The Queen v. Cie Imm. BCN Ltée, 79 DTC 5068, [1979] CTC 71, [1979] 1 S.C.R. 865

SUPREME COURT OF CANADA

The Queen v. Cie Imm. BCN Ltée, [1979] 1 S.C.R. 865

Date: 1979-02-06

Her Majesty The Queen Appellant; and

Compagnie Immobilière BCN Limitée Respondent.

1978: February 8, 9; 1979: February 6.

Present: Pigeon, Dickson, Beetz, Estey and Pratte JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Taxation — Deductions — Capital cost allowance — Emphyteutic lease — Interpretation — Meaning of "disposed of' — Income Tax Act, R.S.C. 1952, c. 148, s. 20 — Income Tax Regulations, P.C. 1954-1917, s. 1100 and Schedule B — Official Languages Act, R.S.C. 1970, c. 0-2, s. 8 — Civil Code, art. 567.

The question in this case is whether respondent can deduct, in computing its income for the taxation years 1967 and 1968, certain amounts in respect of the capital cost of property previously owned by it for the purpose of gaining or producing income when such property has, in a previous year, ceased to be in a prescribed class and no other property was in such class as at the end of both taxation years in question. The case concerned two distinct assets: (1) a piece of land (falling within class 3 under Schedule B of the Income Tax Regulations) which respondent held in 1964 as the successor in title of the lessee under an emphyteutic lease (the "first lease"), of which it became sole owner in January 1965 by acquiring the lessor's rights, and which it then conveyed to the Société Immobilière Place d'Armes (the "Société") by emphyteutic lease (the "second lease"); (2) a (class 13) building erected on the piece of land, which the Société had demolished during 1965 in accordance with the stipulations of the second lease. In 1967 and 1968 respondent had no property left in classes 3 and 13 and for this reason the Minister denied the deduction claimed by respondent for the undepreciated capital cost of these two classes of assets. The Trial Division of the Federal Court affirmed this decision, but it was reversed by the Federal Court of Appeal. The appeal to this Court raises two questions: (1) does s. 1100(2) of the Income Tax Regulations, relating to terminal losses, apply to the circumstances of this case, that is, were the building and the lessee's rights under the first lease disposed of or "aliénés" during 1965? (2) can respondent claim a capital cost allowance when

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there is no property in the relevant class?
Held: The appeal should be allowed.

Section 8(2)(b) of the Official Languages Act does not enact an absolute rule which overrides all other canons of construction, in particular that by which every provision is to be construed with reference to the context. The general canons of construction must be con­sidered and the meaning of words determined from a consideration of all relevant statutory or regulatory provisions. Although the French sometimes uses the words "produit d'une aliénation" or "aliéné" instead of "produit d'une disposition" or "disposé", the meaning of the English phrases is not limited thereby, and the English phrase "disposed of" in s. 1100(2) must be construed as if the French text were "disposé". In light of this construction it must be concluded that respond­ent conveyed full ownership in the building to the Société, since under the terms of the emphyteutic lease the building was not the subject of the emphyteusis. The building was therefore disposed of or "aliéné" within the meaning of s. 1100(2). So far as the rights of respondent under the first lease are concerned, these rights were classified as a leasehold interest, which terminated when the lessee acquired the lessor's rights. The extinction of a right through merger "destroys" that right, and in that sense it was disposed of, "aliéné". Finally, respondent submitted that s. 1100(2) did not, so long as respondent did not take advantage of it, interfere with its normal right to claim capital cost allowance as if the property had continued to exist in the prescribed class. That argument cannot be accepted for two reasons. Firstly, the wording of the Regulation makes it clear that the deduction therein provided may be taken only in the year in which the property was disposed of. In the case at bar, as respondent did not claim in 1965 it lost the right to claim a deduction for this loss in calculating its income for a subsequent year. Secondly, the provisions of s. 1100(2) of the Regulations have the effect of extinguishing the taxpayer's right to normal capital cost allowance in respect of the property disposed of. The amount of a terminal loss that the taxpayer is permitted but failed to take under this section must be considered as depreciation allowed for the purposes of the calcula­tion of the undepreciated capital cost of such property. In view of this conclusion, it is not necessary to express any opinion on the second question.

