Korvette Realties Limited v. Her Majesty the Queen, [1976] CTC 780, 76 DTC 6481

Marceau, J:—By its action, the plaintiff herein seeks to obtain that a reassessment of the Minister of National Revenue, wherein a tax in the sum of $13,466.40 was levied on it in respect of income for the taxation year 1970, be vacated.

The issue deals with what in fact was the amount for which the plaintiff sold two parcels of land it had assembled for shopping centre purposes in St-Hyacinthe, Quebec. In computing its income, the plaintiff company treated the sale price as being $410,000, and calculated accordingly the reserve to which it was entitled under section 85B of the Income Tax Act (RSC 1952, c 148, as amended), then in force. The Minister disallowed part of the reserve on the ground that the sale price was not, as claimed, $410,000 but $375,000, the difference, $35,000, having been paid to the plaintiff, not as part of the price, but as a remuneration for various services it had rendered to the purchaser of the land, especially the efforts it had put forth in ensuring that the two prime tenants of the shopping centre would be Steinberg and Zellers.

The facts are relatively simple.

The plaintiff is in the business of buying and selling land primarily for shopping centre developments. Its procedure generally is first to locate a suitable area and obtain an option to purchase the land: then to seek the co-operation of the municipal authorities and get the assurance that the zoning restrictions will not impede the project; then to carry on various surveys as to, for instance, the traffic flow, the means of ingress and egress to the property, the availability of municipal services; then to make inquiries as to whether or not prime tenants would be interested; and finally to find a developer prepared to purchase the property and construct the shopping centre.

It is during the autumn of 1969 that the plaintiff obtained the options to purchase the land which was to be the subject of the transaction here in question. It had already carried out many of those activities I have just outlined when it commenced negotiations with an interested developer, Argo Construction Limited (hereinafter called “Argo”).

On February 17, 1970 the plaintiff and Argo signed an agreement (Exhibit A-1, page 1) whereby the latter was given an option to buy the two parcels of land for a price of $475,000. The option was to be exercised by April 10, 1970, but by a letter dated April 15, 1970 (exhibit A-1, page 11) that period was extended to May 25, 1970. It may be useful to mention now that according to the testimony of Mr Sugarman, the then president of the plaintiff and its general manager (who incidentally was the only witness called in this case), at a subsequent meeting which took place at the end of May he agreed to reduce the price to $410,000, but the understanding was not then put into writing and the option remained as it was.

On June 9, 1970 the two authorized officers of Argo with whom the plaintiff (more precisely Mr Sugarman) had been so far negotiating, presented the latter with two documents: the first was entitled “Notice of Exercise of Option to Purchase” and the purchase price was therein stated as being $375,000 (Exhibit A-1, page 15); the second was a letter in which it was set out that, on completion of the transaction, a sum of $35,000 was to be paid by Argo to Korvette Realties Limited as a “commission”. Mr Sugarman testified that he objected very strongly, and refused to acknowledge the documents, arguing that the transaction he was asked to complete was different from that which had been contemplated and in any case that his company could not accept a commission, not being a registered broker. “A big discussion” took place, explained the witness, and I was told “that I had to take the deal”; that “that was the way they wanted and that was the way I had to accept”. Il needed the money and there was nobody else I could approach.” (These quotations are from my notes.) So the transaction was completed “the way Argo wanted”, except that the wording of the letter was changed to specify that the $35,000 was paid “for and in consideration of the services rendered to us by you, which services consist in the transfer by you to us of the understandings, goodwill and contracts in progress for the prospective tenants for the Shopping Centre to be erected on the said real property”. The notarial deed of transfer of the land was executed on July 7 (Exhibit A-1, page 21); the price therein stipulated was, of course, as agreed, $375,000.

Counsel for the plaintiff bases his argument on the principle that, when dealing with income tax cases, one must look to the substance of the transaction rather than to the form. He argues that the division of the agreed $410,000 into two parts was a “sham” made at the request of Argo. There was, in his view, a single transaction between the Plaintiff and Argo, and all that the former sold to the latter was the land; although prospective tenants had been contacted by the plaintiff, no commitments had been received, no leases had been signed, and no contracts of any kind were transferred. The “services” which were carried out were normal as they were necessary to make a deal attractive to a developer, and prior to June 9 there had been no discussion as to the payment of a separate consideration with respect to them.

I am not convinced by counsel’s argument, and I fail to see where the “sham” is or in which respect the form the parties gave to their transaction is different from the substance they finally agreed upon. Mr Sugarman admits that the deal proposed by Argo on June 9, which he finally accepted because he was compelled to do so, was a new one. It was a counter-offer whereby Argo was prepared to pay $375,000 for the land and $35,000 for services, which services — described in the agreement as attendances on prospective tenants — although normal, had undeniably been performed, and could be separately remunerated. It is obvious that such counter-offer was made for tax purposes, with a view to allowing Argo to put itself in a position to claim an expense of $35,000; but it is aiso obvious that the plaintiff agreed to it. In other words, the whole form and substance together of the transaction was altered on June 9, 1970, and it seems to me that that transaction has to be taken as it is, and not as the plaintiff, prior to that date, was expecting it, or would have liked it to be. On closing the transaction, the land was sold for $375,000 and the $35,000 was agreed to by the plaintiff as a fee for services rendered. It is clear that a fee for services rendered is not subject to a reserve within the meaning of subparagraph 85B(1)(d)(i) or any other subsection of the

I am therefore of the opinion that there was no error, either in fact or in law, in the reassessment of the Minister, and the action must be dismissed with costs.