Her Majesty the Queen v. Compagnie Immobilière BCN Ltée, [1973] CTC 362, 73 DTC 5295

The Associate Chief Justice:—This is an appeal by Her Majesty the Queen from a decision of the Tax Review Board, dated February 22, 1972, allowing. the appeal by defendant, Compagnie Immobilière BCN Liée, from an income tax assessment dated October 17, 1968, for the taxation year 1964, in which the latter was denied a deduction of $19,315.62 as a capital cost allowance it had claimed on a building known as the Transportation Building, and an emphyteutic lease acquired on the land supporting the building.

Plaintiff in fact alleged that defendant purchased this building in 1964 in order to demolish it and use the land for construction of a new building. Defendant, on the other hand, argues that when the building was purchased it was for the dual purpose of making greater use of certain floors (as it was occupying some at that time) by means of connections to the new building which it intended to construct alongside on its own land, where its head office was already located; and then being able, by purchasing the land on which the Transportation Building stood, to construct its building alongside to a height greater than was permitted by the municipal by-laws. A 32-storey building was eventually constructed on the site, and the Transportation Building was in fact demolished; however, this decision was only taken after purchase of the building and of the lessee rights under the emphyteutic lease, the intention at the time of purchase being, according to the defendant, to carry out the initial plan.

The parties to the action filed a statement titled “Agreed statements of facts”, which reads as follows:

“(1) Defendant was incorporated on December 27, 1962 under the Canada Corporations Act.

(2) For the period in question Defendant’s taxation year ended on November 30, 1964.

(3) Defendant is a subsidiary of the Bank Canadian National, and apart from directors’ qualifying shares, all the issued shares of Defendant are held by the Bank Canadian National.

(4) In 1961 the Bank Canadian National had to deal with the growing problem of space in its head office, and in 1962 it seriously considered constructing a new building.

(5) In 1962 the head office of the Bank Canadian National was located in a block made up of Notre-Dame Street on the south, St. James on the north, St. Francois Xavier on the west and Place d’Armes on the east. Aside from the Bank’s head office this block contained only two other buildings, know respectively as the Royal Globe Building and the Transportation Building.

(6) Before the Transportation Building was demolished the Bank Canadian National was a tenant of part of the Transportation Building.

(7) By contract dated January 3, 1963 the General Trust of Canada, acting “in trust” for the Bank Canadian National, purchased the Royal Globe Building and lots Nos. 99 and 100, on which the said building stood, for the sum of $1,000,000.00.

(8) By contract dated March 27, 1963, the General Trust of Canada, acting “in trust” for the Bank Canadian National, sold to the Compagnie Immobilière BCN Ltée the Royal Globe Building and lots Nos. 99 and 100 for the sum of $1,000,000.00.

(9) On November 19, 1963 an architects’ report concerning two building plans for the future head office of the Bank Canadian National was submitted to the Executive Committee:

(a) Plan A involved demolition of the buildings located in the block described in paragraph 5 above, and construction of a new building;

(b) Plan B dealt with the site of the Bank Canadian National head office at that date.

(10) On November 19, 1963 the Executive Committee of the Bank Canadian National stated that in its opinion the Bank should proceed with Plan B and with purchase of the Transportation Building land.

(11) On March 10, 1964 the Bank Canadian National purchased a piece of land located on St. François Xavier Street and consisting of lots Nos. 135, 136 and 137, in order to make a parking lot for the proposed head Office.

(12) By contract dated March 16, 1964 the Prêtres de St. Sulpice de Montréal sold to the General Trust of Canada the Transportation Building lot and the lessor rights under an emphyteutic lease dated June 2, 1910, for the sum of $700,000.00.

(13) On April 23, 1964 the Executive Committee of the Bank Canadian National considered a building plan submitted by Mr. lonel Rudberg and resolved to have a purchase option drawn up for the Transportation Building and the lessee rights under the emphyteutic lease of June 2, 1910.

(14) By April 24, 1964 the Bank Canadian National held a purchase option on the Transportation Building, and on the same date the Board of Directors of the Bank Canadian National resolved to exercise the purchase option on the Transportation Building.

(15) By contract dated July 3, 1964 Nathan Cohen and Hyman Zalkind sold to the Compagnie Immobilière BCN Ltée the Transportation Building and the rights they held under an emphyteutic lease dated June 2, 1910.

