Roland
St-Onge
(orally:
January
28,
1977):—The
appeal
of
Big
Horn
Inn
Ltd
was
heard
on
January
27,
1977
in
the
City
of
Calgary,
Province
of
Alberta,
and
the
question
at
issue
is
whether
the
proceeds
of
a
sublease
were
taxable
when
received
in
the
appellant’s
1970
taxation
year.
At
the
hearing,
counsel
agreed
to
file
a
Statement
of
Agreed
Facts,
as
follows:
1.
The
Appellant
was
incorporated
on
November
14th,
1969,
the
shareholders
of
which
were
as
follows:
|
H
Lloyd
MacKay
|
49
shares
|
|
Richard
Muselle
|
51
shares
|
|
Total
|
100
shares
|
2.
Richard
Muselle,
a
councilor
in
the
Township
of
Banff
during
the
summer
and
fall
of
1969,
became
aware
of
six
leased
lots
in
the
town
of
Banff
which
the
Department
of
Indian
Affairs
and
Northern
Development
were
desirous
of
acquiring.
3.
By
letter
dated
November
6,
1969
the
Honourable
Jean
Chretien
Minister
of
Indian
Affairs
and
Northern
Development
advised
Mr
Muselle
that
the
Department
were
prepared
to
exchange
Lots
22
to
25
in
Block
6
of
the
Banff
Township
which
Mr
Muselle
was
able
to
acquire
for
Lots
1
to
4
inclusive
in
Block
37
of
the
Banff
Township.
4.
On
November
28,
1969
an
agreement
was
entered
into
between
Richard
Muselle
and
Union
Oil
Company
of
Canada
Limited
for
a
sublease
of
Lots
1
to
3
inclusive,
Block
37,
Banff
Township,
Alberta
for
42
years
less
one
day
for
$250,000.00.
5.
On
February
3,
1970
the
Appellant
and
Union
Oil
Company
of
Canada
Limited
entered
into
an
agreement
to
sublease
Lots
1
to
3
inclusive,
Block
37,
Banff
Township,
Alberta,
the
consideration
stated
being
$250,000.00.
6.
On
February
4,
1970
Messrs
Muselle
and
H
Lloyd
MacKay
borrowed
$153,000.00
from
the
Imperial
Bank
of
Commerce
and
acquired
in
their
names
a
leasehold
interest
in
the
6
lots
in
the
Township
of
Banff
which
the
Department
of
Indian
Affairs
and
Northern
Development
were
desirous
of
acquiring.
These
leasehold
interests
in
the
6
lots
were
then
surrendered
to
the
Department.
7.
On
March
13,
1970
the
Appellant
entered
into
a
43-year
lease
of
Lots
1
to
7
in
Block
37,
Banff
Township
in
exchange
for
the
leasehold
interest
in
the
6
lots
referred
to
in
the
preceding
paragraph.
8.
On
March
18,
1970
the
Appellant
formally
subleased
Lots
1,
2
and
3
and
a
portion
of
Lot
4
on
Block
37
in
the
Banff
Township
to
Union
Oil
Company
of
Canada
Limited
for
$250,000.00
together
with
annual
rental
payments
as
stated
therein.
The
Appellant
was
not
permitted
by
the
Department
of
Indian
Affairs
and
Northern
Development
to
assign
its
leasehold
interest
in
these
lots
and
consequently
the
subleasing
arrangement
was
entered
into.
9.
Big
Horn
Restaurant
Ltd
was
incorporated
on
October
21,
1970
with
Richard
Muselle
and
H
Lloyd
MacKay
as
principal
shareholders.
This
company
subsequently
sub-subleased
from
Union
Oil
Company
of
Canada
Limited,
by
lease
dated
December
1,
1970,
1.32
lots
of
the
leasehold
interest
above-described
for
a
consideration
of
$110,000.00.
10.
By
mortgage
dated
December
2nd,
1970
Big
Horn
Restaurants
Ltd
granted
a
mortgage
to
Union
Oil
Company
of
Canada
Limited
on
the
lands
in
question
in
consideration
for
$219,900.00.
11.
All
dealings
between
the
Appellant
and
Union
Oil
Company
of
Canada
Ltd
were
arms
length
in
nature.
The
main
witness
in
this
appeal
was
Mr
Snowdon,
an
experienced
lawyer
in
transactions
of
this
kind,
who
knew
and
counselled
Mr
Muselle.
Mr
MacKay,
who
was
a
solicitor
practising
in
Banff
and
was
Mr
Muselle’s
lawyer,
has
since
died
of
cancer.
