dated June 4, 1987, informed the numbered company that it was not interested in extending the term of the loan to 1991.

Alexandroff s evidence then turned to the encroachment agreement that is referred to in the facts agreed to that have already been cited. By letter dated June 13, 1986, (Exhibit A-l, Tab 23) addressed to Alexandroff from Mr. George Hughes, Project Manager of South Kingsway Development Ltd., he proposed the making of such an agreement. It reads in part:

Because of our concern that there be absolutely no possibility of movement on your property, we have decided to use a "caisson wall" system which is shown in detail on the attached shoring drawing. This system costs about three times as much as a conventional shoring pile and lagging system but meets the necessary criteria of performance standard.

Part of this system calls for installation of "tie backs" which are essentially anchors inserted in the shale substrata connected by rigid steel rod to the caisson wall in order to hold it upright. These "tie backs" would be installed so as, to be entirely clear of your building foot print and would have no effect on your building. Further if you decide to redevelop your site at some time in the future up to the property line, these can be removed by a simple cutting torch operation at the caisson wall. They are used for temporary support only.

We would like to enter into an agreement with you which would:

1. Give us permission to place tie backs as necessary along our common property line;

2. Provide that we would at our expense and with your cooperation have an engineering survey firm inspect your property and report in detail on the existing condition of said property in order that any future problems (should they develop) could be referenced to the present condition. (You would of course receive copies of this report.);

3. Give us permission to move equipment over your lane provided that we do not block or restrict your use of the lane at any time.

I am attaching for your review a copy of our most recent shoring drawings. Would you please review the same and get back to me as soon as possible outlining comments if any and giving your agreement in principle. A draft encroachment agreement will follow.

As far as the matter of compensation is concerned I underline that we are incurring considerable expense to make sure this job is being done properly so that it will have no material impact on yourselves. In similar situations on downtown projects, we have always reached agreements with nominal dollar values on the understanding that mutual interests are at stake and being served by proper design and execution of the job.

An agreement between the numbered company and SKVL was entered into on June 28, 1986.

The work done by SKVL created considerable commotion, noise, dust, etc. which precipitated complaints by the tenants on the property. By way of example I refer to a letter dated November 18, 1986, sent to Alexandroff by Family Video Place. It reads:

This is to confirm our discussion of August 19, 1986, regarding the shifting of the ground and/or the buildings in our plaza. To date there is a movement of the ground which is apparent as a gap in the sidewalk in front of the store of about one inch. In addition, the ground at the rear access roadway is also receding and cracking. I believe that there are also structural problems cropping up. I have been a tenant here in excess of a year and the problems started only after the excavation for the new apartment buildings were begun and I suspect that this may be the cause. I would advise that the problem be investigated. It is possible to minimize the effects.

A number of photographs taken by Alexandroff at the time the work was being done by SKVL shows fissures in the ground contiguous to property occupied by tenants. On December 22, 1986, Mr. Lionel C. Larry of Robins, Appleby, Kotler, Banks & Taub wrote Tridel Corporation. That letter reads in part:

Secondly, this letter is to put you on notice that there seems to be a shifting of ground and/or buildings on our client’s property. Our client already has received complaints from several tenants that there is movement of ground which is apparent in a gap in the sidewalk. In addition, the ground at the rear access roadway is receding the cracking, and other structural problems are being created. These deficiencies have only become evident following the commencement of excavation.

This letter is to serve as notice to you of the foregoing and to request in accordance with the terms of the encroachment agreement that you immediately attend to a rectification of these matters.

On January 16, 1987, Alexandroff wrote Larry in part as follows:

Further to our conversation this afternoon, I am writing to confirm the findings of my visit to Southport Shopping Centre with Larry Ungerman.

Basically, there appears to be accelerated areas of subterranean decay and shifting of the ground on the south side of the plaza on the lands abutting the Tridel site. Pavement outside the medical centre has severely settled and concrete sidewalks in front of the Video Store, Bakery and Shoppers Store is cracking and a large gap and settlement of concrete sidewalks is occurring in front of these and other stores on the south side. New fissures are evident in the service area driveways adjacent Tridel’s newly constructed retaining wall with the laneway appearing to be shifting as well.

There is also in evidence a document which is in the nature of a form prepared by an insurance broker relating to an incident that occurred on March 25, 1987. With reference to "details” this is said: "Liability. Bodily injury, pieces of ceiling fell striking third party”. The insurance company involved was Hartford Fire Insurance.

