Rosanna Fontaine v. Minister of National Revenue, [1988] 2 CTC 2294, 88 DTC 1656

Rip, T.CJ.: —Mrs. Rosanna Fontaine, the appellant, has appealed notices of reassessment for 1980, 1981, 1982 and 1983; in making each reassessment the Minister of National Revenue, the respondent, reduced the amount of reserve claimed by the appellant purportedly in accordance with subparagraph 40(1)(a)(iii) of the Income Tax Act ("Act"), thus increasing Mrs. Fontaine's income by an additional amount of taxable capital gain.

At all relevant times Mrs. Fontaine was, and is, a resident of Canada. She is a beneficiary of the estate of her late husband, Jean-Marie Fontaine, a resident of Canada at the time of his death in 1980. Among the assets of her husband's estate in which she was vested were the rights and obligations of her husband under an agreement ("Agreement") dated August 1, 1976, with Pearline Developments Ltd. ("Pearline") whereby Mr. Fontaine sold land ("land") to Pearline for the purchase price of $300,000. The purchase price for the property was payable by equal consecutive annual instalments of $20,000 each, to be applied “firstly on interest and secondly on principal”, which were due and payable on the first day of December, 1976, and the first day of December in each and every year until paid in full. Interest on the balance of the purchase price remaining unpaid was ten per cent per annum, computed from August 1, 1976.

Pearline was owned by Mr. Fontaine’s two sons, each having one preferred voting share, and their wives, each having 99 common shares.

The necessary election pursuant to subsection 72(2) of the Act was made by Mrs. Fontaine and the executor of her husband's estate respecting the amount receivable from Pearline under the Agreement.

The land consisted of a quarter section of land near Bonnyville, Alberta Mr. Fontaine had previously subdivided into 20 lake-front lots and 30 back lots. Mr. Fontaine had his summer home on this property and his son Guy Fontaine, a solicitor, testified his father’s intention was to "hand the property over to his sons”.

On August 4, 1976, Pearline filed a caveat on the land, claiming an interest as purchaser. Two numbered corporations were incorporated for the benefit of Pearline. The shares of one company were owned by Jean-Marie Fontaine and the shares of the second company by Guy Fontaine. Jean-Marie Fontaine conveyed the 30 back lots jointly to the two corporations which held the land for the benefit of Pearline.

When Jean-Marie Fontaine filed his income tax returns for 1976,1977 and 1978 he claimed a reserve in accordance with subparagraph 40(1)(a)(iii). Because the annual instalments payable in those years were not sufficient for the payment of annual interest, the respondent disallowed the reserve. By order dated June 17, 1983, the Court of Queen's Bench of Alberta, per Mr. Justice Hogg, rectified the Agreement by deleting from and including the date of execution the words "firstly in interest and secondly" with respect to the application of each annual instalment so that each annual instalment of $20,000 was to be applied on principal. The representative of the estate and the respondent agreed to a reserve on the basis that the balance of the purchase price was reduced by $20,000 per year.

Pearline acquired the lots for resale; however, almost from the outset, the venture to sell the lots was not successful. A sales campaign in 1970 failed. Guy Fontaine stated that the economic boom in the Bonnyville area at the time was reflected in commercial and residential land but not in recreational land.

Efforts were made by the Fontaines to sell the lots. A housing shortage in 1978 and 1979 in Bonnyville suggested some of the land be made available for permanent housing. Guy Fontaine said the family thought they ought to put up some prefabricated houses on some of the back lots. To finance the construction, Pearline borrowed $250,000 from the Treasury Branch of Alberta. The money was borrowed at an annual interest rate of prime plus two per cent. As security for the loan titles to 25 other lots were pledged to the Treasury Branch and guarantees were given by the two numbered companies and personally by Jean-Marie Fontaine and Guy Fontaine. The prefabricated homes did not sell and Pearline lost approximately $150,000 on the housing venture.

During the lifetime of Jean-Marie Fontaine, Pearline made payments to him under the Agreement aggregating $47,357 as follows:

It is obvious that even during Mr. Fontaine's lifetime, payments were incomplete and not on time. At the time of death of Jean-Marie Fontaine the balance of purchase price unpaid was $252,643. No payments have been made by Pearline since Mr. Fontaine's death.

