St. Ives Resources Ltd. v. MNR, 90 DTC 1375, [1990] 1 CTC 2539 (TCC), aff'd 92 DTC 6223 (FCTD), briefly aff'd in turn at 94 DTC 6261 (FCA)

Sarchuk, T.CJ.:—The appeals of St. Ives Resources Ltd. arise from reassessments of taxes payable by the appellant for its 1980 and September 1981 taxation years.

In its return of income for its 1980 taxation year, the appellant reported the sum of $4,554,700 as the amount of its cumulative Canadian development expense at the end of the year and deducted, pursuant to subsection 66.2(2) of the Income Tax Act (the Act), the sum of $1,366,410 in computing its income for the year. In its return of income for its September 1981 taxation year, the appellant reported the sum of $3,215,537 as the amount of its cumulative Canadian development expense at the end of the year and deducted, pursuant to subsection 66.2(2) of the Act, the sum of $964,661.

By notices of reassessment dated January 27, 1984 the respondent assessed the taxable income of the appellant for the taxation years in issue by reducing the appellant's cumulative Canadian development expense at the end of each taxation year respectively, on the basis that a $1,250,000 adjustment of the purchase price was not referable to the property, but could only be referable to the refinancing of a promissory note and/or forbearance of the creditor from pursuing available legal remedies and note and/or forbearance of the creditor from pursuing available legal remedies and therefore could not be included in the appellant's cumulative Canadian development expense.

At the commencement of the hearing counsel for the parties filed a statement of agreed facts. No further evidence was adduced. The statement itself is short and succinct and reads:

1. At all material times commencing with the acquisition described below, St. Ives Resources Ltd. (“St. Ives") was a principal-business corporation as defined in paragraph 66(15)(h) of the Income Tax Act (the “Act”’).

2. At all material times, Carter Oil & Gas Ltd. ("Carter") was a principal-business corporation as defined in paragraph 66(15)(h) of the Act.

3. Prior to December 11, 1979, Carter was the owner of certain resource properties and associated depreciables as more particularly described in the schedule to the Sale Agreement (as hereinafter defined) (the "Properties").

4. On December 11, 1979 and pursuant to the terms of a petroleum, natural gas and general rights conveyance made as of December 11, 1979 (the "Sale Agreement"), Carter sold and St. Ives purchased a 10% interest in the Properties (the "Property Interest"). The Property Interest was a Canadian resource property as defined in paragraph 66(15)(c) of the Act.

5. St. Ives paid the purchase price provided in the Sale Agreement for the Property Interest of $3,500,000.00 by granting to Carter an interest-bearing promissory note in the amount of $3,500,000.00 due five days after demand (the “Original Note").

6. The sole asset of St. Ives was the Property Interest acquired from Carter.

7. By a letter dated February 29, 1980 (the "Demand"), Carter demanded payment of the principal and accrued interest under the Original Note.

8. Pursuant to a Price Rectification Agreement dated March 5, 1980, St. Ives agreed to grant to COG in place of the Original Note, a Promissory Note for $4,750,000.00 on the same terms and conditions as the Original Note.

9. In a valuation written in April 1980 Pitfield Mackay Ross Limited ("PMR") determined that in their opinion the fair market value of the Property Interest acquired by St. Ives was not less than $4,750,000.00 at acquisition.

The appellant's primary position is that the cost to it of the Canadian resource property in issue includes the additional amount of 1.25 million dollars payable by it as an adjustment to the purchase price thereof and therefore should be recognized as a Canadian development expense within the meaning of subparagraph 66.2(5)(a)(iii) of the Act. This submission is founded on the proposition that the sale price set out in the sale agreement, being ten per cent of $35,000,000 was a mistake which was rectified by the letter agreement dated March 15, 1980 (Ex. A-4). Since this document is the basis of the appellant’s submission I set out the document in full:

March 5, 1980

Dr. James Dantow

301-745 West Broadway

Vancouver, B.C.

V5Z 1J6

Dear Sirs:

Re: Rectification —Sale by Carter Oil &

Gas Ltd. to St. Ives Resources Ltd.

Reference is made to this company's Notice of Demand dated February 29, 1980 for payment in full of your promissory note dated December 11, 1979 in the principal amount of $3,500,000.00 plus interest which Notice was delivered to you on February 29, 1980. You have advised us as of the date hereof that you are unable to comply with the Demand for Payment. This letter will confirm the agreement reached between us in respect of the promissory note, and other essential matters relating thereto.