Mr
Muselle
originally
appealed
his
personal
assessment
but
withdrew
his
appeal
at
this
sittings
and
was
not
present
at
the
hearing.
Mr
Snowdon
explained
that
he
got
his
information
about
the
various
transactions
through
conversations
with
the
two
shareholders
of
the
appellant
company,
Messrs
Muselle
and
MacKay,
and
also
by
reading
various
relevant
documents.
Apparently
his
evidence
was
the
best
now
available
with
the
exception
of
that
of
Mr
Byers,
representative
of
Union
Oil
of
Canada
Limited,
who
was
subpoenaed
by
the
appellant
but
refused
to
come
because
he
was
not
offered
conduct
money.
With
the
help
of
various
documents,
Mr
Snowdon
explained
the
following:
The
Department
of
Indian
Affairs
and
Northern
Development
preferred
to
exchange
lots
rather
than
to
obtain
them
by
option,
which
explained
Mr
Muselle’s
conduct.
According
to
a
letter
dated
November
28,
1969,
Union
Oil
Company
Limited
was
prepared
to
sublease
Lots
1
to
3
inclusive,
Block
37
in
Banff
Townsite,
for
the
term
of
the
lease
issued
to
Mr
Muselle
for
42
years
less
a
day.
Union
Oil
was
to
operate
a
service
station
and
restaurant
thereon,
and
this
letter
was
to
constitute
an
offer
to
purchase
the
lease,
and
it
was
mentioned
that
a
cheque
for
$100,000
was
to
serve
as
a
deposit.
Mr
Muselle
and
Mr
MacKay
had
already
incorporated
the
appellant
company
on
November
14,
1969
to
operate
a
motel
to
be
known
as
the
Big
Horn
Inn.
The
head-lease
was
granted
to
build
and
operate
a
motel,
a
restaurant
and
a
service
station.
The
appellant
company
was
interested
in
the
construction
and
operation
of
the
motel,
whereas
Union
Oil
Limited
was
asked
to
build
and
operate
the
restaurant
and
the
service
station.
A
letter
dated
December
30,
1969
was
filed
as
Exhibit
A-11,
to
show
that
a
cheque
in
the
sum
of
$100,000
was
to
be
forwarded
to
Mr
MacKay
in
trust;
that
the
total
consideration
for
the
sublease
was
$250,000,
and
that
$149,900
would
be
paid
upon
completion
and
finalization
of
the
transaction.
It
appears
that
this
was
the
only
method
open
to
Union
Oil
Limited
whereby
it
could
erect
and
operate
a
service
station
in
that
location;
that
it
had
tried
in
vain
to
obtain
a
direct
lease
from
the
Crown;
and
that
the
nature
of
the
lease
from
the
Crown
to
Big
Horn
Inn
Ltd
permitted
third
parties
to
erect
and
operate
the
restaurant
and/or
the
motel
or
the
service
station.
A
letter
dated
February
3,
1970,
with
a
cheque
stub
attached,
was
filed
as
Exhibit
A-13
to
show
that
the
balance
of
$149,900
was
sent
to
Mr
MacKay
with
the
following
notation
on
the
stub:
Balance
of
prepaid
lease
rental
for
42
years
re.
Lots
1,
2,
&
3
plus
common
use
of
Lot
4
(for
parking),
Block
37,
Plan
#22870
&
#51315
in
the
town
of
Banff,
Alta.
On
the
same
date
a
letter,
Exhibit
A-14,
was
sent
by
Mr
Muselle
to
the
Department
of
Indian
Affairs,
which
reads
in
part
as
follows:
As
the
Lessee,
I
will
be
responsible
to
the
Department
on
all
matters
and
the
sublease
will
provide
that
if
Union
Oil
of
Canada
Limited
fail
to
comply
with
the
terms
of
the
head
lease
or
fail
to
comply
with
any
request
that
I
receive
from
the
Department,
their
sublease
will
terminate.
I
will
also
require
financial
statements
showing
all
gross
sales
made
by
the
businesses
on
lots
1,
2,
and
3
and
I!
will
remit
the
percentage
of
gross
sales
set
out
in
the
head
lease
to
the
Department.
On
the
same
date
again,
a
more
formal
agreement
(Exhibit
A-6)
was
entered
into
between
Big
Horn
Inn
Ltd
and
Union
Oil
Company
of
Canada
Limited
which
reads
in
part
as
follows:
4.