On April 13, 1987, First General Construction (Toronto) Ltd. wrote Hartford Insurance in part as follows:

At your request we inspected the above mentioned property to determine the cause and extent of damage to the bathroom wall.

The bathroom wall separated from the rear wall due to a settlement in the floor. This settlement is due to the construction of a highrise building adjacent to this property. It is of our opinion that the ground water table was lowered causing the ground to settle.

The t-bar ceiling in the washroom collapsed when the wall shifted. The main tees separated from the perimeter j-trim moulding. The ceiling above, as it was resting on the washroom wall also shifted, causing the drop in ceiling tiles to hang. Should any more movement of the washroom occur, it is possible that some ceiling tiles will fall. Had this ceiling not been altered during the construction of the washroom partitions, this problem would not have occurred. In order to secure this ceiling, reconstruction of the grid and reinstallation of ceiling tiles are required above the washroom walls.

There was also an exchange of correspondence between Consumers’ Gas and the numbered company.

March 4, 1987, to the numbered company:

We have checked your concerns as outlined in your letter received February 24, 1987.

No evidence of any damage or leak was found.

Consumers’ Gas feels that no potential danger exists at the above site.

If you require any further information, please contact the undersigned at 495-5620.

May 20, 1987, to Consumers’ Gas:

Please be advised that we have again been notified by our engineering company that the gas fittings and lines outside of the buildings above have shifted due to the settlement of the lands due to excavation and construction at the site adjacent this plaza. Because it is felt that this could be a potentially dangerous situation, we are advising Consumers Gas immediately.

Please call the undersigned at 483-4337 for any further information.

May 29, 1987, to numbered company:

We have again checked the area of concern as highlighted in your letter dated May 20, 1987.

We received no readings of any gas escaping at this location but we will continue to monitor this area due to the adjacent construction.

Thank you for your concerns.

July 27, 1987, to Consumers’ Gas:

Further to our correspondence of May 1987 please be advised that we have again been notified by Golder Associates (Mr. J. R. Busbridge) that the relative movement of the ground and building could cause distress to the underground services which enter the building.

Subsequently, the consulting engineers are concerned about the gas supply which enters the south side of the building and have requested we inform you of their concern.

We trust you will act accordingly.

On March 26, 1987, M. L. Nixon, chief building official of the corporation of the city of Toronto, sent an "order to comply" to the numbered company. This is said under nature of contravention: "A recent inspection has revealed that settlement of the concrete floor slab has occurred in the easterly portion of the structure". This is said under remedial action to be Taken: "Provide this department with an engineering report indicating the structural stability of the structure".

Roger R. James Insurance Brokers Ltd. was concerned about the property and on July 16, 1987, it wrote Slavens in part as follows:

We have discussed the insurance situation on the Plaza. The Royal Insurance Company are quite concerned about the plaza and as indicated to you, sent an engineer down to inspect the premises. The report they have from their engineer is that the building is structurally sound but they are very concerned about it from a liability standpoint. As you are aware, the driveway area in some spots and the sidewalk areas and others have sunken quite considerably and there is also a bad area in one of the offices in the doctors section and therefore I have recommended to the Royal that they outline to us their main concerns in writing and I have advised them that I will bring these immediately to your attention and that you have already approached your engineers for his advice on how to solve the problem and hopefully between the two, this can be solved very quickly.

I would like to receive from you if I can, a copy of your engineers report that I can forward onto the Royal and also you mentioned that you have an undertaking from Tridel accepting responsibility and if we could have a copy of that, that would be very useful as well.

A report dated July 31, 1987, prepared by Morrison Hershfield Ltd. is in evidence as Exhibit A-2. It is entitled "Review of Conditions at Southport Shopping Centre, Southport Street, Toronto, Ontario" and is signed by W. J. Clarke. On September 3, 1987, Roger KR. James wrote Slavens as follows:

I have received your letter of Sept. 1 and the report which I forwarded on to the insurance company. I do know that they are going to be interested in the gas company report and I also know that they are concerned about the liability exposure at the premises. Their concern is that someone could very easily trip or get injured in the plaza or on the sidewalk and look to the owners of the plaza for recovery, and therefore back to the insurance company.

If you look at photo #7 that was enclosed and some of the other pictures regarding the sidewalks. They will show the areas of the prime concern of the insurance company.