R. v. BCN Ltée, [1973] CTC 362; Colquhoun v. Brooks (1889), 14 A.C. 493; Canada Sugar Refining Co. Ltd. v. The Queen, [1898] A.C. 735;

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Re Leven, [1954] 3 All E.R. 81, referred to.

APPEAL from a decision of the Federal Court of Appeal[1], reversing a judgment of the Trial Division[2] which had upheld the assessment of the Minister of National Revenue. Appeal allowed.

Alban Garon, Q.C., Wilfrid Lefebvre and Pierre Barnard, for the appellant.

Maurice Régnier, Q.C. and Robert Couzin, for the respondent.

The judgment of the Court was delivered by

PRATTE J.—This appeal is concerned with the right of respondent to deduct, in computing its income for the taxation years 1967 and 1968, certain amounts in respect of the capital cost of property previously owned by it for the purpose of gaining or producing income when such property has, in a previous year, ceased to be in a prescribed class and no other property was in such class as at the end of both taxation years in question.

The facts which are not in dispute can be briefly stated as follows.

In the course of 1964, respondent became the successor in title of the Transportation Building Company, Limited (the "Transportation Compa­ny") with respect to two distinct assets, namely: (a) the rights of the Transportation Company as lessee of a piece of land (the "piece of land") situated on Notre-Dame Street in the City of Montreal, under the terms of an emphyteutic lease (the "first lease") made on June 2, 1910 by the Ecclésiastiques du Séminaire de Montréal as lessor, in favour of the Transportation Company as lessee; and (b) the full ownership of a building (the "Transportation Building") that had been erected on the piece of land.

It is no longer in dispute that these assets were acquired by respondent "for the purpose of gaining or producing income" (Income Tax Regulations 1102(1)(c)) and that respondent was in 1964 entitled

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to claim capital cost allowances in respect of both assets, the Transportation Building to be classified in class 3 ("property not included in any other class that is ... a building ..." ) and the lessee rights under the first lease in class 13 ("property that is a leasehold interest ...") of the Income Tax Regulations (R. v. BCN Ltée[3]).

In January of 1965, the situation of respondent vis-à-vis these two classes of assets changed. Respondent, who already held the lessee's rights under the first lease, then acquired the lessor's rights under the same lease; respondent thereupon became the full owner of the piece of land which it previously occupied as lessee only. Also, immedi­ately after such acquisition, respondent, which was then the full owner of both the piece of land and the Transportation Building, conveyed by emphyteutic lease (the "second lease") to Société Immobilière Place d'Armes Limitée (the "Socié­té"), several properties including the piece of land on which stood the Transportation Building. Under this second lease, the Société obligated itself to demolish the Transportation Building and to build for the use of respondent a new office building in accordance with plans and specifica­tions to be approved by it. In partial fulfillment of this contractual obligation, the Transportation Building was demolished by the Société before the end of respondent's 1965 taxation year.

Following these events, respondent had no prop­erty left in classes 3 and 13 and it is common ground that none was acquired by respondent during the taxation years 1965, 1966, 1967 and 1968.

We are not concerned here with the tax situa­tion of respondent in 1965 and 1966 and the record is silent in that regard. The dispute con­cerns the years 1967 and 1968 for which respond­ent claimed depreciation at the appropriate annual rate in respect of the undepreciated capital cost of the two classes of assets aforementioned. Such claim was denied because respondent did not have

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at the end of these two years, any property in these classes.

Respondent appealed directly to the Federal Court, Trial Division, against the assessment; its appeal was dismissed ([1975] F.C. 523). In his reasons for judgment, Addy J. expressed the view at p. 528:

... that property in the class under consideration must actually exist before a deduction for previously acquired property of that class may be claimed.

He also said at pp. 529 and 530 that there was a more fundamental reason why the claim of respondent could not be entertained:

However, what is more important is the fact that the general disposition of the Act in so far as deductions are concerned, provides that, in order to justify a deduction, the property in question must be used to produce income and, if it no longer exists, it clearly cannot produce income or for that reason justify a deduction. The principle that the property must be used to produce income becomes clear when we examine the text of section 20(6)(a) and (b) of the Act, which reads as follows:

Therefore, in order to enable a deduction to be made pursuant to section 11 of the Act, the property must be used to produce income, or at least, if it does not produce income, it must be held for the purpose of producing some.