(a)
Upon
the
acquisition
of
the
Head
Lease
the
Lessee
shall
immediately
for
consideration
from
Union
in
the
amount
of
two
hundred
and
fifty
thousand
(250,000.00)
dollars
(which
sum
is
presently
held
in
trust
by
Lessee’s
solicitor)
grant
to
Union
a
Sublease
of
Lots
1,
2
and
3
of
the
leased
lands
(hereinafter
referred
to
as
the
“Sublease”)
and
such
Sublease
shall
take
the
same
form
as
the
Head
Lease
and
the
term
of
the
Sublease
shall
be
one
(1)
day
less
than
the
term
of
the
Head
Lease
and
in
a
form
acceptable
to
Union.
And,
at
paragraph
13:
13.
That
the
Lessee
shall
not
interfere
in
any
way
with
Union’s
operations
on
the
subleased
lands
and
that
the
Lessee
shall
grant
to
Union
quiet
enjoyment
of
the
subleased
lands.
Mr
Snowdon
mentioned
that
these
clauses,
and
more
particularly
the
expression
“quiet
enjoyment’’,
are
found
in
most
lease
documents.
Referring
to
the
registered
sublease
between
Big
Horn
Inn
Ltd
and
Union
Oil,
and
the
registered
consent
by
the
Crown,
Mr
Snowdon
said
that
no
lease
or
sublease
can
be
registered
without
the
consent
of
the
Crown
and
that
this
consent
did
not
relieve
Big
Horn
Inn
Ltd
from
its
obligation
and
duty
to
comply
with
all
the
covenants
and
agreements
contained
in
the
said
lease
of
March
13,
1970.
He
also
stated
that
the
sublease
by
Big
Horn
to
Union
Oil
was
a
partial
sublease
for
the
term
of
the
first
sublease
less
one
day,
which
would
allow
Big
Horn
to
take
advantage
of
the
two
renewals
in
case
Union
Oil
did
not
take
it.
Another
letter,
dated
May
22,
1970,
sent
by
the
Industrial
Development
Bank
to
Big
Horn
Inn
Ltd
shows
that
Big
Horn
was
trying
to
get
$300,000
from
the
IDB
by
giving
as
security
7
lots.
On
March
15,
1970
a
document
was
signed
by
Big
Horn
Inn
Ltd
and
Union
Oil
Company
of
Canada
Limited
(Exhibit
A-20)
which
reads
as
follows:
This
letter
agreement
is
to
confirm
our
negotiation
and
discussions
in
regard
to
the
Two
Hundred
and
Fifty
Thousand
($250,000.00)
Dollars
in
prepaid
land
rentals
for
the
sublease
of
the
above
property
for
a
term
of
42
years
plus
any
renewals.
The
funds
are
to
be
applied
at
the
rate
of
$5,952.38
on
the
first
day
of
each
of
the
first
forty-one
years
of
the
term
and
the
balance
of
$5,952.42
is
to
be
applied
on
the
first
day
of
the
forty-second
year
with
no
additional
rental
payable
for
any
renewal
terms.
In
the
event
of
the
lease
from
the
Crown
being
terminated,
cancelled,
or
rendered
void
for
any
reason,
the
rental
is
to
be
adjusted
to
that
day
and
the
balance
of
the
prepaid
rental
is
to
be
immediately
refunded
to
Union
Oil
Company
of
Canada
Limited.
This
was
sent
by
Big
Horn
Inn
Ltd,
and
signed
by
both
parties,
Big
Horn
and
the
Union
Oil
Company.
Mr
Snowdon
further
stated
that,
under
the
original
agreement,
Union
Oil
Company
Limited
was
to
build
a
service
station
and
a
restaurant,
but
Union
Oil
was
unable
to
reach
an
expected
agreement
with
Denny’s
Restaurants.
Apparently
Union
Oil
Company
Limited
was
in
danger
of
violating
an
expressed
term
of
its
sublease,
and
Big
Horn
was,
by
the
same
token,
in
danger
of
violating
a
condition
of
its
own
lease
with
the
Crown.
Consequently,
Big
Horn
negotiated
with
Union
Oil
Limited
for
the
former
to
construct
and
operate
the
restaurant,
and
another
company,
Big
Horn
Restaurant
Limited,
was
incorporated
on
October
21,
1970.
Muselle
and
MacKay
became
principal
shareholders
in
the
restaurant
company
and
Big
Horn
Restaurant
Limited
sublet
from
Union
Oil
Company
1.32
lots
for
$110,000.
Union
Oil
Company
Limited
agreed
to
lend,
on
mortgage,
to
Big
Horn
Restaurant
Limited
the
sum
of
$219,900.
The
Crown
consented
to
this
“sub-sublease”
and
to
the
mortgage
agreement.
This
sub-sublease
is
for
42
years
less
two
days,
and
Big
Horn
Inn
Ltd
is
responsible
for
both
the
sublease
and
the
sub-sublease
because
of
the
conditional
consent
by
the
Crown.
