141224 Canada Ltd. v. Her Majesty the Queen, [1995] 1 CTC 2947, [1995] DTC 385

Lamarre Proulx J.T.C.C.:—This appeal concerns this appellant’s 1986 and 1987 taxation years.

The question at issue is to determine the time at which the amounts paid or receivable are to be included in computing the appellant’s income

A. in execution of agreements of purchase and sale from plans of condominium units,

B. in execution of condominium occupancy agreements, and

C. in execution of sales of condominium units.

The statutory provisions that the respondent relied on are sections 3 and 9, paragraphs 12(l)(b), 13(21)(c) and (d), 54(c) and 54(h), subsection 152(4.1) and section 248 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The appellant relied on section 9 of the Act.

During the 1986 and 1987 taxation years, the appellant operated a firm that built and sold condominium units. In these years, 22 condominium units were built and sold. Each unit was covered by an agreement of purchase and sale, an occupancy agreement and a notarized deed of sale. The appellant’s fiscal year begins on October 1, and ends on September 30 of the following calendar year.

The appellant included income from sales in computing her income for the taxation year during which the sales were affected, i.e., when the contract was signed before the notary. Each of the 22 contracts was signed after October 1, 1986.

In the reply to the notice of appeal, the Minister of National Revenue (the "Minister") considered that the appellant’s gains were realized not when the sale agreement was signed before the notary, but either when the purchasers signed an interim agreement and took possession of their condominium unit or when the declaration of co- ownership was registered, because on these dates the sale price would or could have been due.

The evidence in fact revealed that nearly all the occupancy agreements for the condominium units were signed before October 1, 1986. In fact, of the 22 condominium units sold, 19 involved the signing of an interim occupancy agreement.

The dates on which the declarations of co-ownership were registered were provided by the respondent at the request of the Court, after the hearing, because the documents adduced at the hearing did not report these dates, except for one declaration of ownership, bearing registration number 3779508 and dated October 10, 1986. The information supplied by counsel for the respondent and corroborated by counsel for the appellant is that declaration number 3777626 was registered on October 1, 1986, declaration number 3775344 on September 25, 1986, declaration number 3640894 on October 10, 1985, declaration number 3688173 on February 28, 1986 and declaration number 3686782 on February 26, 1986. Thus two declarations of co- ownership out of six were registered in the 1987 taxation year.

If we return to the facts in chronological order, the offers to purchase the units were all completed on the standard form of the Association provinciale des constructeurs d’habitation du Québec Inc. [Translator’s note: unofficially known as the Provincial Home Builders Association of Quebec Inc.] and were signed between October 1985 and June 1986.

As an example, let us examine the offer to purchase for S. Frenette, Exhibit A-1, tab 86, pages 26-30. The offer was made on October 19, 1985 and accepted on October 21, 1985. The expected occupancy date was July 1, 1986. The total price of the unit was $65,000. The terms were the following: deposit accompanying the offer: $1,000, deposit upon acceptance of the offer: $4,000, deposit upon assuming first mortgage: $48,750, cash upon execution of the notarized deed of sale: $11,250.

In the part of the offer entitled "obligations of the vendor", the following clauses are included:

Declaration 1.1

The vendor agrees to proceed to have a declaration of co-ownership registered against the building containing the residence unit being the subject hereof pursuant to section 441(B) and the following sections of the Civil Code.

Valid Title

The residential units shall be sold to the purchaser free and clear of all liens, mortgages and other encumbrances, save and except for the mortgage assumed by the purchaser, the co-ownership registration against the building....

Delivery 1.7

The delivery of the residential unit by the vendor will occur on the date fixed for occupancy by the purchaser, provided that the deed of sale be previously executed.

Under the heading of general clauses in the offer, article 3.2, is worded as follows:

General Clauses

3.2 If the declaration has not been registered on the date fixed for occupancy by the purchaser and consequently the deed of sale may not be executed, the purchaser thereupon agrees to sign an interim occupancy agreement prepared by the vendor, and in such case, the purchaser shall pay the vendor the balance due on the purchase price upon execution of the deed of sale, which said amount the vendor shall hold in trust in a special account. Moreover, the purchaser shall pay the vendor, according to the interim occupancy agreement, a monthly occupancy fee representing the total of the following amounts:

(i) the share of monthly charges regarding the common expenses pertaining to the condominium for which the purchaser should be responsible pursuant to the declaration; and

(ii) the proportion of real estate taxes imposed upon the building attributable to the residential unit; and

(iii) if applicable, the amount of interest the vendor would have obtained, monthly, on the investment of the balance of purchase price at a rate equal to the rate set forth in this offer, if the deed of sale had been executed at the date fixed for occupancy by the purchaser.