(16) On September 25, 1964 the Board of Directors of the Bank Canadian National accepted the offer by Mon Dev Corporation Limited to construct a 32-storey building on the entire block described in paragraph 5 above.

(17) By contract dated October 29, 1964 the General Trust of Canada sold to the Bank Canadian National lot No. 98, being the land on which the Transportation Building was situated, for the sum of $700,000.00.

(18) By contract dated January 8, 1965 the Bank Canadian National sold lot No. 98, namely the Transportation Building lot, to Defendant for the sum of $700,000.00.

(19) By contract dated January 8, 1965 Defendant leased to the Société Immobilière Place d’Armes Ltée all of the land described in paragraph 5 above on an emphyteutic lease for a period of 99 years.”

Plaintiff based her appeal, inter alia, on paragraphs 11(1)(a) and 12(1)(b) of the Income Tax Act, on paragraph 1102(1)(c) of the Income Tax Regulations, and on Article 1198 of the Civil Code. She submitted that for a taxpayer to be entitled to a capital cost allowance on an asset, he must have acquired it with the intention of producing income from it; and she stated that defendant did not acquire the Transportation Building and the rights under the emphyteutic lease on the lot supporting this building with the intention of producing income from it, but in order to acquire a site. She stated that defendant could only acquire ownership of land in the whole block mentioned in the Statement by purchasing the buildings known as the Royal Globe Building and the Transportation Building, the lots on which these buildings were constructed, and all the lessor and lessee rights conferred by the emphyteutic lease of May 1, 1911.

Plaintiff submits that at the time it acquired the Transportation Building and the lessee rights under the emphyteutic lease, defendant intended to demolish the Transportation Building and arrange matters so that the lessee rights under the said emphyteutic lease were extinguished by confusion, which in fact occurred on January 8, 1965 when defendant became the owner of the lessor and lessee rights conferred by the said lease.

Alternatively, plaintiff argues, if defendant had no intention of demolishing the building and arranging matters so that the extinction of lessee rights under the emphyteutic lease resulted by confusion, then defendant had formed no definite intention and is not entitled to a capital cost allowance on the Transportation Building under Class 3 of Schedule B of the Income Tax Regulations, or on lessee rights under the emphyteutic lease in accordance with Class 13 of Schedule B of the Income Tax Regulations, since she contends defendant did not acquire the said property specifically for the purpose of gaining or producing income. Defendant would accordingly not be entitled to a capital cost allowance on the Transportation Building and on the lessee rights under the emphyteutic lease.

By the contract of July 3, 1964 defendant acquired two separate properties, namely the lessee rights under the emphyteutic lease and an immovable, the Transportation Building.

The Court has to decide, first, whether defendant is entitled to depreciate the lessee rights under the emphyteutic lease, and if so, must the latter rights be depreciated in accordance with Class 3 or Class 13 of the Income Tax Regulations?

If the lessee rights under the emphyteutic lease were acquired to produce income, as required by paragraph 1102(1)(c) of the Regulations, they could be depreciated even if they were extinguished on January 8, 1965, that is before the building was even demolished, by the confusion which occurred when defendant became owner of the land. The same question arises with regard to purchase of the Transportation Building. Plaintiff in fact claims that it was only bought by defendant for demolition, in order to acquire a site for the huge complex which was subsequently constructed on a block including the lot on which the building stood. The issue thus comes down to a question of fact, as to whether at the time the building and the lessee rights under the emphyteutic lease were purchased, defendant intended to use them, or was only buying these properties to obtain a site for the huge complex which was subsequently constructed, and eliminate the emphyteutic lease to facilitate financing and subsequent construction of the complex.

Paragraph 11(1)(a) states that

. . . the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation:

Paragraph 1102(1)(c) of the Regulations prohibits depreciation of classes of property which were not acquired by the taxpayer for the purpose of gaining or producing income.

This section in fact reads as follows:

The classes of property described in this Part and in Schedule B shall be deemed not to include property

(c) that was not acquired by the taxpayer for the purpose of gaining or producing income;

To resolve the matter we must examine the reasons which prompted defendant to purchase these properties, and the circumstances in which the purchases were made, as related by its chairman, Mr Hebert. The Court must also consider the decisions taken by defendant at meetings of its Board of Directors, its Executive Committee and even its Building Committee, as well as contracts accompanying the aforementioned purchases.