As you have acknowledged that the purchase price paid by you on December 11, 1979 did not reflect the fair market value of the oil and gas properties ("the properties") sold which acknowledgement we understand is based on a verbal independent evaluation (subject to a written report) of the properties made by Pitfield Mackay Ross Limited on your behalf, this will confirm your agreement to increase the purchase price by an additional $1,250,000.00 thereby revising the purchase price from $3,500,000.00 to $4,750,000.00. You shall execute a new promissory demand note dated December 11, 1979, for the total revised price on the Same terms and conditions as the old note and we shall return the latter note to you upon receipt of the new note.

The increase in the purchase price shall also be in consideration for Carter Oil & Gas Ltd.'s withdrawal of its Demand of Payment, and for it not to pursue the legal remedies available to it to enforce payment of such note.

Carter Oil & Gas Ltd. or J.A. Carter Consultants Ltd. shall continue to manage and operate the properties on your behalf pursuant to existing Agreements between the parties hereto for a new contract consideration of $3,500.00 per month. In addition, it is agreed and acknowledged that the working interests comprising the YoYo, British Columbia, properties should have been excluded from the sale and purchase, and the parties hereto agree to enter into a Rectification Agreement to reflect the foregoing. We would also confirm your assurances that you shall from time to time do all such further acts and execute and deliver all such further deeds and documents as shall be reasonably required in order to fully conform and carry out the sale and purchase of the properties.

We further understand that you have retained legal counsel to advise you in respect of the matters referred to herein, and we would ask that you refer this letter for your counsel's review. In the event the foregoing correctly sets forth our agreement, would you kindly endorse your agreement and acceptance on the copy of this letter in the space provided, returning the same to this office forthwith.

Yours very truly,

CARTER OIL & GAS LIMITED

"J.A. Carter,"

President

AGREED TO AND ACCEPTED THIS

day of , 1980.

St. Ives Resources Ltd.

Per: "J.E. Dantow, M.D.

It was contended that the principles of rectification are applicable even where, as in this case, the parties to a contract agree without court intervention that a mistake in the contract be rectified. Appellant's counsel argued that the letter dated March 5, 1980 (Ex. A-4) (the letter agreement):

. .is clearly rectification of the original petroleum natural gas and general rights conveyance. The parties made a mistake. They thought they were selling on December 11th, 1979 at fair market value, the parties agreed to sell at fair market value, an appraisal was obtained for 4.75 million. It was obtained after that. They had rectified the agreement. A mistake was made in the conveyance.

and submitted as further evidence of a mistake the fact that a promissory note:

. I on exactly the same terms and conditions for an additional 1.25 million dollars was executed by St. Ives Resources. It went from 3.5 to 4.75 same terms and conditions. Clearly in our submission this is best indicated by a mistake between the parties in relation to the original document.

In support counsel relies on a decision of the Saskatchewan District Court, Keller & Cameron Ltd. v. Schmaltz, [1977] 5 W.W.R. 278 and says that the evidence in this appeal meets the tests set out and considered in that judgment.

The position of the respondent is that “in order to obtain true rectification there must be an operative mistake in law that the agreement did not reflect the true intentions of the parties at the time". Counsel submitted that use of the word "rectification" with respect to the letter agreement was merely nomenclature and did not properly characterize the nature of the agreement. This document, counsel submitted, established two principal points: that the vendor wanted an additional 1.25 million dollars in payment for the property and that the payment of this amount would cause him to forbear enforcing the promissory note. There was no evidence before the Court that an error regarding fair market value existed at the time the sale agreement was executed. Accordingly the respondent was correct in assessing as he did.

The principles to be followed by the Court in an action for rectification have been clearly and unambiguously stated in numerous judicial decisions. In Hart v. Boutilier (1916), 56 D.L.R. 620, Duff, J. as he then was, in delivering the judgment of the Supreme Court of Canada said at page 630:

The power of rectification must be used with great caution; and only after the court has been satisfied by evidence which leaves no “fair and reasonable doubt” (Fowler v. Fowler (1859) 4 DeG. & J. 250, at 264, 45 E.R. 97), that the deed impeached does not embody the final intention of the parties. This evidence must make it clear that the alleged intention to which the plaintiff asks that the deed be made to conform, continued concurrently in the minds of all the parties down to the time of its execution; and the plaintiff must succeed in showing also the precise form in which the instrument will express this intention.

Rectification is an "equitable remedy" whereby one party to a contract seeks the Court's intervention to rectify a written instrument which does not accurately reflect the terms agreed to orally by the parties prior to putting their agreement down in writing. Certain requirements must be met before a court will intervene to rectify a written instrument. These requirements apply even though the parties purport to have “rectified” the agreement themselves.