On
cross-examination,
Mr
Snowdon
said
that
Muselle
gave
up
his
Kentucky
Fried
Chicken
business
in
1969
to
go
into
the
motel
business.
Oil
companies
had
difficulty
in
obtaining
sites
in
the
Banff
National
Park,
and
only
a
certain
number
of
permits
were
granted
in
a
given
period.
He
said
that,
before
November
28,
1969,
he
approached
Union
Oil,
apparently
to
propose
that
it
take
part
in
the
package
deal
and,
on
November
28,
1969,
he
received
a
favourable
answer.
He
further
explained
that
he
had
met
Mr
Muselle
because
of
his
former
association
with
the
British
American
Oil
Company
Ltd.
Mr
Snowdon
went
on
to
say
that,
when
Mr
Muselle
obtained
the
promises
from
Mr
Chrétien,
his
interest
was
to
sublease
to
Union
Oil
for
$250,000
as
prepaid
rent;
that
there
were
two
means
of
transferring
a
piece
of
land,
first,
by
an
assignment
of
the
lease,
or
second,
by
subleasing
for
the
remainder
of
the
term
less
one
day.
Furthermore,
the
Crown
refused
to
give
its
consent
to
an
assignment
for
a
portion
of
the
head-lease
but
was
willing
to
give
it
for
a
sublease.
Counsel
for
the
Minister
then
questioned
the
witness
on
three
documents,
which
were
thereupon
filed
by
the
Crown
as
Exhibits
R-1,
R-2
and
R-3,
to
indicate
that,
after
February
1970,
and
more
particularly
in
1972,
Mr
Muselle
tried
to
locate
sites
in
the
Park
for
oil
companies
in
exchange
for
a
fee.
As
a
matter
of
fact,
Mr
Muselle
incorporated
Mountain
Parks
Development
Company
for
this
specific
purpose.
Mr
Pascoe,
an
accountant
and
investigator
with
Revenue
Canada,
testified
that
the
letter
dated
March
15,
1970,
and
filed
as
Exhibit
A-20,
was
back-dated.
According
to
what
he
said,
there
is
a
great
possibility
that
this
letter
may
indeed
have
been
back-dated
on
purpose.
He
also
stated
that
Union
Oil
Company
Limited
had
capitalized
the
$250.000
and
amortized
it
over
a
period
of
42
years.
This
period
of
time
was
later
changed
to
40
years
because,
according
to
Schedule
H,
a
leasehold
interest
is
depreciable
for
a
period
of
40
years
only.
Counsel
for
the
appellant
argued
that
in
common
law
a
tenant
has
a
complete
right
to
either
assign
or
sublease
a
property.
The
difference
between
an
assignment
of
a
lease
and
a
sublease
is
that,
when
a
lease
is
assigned,
the
original
landlord
is
the
landlord
of
the
assignee,
the
new
tenant,
whereas,
in
the
subleasing
arrangement,
the
Original
landlord
can
have
no
privity
of
estate
with
the
new
tenant.
Then
he
referred
to
many
documents
to
show
that
the
expression
“prepaid
rent’’
was
used
early
in
the
transaction,
and
that
the
expression
“sublease”
is
found
11
times
in
Exhibit
A-11
and
8
times
in
Exhibit
A-13.
As
to
the
back-dated
letter,
he
said
that
this
document
did
not
add
any
weight
and
that,
if
it
is
a
prepaid
payment,
section
85
of
the
Income
Tax
Act
is
available.
In
his
opinion,
the
amount
of
$250,000
can
be
nothing
else
but
a
prepaid
rental.
Counsel
for
the
Minister
admitted
that
it
was
purely
a
sublease,
that
the
amount
of
$250,000
was
paid
to
get
this
sublease,
and
that
rent
is
income.
He
also
argued
that
getting
a
lease
and
subleasing
it
at
a
profit
is
no
different
than
buying
and
selling
whisky
and
toilet
paper,
and
that,
to
obtain
land
in
the
Park,
Big
Horn
transferred
a
leasehold
interest
for
a
sum
of
money
instead
of
transferring
a
freehold
interest.
He
said
that
the
essential
documents
do
not
mention
prepaid
rental;
that,
because
Big
Horn
Inn
Ltd
could
not
assign
the
lease,
it
subleased
for
a
fee,
which
is
an
adventure
in
the
nature
of
trade;
and
that
Muselle
was
being
paid
$250,000
for
a
sublease
even
before
he
got
the
head-lease.