In order to determine whether the properties were acquired for the purpose of gaining or producing income, we must go back to the time of acquisition, as it is possible for a property to be acquired for the purpose of earning income and subsequently be disposed of or demolished, but in such circumstances the purchaser will still have the right to depreciate its purchase price. He would not have that right, however, in the case of a building purchase, if at the time of purchase his only purpose was to demolish it and obtain a site for the construction of another building. Subsection (2) of section 1102 of the Regulations thus provides that the classes of property described in Schedule B shall be deemed not to include the land upon which a property described therein was constructed or situated. However it is clear, once again, that provided a property is acquired for the purpose of earning an income, this is sufficient to enable the purchaser to depreciate it, even if in fact that property produces no income. It should be mentioned here that defendant is a subsidiary of the Bank Canadian National, and it is on the basis of the activities and decisions of the officers and directors of the Bank that we must decide whether, when it bought the building and the lessee rights, defendant intended to use these assets for the purpose of earning income, by using them itself or leasing them to others.

Defendant contends that it bought the Transportation Building in order to incorporate it as such in a new head office for the Bank, which would be alongside with connections to various floors of the Transportation Building, and in such circumstances clearly it made the purchase in order to gain or produce income. It further maintains that the building should be classed in Class 3, and the lessee rights in Class 13, by virtue of the decision in Cohen & Zalkind v MNR, [1967] CTC 254; 67 DTC 5175. Plaintiff however argues that the building was bought merely for demolition, or if not for demolition, then to use it or demolish it depending on the decision taken after its purchase, which in plaintiff’s submission, even in this situation, would preclude it from depreciating the building. As to the distinction made by defendant, concerning the’ capital cost allowance on the building under Class 3, and on the lessee rights under the emphyteutic lease under Class 13, no distinction exists in the view of plaintiff’s counsel, since both assets were acquired by the Bank with the same idea in mind, namely to demolish the building and extinguish the lessee rights under the emphyteutic lease by confusion.

Mr Hébert, the Bank chairman, stated the reasons for incorporating defendant and explained the problem of the lack of space at the Bank’s head office location in 1963, and its plans for expansion.

He said that the head office of the Bank Canadian National had been located at the corner of Place d’Armes and St James Street, in Montreal, since 1914 or 1915. The site was bought at the time from Royal Globe, and consisted of lots 101-102 and 103. Even then the head office premises were overflowing into the Transportation Building, where the Bank leased offices on the ground floor, as the space in its own building was not large enough for the main office. The lack of space in the Bank’s quarters became critical in about 1957, and at that stage the directors began thinking about expansion. At -a meeting of the Executive Committee on November 19, 1963, two building plans, described as A and B, were considered. Plan A dealt with the whole block, including the lot on which the Transportation Building stood. Plan B, on the other hand, was based on the Bank’s existing site. At this meeting Plan A was shelved and Plan B adopted, one consideration being, however, that “if the Bank took over the Transportation Building land, the municipal authorities might permit a few floors to be added to Plan B.” The minutes then concluded as follows:

For all these reasons the Executive Committee felt that the Bank should proceed without further delay to put Plan B into effect, and to the purchase on favourable terms of the Transportation Building lot.

Mr Hébert stated that the intention at that time was to put the main office of the Bank and that of the General Trust, on the ground floor, and this could not be done using only the side facing St James Street. It was in fact necessary to extend into the Transportation Building, and the best way to protect the Bank was to acquire the land supporting that building. Mr Hébert stated that their intention on November 19, 1963 was only to buy the rights of the Prêtres de St Sulpice to the land in question, but he added that if General Trust came in with them on the project, it would include purchase of the building as well as the lessee rights under the emphyteutic lease, which still had several years to run. At that time the Bank Canadian National occupied nearly all the ground floor of the Transportation Building, and the whole of the fourth floor, and doors had been opened to provide access to that building from the Bank’s head office. The building the Bank was thinking of constructing on its own land was 12 storeys high, and according to Mr Hebert their architects told them at the time that if the Bank owned the entire block, even if it only built on the front of it, it might enable them, under the municipal by-laws, to add a few storeys more. Thus, by purchasing the Transportation Building land, even without buying the building itself, this might allow their adjacent building to be built to a greater height. Concurrently with the decision taken in November 1963, a Building Committee was set up.