In concluding his reasons he expressed himself as follows at p. 530:

I must therefore conclude that, by demolishing the Transportation Building in 1965, the plaintiff lost all right to future deductions based on the original purchase price of that building under section 11 of the Act, since no other property of that class existed, and for the same reason I must also conclude that, in view of the confu­sion of the rights of lessor and lessee when the emphyteutic lease and the building were both purchased, the plaintiff also lost all right to a deduction arising from the said lease.

On appeal to the Federal Court of Appeal, the judgment of the Trial Division was set aside and the assessments for the 1967 and 1968 taxation years were:

referred back to the Minister for re-assessment on the basis that

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(a) Regulation 1100(2) did not confer on the appel­lant any right to a deduction for the 1965 taxation year; and

(b) s not necessary for property to be in existence or used or held for income producing purposes for its capital cost to be included in the computation of capital cost allowance under Regulation 1100(1),

([1976] 2 F.C. at p. 437.)

There are two main issues in this appeal: the first is as to the application of the terminal loss provision of Regulation 1100(2) of the Income Tax Regulations to the circumstances of this case; the second is as to the right of respondent to claim in any event a capital cost allowance (other than a terminal loss) when there is no property in the relevant class.

Regulation 1100(2) reads as follows in both official languages:

(2) Where, in a taxation year, otherwise than on death, all property of a prescribed class that had not previously been disposed of or transferred to another class has been disposed of or transferred to another class and the taxpayer has no property of that class at the end of the taxation year, the taxpayer is hereby allowed a deduction for the year equal to the amount remaining, if any, after deducting the amounts, determined under sections 1107 and 1110 in respect of the class, from the undepreciated capital cost to him of property of that class at the expiration of the taxation year.

(2) Lorsque, dans une année d'imposition, autrement qu'au décès, tous les biens d'une catégorie prescrite qui n'avaient pas auparavant été aliénés ou transportés à une autre catégorie ont été aliénés ou transportés à une autre catégorie et que le contribuable n'a pas de biens de cette catégorie à la fin de l'année d'imposition, il est par les présentes accordé au contribuable une déduction, pour l'année, égale au montant qui reste, s'il en est, après déduction des montants, établis en vertu des arti­cles 1107 et 1110 à l'égard de la catégorie sur le coût en capital non déprécié, pour lui, des biens de cette catégo­rie, à la fin de l'année d'imposition.

The first question to be decided is as to whether the Transportation Building and the lessee's rights under the first lease must, because of the circum­stances previously outlined, be regarded as having been "disposed of" or "aliénés" during respond­ent's 1965 taxation year. Appellant argues for the

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affirmative and submits that the interpretation of this provision should be governed by that of the expression "disposed of" which should be given its broadest possible meaning. Respondent favours a more restrictive interpretation; it supports the view of Jackett C.J. who, speaking for the Federal Court of Appeal, held that the meaning of the expression "disposed of" in the Regulation should be controlled by the narrower meaning of the French word "aliénés" used in the French version of the same Regulation; he said at p. 436:

... Regardless of whether the expression "disposed of would have been given some other sense if the English version were read alone, in my view, when the two versions are read together, "disposed of" must be read in the sole relevant sense that that expression has in common with the French word "aliénés". In my view, this sense would include any transfer, by way of sale, gift or otherwise, of legal title, to some other person but would not include the bringing about of the destruction or extinguishment of the property.

In support of the judgment of the Federal Court of Appeal that the expression "disposed of' should be given the restrictive meaning of "aliénés", respondent has referred us to s. 8 of the Official Languages Act, (R.S.C. 1970, c. 0-2) which reads in part as follows:

8. (1) In construing an enactment, both its versions in the official languages are equally authentic.

(2) In applying subsection (1) to the construction of an enactment,

(b) subject to paragraph (c), where in the enactment there is a reference to a concept, matter or thing the reference shall, in its expression in each version of the enactment, be construed as a reference to the concept, matter or thing to which in its expression in both versions of the enactment the reference is apt;

I do not believe that s. 8(2)(b) of the Official Languages Act is of much assistance to respond­ent. The rule therein expressed is a guide; it is one of several aids to be used in the construction of a statute so as to arrive at the meaning which, "according to the true spirit, intent and meaning of an enactment, best ensures the attainment of its objects" (s. 8(2)(d)). The rule of s. 8(2)(b) should

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not be given such an absolute effect that it would necessarily override all other canons of construc­tion. In my view therefore the narrower meaning of one of the two versions should not be preferred where such meaning would clearly run contrary to the intent of the legislation and would consequent­ly tend to defeat rather than assist the attainment of its objects.

