A J Frost:
1 This is an appeal from four assessments each dated November 16, 1973, in respect of appellant's 1967, 1968, 1969 and 1970 taxation years. The appeal was heard on November 29, 1974, at the City of Toronto. It was agreed that the appeals of Plan B Leasing Limited, Plan C Leasing Limited, Strathearn Holdings Limited and Calfonta Investments Limited be heard together with this appeal on common evidence and that any decision reached would apply to the five appeals.
2 At the opening of the proceedings counsel for the respondent filed a notice of motion for an order striking out the notice of appeal dated December 5, 1973, which initiated the present litigation in so far as it relates to income tax assessments for the 1967 and 1968 taxation years, on the ground that no tax was payable for these years and this Board would therefore have no jurisdiction.
3 It is true that this Board has on occasion taken the position that an appeal may lie from a so-called “nil” assessment if the appellant's rights under the Income Tax Act were not exhausted and he could show a legitimate interest in having his assessment reviewed. Apart from the fact that the Federal Court (Trial Division) has shown no support for the Board's decisions in this respect, I am of the opinion that in this appeal the 1967 and 1968 assessments should be quashed, as should the 1967 and 1968 assessments of Strathearn Holdings Limited, and the 1968 and 1969 assessments of Plan B Leasing Limited and Plan C Leasing Limited, respectively. None of the assessments appealed from by Calfonta Investments Limited were nil assessments.
4 Turning now to the appeal pertaining to the assessments in respect of the appellant's 1969 and 1970 taxation years, the following summarizes the relevant facts and gives the basis of the dispute before me.
AGREED STATEMENT OF FACTS
1. In February, 1962, Samuel Lunenfeld, the owner of the lands (the “Lands”) and the building (the “Building”) situated at the northwest corner of Bay and Front Streets, in the City of Toronto, accepted an offer to sell the Lands and Building to Joseph Rosenblum.
2. Joseph Rosenblum subsequently accepted an offer dated February 16, 1962, made by The Great West Life Assurance Company (“Great West”) which offer stated that it was for the purchase of the Lands only, excluding the Building. The offer provided that, contemporaneously with the closing of the transaction, a lease of the Lands would be granted by Great West, as landlord, to Joseph Rosenblum, or his nominee, as lessee, for a term of 99 years.
3. By a deed dated April 16, 1962, Samuel Lunenfeld stated that he conveyed the Lands to Great West.
4. A deed dated April 16, 1962, executed by Samuel Lunenfeld purported to convey the Building to 159 Bay Street Limited. It is the Appellant's contention that this deed effectively conveyed ownership of the Building to 159 Bay Street Limited; the Respondent denies this contention.
5. A lease (the “Lease”) dated April 16, 1962, was entered into between Great West as landlord, and 159 Bay Street Limited.
6. Under an agreement dated May 4, 1962, Plan A Leasing Limited purported to purchase the Building from 159 Bay Street Limited and to acquire from it an assignment of the Lease. Pursuant to the said agreement, a deed dated May 1962, purported to convey the Building to Plan A Leasing Limited and an assignment of lease dated May 17, 1962, purported to assign the interest of 159 Bay Street Limited in the Lease to Plan A Leasing Limited. It is the Appellant's contention that the deed dated May 1962, effectively conveyed ownership of the Building to Plan A Leasing Limited; the Respondent denies this contention.
5 It is obvious that the appellant objects to the fact that the respondent disallowed a deduction of capital cost allowance calculated on the basis of its alleged ownership of the Building and only allowed a deduction of the amount prescribed in Schedule H of the Income Tax Regulations.