Guy Fontaine stated that sometime prior to his death Jean-Marie Fontaine told Guy "he didn't expect to get paid until after the Treasury Branch had been paid”. In examination-in-chief Guy said his father did not expect payment from Pearline until the Treasury Branch had been paid and Pearline had gained an even keel. He explained the housing project was his father's idea; his father believed that if some people lived on the site others would be attracted to it and the lots would be more sellable.

In cross-examination Mr. Fontaine said he could not remember when his father mentioned he did not expect to receive payment nor could he remember the exact words his father used to inform him he did not expect to get paid, although "Father mentioned this on more than one occasion”.

Mr. Fontaine said his mother, the appellant, has not requested any payment from Pearline since her husband's death nor has she threatened to foreclose on the property. She has only recently engaged counsel to advise her of her rights. Guy Fontaine understood his mother's position to be that no payment would be made by Pearline and she would request no payment until the Treasury Branch was paid. He stated he came to this understanding "probably within a year of Father's death" at a meeting which was attended by him and his mother at their accountant's office in Edmonton. In Guy Fontaine's view his mother was “mindful that if she requested the money she wouldn't receive anything since the Treasury Branch was ahead of her”. The Treasury Branch was paid in late 1986 or early 1987.

Guy Fontaine assumed his mother treated the Pearline debt in the same manner her husband did since, although "she is not verbal, [she] is astute and aware of what's going on”. During the trial Mrs. Fontaine confirmed that she has not received payment from Pearline nor has she taken steps to demand or enforce payment; however, she also said she did not know the Agreement called for annual payments to be made by Pearline.

Mr. Gary Davidge, a chartered accountant in Edmonton, testified as to the financial position of Pearline and the history of payments by Pearline to each of the Treasury Branch and Jean-Marie Fontaine and his estate. Documents produced and prepared by Mr. Davidge reflect the reductions in the debt to the Treasury Branch from 1981 to 1984 but no payment to the estate of the late Mr. Fontaine during those years.

Mr. Davidge was appointed accountant of Pearline in 1981 but had met the late Mr. Fontaine a year before his death. Mr. Davidge's review of financial records of Pearline confirmed to him that as a result of the loss on the housing venture Pearline did not have sufficient funds to pay all of its debts and whatever cash was generated went to pay off the Treasury Branch debt. The financial statements of Pearline reflect an earning of $40,429 and a loss of $151,231 for 1982 and 1983 respectively; Pearline's earnings for 1984 were $29,672. The retained earnings of Pearline for the years 1981 to 1984 were as follows:

Counsel for the appellant submits his client is entitled to an additional reserve pursuant to subparagraph 40(1)(a)(iii) since Mr. Jean-Marie Fontaine waived his right to payment of the annual instalments; consequently in his view, the amount of the purchase price not due to the appellant until after the end of each of 1980, 1981, 1982 and 1983 was $252,643. Counsel suggests the Court conclude from the facts the existence of a waiver.

In the respondent's view, the appellant is entitled to a reserve based on the balance of the purchase price provided for in the Agreement subsequently rectified by court order, and no waiver took place. The respondent assessed on the basis the balances of purchase price not due to the appellant until after each of 1980, 1981, 1982 and 1983 were $170,600, $153,541, $136,481 and $119,421 respectively. The portion of the balance of purchase price not due to the appellant until after the end of each taxation year in issue decreased at a rate not less than $20,000 per year.

Subparagraph 40(1)(a)(iii) of the Act reads as follows:

Except as otherwise expressly provided in this Part

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(iii) subject to subsection (1.1), such amount as he may claim as a deduction, not exceeding the lesser of

(A) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

(B) an amount equal to the product obtained when 1/5 of the amount determined under subparagraph (i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property; . . .

Mr. Wolff, appellant's counsel, stated that the determination of the existence of a "waiver" is a difficult question in law. He suggested that in acting as he did, Jean-Marie Fontaine led Pearline to believe he would not exact payment until the Treasury Branch had been paid in full. In his view the waiver was a form of estoppel.