Registration

3.3 As soon as the declaration is registered against a property, the interim occupancy agreement shall be replaced by a formal deed of sale before a notary.

Vendor’s Default

3.14 Subject to the provisions of sections 1.8, 3.2, 3.5 and 3.10, if the vendor fails to execute any of his obligations herein and fails to correct such default within seven consecutive days of his being advised, the purchaser may declare this agreement terminated and the vendor shall reimburse the purchaser for deposit moneys paid, without prejudice to any other recourse.

In connection with clause 3.2 of the offer to purchase, we note that the balance owing on the purchase price and to be paid upon signing of the interim agreement was to be held in trust.

We further note in connection with clause 3.14, that if the vendor fails to meet any of his obligations, he is required to reimburse the deposits paid.

All the interim agreements begin as follows: "Whereas the declaration of co-ownership has not yet been registered on the building in which the buyer has acquired a unit", [translation] when in fact the declaration of co-ownership had already been registered. The possibility of an intentional delay in executing the sales contracts was not raised by the Minister. The appellant nevertheless called as a witness a notary who was involved in the matter, who explained that the delays in executing the sales contracts were attributable to their general complexity and for no other reason. As this is not a point that was raised by the Minister, I do not want to make it a subject of discussion.

The interim agreement with S. Frenette (Exhibit A-l, tab 23) was signed on July 3, 1986. As this document is central to the issue, I reproduce much of it here.

The purchaser shall pay to the vendor, prior to occupying his unit, the amount of $11,250, representing the full amount owing on the purchase price and due upon execution of the deed of sale.

The purchaser shall also pay to the vendor, beginning on the date of occupancy and until registration of the declaration on co- ownership on the building:

(a) The amount of $40.80 per month, representing his share of monthly charges regarding the common expenses; these amounts are payable on the first of each month by postdated cheque and in advance for the first month of occupancy;

(b) The proportion of taxes assessed upon the building attributable to the buyer for his residential unit; this amount shall be payable on the date that the deed of sale is executed;

(c) A monthly amount of $406.25 payable on the first of each month and in advance for the first month of occupancy, representing 10 per cent per month on the balance of the sale price, i.e., the interest on the amount equal to the mortgage that the purchaser obtains and any remaining balance on the sale price assumed by the vendor. The mortgage is $48,750.

Notwithstanding the fact that the purchaser will be occupying the premises, it is agreed that he will only hold title when a valid deed of sale is signed in compliance with the terms and conditions of the offer to purchase agreed to as mentioned above.

The purchaser recognizes that the vendor will do everything in his power to make it possible for the purchaser to occupy the premises comfortably, but it is expressly agreed that the vendor shall not be responsible for any damages or costs of any kind stemming from any inconvenience that the purchaser may experience by taking occupancy of the premises.

The purchaser agrees to comply with all regulations and rules established by the vendor with respect to the occupancy of the above-mentioned unit for the full occupancy period.

The purchaser agrees to keep the unit in good repair at his own expense.

This agreement shall be executed without substitution or derogation of all vendor and purchaser rights as established in the offer to purchase, which was accepted as mentioned above, and all terms, clauses and conditions of the said offer to purchase shall remain in force and have full force and effect between the parties. The purchaser also shall state that he has familiarized himself with the premises and is satisfied, except as regards any apparent defects mentioned in the schedule.

[Emphasis added; translation.]

A reading of the interim agreement shows that the purchaser was to pay an amount of money indicated as the total amount owing on the purchase price to be paid upon execution of the deed of sale. These words created a degree of confusion. They appear to say that the amount of $11,250 represents the total amount owing on the purchase price including the mortgage payment, which is not the case. The $11,250 amount is the amount that was to be paid personally by the purchaser and does not include the amount loaned by the mortgagor. The mortgage amount is $48,750. This amount was only paid by the borrower when the deed of sale was signed as prescribed in the offer to purchase and in paragraph (c) of the interim agreement, above.

We note that the interim agreement does not stipulate that the $11,250 is to be held in trust as stated in the offer to purchase. We further note that the interim agreement clearly states that the purchaser does not own the premises.

The evidence did not reveal whether the amounts mentioned in paragraphs (a), (b) and (c) above, i.e., the amount of $40.80, the proportion of taxes and a monthly amount, are at issue or not in the instant case. If these amounts are part of the debate, I believe that it is clear that they ought to be included in the appellant’s income at the time they were received. They are definitely not part of the deposits payable on the sale price.