One of the most important rules to be followed in the interpretation of a particular provision of a statute was expressed as follows by Lord Herschell in Colquhoun v. Brooks[4], at p.506:

It is beyond dispute, too, that we are entitled and indeed bound when construing the terms of any provi­sion found in a statute to consider any other parts of the Act which throw light upon the intention of the legisla­ture and which may serve to shew that the particular provision ought not to be construed as it would be if considered alone and apart from the rest of the Act.

And, in Canada Sugar Refining Company, Limited v. The Queen[5], Lord Davey said at p.741:

.. Every clause of a statute should be construed with reference to the context and the other clauses of the Act, so as, so far as possible, to make a consistent enactment of the whole statute or series of statutes relating to the subject-matter.

Clearly, this basic rule of statutory construction is still in effect; it has not been repealed by the enactment of s. 8 of the Official Languages Act.

The expressions "disposed of" or "aliénés" as found in Regulation 1100(2) should therefore not be interpreted in the isolated context of the Regu­lation itself as if it stood alone and independently from the statute under which it was passed. Its true meaning should rather be gathered from a consideration of all relevant statutory or regulato­ry provisions under which the scheme of capital cost allowances was established and regulated and of which the terminal loss provisions of Regulation 1100(2) are but a part.

The rules respecting the operation of the capital cost allowance system are essentially to be found

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in s. 20 of the Act, in Regulations 1100 to 1205 and also in Schedules B, C, D, E and H, all passed under the authority of s. 11(1)(a) and (b) of the Act.

Section 20 contains a number of substantive rules regarding the recapture of capital cost allow­ances and the effects on the operation of the system of a change in the use of depreciable property. It also contains an interpretative clause that is expressed to have effect for the purposes of s. 20 and also for the purposes of the "regulations made under paragraph (a) of subsection (1) of section 11" which, of course, include Regulation 1100(2) aforesaid. In all but two of the definitions in s. 20(5), the words defined therein are declared to "mean" so and so; these are true definitions and therefore restrictive. There are two exceptions where the words defined are declared to "include" so and so; these exceptions are the following:

Sec. 20(5)

(b) position of property" includes any transaction or event entitling a taxpayer to proceeds of disposition of property;

(c) proceeds of disposition" of property include

(i) the sale price of property that has been sold,

(ii) compensation for property damaged, destroyed, taken or injuriously affected, either lawfully or unlaw­fully, or under statutory authority or otherwise,

(iii) an amount payable under a policy of insurance in respect of loss or destruction of property,

(iv) an amount payable under a policy of insurance in respect of damage to property except to the extent that the amount has, within a reasonable time after the damage, been expended on repairing the damage, and

(v) an amount by which the liability of a taxpayer to a mortgagee is reduced as a result of foreclosure of his interest in property that is mortgaged or as a result of the sale of that property under a provision of the mortgage, plus any amount received by the taxpayer out of the proceeds of such sale;

In the context of s. 20(5), the definitions of "disposition of property" and "proceeds of disposi­tion" cannot be said to be exhaustive; these expressions

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must bear both their normal meaning and their statutory meaning; it would be wrong to restrict the former because of the latter.

The expressions "disposed of"' or "aliénés" used in Regulation 1100(2) are nowhere defined; it is apparent, however, that they must be ascribed the meaning which conforms with that of their com­panion defined expressions "disposition of proper­ty" and "proceeds of disposition".

The expression "disposed of" which is used in Regulation 1100(2) is also used in a number of provisions in s. 20 of the Act: see ss. 20(1), 20(1)(6), 20(5c), 20(6)(a), 20(6)(d), 20(6)(e), 20(6)(f)(ii), 20(6)(g), 20(6)(i), 20(6)(j), 20(12), 20(12)(a)(ii), 20(12)(6). In the French text of seven of these provisions, the French word "disposé" has been utilized while in six, the word "aliéné" was used.

The word "disposition" is also frequently found in s. 20: see ss. 20(2), 20(2)(a)(i), 20(5)(b), 20(5)(e)(ii), 20(5)(e)(ii)(C), 20(6)(g), 20(6)(j) and 20(12)(b); in all but the last two provisions where the word "aliénation" is used, "disposition" is used in French where "disposition" appears in English; in the definition section, "disposition of property" is, in French, "disposition de biens".

