May Bros. Farm Ltd. v. The Queen, 92 DTC 6342, [1992] 1 CTC 358 (FCA)

Hugessen, J.A. (Pratte and Décary, JJ.A., concurring):—This case was pleaded both here and in first instance as though its resolution turned upon an arcane aspect of the law of real property, namely the ancient common law doctrine of merger. In my view, as matters turn out, the case in fact depends upon the construction of some relatively straightforward late twentieth century documents.

The appellant (plaintiff in the Trial Division) is in the business of cranberry farming. It became interested in acquiring some land in Richmond, B.C. which was presumably suitable for its operations. The land was owned by a company called Wingly Enterprises Ltd. who had leased it with greater extent to a company called Bell Farms Ltd. The term of that lease expired December 31, 1983. The plaintiff approached Bell with a view to obtaining a sub-lease of the land. Bell was willing but Wingly, the head lessor, withheld the necessary consent under the head lease. In June 1980, the plaintiff and Bell contrived a method of allowing the plaintiff to farm the land which would not require Wingly's consent. They entered into two agreements both dated June 27, 1980.

The first of these agreements, sometimes in the materials called the "farming rights agreement” and sometimes the "management agreement", provided that the plaintiff was to have the right to farm the land and for that purpose to enter thereon with machinery and equipment and to do all that was necessary for a complete cranberry farming operation. The agreement specified that Bell was to remain in legal possession of the land but was not to interfere with the plaintiff. The agreement also specified that Bell was to have the right to certain "prunings" which would result from the plaintiff's operations. The price for the agreement was $1,000,000 paid by the plaintiff to Bell and the agreement was to endure for the balance of the term of the lease from Wingly to Bell, i.e., to December 31, 1983.

The second agreement, called the option rights agreement, provided for Bell to execute and deliver to the plaintiff an option to purchase Bell's interest in the lease from Wingly to Bell. The remaining terms of this agreement have little bearing on the present litigation although it is interesting to note that clause 7 provides that Bell's rights in the “ prunings” shall expire December 31, 1982 (i.e., one year prior to the termination of the lease and of the management agreement) and clause 9.00 provides that, in the event of inconsistency between the management agreement and the option rights agreement, the latter shall prevail.

It is common ground between the parties that the management agreement created an interest in land in the plaintiff (a "profit à prendre"). As for the option rights agreement, it was given effect to by the execution of an option from Bell to the plaintiff. The operative part of that option reads as follows:

By a lease dated the 13th day of December, 1977, registered in the New Westminster Land Title Office on the 21st day of February, 1979 under number RD87899, a copy of which is annexed hereto, and marked Schedule "A" ("the Lease") Wingly Enterprises Ltd. leased the Lands to Bell on the terms and conditions set out therein.

(Appeal Book, Appendix I, page 34)

The option was registered in the New Westminster Land Title Office under number RD120430A.

As indicated, these agreements between plaintiff and Bell were entered into in June 1980. Although there is no evidence on the point, it seems that plaintiff continued to attempt to deal with Wingly, the owners of the land and that those attempts bore fruit. At any event, on October 14, 1980, Wingly executed a deed by which it transferred to plaintiff the fee simple in the land. Such transfer was specifically stated to be "Subject to Lease and Option to Purchase Lease under New Westminster Land Title Office Nos. RD87899 and RD120430A respectively" (Appeal Book, Appendix I, page 45). Those references are to the registrations respectively of the lease from Wingly to Bell and of the option from Bell to plaintiff.

How does all of the foregoing give rise to income tax litigation and the invocation of the common law doctrine of merger? The trial judge puts the matter with her customary clarity and concision:

The plaintiff and the defendant agree that the plaintiff's rights under the Farming Rights Agreement fall within Class 14 of Schedule Il of the Income Tax Act. Class 14 property, at the relevant time, was described as:

Property that is a patent, franchise, concession or licence for a limited period in respect of property, except

(a) a franchise, concession or licence in respect of minerals, petroleum, natural gas, other related hydrocarbons or timber and property relating thereto (except a franchise for distributing gas to consumers or a licence to export gas from Canada or from a province) or in respect of a right to explore for, drill for, take or remove minerals, petroleum, natural gas, other related hydrocarbons or timber;

(b) a leasehold interest; or

(c) a property that is included in Class 23

The plaintiff argues that upon acquiring the fee simple from Wingly its rights under the Farming Rights Agreement were merged with the fee simple and, therefore, after that date the plaintiff no longer owned any Class 14 property. It is argued that, as a result, subsection 20(16) of the ITA triggers a terminal loss for the plaintiff's 1981 taxation year. At the relevant time, subsection 20(16) read:

(16) Notwithstanding paragraphs 18(1)(a), (b) and (h) where at the end of a taxation year,

(a) the aggregate of all amounts determined under subparagraphs 13(21)(f)(i) to (ii.1) in respect of depreciable property of a particular prescribed class of a taxpayer exceeds the aggregate of all amounts determined under subparagraphs 13(21)(f)(iii) to (vii) in respect of depreciable property of that class of the taxpayer, and

(b) the taxpayer no longer owns any property of that class, in computing that taxpayer's income for the year,

(c) there shall be deducted the amount of the excess determined under paragraph (a), and

(d) no amount shall be deducted for the year under paragraph 1(a) in respect of property of that class,

and the amount of the excess determined under paragraph (a) shall be deemed to have been deducted under paragraph (1)(a) in computing the taxpayer's income for the year from a business or property.