The report also indicated a problem with ceiling tiles and that some had collapsed and this poses a liability problem.

What I think would be useful would be something in writing indicating that at least some of these will be taken care of immediately and your plans for the repairs.

On September 15, 1987, Alexandroff wrote Roger R. James as follows:

We are in receipt of your letter of Sept. 3, 1987 regarding certain matters at Southport Plaza.

As you are aware the gas company has notified us on several occasions that they have checked out the possibility of gas leakage and that there is no evidence of such. I am expecting a further written communication from Consumers Gas to that effect and I shall forward you a copy upon receipt.

Regarding the other matters referred to in your letter, please be advised that we are aware of these items, and that they are being attended to. Specifically the area of concern in photo #7 has been repaired as have several other areas in the parking lot that required attention.

We thank you for bringing these issues to our attention and again we wish to reiterate that the situation is being monitored and repairs effected as necessary.

Alexandroff said this about the Morrison Hershfield report in an exchange with counsel for the appellants:

A. My impression of the report was that there were many areas of concern in regard to the physical state of affairs of the property at Southport Plaza. There were problems that we hadn’t anticipated when this property was purchased and we had no knowledge yet of how they should be handled. We were not prepared. We read their recommendations and we read their assessment. A lot of it was technical and felt that this was going to be a challenge.

Q. Do you recall what your understanding was of what was happening on the inside of the plaza to cause the various things, the inside of the building?

A. There was settlement of the floor slab, basically around the perimeter areas of the building where it was separating from the walls. It looked like it was major stuff.

Q. In terms of the report you received, what was your understanding of the recommendations or the ability to repair that floor slab?

A. That it might be able to be done at some great expense.

Q. What was your reaction to having received the report that contemplated that kind of reconstruction?

A. We weren’t happy. We were particularly nervous about some of the liability problems and the ongoing bad will that we now were inheriting from the tenants as a result of something we had nothing to do about.

There was a falling-out with Tridel because of the effect on the property of the construction being done by SKVL. The upshot was the commencement of proceedings on July 29, 1987, by the numbered company against SKVL and Tridel in the Supreme Court of Ontario. The plaintiff claimed damages of $500,000 and costs.

In September 1987 Mr. J. Chan, as purchaser in trust for a corporation to be incorporated, and the numbered company, as vendor, entered into an agreement of purchase and sale in respect of the property. Chan signed the document on September 12 and it was signed on behalf of the company on September 14. The purchase price was $3,830,000. Details of payment need not be recited for the purpose of these reasons. The date for completion of the agreement was December 17, 1987. Included in what was agreed to by the purchaser 1s:

(d) that the vendor has made a claim against the owner of the abutting lands to the south of the property with respect to the encroachment agreement and that the vendor is entitled to all of the proceeds of that claim, whether awarded by a court or by out- of-court settlement; and

(e) that it is taking the property on an "as is, where is" basis, including, without limitation, the physical condition of the structures thereon and the terms and status of any tenancies and any vacancies.

The offer to purchase was unsolicited. Alexandroff said that it seemed to Slavens, Ungerman, Appleby and himself that this might be a opportune time to sell the property. He added: "It was starting to be a very cumbersome responsibility and we were concerned about the potential future damage to property". Once they had an offer signed by Chan in a form acceptable to them they "contacted all the limited partners for their input". Alexandroff spoke to Lyons and the latter agreed to the sale. The required special resolution to sell was passed. The group that formed the limited partnership did not as such have any further business dealings. Alexandroff said that if it were not for the problems experienced the property would not have been sold under any circumstances. But it had become a cumbersome responsibility. In cross-examination he agreed that apart from the SKVL construction there were repair problems with the property. He said it was an older property that had been neglected and was showing its age. The plaza had been constructed in 1969.

Dr. William J. Clark received a Ph.D. in civil engineering from the University of Alberta. Prior to that a B.Sc. in civil engineering and a M.Sc. in structural engineering had been conferred on him by Queen’s University. He described himself as a structural engineer. Counsel for the respondent acknowledged that he was qualified to give expert evidence in that field for the purpose of these appeals.

In 1987 his employer, Morrison Hershfield Ltd., was retained by the numbered company for the purpose of reviewing the condition of the property; to consider matters related to safety thereon; to develop conceptual repair schemes if such were thought to be in order and to prepare a report. The report is dated July 31, 1987, and has already been referred to.