In most cases, "produit d'une disposition" is treated as the equivalent of "proceeds of disposi­tion": see ss. 20(1), 20(5)(c), 20(5)(e)(ii)(A), 20(6)(e), 20(6)(f)(ii) and 20(6)(g). But, in a few cases, the expression "produit d'une aliénation" has been used: see ss. 20(5a)(b), 20(6)(i), 20(6)(g) and 20(12).

A detailed examination of these provisions has convinced me that the expressions "disposition", "proceeds of disposition" and "disposed of" must, throughout, receive the same meaning respectively, regardless of the fact that in a limited number of cases the French text taken in isolation would convey a more restrictive meaning. Such a narrow meaning cannot however be held to control the much broader meaning of the English expressions, especially when it is apparent that such was not

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the intent, quite the contrary. It will be sufficient to refer to two examples:

Section 20(5a) deals with the tax treatment of the proceeds of a policy of insurance payable as a result of damage caused to property of a pre-scribed class. Such proceeds are specifically included in the definition "proceeds of disposi­tion", "produit d'une disposition", given in s. 20(5)(c); yet when making reference to such pro­ceeds in s. 20(5a), the words "produit d'une aliénation" which are nowhere defined are used where the English expression is "proceeds of dispo­sition". Clearly, the words "produit d'une aliéna­tion" are inapt and mean "produit d'une disposition".

Section 20(12) affords another indication that the use of a French expression of a narrower meaning should not be allowed here to restrict the sense of the English expression. This section refers to the tax treatment of the proceeds of the sale of vessels under certain circumstances. It provides that the recapture provision of s. 20(1) shall not in certain circumstances apply to the proceeds of the sale. Section 20(12)(a) reads in part: "subsection (1) does not apply to the proceeds of disposition ..." In French, the same paragraph reads: "(a) le paragraphe (l) ne s'applique pas au produit de l'aliénation ..." Section 20(1) which is referred to in s. 20(12) refers to proceeds of disposition in the English text and to "produit de la disposition" in the French text; in other word, the French text of s. 20(12)(a) uses "produit d'une aliénation" to designate what is described in subs. (1) of s. 20 as "produit d'une disposition".

Also, in the same s. 20(12), the words "aliéné" and "disposé" are both used when the English expression is "disposed of" and refers to the same transaction: compare the opening part of s. 20(12) with s. 20(12)(a)(ii).

I come to the conclusion that the French words "produit d'une aliénation" or "aliéné" that are sometimes used instead of "produit d'une disposi­tion" or "disposé" should not be so construed as to restrict the meaning of the English expressions.

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This conclusion is also applicable to the words "disposed of" as used in Regulation 1100(2); in the absence of some clear indication to the con­trary, this expression must be given the same meaning in the Regulation as in the substantive provision of the Act which it is intended to supplement. The expression "disposed of" in Regulation 1100(2) must be construed as if there was in the French "disposé" as in numerous provisions of s. 20: see ss. 20(1), 20(1)(6), 20(6)(d), 20(6)(e), 20(6)(f) (ii) and 20(6)(g).

The verb "to dispose" has a very broad meaning; it is defined as follows in the Oxford English Dictionary (see To dispose of):

b. To put or get (anything) off one's hands; to put away, stow away, put into a settled state or position; to deal with (a thing) definitely; to get rid of; to get done with, settle, finish. In recent use sometimes spec. to do away with, "settle", or demolish (a claim, argument, oppo­nent, etc.); also humorously, to make away with, con­sume (food).

The substantive definitions of "disposition of property" and "proceeds of disposition" in s. 20(5)(b) and (c) are a clear indication that the words "disposed of" should be given their broadest possible meaning.

In French, the verb "disposer" would convey the same idea as "to dispose of". In discussing the jus abutendi which is one of the three main attributes of the right of ownership, Mignault (Droit civil canadien, Vol. 2, at p. 477) wrote:

[TRANSLATION] The jus abutendi, or right of disposal, is the right to make some final use of the thing, which will not be repeated, at least for the same person. Disposing of a thing means transforming, consuming, destroying or, finally, alienating it, that is, transferring it to another person.

The same view is expressed by Mazeaud (Leçons de droit civil, T. 2, Vol. 2, Nos. 1332 and 1333):

[TRANSLATION] 1332....

