Supreme Court of Canada
New Brunswick & Canada Railboard Co. v. New Brunswick Ry. Co., [1924] S.C.R. 450
Date: 1924-06-06
New Brunswick and Canada Railroad Company (Plaintiff). Appellant;
and
New Brunswick Railway Company (Defendant) Respondent.
1924: May 19, 20; 1924: June 6.
Present: Idington, Duff, Anglin, Mignault and Malouin JJ.
ON APPEAL FROM THE CHANCERY DIVISION OF THE SUPREME COURT OF NEW BRUNSWICK
Lease—Demise of railway—Covenant by lessee—Construction—Payment of taxes.
In 1882 The N.B. and Can. Rd. Co. leased its railway to The N.B. Ry. Co. for 999 years and the lessee covenanted, inter alia, to pay "all taxes that may be lawfully assessed upon the (lessor) and upon the real and personal estate taken under this lease" and a rental of $35,000 per annum.
Held, affirming the judgment appealed from (50 N.B. Rep. 376), Idington J. diss., that the covenant as to taxes only applied to those imposed in respect of the property demised and did not oblige the lessee to pay taxes imposed on the lessor under the Dominion Income War Tax Act, 1917, and amendments.
APPEAL by consent from the judgment of the Chancery Division of the Supreme Court of New Brunswick in favour of the defendant company.
[Page 451]
The question for decision on this appeal is one of construction of the covenant set out in the head-note contained in a lease by appellant to respondent of the former's railway. The appellant contends that such covenant obliged respondent to pay the income tax imposed on appellant under the Dominion Income War Tax Act, 1917, and Amending Acts. The Supreme Court of New Brunswick, on a reference from the Chancery Division, held against this contention.
Baxter K.C. for the appellant. The grammatical construction of the covenant, whether or not you read "and" as "or" and the terms of the whole lease show that the parties intended the whole rent to come to the lessor without diminution so that the entire sum could be distributed among its shareholders.
In construing written instruments the grammatical and ordinary sense of the words is to be adhered to unless it would lead to absurdity or some repugnancy or inconsistency with the rest of the instrument. Maxwell on Statutes (5 ed.), page 4. No such result would follow in this case.
The view taken in Hurst v. Hurst is in accord with the appellant's contention; and see Arran v. Crisp; Amfield v. White; Palmer v. Earith.
Tilley K.C. and Fred. R. Taylor K.C. for the respondent: A covenant to pay all taxes only applies to future taxation of the kind in existence when the covenant was made. See Woodfall Landlord and Tenant (20 ed.), page 675. Foa Landlord and Tenant (5 ed.), page 184. Shrewsbury v. Shrewsbury.
The spirit of the Income Tax Act is that the person who receives the income shall pay the tax and that it shall not be passed on to any one else. Nova Scotia Steel and Coal Co. v. Minister of Finance of Newfoundland; North British Ry. Co. v. Scott.
Baxter K.C. for the appellant.
Tilley K.C. and Fred. R. Taylor K.C. for the respondent.
Idington J.—The appellant, being what its name implies, became the owner of certain railroad properties acquired by virtue of its powers given it by the New Brunswick
[Page 452]
Legislature incorporating it, or later legislation authorizing it to so acquire, and on the 22nd of August, demised same for the term of 999 years to the respondent, a corporation created by virtue of the laws of New Brunswick and of the Dominion of Canada, and the indenture containing said demise is somewhat lengthy.
Though it thereby bound itself to pay all taxes lawfully assessed upon the lessor, the lessee disputes its liability to repay the taxes imposed upon the appellant by virtue of the Dominion Income War Tax Act, 1917.