On March 10, 1964 the Bank acquired a lot situated on St Fancois Xavier Street, according to Mr Hébert, for the purpose of making it into a parking lot for the head office, because the Bank could not use the area underneath the adjacent building for this purpose since it was not sufficiently deep to permit descending and ascending traffic.

The Bank had signed a lease with Messrs Cohen and Zalkind, the owners of the Transportation Building and lessees of the rights under the emphyteutic lease. This lease was concluded in 1955, and contained in paragraph 11 a right of preemption by the Bank if the owners decided to sell the building.

At a meeting of the Executive Committee on April 23, 1964 a plan known as the Rudberg plan was discussed, and this entailed construction of a large building on the entire block. Apparently the Committee was divided on the question of whether to accept this plan, or whether they should adhere to the plan which had already been approved by the Committee on November 19, 1963.

It is of interest to reproduce a portion of the minutes of the meeting on April 23, 1963, and the views of the Bank chairman, who opted for construction of the large complex:

Mr Hébert had no misgivings, at least no serious misgivings, about the return on the project, and he outlined the facilities for low-cost financing. He went on, “The Bank is at a turning-point in its history. The public is watching us; they are looking for a clear demonstration of our position and our confidence in the future. What we do now will have lasting implications for our organization.”

Messrs Roberge and Bhérer, directors of the Bank, shared Mr Hé- bert’s view, and added that, taking everything into consideration and allowing for tax depreciation, this plan would not prove much more expensive than the one already approved by the Board.

Messrs Brais, Cousineau and DeSerres, while indicating a keen interest in the Rudberg plan, wondered if the current rental outlook and the Bank’s resources warranted a project of this size. They did feel that the Bank should participate in implementation of the plan, but only as a tenant, on a formula to be determined, rather than rushing into a venture which, in their opinion, involved certain risks.

After discussion of the matter it was resolved:

(a) to have a purchase option prepared immediately for the Transportation Building, Mr Hébert personally undertaking to approach the owners of that building after the meeting;

(b) to submit the Rudberg plan to the Board of Directors the next day.

On April 24 the plan was submitted to the Board of Directors and it was decided to devote the Board’s next meeting to considering it. It was also decided to exercise the purchase option on the building.

Mr Hébert explained that in 1963 the Bank did not have the means to undertake a twenty-million-dollar venture; he said that Rudberg undertook to finance the project, but added that he never did so. As the Bank would have had to assume all responsibility, the Rudberg project was taken no further.

Regarding the purchase of the Transportation Building, as recommended by the Committee, which took place on July 3, 1964, Mr Hébert said that “none of the directors were unhappy about the Bank’s buying it, because in any case the building had to be used in order once again to install our main office on the ground floor, and in the event we only built alongside we could use all the space in the Transportation Building.” Mr Hébert added that a vice-president of the Bank, Mr Cousineau, was president of René P Leclerc, whose offices were in the Transportation Building, and that at the time the Bank was taking the actions described above, his firm was having extensive repairs made to its premises for about fifty thousand dollars. If Mr Cousineau had been certain at the time that the building would be razed, he would not have undertaken such expensive repairs to his own quarters. Obviously, said Hébert, a large amount was involved, namely $2,000,000, but this was still a long way from $20,000,000, and it was in no way a risky investment.

On May 29, 1964 Hébert stated at a meeting of the Building Committee that purchase of the Transportation Building had been finalized for the sum of $1,900,000. Paragraphs 3 and 4 of the minutes of that meeting read as follows:

3. After discussing various aspects of the construction project, Committee members decided it would be advisable to retain the services of a qualified person to negotiate with the present tenants of the Transportation Building the termination of the existing leases, a number of which, amounting to 38 per cent, were due to expire on April 30, 1965. The latter might be allowed to continue until their expiry date. Regarding the others, with expiry dates extending to 1969—except for those relating to the premises occupied by the Bank, whose term extended to 1978—arrangements would have to be made with the tenants for the premises to be vacated on the most favourable terms possible. In each case an attempt should be made to ensure that these tenants eventually returned to our future building.