Because it is absolute, the right of ownership is a total right: the owner has complete powers over the thing. This collection of powers may be broken up into three attributes: the jus utendi, or right to make use of the thing, the jus fruendi, or right to receive income produced

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by it, and the jus abutendi, or right to dispose of the thing: to preserve, give, sell, destroy or abandon it.

1333. Prerogatives of the jus abutendi.—The right of disposal includes, besides the right to abandon the thing and the right to destroy it, two important prerogatives: the right to alienate the thing whether gratuitously or for consideration, and the right to preserve it in the estate.

The question now to be answered is whether it can properly be said in the light of the above that the Transportation Building and the first lease were "disposed of" in 1965.

The Transportation Building which was in the full ownership of respondent was conveyed by it to the Société in January 1965 under the second lease and it was immediately demolished. The relevant provisions of the second lease were as follows:

1. The Lessor hereby conveys with legal warranty by emphyteutic lease to the Lessee, thereof accepting, free and clear of any and all hypothecs, mortgages, liens, privileges and encumbrances, a certain piece of land (hereinafter called "the Premises") ... together with the three (3) buildings located thereon and presently known as the Transportation Building, the Banque Canadienne Nationale Building and the Royal Insurance Building;

3. The Lessee shall at its own cost and expense, com­mencing on the first day of May, Nineteen hundred and sixty-five or as soon thereafter as possible, proceed to demolish the three buildings presently erected on the Premises, the Lessee retaining the salvage therefrom as compensation, and shall, immediately after completion of such demolition, construct on the Premises a new building of about thirty-two (32) stories high ("the Building"), in accordance with the preliminary sketches and outline specifications referred to in Clause 6 hereof, and of the general plans and specifications to be approved by the Lessor under said Clause 6, the work of demolition and construction to proceed with due dili­gence and the Building to be substantially completed and ready for occupancy not later than the first day of May, Nineteen hundred and sixty-seven;

One of the essential features of an emphyteutic lease is the obligation for the lessee to make certain specific improvements to the property that is the subject-matter of the lease. Another essen­tial ingredient of emphyteusis is the reversion of the property to the lessor at the end of the lease.

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The absence of these two features in so far as the Transportation Building is concerned shows that the emphyteusis created by the lease did not include the Transportation Building, but only the land that was supporting it. While the Société, as lessee, under the second lease, acquired the tempo­rary ownership of the land, it acquired the full ownership of the building which it undertook to demolish so as to make room for the new building to be erected on the land and which would consti­tute an improvement thereto. The right of ownership in the building that was conveyed by the second lease was therefore quite different from that to the land which was created "for a time" (art. 567 C.C.).

In my view, the second lease did not have the effect of creating a leasehold interest in the Trans­portation Building; it rather transferred to the Société the full ownership of the building subject to the obligation to proceed with the demolition and the construction of a new office building. Such transfer was a "disposition of property"; such building was therefore "disposed of" within the meaning of Regulation 1100(2).

I now come to deal with the rights of the respondent as lessee of the piece of land under the first lease. These rights were classified as a lease-hold interest in class 13 of Schedule B of the Income Tax Regulations. This leasehold interest automatically terminated when the lease under which it was created came to an end upon Respondent acquiring the lessor's rights under the same lease. One cannot at the same time be lessor and lessee of the same property.

The narrow point is whether the leasehold interest which terminated in such circumstances should be regarded as having been "disposed of" for the purposes of Regulation 1100(2).

As already indicated, the verb "to dispose of", in its first meaning, encompasses the idea of destruc­tion; one of the meanings of the verb "to destroy" is "to put an end to, to do away with" (Shorter Oxford English Dictionary, see Destroy). The extinction of a right through merger is but one method of "destroying" that right, that is of putting

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an end to its existence. In Re Leven[6], it was said that the word "disposition" taken by itself and used in its most extended meaning was "wide enough to include the act of extinguishment".

The acquisition by respondent of the lessor's rights under the first lease brought about the automatic termination of the leasehold interest; such interest was extinguished, it was destroyed.

In my view, the rights of respondent under the first lease should be regarded as having been "disposed of" in January 1965.

But, it was argued on behalf of respondent that the fact that both the Transportation Building and the lessee's rights under the first lease might have been disposed of in 1965 was not determinative of this appeal. It was submitted that Regulation 1100(2) did not, so long as respondent did not take advantage of it, interfere with its normal right to claim capital cost allowance annually at the appro­priate rate as if the property had continued to exist in the relevant prescribed class.