Appellant's counsel submitted that Parliament's intention is for the tax to attach to income when the amount is paid and not when the liability is created: Kennedy v. M.N.R., [1973] C.T.C. 437 at 440; 73 D.T.C. 5359 (F.C.A.) at 5361, Hannem v. M.N.R., [1980] C.T.C. 2089 at 2091; 80 D.T.C. 1091 at 1093 (footnote). A person who enters a contract to sell his goodwill does not regard an amount the purchaser promised to pay in part consideration of the purchase a year after the making of the contract an amount payable in the year of the making of the contract; the amount would be payable in the year when the due date arrived: The Queen v. Timagami Financial Services Ltd., [1982] C.T.C. 314 at 316-17, 82 D.T.C. 6268 at 6269. In other words, counsel says that no amount of the balance of purchase price ought to be included in income until an amount is due for payment by the purchaser to the vendor.

Mr. Wolff also submitted that because of the waiver by the late Mr. Fontaine, Pearline acted in reliance upon such waiver; its conduct was influenced by Mr. Fontaine's concession not to enforce payment according to the Agreement. Accordingly the appellant was bound in equity by the doctrine of estoppel to give Pearline reasonable notice that it would enforce payment in accordance with the Agreement before it could demand such payment. Since Mr. Fontaine had intended the promise to be acted on, and Pearline did in fact act on it, neither Mr. Fontaine nor Mrs. Fontaine can go back on it: Wauchope v. Maida et al., 22 D.L.R. (3d) 142 at 148.

In the case at bar, appellant’s counsel concludes, no amount of the balance of purchase price is due to the vendor in any of the years in appeal since the vendor had waived his right to payment until the Treasury Branch had been paid; only after payment to the Treasury Branch was the debt due to Mrs. Fontaine.

Counsel for the respondent submits that no waiver of payment ever took place. The balance of the purchase price was and remained due and payable throughout the years in appeal in accordance with the Agreement, as rectified by the Court. Guy Fontaine could not recollect the precise words used by his father and in any event the words "do not expect to be paid" do not constitute a waiver of payment. Mrs. Fontaine was not aware Pearline had to make annual payments and counsel therefore suggested this may have been the reason she did not seek any payments.

The precise words the late Mr. Fontaine uttered to his son, Guy, are not known. In his evidence Guy Fontaine referred on several occasions to his father's utterance as "didn't expect payment until the Treasury Branch is paid” and to words analogous to this phrase. Such a declaration by a creditor may indicate he has concluded that the debtor is in a precarious financial position and he has no hope of collecting any portion of the balance of purchase price until a creditor at arm's length is paid off, in particular since he has personally guaranteed the debt to the creditor. Such a declaration by the deceased may very easily have been an expression of the reality of the situation as he saw it.

On the other hand, the appellant's position is that Jean-Marie Fontaine intended to waive his rights under the Agreement. The principle of waiver is set out in the reasons for judgment of Lord Denning, M.R. in W.J. Alan & Co. Ltd. v. El Nasr Export and Import Co., [1972] 2 Q.B. 189 at 213:

The principle of waiver is simply this: If one party, by his conduct, leads another to believe that the strict rights arising under the contract will not be insisted upon, intending that the other should act on that belief, and he does act on it, then the first party will not afterwards be allowed to insist on the strict legal rights when it would be inequitable for him to do so: see Plasticmoda Societa per Azioni v. Davidsons (Manchester) Ltd., [1952] 1 Lloyd's Rep. 527, 539. There may be no consideration moving from him who benefits by the waiver. There may be no detriment to him by acting on it. There may be nothing in writing. Nevertheless, the one who waives his strict rights cannot afterwards insist on them. His strict rights are at any rate suspended so long as the waiver lasts. He may on occasion be able to revert to his strict legal rights for the future by giving reasonable notice in that behalf, or otherwise making it plain by his conduct that he will thereafter insist upon them: Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd. [1955] 1 W.L.R. 761. But there are cases where no withdrawal is possible. It may be too late to withdraw: or it cannot be done without injustice to the other party. In that event he is bound by his waiver. He will not be allowed to revert to his strict legal rights. He can only enforce them subject to the waiver he has made.