According
to
the
evidence
adduced,
there
is
not
a
tittle
of
evidence
to
indicate
that
this
amount
of
$250,000
was
paid
as
a
fee
to
find
a
site
for
a
service
station.
On
the
contrary,
there
is
an
abundance
of
evidence
to
show
that
Union
Oil
Company
Limited
received
a
sublease
and
that,
early
in
the
negotiations,
mention
is
made
of
the
prepaid
rent
of
$250,000.
It
is
difficult
to
conceive
that
this
transaction
could
have
been
an
adventure
in
the
nature
of
trade.
First,
there
is
no
evidence
to
show
that
the
two
main
shareholders
were
traders
in
leases,
in
land,
or
in
any
other
property
transaction.
The
Big
Horn
Inn
company
was
incorporated
for
the
specific
purpose
of
erecting
and
operating
a
motel,
which
it
did.
The
fact
that
Muselle
incorporated
a
company,
after
the
transaction
under
appeal,
for
the
purpose
of
finding
sites
in
the
Park
for
oil
companies,
is
immaterial,
and
shows
only
that
his
first
experience
has
created
many
openings
for
him
to
become
active
in
new
fields
of
operation.
Counsel
for
the
Minister
admitted
himself
that
it
was
a
sublease
rather
than
an
assignment
of
a
lease,
and
when
one
mentions
“sublease”,
this
implies
the
payment
of
a
rent.
The
intent
of
the
appellant
company
was
to
operate
a
motel,
and
the
best
opportunity
for
doing
so
was
to
get
this
head-lease
from
the
Crown
and
find
other
people
to
complete,
within
a
delay
of
about
a
year
and
a
half,
this
three-operation
complex
of
service
station,
restaurant
and
motel.
In
this,
the
company
has
succeeded,
since
two
out
of
the
three—the
motel
and
restaurant—have
been
built
and
are
now
being
operated.
The
form
of
the
various
documents
filed
speaks
of
“sublease”
and
“prepaid
rent”
and
does
not
speak
of
any
commission
having
been
paid.
Most
of
the
facts
and
the
documents
are
in
favour
of
the
position
of
the
appellant
company
to
the
effect
that
it
has
not
acted
as
a
trader
in
leases,
and
the
appellant’s
course
of
conduct
is
so
special
that
it
cannot
be
said
that
this
transaction
was
an
adventure
in
the
nature
of
trade.
This
case
is
so
unique
that
counsel
apparently
were
unable
to
cite
any
jurisprudence
on
this
point.
The
fact
that
Big
Horn
Inn
Ltd
has
the
obligation
to
provide
Union
Oil
with
the
quiet
enjoyment
of
the
land
is
an
indication
that
the
appellant
is
still
the
lessor,
and
it
is
plausible
that,
in
c^se
of
termination
of
the
sublease
before
the
end
of
its
term
due
to
any
fault
of
Big
Horn
Inn,
Union
Oil
would
have
the
right
of
action
against
Big
Horn
Inn
to
claim
the
balance
of
the
prepaid
rent.
If
the
appellant
company
granted
a
sublease
to
Union
Oil
Limited,
it
was
not
so
much
because
it
wanted
to
find
a
site
in
the
Park
for
the
said
oil
company,
but
because
it
wanted
to
complete
the
three-
piece
complex
and,
by
the
same
token,
keep
and
preserve
its
longterm
lease.
It
has
also
to
be
noted
that
the
appellant
company
does
not
claim
that
the
$250,000
is
not
income.
On
the
contrary,
by
saying
that
it
was
prepaid
rent,
it
is
acknowledging
that
it
is,
by
its
nature,
income.
And,
because
the
amount
was
all
paid
in
advance
in
its
1970
taxation
year,
Big
Horn
was
told
and
advised
by
its
accountants
to
use
paragraph
85B(1)(c)
of
the
1952
Income
Tax
Act
so
that
the
rental
income
will
be
taxed
over
the
life
of
the
lease.
It
seems
to
me
that
this
method
of
computing
the
prepaid
rental
is
the
best
in
the
circumstances.
To
treat
the
liability
to
Union
Oil
of
Canada
Limited
and
the
receipt
of
prepaid
rental
in
any
other
manner
than
as
presented
by
Big
Horn
Inn
Ltd
would
not
be
a
proper
reflection
of
the
company’s
financial
position
and
would
be
inconsistent
with
good
and
proper
accounting
principles.
This
approach
by
the
appellant
is,
in
my
opinion,
much
more
consistent
than
the
respondent’s
contention
that
this
transaction
is
an
adventure
in
the
nature
of
trace.
For
these
reasons
the
appeal
is
allowed.
Appeal
allowed.
Email this Content