4. In the opinion of Committee members the Bank should retain the services of an additional architect, on a basis of remuneration to be determined, to supervise performance of the construction work and ensure that the whole was in accordance with plans and specifications.

It seems clear from Mr Hébert’s testimony that the intention here was at all times to build alongside, and renovate, the Transportation Building, since, he explained, if the Bank was going to renovate that Building it could not do so, modernizing it and installing air conditioning, without asking tenants to vacate it temporarily.

The possibility of constructing a large complex had not been ruled out, however, since on June 16, 1964, at a meeting of the Building Committee, the architects David and Perrault submitted to the Committee sketches of two plans, Plan A consisting of twin towers and Plan B involving a single building, but both making use of the entire block.

However, according to Hébert both plans were rejected. We thus come to the purchase of the Transportation Building by deed dated July 3, 1963, between Nathan Cohen and Hyman Zalkind and Compagnie Immobilière BCN Ltée, involving the sale of two separate assets, namely the building and the rights under the lease, and this document mentions a selling price of $1,850,000, distributed as follows: $1,750,000 for the lease and $100,000 for the building; and it adds: “for the aforesaid building which is to be demolished as soon as the purchaser can obtain vacant occupancy for the said building”.

Hébert explained, however, that when he came to sign the deed of sale, and saw the clause indicating that the building was to be demolished as soon as the purchaser could obtain vacant occupancy of the premises, he was unwilling to sign it, but was encouraged to sign by the vendors’ reducing the price from $1,900,000 to $1,850,000, that is by $50,000.

Hébert adds that this wording was insisted on by the vendors, Cohen and Zalkind. The vendors, who were customers of the Bank, apparently told him to call their lawyer, who had drawn up the deed of sale, to see what it involved. The vendors’ lawyer told him, and I quote:

Listen, this won’t affect your rights, it can’t harm you In any way, and I was the one who recommended that my clients proceed in this manner.

Hebert then replied as follows to a question from the Court:

THE COURT: At that stage, at the date of the document in question, was It the Bank’s intention to demolish the building at that time, or if you continued using it, had you made a final decision? A. No . . . the project as lt stood, if we were required to undertake it ourselves, we could not get approval from the Board of Directors to go ahead with construction and Invest twenty million.

Q. At that time? A. At that time, and it remained a possibility, and that Is what happened later when Mondev made its offer to handle the whole thing, to arrange demolition, put out the tenants and give us a rental of . . . so we accepted Mondev’s offer, but this happened long after the sale.

Mondev's firm offer to handle the problem of financing the complex was in fact made in September 1964, and as we have seen was eventually accepted.

It would appear, however, that before this offer was accepted several builders became interested in construction of the complex, and the Bank authorities met in turn with the aforementioned Rudberg, and Dr Samaritani and his representative Marescotti, to name but a few. According to Hébert, as these plans in every case left the Bank with the whole financial responsibility for the enterprise, they were not accepted. They did, however, have the effect of alerting certain tenants in the Transportation Building, who feared they would be evicted from the building. The Bank deemed it advisable to write to them, on August 18, 1964. One of these letters (similar to those written to other tenants) was sent to Messrs Paquette & Paquette, one of the tenants, and reads as follows:

Dear Sirs:

Since acquisition of the Transportation Building by our subsidiary company, some tenants have inquired with some concern as to our plans for this building. We therefore feel we should reassure them that the building will not be demolished.

However, we intend, while continuing with our present tenants, to make certain Improvements to the building which will make it more in keeping with modern requirements.

Yours very truly,

General Manager

It appears that at that stage the Bank intended to hold on to the Transportation Building, as moreover on page 5 of the deed of sale, clause 3, it had undertaken to be bound by the registered leases included in a schedule attached to the deed of sale, some of which did not expire until 1978.