[Emphasis added by Reed, J.]

The plaintiff claims that the $1,000,000 paid for the Farming Rights Agreement should be allocated so that, for the purposes of its 1980 and 1981 taxation year, deductions of $3,117.70 and $996,882.30 respectively are allowed.

The defendant's position is that no merger occurred and that the $1,000,000 which was paid for the Farming Rights Agreement should be allocated over the life of that agreement, pursuant to paragraph 20(1)(a), Regulation 1100, and Class 14 of Schedule II of the Income Tax Act. The defendant's allocation of the $1,000,000 is as follows:

1980	$	2,341
1981		284,711
1982		284,711
1983		284,711
1984		143,526
	$1,000,000

There is no dispute concerning the respective calculations. The only dispute is whether the purchase of the fee simple, in October of 1980, resulted in a merger.

[Appeal Book pages 82-83]

Both in the Trial Division and in argument before us, the matter proceeded as though it turned upon the application of the doctrine of merger; reliance was placed on ancient authority to support the view that when a greater and a lesser estate are combined in one person the latter is merged in the former by sole operation of law and without regard to the intention of the parties.

Since none of the panel hearing the appeal had a working familiarity with the law of real property as it applies in British Columbia, we reserved the matter on the basis on which it had been pleaded. Shortly thereafter, however, we became aware of the terms of section 13 of the Law and Equity Act (R.S.B.C., [1979] c. 224) of British Columbia. That section reads:

13. There shall not be any merger by operation of law only of any estate the beneficial interest in which would not be deemed to be merged or extinguished in equity.

Accordingly, we required further written representations from the parties, as to the relevance of section 13 and its impact upon the decision we have to render. Those representations have now been received.

Clearly, the effect of section 13 is to abolish the common law doctrine of merger in British Columbia. Merger is only to take place when equity requires it. Merger in equity does not take place by sole operation of law. Indeed, there is even authority that merger is''odious" to equity (Flanagan v. Babineau, 125 N.E. 2d 231). In equity, merger is dependent upon intention. The rule is well and concisely stated by Megarry:

At common law, if a rentcharge became vested in the same person as the land upon which it was charged, the rentcharge became extinguished by merger, even if this was not the intention. For this to occur, both the rent and the land must have been vested in the same person at the same time and in the same right. This automatic rule of the common law no longer applies for, by the Law of Property Act 1925, [1] there is to be no merger at law except in cases where there would have been a merger in equity, and the equitable rule is that merger depends upon the intention of the parties. Even if an intention that there should be no merger cannot be shown, there will be a presumption against merger if it is to the interest of the person concerned to prevent it. (Megarry's Manual of the Law of Real Property, 6th ed. by David J. Hayton (Stevens & Sons Ltd., 1982).)

The burden of proving that merger took place here lay on plaintiff. There was no direct evidence of intention (assuming that such evidence would be useful) so we are driven back to determining the parties' intention from the language used in the deeds. That language, in my view, indicates that in October 1980, at the time of the acquisition by plaintiff of the fee simple, the intention was that both the lease, and the management agreement which depended upon it, should survive the transfer. I can give no other interpretation to the provision quoted above from the deed of transfer itself. Such transfer is made subject not only to the lease but also to the option by which the transferee of the fee simple was entitled to acquire the lessee's interest in the lease.

The effect of this, as I see it, is that plaintiff had acquired rights in the land from Bell under both the management agreement and the option; those rights were dependant on and subject to the lease from Wingly to Bell. Plaintiff then acquired the fee simple from Wingly, expressly subject to both the lease, under which it held a license, and the option, which was in its favour. Accordingly, both of these rights survived the acquisition of the fee simple and there was a clear intention that they not be merged. There is no evidence that plaintiff ever exercised its option (which might have given rise to merger), but since both the lease and the option survived the transfer, it seems to me that the management agreement, which was subordinate to the option and dependent on the lease, must likewise have been intended to survive it.

Even absent any indication of the parties' intention, it would be my view that no extinguishment of the plaintiff's interest in the land under the management agreement took place upon the acquisition of the fee simple. Where there is no evidence of intention equity looks to the interest of the person concerned, in this case the plaintiff. For so long as the lease, whose existence was expressly preserved by the deed of transfer, continued to be held by Bell, plaintiff's only right to immediate entry on the land arose under the management agreement. As owner of the fee simple plaintiff had no right to enter the land as against Bell the lessee who was in possession. Since entry on and use of the land was what plaintiff wanted, and had paid $1,000,000 to obtain under the management agreement, it was manifestly to plaintiff's advantage that the interest in land created in its favour by the latter should continue in full force and effect for the balance of its term. That plaintiff should now assert, long after the lease has run its course, that it is in its interest that the management agreement should be extinguished by merger is of course nothing to the point.

I would dismiss the appeal. Since I consider that counsel for both parties have failed in their duty to the Court (and indeed have led the judge of the Trial Division into deciding this case on a wrong basis, albeit with the right result), I would award no costs on the appeal.

Appeal dismissed.