The whole question of such liability, which is all that is involved herein, must turn upon the interpretation and construction of the third paragraph of said agreement, of which the herein directly pertinent point reads as follows:—
Article III
The party of the second part, for itself, its successors and assigns, hereby accepts said lease and agrees to take, manage and operate all of the railroads and branches, hereby demised, substantially in the present line, during the term of this lease, at its own expense and for its own benefit, in accordance with the charter of the party of the first part and any amendments thereto and will hold the party of the first part harmless against and from all loss and damage by reason of any act or thing done or omitted to be done or negligence on the part of the party of the second part, its successors or assigns, in the operation, maintenance or use of said railroads and branches and will keep and maintain said railroads, its fences, rolling stock, equipments, depots and other leased property and all renewals and additions thereto in good condition and repair and will make good all loss or damage to any of the leased property, and substantially restore, at the termination of this lease, the same and all parts thereof to the party of the first part, its successors or assigns, in good order and condition, fulfil all duties relating to the maintenance, use or management of the property leased, which may be imposed by law, pay all taxes that may be lawfully assessed upon the party of the first part, and upon the real and personal estate taken under this lease, including all lawful expenses and charges of Railroad Commissioners and such like expenses and pay the interest and rental indebtedness of said party of the first part, as follows:—
That is followed by seven distinctly specified liabilities then borne by the appellant, and thereafter to be assumed by the respondent.
And those by the following:—
And the party of the second part for itself, its successors and assigns, further agrees to pay, for each and every year during the continuance of this lease, to the said party of the first part, its successors and assigns, by way of further rental, the annual sum of thirty-five thousand dollars ($35,000).
[Page 453]
And for the expense of keeping up the corporate organization of the said party, the further sum of one hundred dollars ($100) annually, all of the aforesaid interest and rental charges being payable, one-half on the first of January, and one-half on the first of July, in each and every year.
The court below held that the said income tax for which appellant was assessed under and by virtue of said Income Tax Act for the years 1917 to 1921 inclusive, did not fall within the meaning of said covenant above quoted.
I submit that having due regard to the entire purview of the said agreement, which evidently was designed to give the appellant an annual annuity of $35,000, clear of all expenses, during the currency of the lease, save and except the expense of maintaining its corporate existence during that period, to cover which there was to be paid the further annual sum of $100 each year, it clearly was the intention of the parties that all such taxes as were lawfully assessed by any duly constituted authority upon the appellant, should be paid by the respondent.
The tax seems to have been lawfully assessed for that is not denied.
The tax is not imposed upon the shareholders of the appellant but upon the corporation making this lease upon the assurance that the lessee would pay it.
It may indeed turn out that the respective shareholders getting parts of said rental may have to meet income taxes in their respective home jurisdictions.
It seems to me that it is quite beside the question to argue that Dominion income taxes had not been sought prior to the making of this lease. The power to do so existed. Indeed the first sentence of the indenture indicates that the respondent had owed some of its corporate powers, enabling it to enter into such a contract at all, to the Dominion laws.
And it seems to me that it clearly must have been within the contemplation of the parties that if the Dominion should impose any burden on this railway property the respondent must be prepared to meet it.
The period for which the lease was to run is far beyond what has to be considered in many leases for short periods of time.
We must therefore extend our range of vision and not take a narrow view of what the parties must have intended.
[Page 454]
The language used seems to me clear and express and wide enough to cover what appellant claims.
I may observe that our Dominion was only a few days over fifteen years in existence when this agreement was entered into.
I am of the opinion that this appeal should be allowed with costs here and below and the amounts assessed, with interest from the respective dates when due (but not to includes the penalties incurred by appellant for non-payment), should be directed to be paid by respondent to appellant.
Duff J.—The clause which has given rise to this litigation, read literally, makes the appellant responsible for taxes assessed upon the real and personal estate passing under the lease, which are also properly assessed against the appellant. The clause, that is to say, gives a right of indemnity in relation to taxes for which the appellant is personally liable with respect to the property passing under the lease. I think this construction should be given effect to, because I think it best harmonizes with the context which appears to exhibit an intention to create a right of indemnity in respect of obligations arising by virtue of the lessor's proprietorship of the reversion in the properties demised.
The tax in question is not a tax levied upon the appellant company as proprietor of the reversion or even as a railway company; that is to say, as a corporation having authority to construct and work railways. It is simply an income tax and is payable by the appellant in respect of its income from whatever source it may be derived, on precisely the same conditions as those upon which it is exigible from other income earners. It is therefore, in my opinion, not a tax of the class envisaged by the clause.