At a meeting of the Executive Committee on July 30, 1964 Me C-An- toine Geoffrion submitted, on behalf of another group, a model and preliminary plans for a head office construction proposal. At that time Mr Hébert informed his colleagues of interviews he and Mr Cousineau had had with Rudberg and with Samaritani and Marescotti. He told the members of the Executive Committee that these persons were interested in building the head office according to a formula similar to that stated by Me Geoffrion. He went on to say:

In any case, Mr Rudberg and Place Victoria-St-Jacques Co (that is, Messrs Samaritani and Marescotti) are each supposed to submit a written proposal, as soon as they are Informed of the Bank’s terms.

The Committee then reached agreement on the principal points to be dealt with in the offers submitted to them by the promoters. It was first agreed, but without any commitment by the Bank, to communicate to interested parties the terms envisaged by the Bank, the chief of which are the following:

(a) the Bank will agree to an emphyteutic lease of the whole block for a term of 67 years, at a net annual rental of $150,000;

(b) the building will be constructed according to plans and specifications approved by the Bank, and will be completed on or about March 1, 1977 sic).

However, it can be seen that the plan for building alongside was still in effect, since according to the minutes of the meeting:

Mr Brats then submitted to his colleagues a summary report prepared by the architect J J Perrault, on the feasibility of constructing a ten-storey building on the front part of the Place d’Armes, and using the Transportation ullding.

Certain points still needed clarification, In particular location of the elevators, and Messrs Brais and Cousineau undertook to meet with Mr Perrault to discuss the matter more fully with him.

The minutes of a meeting of the Executive Committee on August 6 and 7, 1964 indicate that Mr J J Perrault, the architect, submitted preliminary plans which he prepared after his meeting with Messrs Brais and Cousineau, concerning the construction of a building fronting on the Place d’Armes, with which the Transportation Building, after certain necessary modifications, would be linked. It is stated that Messrs Cousineau, Ouimet, DeSerres and Bhérer seemed to be very interested in a proposal of this nature, which had the merit of earlier completion, without affecting tenants in the Transportation Building, except for a limited number in the basement.

Mr Hébert, however, indicated some hesitation at approving a scheme which would give the Bank a “half-new building, lacking in prestige, the old part of which, even though modernized, would (in his view) be a financial liability”.

In any case Mr Perrault was requested to prepare immediately a detailed estimate of the cost of the project, allowing for the modifications that would have to be made to the Transportation Building.

At a meeting on August 14, 1964 the Board of Directors decided against a large-scale project, as the Bank did not have the resources to undertake it as a whole, and it had to build, having no choice since it was a tenant in the former Montreal Trust building, and a decision had to be made, according to Hébert. The decision was to build a 12-storey building alongside with connections to the Transportation Building, as stated in the report made by the Executive Committee on November 19, 1963.

The minutes then conclude as follows:

The members of the Board, who were then invited to state their feelings on the matter, recognized the wisdom of the proposed solution, though not without a measure of regret among certain members at abandoning a more prestigious project, and adopted the recommendations which had just been made.

Montreal Trust was further mentioned in the minutes of a meeting of the Building Committee on August 20 and 21, 1964, but as noted by Mr Hébert, “the Trust did not want to meet our requirement of assuming responsibility for the project”.

Paragraph 3 of these minutes states, however, that Messrs Brais and Cousineau gave an account of discussions they had had that week with the president of Montreal Trust. They decided that the latter company had a significant interest in the company which had prepared the proposal recently submitted by Me Geoffrion, and ‘it provided the financing. They then stated that the president of Montreal Trust would like the Bank to reconsider its decision. The minutes then noted that:

The Building Committee however felt that the position adopted by the Bank should be maintained unless Montreal Trust would personally guarantee completion of the project. Only then could new recommendations be made, If necessary, to the Board of Directors.

An extract from the minutes of the Board of Directors for September 25, 1964 indicates that Mr Hébert communicated the text of the proposal by MonDev Corporation Ltd, a company in which Montreal Trust holds 50 per cent of the shares; this was the proposal prepared by Me Geoffrion. Essentially, this company offered to assume an emphyteutic lease on the whole block, demolish the existing buildings and, in cooperation with the architects Perrault and Davis, construct a prestige building in which the Bank would be the principal tenant, and which would become the property of the latter at the end of the prescribed term, namely on May 1, 2031. The proposal, to expire on September 28, 1964, contained all the necessary specifications as to type of building and terms of rental; it also guaranteed complete performance of the project by the. surrender to the Bank of a surety bond. A letter from the Montreal Trust Company to MonDev Corporation, stating that it would finance the undertaking, was also read to the Board. In his capacity as chairman of the Building Committee, Mr Cousineau elaborated on the attractiveness of the proposal submitted. He observed that with such a worthwhile offer at hand, offering so much protection for the Bank, the latter should review its decision concerning construction of its head office. He added that, after studying the whole matter and making necessary amendments, the Committee had met that morning, prior to this meeting, and recommended unanimously that the Board accept the proposal of MonDev Corporation Ltd. It was then unanimously resolved to accept the proposal.