In 1987 Dr. Clark visited the property on three occasions; June 15, 22, 24. His report was reviewed in some detail. It includes under the heading "Inspection Observations" references to gaps under baseboards, cracked floor slab, gaps at the partition wall/ceiling junction, tearing of the wall/wall joint and separation of the walls; cracked partitions and door frame distortions. These defects appeared in various rental units in the mall.

This is said at page 6:

In our visual examination of the mezzanine level interior and the westerly roof visible for that area, we saw nothing to suggest that the mezzanine floor, partition walls, or ceiling have experienced displacements, or that the visible roof has experienced settlement displacements. We saw no evidence of any water ponding on that roof, despite recent heavy rainfall.

Our visual inspection of the exterior walls of the original building indicated that the interior finishes, glazing, and exterior masonry are in excellent condition with nothing to suggest movement of those walls.

In the new Shoppers Drug Mart building, there is no sign of displacement of the floor, superstructure, or exterior walls. There are small cracks in drywall finish over doors in the south wall and an east side partition, but we do not consider these significant.

Paragraph 2.4 of the report reads:

Review of Work by Others

As mentioned earlier, Golder Associates have been retained by you as geotechnical consultants regarding this problem, and have issued a letter report dated July 17, 1987. Their work regarding monitoring of settlement displacements indicates significant recent high rates of settlement which suggest that the current settlement movements "are most probably associated with the adjacent construction activities".

On the basis of our investigation of conditions, we are in agreement with this opinion.

The Golder report also states that they "consider that the building structure is not at risk". We are in agreement with that opinion.

The document concludes with "recommended short-term remedial work" and "recommended long-term remedial work". One of the recommendations relating to the long term was a new structurally-supported floor slab rather than a slab on grade. The latter is supported entirely on the ground, the concrete having been poured directly on top of the ground. This would involve evacuation of all the tenants for a period of up to three months.

Mr. John R. Busbridge received a B.Sc. and a M.Sc. in 1967 and 1968 respectively. Both were conferred on him by the University of Strathclyde, Glasgow. He is employed as a geotechnical engineer by Golder Associates of Mississauga, Ontario. He is qualified to give expert evidence in that field. He described his profession in this way:

A geotechnical engineer specializes in the mechanical properties of soil and rock. In the civil engineering profession we apply this to problems with foundations for buildings, tunnel design, design of structures, earth structures such as dams.

Essentially, we specialize in problems associated and design of structures connected with soil and rock.

In November 1981 he co-authored a report entitled "Subsurface Investigation, Proposed Shoppers Drug Mart, Swansea Shopping Centre". A new building was constructed on the property to house Shoppers Drug Mart which was evacuating premises it previously occupied there. Because of the condition of the soil it was recommended that floor slab for the new building be supported on a deep foundation rather than as a slab on grade. This advice was accepted.

In 1987 Alexandroff contacted Busbridge about ascertaining the cause of settlement of ground at the property. After examining the site Busbridge wrote him on February 12, 1987, in part, as follows:

The paved areas surrounding the mall buildings show obvious signs of settlement. There appears to be settlement of the floor slab in several of the units in the eastern portion of the main mall building. This is reflected in gaps Opening up between the floor slabs and partitions, some cracking of partitions and distortion of door frames.

We are concerned that movement of the ground could be causing distress to gas services which enter the mall buildings from the south side (ï.e., from the lane between the mall and the excavations). Induced stress is likely to be severe because the buildings are on deep foundations and not settling with the surrounding soil. We request that our concerns are passed on as soon as possible to those responsible for the excavation and that Consumers’ Gas be notified so that they can inspect the connection.

The apparent ground movements could well be associated with the adjacent excavation. Causes of such settlement would be:

-settlement of adjacent ground due to stress relief;

—settlement of loose fill due to vibrations caused by pile driving and construction activity;

-settlement of loose fill due to groundwater lowering.

We suggest that you obtain any records of ground movements and groundwater levels which are available from the developers of the adjacent property. In addition, a copy of any pre-construction survey of the mall would be helpful in establishing the damage caused by the adjacent excavation. In addition, we recommend that independent monitoring of cracks is carried out in future. We can carry this out if requested.