The remedy of rectification is not available to correct a mistaken assumption of fact. In other words there must be a literal disparity between the terms of the prior agreement and the terms of the written instrument. This requirement is best illustrated by the English case of Frederick E. Rose (London) Ltd. v. William H. Pim Junior & Co. Ltd., [1953] 2 Q.B. 450. In that case the parties had entered into an oral agreement for the purchase of horsebeans, in the belief that they were "feveroles", and a subsequent written agreement embodied the same terms. The buyers after accepting the goods, sought to rectify the contract. At trial, as Lord Denning noted at page 461 of his judgment:

The judge has granted their request. He has found that there was "a mutual and fundamental mistake" and that the defendants and the plaintiffs, through their respective market clerks, "intended to deal in horsebeans of the feverole "type"; and he has held that, because that was their intention—their “continuing common intention"—the court could rectify their contract to give effect to it. In this I think he was wrong. Rectification is concerned with contracts and documents, not with intentions. In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties-into their intentions-any more than you do in the formation of any other contract. You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed. If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice. It is not necessary that all the formalities of the contract should have been executed so as to make it enforceable at law (see Shipley Urban District Council Bradford Corporation); but, formalities apart, there must have been a concluded contact. There is a passage in Crane v.Hegeman-Harris Co. Inc. which suggests that a continuing common intention alone will suffice; but I am clearly of opinion that a continuing common intention is not sufficient unless it has found expression in outward agreement. There could be no certainty at all in business transactions if a party who had entered into a firm contract could afterwards turn round and claim to have it rectified on the ground that the parties intended something different. He is allowed to prove, if he can, that they agreed something different; see Loell & Christmas v. Wall, per Lord Cozens-Hardy M.R. and per Buckley L.J., but not that they intended something different.

[Emphasis added.]

In Carlson, Carlson and Hettrick v. Big Bud Tractor of Canada Ltd., (1981) 7 S.R. 337; 42 C.B.R. (N.S.) 163, the issue before the Court was whether or not the trial Court had correctly concluded that the respondent was entitled to the equitable remedy of rectification. Bayda, J.A. considered a number of authorities and at page 346 said:

A review of the cases on rectification confirms that the following extract from the Law of Contract by Professor P.H.L. Fridman, correctly stated the law respecting the requirements of rectification (page 624):

What must be shown by a party claiming rectification, either in a suit for such remedy, or by way of a defence to an action on a contract, is a mistake in putting down the parties’ intentions, and some earlier agreement which shows that there was such a mistake. These important qualifications for, or ingredients of a successful claim for rectification must be established, as noted earlier, by strong, clear, and convincing proof, .. . .

Do the facts of the present case disclose the existence of the three basic requirements, (i) mistake in putting down the parties’ intentions, (ii) some earlier agreement (concluded common intention) which shows that there was such a mistake, and (iii) strong, clear and convincing proof?

I reject the submission that the sale agreement does not accurately reduce into writing the agreement reached by the parties by their negotiations at that time. The genesis of the letter agreement was not the sudden discovery by the parties of an error in the sale agreement regarding the manner in which a term of their contract had been written. Rather it was the failure by the purchaser to carry out the terms of that agreement. There is absolutely no evidence before me to suggest that a mistake was made in the wording of the sale agreement.

I do not regard the evidence and in particular the statement of agreed facts and the letter agreement as providing adequate proof that prior to the execution of the sale agreement of December 11, 1979 the parties had agreed that the fair market value of the property was $47,500,000 rather than the amount stated therein. The subsequent acknowledgement that the sale price "did not reflect the fair market value" does not establish that error existed nor does the backdating of the promissory note to December 11, 1979, an action which probably owes more to the provisions of the Income Tax Act as they stood at that time than to any other reason. It is a fact as well that the valuation referred to in the statement of agreed facts was not written until April 1980.

On December 11,1979 the property was sold to a number of purchasers, of whom this appellant was one, for the sum of $35,000,000. This contract was fully performed by the purchasers and vendor. This appellant received the property in exchange for the original promissory note. The fact that it owed money to the vendor pursuant thereto does not alter the fact that the terms and conditions of the sale agreement had been carried out. The original promissory note itself, once granted, constitutes a contract distinct from the sale agreement and in fact it was pursuant to this promissory note that the vendor Carter on February 29, 1980 demanded payment of the principal and accrued interest.

There is simply no evidence capable of supporting the appellant's case. As previously indicated the onus is on the appellant to present proof by incontrovertible evidence with regard to the alleged concluded agreement between the parties with respect to fair market value and of the subsequent mistake in not incorporating that term into the sale agreement. The evidence adduced in support of the existence of the basic requirements of rectification is tenuous to say the least and in my view fails to meet the onus.