A 32-storey building was subsequently built and the Bank now occupies the first ten floors, the thirteenth, the thirtieth and half of the first underground level; the remainder is occupied by tenants. The MonDev proposal was implemented by simply leasing the. site to the Société Place d’Armes, a subsidiary of MonDev, which assumed an emphyteutic lease on it and built the 32-storey building. The Compagnie Immobilière BCN Ltée remains owner of the land, and in 2031 the building will revert to it on expiry of the emphyteutic lease.

We have seen that the subsidiary Compagnie Immobilière BCN Ltée had the lessee rights and the Bank Canadian National the rights of the Prêtres de St Sulpice, over the land. In January 1965 the Bank Canadian National sold to its subsidiary for $700,000 the land supporting the Transportation Building, so that at that point the emphyteutic lease disappeared by confusion. The purpose of this transaction, according to Mr Hebert, was to arrange matters so that all the pieces of land were in the same lot and had the same owner, and the Bank managed to achieve this result by selling its rights over the land to its subsidiary.

The balance sheet of the Compagnie Immobilière BCN Ltée for the year ending November 30, 1964 shows in the profit and loss statement an amount of $153,983.66, and expenses of $99,252.34, that is a net profit from rental of $54,731.32, from the Transportation Building, from July to the end of November, 1964. If defendant is entitled to depreciate the property acquired it will benefit from depreciation of $19,000, and will then have taxable income from this rental of $35,000.

There is no doubt that the purchase of the Transportation Building produced income, and defendant could have remained owner of the building without demolishing it, and drawn a substantial income from it. The only point to be decided is whether the Transportation Building and the lessee rights under the emphyteutic lease were acquired for the purpose of gaining or producing income as required by paragraph 1102(1)(c) of the Income Tax Regulations. I deliberately set out in extenso the activities and remarks of members of the various committees of the Bank, and the testimony of its chairman, Mr Hébert. This is the means by which the Court may determine what was the reasoning of the Bank’s directors and officers when the properties were acquired.

Counsel for the plaintiff argues that defendant did not acquire the Transportation Building and the lessee rights under the emphyteutic lease for the specific purpose of deriving an income from them, but in order to get hold of a lot and a a site.

Alternatively he argues that if the Court finds that defendant had made no final decision, if it had an uncertain alternative intent at the time it acquired these two assets, the appeal should still be allowed because defendant has the burden of proof, and he says it must provide certain and specific proof that it did in fact have the Intent of earning income from the assets acquired.

According to Me Gauthier the Bank must at the time it acquired the assets have intended solely to use both the Transportation Building and the lessee rights under the emphyteutic lease.

Plaintiff argues that the intention or decision to build alongside only was not formed until August 6, 1964, that is one month and a half after signature of the contract.

Counsel for the plaintiff sets May 12, 1964 as the time when the Bank’s intent should be evaluated, that is the time when the Bank exercised its option, and maintains that since at that time the Bank was considering the Rudberg proposal, which entailed use of the block, including the land on which the Transportation Building stood, this was in his submission the purpose for which these assets were acquired.

It is true to say that the first mention of purchasing the Transportation Building was at the April 23 meeting, when the Rudberg proposal was presented, bu at that time it was only a proposal, a matter for discussion, whic’ moreover was taken no further since Rudberg was unwilling to assume any financial responsibility, and the Bank would not, and could not, embark on an expenditure of 20 million dollars. Furthermore, it is clear that even then the Board still preferred building alongside, since it was said of the Rudberg proposal that it “‘would not prove much more expensive than the one already approved by the Board”, which as we have seen was for an adjacent building. The evidence further established that the Transportation Building was needed to tie it in with this plan.