A number of photographs depicting work being done by SKVL and damage to the plaza were put in evidence through Busbridge. The photographs were, however, taken by another employee of Golder Associates, Mr. D. DuBois. All of the damage shown is not necessarily attributed to SKVL. On March 3, 1987, DuBois wrote Alexandroff, in part, as follows:

On March 2, 1987 our engineer visited the above shopping mall and installed some tell tales across existing cracks in the building. These tell tales will provide a measurement of any further movement at their locations. As was described in our letter to you dated February 12, 1987, the mall is suffering some distress, which is reflected in gaps opening up between the floor slabs and partitions, some cracking of partitions and distortion of door frames. This distress is apparent in the eastern portion of the mall.

On May 19, 1987, DuBois wrote Alexandroff, in part, as follows:

We consider that the settlement of the ground relative to the building will cause distress to underground services which enter the building. We would remind you of our concern about the gas supply which enters the south side of the building and suggest that appropriate authorities are informed of our concern and the site conditions.

Again on July 17, 1987, DuBois wrote Alexandroff, in part, as follows:

Since May 14, 1987 the average rate of settlement of the two points on the sidewalk slab relative to the building is about 0.16 mm per day. Extrapolation of this average rate suggests that if this rate of settlement had occurred since about 1982, when we understand the sidewalk was constructed, the total relative movement would be about 250 mm. There is no evidence of such a large total movement of the sidewalk. We therefore consider that the movements currently being recorded are likely to have a more recent cause and are most probably associated with the adjacent construction activities.

We consider that the relative movement of the ground and the building could cause distress to the underground services which enter the building. As expressed in our telephone conversation of May 7, we are concerned about the gas supply which enters the south side of the building and trust that you have informed the appropriate authorities of our concern as agreed.

During our visit, the tenant of the medical building expressed concern about safety and stability of the air conditioning fan that is in the ceiling above their central hallway. Several ceiling tiles are separated from this fan. Comments on the stability of this fan are beyond our expertise, but we would suggest that you have this fan inspected.

The letters of March 3, May 19 and July 17 are all cosigned by Busbridge. Busbridge was asked this question by counsel for the appellants

and he gave this answer:

Q. By way of summary, based on all your observations, what was causing the damage that you observed and the separations you were observing at the site?

A. I would summarize the situation by saying that the decision by the owner in, I believe, 1982, to reconstruct the east part of the mall and still adopt a slab on grade for that part of the building, meant that it did not have entirely an adequate foundation for the soil on the site. What we saw was, to a large extent, caused by the construction activities of the adjacent Tridel excavation. So, we had seen a lot of settlement which had been triggered in a fairly short period of time by the excavation carried out by Tridel. But, nevertheless, the building had, I am sure, seen some settlement in the past because of the nature of the foundation before Tridel got on the adjacent site and would see some settlement in the future if that floor slab was not supported on deep foundations.

Later he added that he thought it highly probable that the majority of the damage he saw was directly attributable to the SKVL excavation.

Mr. Ronald S. Steinberg is a chartered accountant of some 33 years standing. He is a partner in the firm Price Waterhouse. As previously noted, he is the husband of Donna Steinberg. He became involved in the partnership through a client, Mr. Lustig. He studied the projections referred to earlier in these reasons that were prepared by Alexandroff and he also discussed them with Lustig. Based on them and other things, including intended management, he regarded what was being proposed as a "reasonable deal" and he recommended in favour of it. In the result Mrs. Jill Lustig, one of the signatories to the limited partnership agreement, acquired, according to a schedule attached to the partial agreed statement of facts, one-third of a unit. Mrs. Frances Storm, the wife of a business associate of Steinberg, took one-third of that unit and the other one-third went to Steinberg’s wife. He said that it had not been intended to sell the property. How this came about is related in this exchange between counsel for the appellant and the witness:

Q. Were you informed of the fact that there was an offer to sell the property?

A. Yes.

Q. That is the offer that ultimately resulted in the sale. How were you informed of that?

A. Lustig had called me and told me that there had been an offer to sell the property and contemporaneously with that, suggested that we had got some - damage had been happening to the property and I thought it was really just a paving the lot at that time. Whether it was the structure of the building, I don’t know, but there was paving and it was extremely serious and damaging and somebody wanted to come along and make an offer for the property. Since I believe you can’t continue to flog a dead horse, I said, "Look, if we have got problems I don’t want any. If there is an opportunity to sell the thing, then I guess we have to sell it”.