In the alternative counsel for the appellant submits that if the Court were to find that the increase of $1,250,000 between the first and second transactions was a payment to refinance the existing debt and for the forbearance of Carter from pursuing the legal remedies available to it to enforce payment of the first promissory note, it was nonetheless a cost to the appellant of a Canadian resource property as that term is defined in subparagraph 66.2(5)(a)(iii) of the Act. The relevant part of this subparagraph reads:

66.2(5) In this section and sections 66 and 66.1,

(a) “Canadian development expense" of a taxpayer means any outlay or expense made or incurred after May 6, 1974 that is

(iii) notwithstanding paragraph 18(1)(m), the cost to him of any Canadian resource property . . . but not including any payment made to any of the persons referred to in any of subparagraphs 18(1)(m)(i) to (iii) for the preservation of a taxpayer's rights in respect of a Canadian resource property or a property that would have been a Canadian resource property if it had been acquired by the taxpayer after 1971, . . .

Counsel for the appellant contends that pursuant to the provisions of this subparagraph the cost of a Canadian resource property includes not only the cost of acquisition but also includes "amounts paid to persons other than the Crown or those referred to in subsections 18(1)(m)(i), (ii) and (iii), to preserve the Canadian resource property". He said:

. . . In other words, if I am preserving the property and I make a payment, then that is caught by that section, and in my submission, we have an Agreed Statement of Facts here that the sole asset, the sole asset of St. Ives was this interest they acquired from Carter.

and added that if this Court concluded that the 1.25 million dollars was in fact a refinancing charge or for the forbearance of Carter from pursuing its legal remedies then the payment made by the appellant was made to preserve that property. Counsel argued that the definition of "preservation" found in Black’s Law Dictionary supports this contention; it reads:

Preservation: Keeping safe from harm; avoiding injury, destruction or decay; maintenance. It is not a creation but the saving of that which already exists, and implies the continuance of what previously existed.

With respect to the appellant's position regarding subparagraph 66.2(5)(a)(iii) of the Act counsel for the respondent submitted that it would be improper to draw the inference from the wording of this section that a preservation cost of the type suggested by counsel for the appellant is allowable as a cost of acquiring the property. The position of the respondent is that the additional $1,250,000 that was paid was an outlay by the appellant which is properly characterized as consideration for the financing of the purchase and cannot be characterized as the cost of acquisition of property. In this context counsel cited The Queen v. Geoffrey Stirling, [1985] 1 C.T.C. 275 ; 85 D.T.C. 5199 (FCA).

I do not accept the position advanced by counsel for the appellant. As noted in the text E.A. Driedger, Construction of Statutes, 2nd ed. 1983 at page 18:

Definition provisions appear in varying forms. One encounters definitions where a word or phrase is stated: (1) to mean something, (2) to include something, (3) to mean something and to include another thing, or (4) to mean and include something.

The standard guide for draftsmen is that means restricts and includes enlarges.

the author went on to say at page 20:

It seems to be generally accepted now that means is restrictive and includes is enlarging.

A definition that a word or expression means one thing and then goes on to say that it includes something else is in reality a double definition; it is commonly found, and is not subject to the objection to means and includes, since the restriction and enlargement are separate and not fused. The definition to start is restrictive, but then, to remove doubt, an inclusive element is added. Sometimes the added definition is negative—but does not include.

At page 22 he noted the following statement by Sachs, J. in Commissioners of Customs and Excise v. Savoy Hotel Ltd., [1966] 1 W.L.R. 948:

“Including” is a word to which parliamentary draftsmen seem considerably addicted: one reason for this may be that in law it can have, according to its context, not only one or other of simple but in essence quite differing effects (for instance, in relation to the words that follow it may be found to have been used simply to enlarge, to limit, to define exhaustively or for the avoidance of doubts to repeat the preceding word or phrase), but it may also be used to secure on one and the same occasion more than one of those effects, thus putting the draftsman, but not necessarily the court, in a happy position.

These comments apply equally to the phrase "but does not include" in issue in this appeal.

The provision before me, subsection 66.2(5), commences with the following words:

Canadian development expense of a taxpayer means any outlay or expense . . . (emphasis added).

This provision is restrictive and the negative definition "but not including” further adds to the restriction. It was unquestionably the intention of the legislators to remove any doubt that the particular form of payment described in subparagraph 18(1)(m)(i.2)(iii) of the Act could not in any circumstances be considered as a Canadian development expense for the purposes of subsection 66.2(5) of the Act.

No other construction of this subsection is possible.

Accordingly the appeals are dismissed.

Appeals dismissed.