In the circumstances I must conclude that at the time of the decision by the Bank to purchase the Transportation Building and the rights under the emphyteutic lease, the Bank intended to use these assets solely for the purpose of accommodating its offices. Consideration was undoubtedly being given to plans for a large complex, but none of the proposals presented in April, June or August could be implemented because the promoters were unable to finance them. In July the proposal for building alongside was still the one being considered, since on July 3 Mr Cousineau, director of the Bank and vice-president of René P Leclerc, whose offices were in the Transportation Building, had extensive repairs made to the latter amounting to $50,000, and as Mr Hébert pointed out, he certainly would not have made these costly repairs if the building was going to be razed. It was also the one under consideration in August 1964, since on August 6, 1964 the architect Perrault submitted preliminary plans for this proposal, on which he must have worked throughout the period between the decision taken by the Bank to avail itself of the offer to buy the building, on April 24, 1964, and the date his plans were submitted.

On August 18 certain rumours were circulating among the tenants that the building would be demolished, and they were concerned about this. On that date a letter was sent to all tenants, informing them that the building would not be demolished, and this confirms that the intent was still to use the building to accommodate some of the Bank’s offices.

Indeed, it was not until September 25, 1964 that the Board of Directors reviewed the decision regarding construction of the head office, rejected building alongside and adopted a resolution accepting the MonDev proposal. It was only then, in fact, that for the first time a proposal for the building of a large complex contained the necessary guarantees for its completion, and a letter from Montreal Trust confirmed that it would finance the undertaking.

I must conclude, therefore, that the Bank had decided, in November 1963, to go ahead with an adjacent construction, and though several other proposals involving use of the entire block were subsequently discussed, and some of the Bank’s officers wanted a prestige building, between November 1963 and September 25, 1964 the Bank only considered, and could only consider, an adjacent construction. Indeed, it was impossible for the Bank to obtain from its directors authority to construct a twenty-million-dollar building which it would finance itself.

I therefore feel the evidence establishes that (1) up to September 1964 the proposal the Bank intended to implement was that for an adjacent construction, with connections to the Transportation Building and partial use of some floors in the latter; (2) the building was acquired in July 1964 at a time when the Rudberg proposal was under discussion, it is true, but as was established by Mr Hébert, in order to ensure that it could be used to house the Bank’s offices, and to be able to construct a taller building alongside. The letter to the tenants dated August 18, reassuring them with the statement that the building would not be demolished, clearly indicates the Bank’s intention to use the building; and finally (3) it was decided only in September 1964 to shelve the adjacent construction proposal and accept the MonDev proposal. I take it that throughout the period between November 1963 and September 1964 the Bank intended to build [alongside?] [s/c] and to use the Transportation Building, instead of constructing a large complex necessitating its demolition, a complex which undoubtedly interested some of its directors, but only on condition that it was not responsible for the financing. As we have seen, it was not until September 1964 that the MonDev proposal was put forward which, with the General Trust, solved the financing problem and made possible construction of the complex.

I must therefore conclude that the sole reason for acquiring the building and the lessee rights under the emphyteutic lease was to make use of them in the adjacent construction project. It is true that during this period some directors were in favour of construction of a large complex, but I repeat, these were at most hopes which could only be realized with the support of a company like MonDev, and acquiescence of the General Trust, and at the time the assets in question were bought no plan or proposal offered the terms necessary to carry out the project. It is true that, though the adjacent construction proposal had been adopted, it was still possible to alter it, since this is in fact what occurred, and I feel this is what Mr Hébert meant at the examination on discovery when he said that in September 1964 the adjacent construction proposal had not been finally adopted.

I set aside as not representing defendant’s intention the statement inserted in the deed of sale of July 3, 1964 that the Transportation Building was to be demolished. The facts presented to offset this statement indicate that it was only included in the deed of sale in the interest of the vendors, who doubtless saw a means of reducing their tax liability.

I must therefore conclude that the assets acquired by defendant were acquired to be used, and not for demolition or for extinction by confusion. The building must be classified in Class 3 and the lessee rights in Class 13.

The appeal is accordingly dismissed, but without costs as I feel that the capital cost allowance would not have been denied if defendant had not achiesced in the inclusion of an erroneous statement in the deed of sale.