Q. What did you recommend to Mrs. Lustig in terms of their investment?

A. The same thing. If that was going to be the seriousness of the situation, I recommended to everybody that we just get out.

Q. But for the damage that was being reported to you, would you have wished to sell the property?

A. No, it was never our intent to sell the property.

Michael D. Lyons was in the business of operating golf courses. Around Christmas of 1985 he was approached by Alexandroff who told him about the acquisition of the property. Lyons had known Alexandroff, Ungerman and Slavens for many years.

He was supplied with projections prepared by Alexandroff. In addition he visited the property to study it and "I did my own appraisal of what I saw and what the potential might be". He was impressed by the importance of some of the tenants and the cleanliness and attractiveness of the neighbourhood. He also noted the planned completion of highrise construction adjacent to the property. In his discussions with Alexandroff nothing was said about reselling the property. Therefore when and after he acquired one-half of a unit in the limited partnership there was no discussion of that kind. His wife Vikki also acquired one-half of a unit. The fact that precipitated his agreement to sell was the damage associated with the excavation by SKVL.

As already said Mr. Richard M. Pasternac is an appellant. He is a chartered accountant practising in North York. He was introduced to the property by his brother-in-law, Ungerman. They discussed what was intended regarding it and he carefully studied Alexandroff’s projections. After carefully analyzing the project in consultation with his father Morris, who is also a chartered accountant, they decided to get involved and each acquired one-half unit in the partnership. The firm of Pasternac and Pasternac were the accountants for the limited partnership and their task was the preparation of the year-end financial statements and interim statements as required. They were not involved in the management of the property.

The witness attended an organization meeting pertaining to the limited partnership on March 26, 1986. It was chaired by Appleby and it was made clear to those present that the intent ’’was to own and operate this plaza and hopefully make some money from the rents and be around for a long time and have a business relationship with this group that would hopefully flourish and maybe, in the future, purchase other properties as well".

With reference to the sale of the property Pasternac heard from Ungerman and they discussed the serious problems afflicting it. Ungerman said there was an offer to buy it and he was recommending sale. He asked Pasternac if he would like to sell. This exchange followed between counsel for the appellant and the witness:

Q. What was your response in answer to that?

A. Well, initially I was upset about it, more from an emotional response than anything else. I didn’t really know the condition of the property at the time. I wasn’t privy to the engineering reports and the rest of it. So, naturally, I was kind of upset about it because, you know, it would have been difficult to replace an investment that was yielding those kinds of after-tax returns, but I listened to what he had to say. I told him to call me back and I spoke to my dad about it and he felt the same way I did. Larry called me the next day and said it was basically done, it was all agreed to by the other partners that they wanted to sell and they had a majority and it was sold.

His Honour: They had to have a 75 per cent?

The witness: Apparently, yes.

The disposition of this appeal turns on the answer to this question: when the property was purchased on November 8, 1985, [6] by the numbered company as trustee for the limited partnership, was the only motivating intention of both the trustee and the beneficiary of the trust its acquisition as an income-producing investment? In law the intention attributable to the numbered company is the intention that the natural person or persons responsible for the corporate act of acquiring the property had at the time of acquisition: O & M Investments Ltd. v. M.N.R., [1985] 2 C.T.C. 2207, 85 D.T.C. 535 (T.C.C.) at page 2209 (D.T.C. 537). In this case those persons are Alexandroff, Ungerman and Slavens.

The whole of the relevant evidence satisfies me that the only motivating intention of the numbered company, ascertained on the basis just described, was to acquire the property as an income- producing asset. There is nothing to suggest that the intention of that company, in its capacity as the general partner in the limited partnership, and the intention of Slavens, in his capacity as the initial limited partner, was different. Having regard to the deterioration in the property after it was purchased there is ample evidence on which to conclude that the decision made in 1987 to sell it was not inconsistent with that prior intention. It follows that the appeal succeeds.

As these reasons indicate, evidence was adduced at trial to establish the intention of persons who became limited partners under the terms of the partnership agreement of April 15, 1986. While I am prepared to accept that their intention was investment, as opposed to speculation in order to make a profit, I do not believe, on reflection, that their intention on acquiring an interest in the partnership is germane. What was received by them under the partnership agreement was an interest in a partnership that already held the property as a capital asset.

The appeal is allowed.

Appeal allowed.