6 The appellant acted in fact as a trustee for Syndicate 159. It is not entirely clear what was the relationship between 159 Bay Street Limited and Syndicate 159. In a note appearing on the financial statements of Syndicate 159 as administered by the appellant for 1969, the accountants Newman, Langer and Company stated: “The syndicate assumed a 99-year land lease in 1962. The annual rent for the first 40 years of the lease is $130,000.” On the financial statements (profit and loss) one finds the said amount of $130,000 as an annual expense. How the appellant managed to claim an amount of $358,000 in 1968 as “cost of acquiring head tenant's lease” has puzzled me but, having disposed of the appeal in respect of that taxation year, the matter is beyond the scope of this judgment.
7 As the documents and evidence adduced clearly show, the appellant acquired in 1962 a leasehold interest in the Lands from 159 Bay Street Limited. The latter had prior to that time obtained the same leasehold interest from Great West which had bought the Lands from Samuel Lunenfeld by deed of April 16, 1962, save and except “the buildings, improvements, appurtenances thereto and fixtures therein or thereon, situate upon the said land.” In spite of this stipulation, the lease which Great West granted to 159 Bay Street Limited contained all the usual terms and conditions of an ordinary lease of land as, for example, the landlord's right to the buildings on the land upon termination of the lease “by effluxion of time or sooner as herein provided ipso facto and without compensation or further consideration”, his right to re-enter upon default of the tenant, etc. In other words, notwithstanding the fact that in subsequent deeds made up and signed in evidence thereof, a sub-lease of the Lands and a conveyance of the Building were separately recorded, the tenant of the land, namely 159 Bay Street Limited never acquired more than a leasehold interest and could never convey more than that to the present appellant. Counsel for the appellant aptly quoted the Roman adage of nemo dat quod non habet, although he applied that famous rule incorrectly. It is perfectly true that Great West did not lease the Building; it did not have to do so because the lease was part and parcel of the package deal between Lunenfeld and Rosenblum. Title to the real property was acquired by Joseph Rosenblum as nominee subject to existing or concurrently granted rights of others. All this did not change the character and legal consequences of the transactions whereby Great West obtained the title of ownership and granted the leasehold interest in the said land to 159 Bay Street Limited.
8 The Board is aware of new developments in the law of property referred to by appellant. Many years ago the necessity of acquiring enough capital to construct high rise apartment buildings caused jurists to wonder whether the old pyramid theory was still adequate in modern times and suggestions were made to recognize the ownership of a horizontal slice of real property. This has nothing of course to do with the case at bar. If the Board had to condone the manipulation of the basic rules of the law of property as was advocated by the appellant in this case purporting a split of the real estate title in horizontal slices which conveniently coincided with an increase in deductions for income tax purposes (namely, capital cost allowance on buildings at full ownership rate plus rental expense on the land) the Income Tax Act would have to be amended. Fortunately this is not necessary if we prevent this kind of gimcrackery. The Income Tax Regulations provide in subsection 1102(5) only one exception to the ordinary rules contained in Schedule H to those Regulations regarding capital cost allowance on leasehold interests and this exception concerns buildings and other improvements which the leaseholder himself has erected on leased land. A contrario one may say that in all other cases Schedule H applies when it comes to writing off the cost of fixed assets which were attached to leased land at the time the lease was initiated.
9 Counsel for the appellant has quoted from the well-known CIR v. Duke of Westminster, [1936] A.C. 1, case in support of his contention that if one tries to ignore the legal relationship between parties and to replace it by its economic and commercial significance it would be “sheer nonsense”, according to the House of Lords. This reference is not relevant because the Board rejects the appellant's claim, not on account of the economic and commercial significance of the transactions concerned but because of the nature of the legal relationship between the appellant as tenant and Great West as landlord. However, since counsel for the appellant brought up the matter, I may also remind him of the remark of Lord Denning who, as President of the English Court of Appeal, in the case of Morgan v. IRC, [1963] Ch. 438at 458 dealing with an astonishing tax avoidance scheme, said: “It makes me rub my eyes. I cannot believe it is true. Those near me acclaim the feat. But I do not.”
10 For the reasons set out hereabove I dismiss the appeal for each of the four years 1967, 1968, 1969 and 1970.
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