I express no opinion upon the question, which does not arise, whether a tax levied upon the company, in respect of its rent under the lease, would fall within the scope of the indemnity.
Nor do I express an opinion upon the other point upon which counsel for the respondent company relies, namely, that the indemnity is limited in its application to taxes of a character similar to those which, up to the time of the
[Page 455]
execution of the lease, had been known to be public finance of New Brunswick.
The appeal should be dismissed with costs.
Anglin J.—The circumstances under which the question at issue between the parties has arisen and the terms of the document upon the construction of which its solution depends are set out in the judgment of the Supreme Court of New Brunswick, delivered by Mr. Justice White.
Neither in a grammatical reading of the covenant relied upon, which is found towards the end of the first paragraph of Article III of the lease or agreement between the appellant and the respondent, nor in the tenor of that instrument taken as a whole, do I find any expression or indication of an intention on the part of the lessee to assume the burden of income tax imposed on the lessor in respect of rental to be derived by it from the leased properties. The obligation of the lessee in regard to the rental of $35,000 per annum is to pay that rental to the lessor without deduction. That obligation has been fulfilled. It has also undertaken to satisfy all charges in the nature of taxation levied upon the demised property itself, and possibly, in addition, such as may be imposed upon the lessor qua owner of the property. Beyond that it is, I think, quite impossible to extend the obligation in regard to taxes assumed by the lessee. It has not undertaken, and there is nothing to indicate that it was ever contemplated that it should undertake, to pay any taxes which might be levied upon the $35,000 rental after its receipt by the lessor, or which might be imposed upon the lessor itself by reason, or as a consequence, of such receipt. It is against payment of such taxes that the lessor now seeks indemnification. The covenant relied upon, in my opinion, is not open to a construction which would support that claim.
The appeal therefore fails.
Mignault J.—By a lease dated the 22nd of August, 1882, the appellant company demised its line of railway, stations, rolling stock, etc., to the respondent for the period of 999 years from the 1st of July, 1882. The rental was
[Page 456]
fixed at $35,000 a year, and among other charges the respondent undertook to pay to the appellant $100 annually for the expense of keeping up its corporate organization and also agreed that it would
pay all taxes that may be lawfully assessed upon the party of the first part (the appellant), and upon the real and personal estate taken under this lease.
Under the Federal Income War Tax Act, 1917, and amending Acts, the appellant was called upon to pay to the Receiver General of Canada various sums as an income tax imposed on its income comprising the rental it received from the respondent under the lease, and it claims these sums from the respondent, contending that the latter assumed the obligation to pay such a tax by the covenant I have cited. This contention was rejected by the Appeal Division of the Supreme Court of New Brunswick.
The only question therefore involved in this appeal is one of construction. Assuming that the two members of the phrase I have quoted, and which are separated by a comma, should be read disjunctively, it would be altogether unreasonable to contend that the respondent assumed the obligation to pay any tax that might be lawfully assessed upon the appellant, irrespective of its nature or of the cause of its imposition. Mr. Baxter was asked whether the respondent would be liable for a tax imposed on property purchased by the appellant with the rental it received from the respondent, and refrained from so arguing. It is obvious that the first part of the phrase is subject to some limitation, and when read with the second part its reasonable meaning, and that no doubt which was intended by the parties, is that the respondent assumed liability for taxes imposed upon the appellant in respect of the property demised by the lease. In other words if, after the respondent has acquitted its obligation to pay the annual rental to the appellant, this rental is taxed in the appellant's hands as property belonging to it the respondent is not bound to pay the tax. Whether the appellant retains the rental in money or invests it in the purchase of property, any tax imposed upon the rental or its investment, as property belonging to the appellant, is a tax which the appellant alone must bear.
I would dismiss the appeal with costs.
[Page 457]
Malouin J.—I agree with Mr. Justice Anglin and Mr. Justice Mignault. I would dismiss this appeal with costs for the reasons stated by them.
Appeal dismissed with costs.
Solicitor for the appellant: N. Marks Mills.
Solicitor for the respondent: Fred. R. Taylor.
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