Edwynn Holdings Ltd. v. Minister of National Revenue, [1990] 1 CTC 2108, 89 DTC 720

Kempo, T.C.J.:—These appeals are in respect of the appellant’s 1981 and 1983 taxation years and concern the replacement property provisions found within subsections 44(1) and 44(5) of the Income Tax Act (the "Act") which, in their simplest terms, permit a deferral of tax that would have otherwise been immediately exigible on a disposition of capital property. The colloquial term for this effect is that it is a "rollover".

Counsel for each party agreed that the underlying facts of the case were as set out in the pleadings, and that the essential issue to be decided was whether the shares held by the appellant in a company which owned and operated a hotel were a "former business property" as that phrase is defined and set out in subsection 248(1) of the Act, and concomitantly whether the appellant’s sale of those shares and subsequent acquisition of an interest in another hotel venture was a "replacement property" as that phrase is defined and set out in subsection 44(5) of the Act.

The appellant, at all material times, was a Canadian resident corporation carrying on business as a hotel operator and manager in Alberta. It had owned, managed and then sold a hotel in Lloydminster. It then owned, managed and sold a hotel in Tofield sometime after March 31, 1977.

On about March 23, 1978 the appellant acquired treasury shares representing a 50 per cent ownership interest in 115002 Holdings Ltd. (the "numbered company") which then acquired and operated a hotel in Fort Saskatchewan. The appellant was an active participant in its management.

Because of management disagreements, on or about October 15, 1980 the appellant sold all of its shares in the numbered company to the other shareholder.

Subsequently, through a partnership arrangement, the appellant acquired a one-ninth interest in the assets of a hotel in Lethbridge in which it similarly became active in its management.

The appellant seeks a rollover under the replacement property rules on the premise that:

— the partnership interest, in the Lethbridge hotel is a replacement property within the meaning of subsection 44(5) of the Act;

— IT Bulletin 259R2, paragraphs 15(a) and 16 recognize the principles of similar use and substitution of the replacement property for the former property. The similarity test is satisfied here as both properties were hotels and both received the appellant's active participation and management;

— Paragraph 15(b) of IT 259R2 acknowledges that shares could replace land or land could replace shares as it contended that:

15(b) Although the replacement property generally will bear the same physical description as the former property, eg, land replaced by land or a building by a building (but see 4 above), there may be cases where a different type of property provides the same use or function as the former property. For example, where shares of a cooperative corporation which carry rights to accommodation in an office building are acquired to replace an expropriated office building of the taxpayer, the shares could constitute a replacement property.

— The only differentiation between the replacement property (the partnership interest in the Lethbridge hotel) and the former property (the shares in the numbered company which owned the Fort Saskatchewan hotel) was in the nature of the interest held. The interest was directly held in the replacement property while it was merely indirectly held in the former property;

— "Former property" by paragraph, 44(1)(b) of the Act is said to be a "former business property" which by that part of the subsection 248(1) definition of relevance here means a real property "or an interest therein”. The definition does not preclude an indirect interest in real property;

— Mr. Justice Rand in Zwicker v. Standbury, [1953] 2 S.C.R. 438 at 439; [1954] D.L.R. 257, was of the view that shares in a corporate entity are "simple fractions of a potential interest in the assets and active life of a company, whatever it may be, into which capital is divided”. [emphasis added by counsel] Lord Wrenbury, in the case of Bradbury v. English Sewing Cotton Co., [1923] A.C. 744 (H.L.) at page 767, noted that a share conferred upon the holder "a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or a distribution of assets in winding up.";

The Business Corporations Act of Alberta ("B.C.A.A.") provides:

Section 24

(3) If a corporation has only one class of shares, the rights of the holders of those shares are equal in all respects and include the rights

(c) to receive the remaining property of the corporation on dissolution.

Section 204

(7) After issue of a certificate of intent to dissolve, the corporation shall

(d) after giving the notice required under clauses (a) and (b) and adequately providing for the payment or discharge of all its obligations, distribute its remaining property, either in money or in kind among its shareholders according to their respective rights.

The relevant parts of the applicable provisions of the Income Tax Act as they applied during the years under appeal read as follows:

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

(b) a property that was, immediately before the disposition, a former business property of the taxpayer,

and the taxpayer has

acquired a capital property (in this section referred to as his "replacement property") as a replacement for his former property and . . ., if he so elects . . . [balance is not relevant here]

248(1) — "former business property" of a taxpayer means a capital property that was used by him primarily for the purpose of gaining or producing income from a business, and that was real property or an interest therein of the, taxpayer. . . [emphasis added]

— "common share" means a share the holder of which is not precluded upon the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid upon thereon plus a fixed premium and a defined rate of dividend;

248(4) In this Act, an interest in real property includes a leasehold interest in real property but does not include an interest as security only derived by virtue of a mortgage, hypothec, agreement for sale or similar obligation.

44(5) For the purposes of this section, a particular capital property of a taxpayer is a replacement property for a former property of the taxpayer, if

(a) it was acquired by the taxpayer for the same or a similar use as the use to which he put the former property;

(b) where the former property was used by the taxpayer for the purpose of gaining or producing income from a business, the particular capital property was acquired for the purpose of gaining or producing income from that or a similar business; and

(c) [not of relevance here]

Counsel for the respondent has conceded in this case that the shares that the appellant held in the numbered company were capital property, and that they were used primarily for the purpose of gaining or producing income from a business.

However the appellant, counsel submits, is not entitled to the replacement property rollover because the Act requires that the former business property must be an interest in real property, that subsection 44(1) is an exempting provision in which the appellant must fit within all of its four corners, Aubry v. The Queen, [1976] C.T.C. 598 at 600, 76 D.T.C. 6343 at 6344 (F.C.T.D.), that as there are no ambiguities in the provision the words must be construed according to their ordinary and natural meaning; and that there is nothing cloudy or obscure in the notion of an interest in real property. The notion of a "class" of interests which are very remote from generally understood concepts of an interest in real property would be to add words into the definition which are not there, and which the definition itself does not warrant. Additionally, the Act in subsection 248(3) specifically provides for the exclusion of those classes of interests which under ordinary circumstances might be considered an interest in real property, such as by way of mortgage or reservations under an agreement for sale. Accordingly, and if anything, the interest in real property encompassed by the subject definition is actually restrictive; it narrows the types or classes of interests that fall within it rather than reaching out to embrace new and novel ones.

Further, it was submitted, the indirect interest concept urged by the appellant requires lifting of the corporate veil, with this not being an appropriate situation; Kosmopoulos et al. v. Constitution Insurance Company of Canada et al., [1987] I.L.R. 8297 at 8300 (S.C.C.) and In re Corlet Estate, [1939] 3 W.W.R. 83 (Alta. S.C.).

Appellant's counsel has labelled the right to a distribution of property on a corporate wind-up as an indirect interest in that property. To my mind that right, or potential, is more akin to a residual interest in the corporation's capital assets (of which real property may only be a part) because it enures to a shareholder only in a residual way and after all aspects pertaining to a wind-up have occurred. When seen in this light, the subject fiscal definition must be stretched even further to accommodate the appellant's thesis. For the Court to follow this line of argument would go well beyond the statutory words employed without any necessity to do so and would amount to judicial legislation.

It is my view that the submissions of counsel for the respondent are to be preferred and are adopted as being the correct approach to be taken here. Both counsel are to be commended for their succinct analysis and presentation.

For the reasons given, the appellant's appeal is dismissed.

Appeal dismissed.