There has been no evidence adduced at trial establishing that as a result of the purported statement of Jean-Marie Fontaine Pearline suffered any injustice or, other than not making any of the required payments, acted differently from what it otherwise would have done. In the case at bar it was in Jean-Marie Fontaine's interest that Pearline pay the Treasury Branch debt on a regular and timely basis. If Pearline did not pay he would be liable for payment. The most that I can conclude Mr. Fontaine may have given to Pearline was an indulgence granted by a father to a corporation owned by his children. In the case of Burrows v. Subsurface Surveys Ltd. and G. Murdoch Whitcomb, [1968] S.C.R. 607, Ritchie, J. refers to the issue of estoppel at page 615:

It is not enough to show that one party has taken advantage of indulgences granted to him by the other for if this were so in relation to commercial transactions, such as promissory notes, it would mean that the holders of such notes would be required to insist on the very letter being enforced in all cases for fear that any indulgences granted and acted upon could be transacted into a waiver of their rights to enforce the contract according to its terms.

At page 617 the Court concluded that the repeated failure of one party to insist on payment at the agreed date does not preclude that party from insisting on strict adherence to the contract:

I am on the other hand of opinion that the behaviour of Mr. Burrows is much more consistent with his having granted friendly indulgences to an old associate while retaining his right to insist on the letter of the obligation, which he did when he and Whitcomb became estranged and when the respondents were in default in payment of an interest payment for a period of 36 days.

The Court based its conclusion on the fact that the party granting the delay for payment did not intend to change the contractual relationship between the parties. There is no evidence to suggest Mr. Fontaine intended to change the contractual relationship between himself and Pearline. Mr. Fontaine's purported statement is not as certain as it could have been. In Andrews v. M.N.R., [1987] 1 C.T.C. 2165; 87 D.T.C. 118 this Court found a verbal agreement of purchase and sale binding on the parties because the terms of payment of the purchase price were enforceable. In the Andrews appeal there was no uncertainty as to the intent of the parties.

Even assuming that estoppel did exist in the case at bar Mr. Fontaine, by sending a reasonable notice to the purchaser, could have insisted that the contract be respected in the future: Burrows v. Subsurface Surveys Ltd. et al., op cit, at page 316, W.J. Alan & Co. Ltd. v. El Nasr Export and Import Co., supra. Cheshire and Fifoot, Law of Contract, 7th ed. Butterworths: London, 1969, page 502.

The words expressed by the late Mr. Fontaine, according to his son, are not in my view sufficient to vary the terms of the Agreement.

The issue narrows itself to whether a sum which the vendor chooses not to claim, or which he may not claim without a reasonable notice, may be said to be “due”. The answer lies in the reasons for judgment in the appeal of The Queen v. Derbecker, [1984] C.T.C. 606; 84 D.T.C. 6549. In that case, part of the proceeds of disposition were represented by a promissory note expressed to be payable "on demand after December 31, 1976.” Hugessen, J. of the Federal Court of Appeal wrote, at page 607 (D.T.C. 6549):

The learned trial judge held that in the absence of a demand in the year 1977 the note in question was not "due" to the taxpayer in that year. She said:

. . . what was intended was to tax the taxpayer not at the time he was entitled to the money but at the time when it was required to be paid to him.

With respect we think that she was wrong and that the words "due to him” look only to the taxpayer's entitlement to enforce payment and not to whether or not he has actually done so.

The instalments provided for in the Agreement were binding on Pearline during the years in appeal. The words of Mr. Fontaine, if not an expression of the state of Pearline’s financial state, were a mere indulgence and he was entitled to enforce payment at all times. And if I accept the appellant's contention that the vendor's words created a valid waiver or gave rise to estoppel, the waiver or estoppel was of a nature that the vendor nevertheless was entitled to enforce payment in the year after giving reasonable notice. In both cases the amounts were due at the time set out in the Agreement whether or not the appellant chose to enforce payment. The amount of the balance of purchase price was due to the vendor, although at the future dates set out in the Agreement, from the time the Agreement was executed because he could at that time enforce payment in accordance with the terms of the Agreement. The appellant's choice not to enforce payment does not affect the "due" character of the portions of the balance of purchase price under the Agreement.

The appeals are therefore dismissed.

Appeals dismissed.