Regulation 1100(2) creates a right in favour of the taxpayer; the deduction of a terminal loss is permissible; it is allowed; the loss "may be deducted in computing the income of (the) taxpayer" to use the words of the opening paragraph of s. 11(1) (a) which is the statutory basis of the Regu­lation. There is no obligation on the taxpayer to claim the deduction provided in Regulation 1100(2), but the fact that he elects not to claim it does not mean that the deduction is not permissi­ble; in that sense, the Regulation may be said to be permissive rather than mandatory.

But, it does not follow that the right created under the Regulation may be exercised outside of the conditions therein prescribed or that in any event, the mere existence of that right is without effect on the application of some of the other rules respecting capital cost allowance.

Firstly, the wording of the Regulation makes it clear that the deduction therein provided may be taken only in the year in which the property was "disposed of"; if the taxpayer elects not to claim the deduction that year, he cannot claim it in a

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subsequent year because it is not allowed to be taken in a subsequent year. The right to claim a terminal loss exists in respect to the year in which it was incurred; the right is forfeited if it is not exercised for that year and it is not available to be used in respect of a subsequent tax year.

In the case at bar, the property was disposed of in 1965 and respondent did not claim a terminal loss for that year; it therefore follows that it cannot claim a deduction for such loss, in whole or in part, in calculating its income of a subsequent year.

Secondly, the terminal loss provisions of Regula­tion 1100(2) have the effect of extinguishing the taxpayer's right to normal capital cost allowance in respect of the property disposed of. Such allowance is calculated on the basis of the "undepreciat­ed capital cost" of the class of property which must be established in each year in accordance with the rules contained in the definition of s. 20(5)(e) which reads in part as follows:

Sec. 20(5)

(e) "undepreciated capital cost" to a taxpayer of depre­ciable property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(i) the total depreciation allowed to the taxpayer for property of that class before that time,

(ii) .. .

The first item to be deducted from the capital cost of a class of property is "the total depreciation allowed to the taxpayer for property of that class". The terminal loss deduction is "allowed" by Regu­lation 1100(2), whether it is claimed or not. The fact that the terminal loss may not have been claimed does not mean that the deduction was not allowed, i.e. permissible. The situation is of course different as regards most other deductions because the language used in the Regulations is different. For instance, Regulation 1100(1)(a) reads in parts as follows:

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or

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property, as the case may be, deductions for each taxa­tion year equal to

Rates

(a) such amounts as he may claim in respect of property of each of the following classes in Schedule B,...

In the case of a deduction permitted under Regulation 1100(1) (a), it is clear that the deduc­tion that is not claimed by the taxpayer cannot be said to be allowed for the purposes of the calcula­tion of the undepreciated capital cost since the deduction is expressed to be allowed only to the extent that it is claimed.

I am therefore of the view that in calculating the undepreciated capital cost of depreciable property of a class, the amount of a terminal loss that the taxpayer was permitted but failed to take under Regulation 1100(2) must be considered as "depreciation allowed" for the purposes of the calculation of the undepreciated capital cost of such property. I am in agreement with Jackett C.J. when he says in his reasons for judgment at p. 436: It follows that, as the whole of the balance remaining in the undepreciated capital cost account for the particular class at the end of the year of "disposition" or "aliéna­tion" is deductible in computing income for that year, no amount in respect of the capital cost of property of that class acquired before that time will remain in the base for computation of the capital cost allowance deduction for property of that class for a subsequent year. (Compare Regulation 1100(1) with section 20(5)(d) and (e) of the Act.)

In view of this conclusion, it becomes unneces­sary to express any opinion on the question argued before us and dealt with in the judgments of the Courts below as to whether property is required to have been in existence in a class at the end of a taxation year in order for the taxpayer to have the right to claim capital cost allowance in respect of such class of property.

I am of opinion that this appeal should be allowed, the judgment of the Federal Court of Appeal set aside and the judgment of the Federal Court, Trial Division, restored, the whole with costs throughout.

Appeal allowed with costs.

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Solicitor for the appellant: D. S. Thorson, Ottawa.

Solicitors for the respondent: Stikeman, Elliot, Tamaki, Mercier & Robb, Montreal.