The deed of sale is dated October 23, 1986, (Exhibit A-l, tab 25). The price clause reads as follows:

Price

This sale is also agreed to for and upon the payment of $65,000 which the vendor acknowledges having received, partly on this day and partly prior to this day from the purchaser, in full and final settlement.

[Translation.]

In the deed of sale executed on October 23, 1986, the clause clearly states that the sale is made for the total amount that the vendor acknowledges having received in part on the day of the deed of sale and in part prior to the day of the deed of sale. It is on the day that the deed of sale is signed that the mortgage loan becomes effective and, only at that time, that the mortgage payment is due.

Appellant’s position

The appellant contended that the income at issue came from sales made during the 1987 taxation year and not the 1986 taxation year because the sale contracts were signed in that year.

Counsel for the appellant referred to Title Fifth of the Civil Code of Lower Canada, and in particular to section 1476 concerning the promise of sale, which states that a simple promise of sale is not equivalent to a sale. He referred to Thérèse Rousseau-Houle’s book Précis du droit de la vente et du louage, on page 37: "A bilateral promise assumes that each party has an active attitude in executing a definitive contract. It is a ‘preliminary contract’ whose purpose is solely to bind the parties in an agreement to cooperate later in executing the deed of sale." and on page 38: "If the parties agree to delay execution of the contract until a notarized deed is signed, there is an assumption that the parties do not intend to effect the sale immediately" [translation].

Counsel for the appellant referred to Olympia and York Development Ltd. v. The Queen, [1980] C.T.C. 265, 80 D.T.C. 6184 (F.C.T.D.) to submit that there was no sale of condominium units prior to the notarized duly signed contract because it was at the time of signing this contract that there was a transfer of real estate property.

The two lawyers referred to the decision of the Federal Court of Appeal, in West Kootenay Power and Light Co. v. Canada, [1992], 1 C.T.C. 15, 92 D.T.C. 6023, which had to rule on the meaning of the word "receivable" in connection with services rendered but still unbilled. This is not the subject matter here, but the decision is of interest because it examines the meaning of receivable revenues. This must be a legal and not a precarious right. I cite Judge MacGuigan at pages 24-25 (D.T.C. 6029-30):

The locus classicus for the concept of "receivable" is M.N.R. v. John Coif ord Contracting Co., [1960] C.T.C. 178, 60 D.T.C. 1131 (Ex. Ct), at pages 186-87 (D.T.C. 1134-35), where Kearney J. said:

As "amount receivable" or "receivable" is not defined in the Act, I think one should endeavour to find its ordinary meaning in the field in which it is employed.... In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it. A second meaning, as mentioned by Cameron J., is "to be received" and Eric L. Kohler, in a Dictionary for Accountants, 1957 edition, page 408, defines it as "collectible, whether or not due." These two definitions, I think, connote entitlement.

In M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12, [1967] C.T.C. 418, 67 D.T.C. 5275, Judson J. held for the Supreme Court of Canada that compensation following expropriation must be attributed to the year in which it was received (at pages 15-16 (C.T.C. 420-21; D.T.C. 5276-77)):

In my opinion, the Minister’s submission is sound. It is true that at the moment of expropriation the taxpayer acquired a right to receive compensation in place of the land but in the absence of a binding agreement between the parties or of a judgment fixing the compensation, the owner had no more than a right to claim compensation and there is nothing which can be taken into account as an amount receivable due to the expropriation.

[Emphasis added.]

Not only must there be entitlement to an amount, but also an enforceable contract stipulating the amount, under which the amount is paid.

In M.N.R. v. Colford Contracting Co., [1960] C.T.C. 178, 60 D.T.C. 1131 (Ex. Ct.), upheld by the Supreme Court of Canada without written reasons, Kearney J. concluded that the amounts held by the owner on the amount owing for the construction costs would not be the amounts receivable by the builder when there was a prior and essential condition of entitlement to receive these. In the instant case, the prior and essential condition is the transfer of title. In respect of the payments made as work

progressed, these should have been included in computing the income of the construction company.

Counsel for the appellant also referred to a Supreme Court decision, M.N.R. v. Atlantic Engine Rebuilders Ltd., [1967] S.C.R. 477, [1967] C.T.C. 230, 67 D.T.C. 5155, in which the Supreme Court of Canada decided that deposits ought not to be included in computing the income of a taxpayer for as long as they retained the status of deposits, even if they were not deposited in trust and, more specifically on page 480 (C.T.C. 231 (D.T.C. 5156)):

The circumstances that the respondent became the legal owner of the moneys deposited with it and that they did constitute a trust fund in its hands appears to me to be irrelevant;

...as each deposit was received by the association and became a part of its assets there arose a corresponding contingent liability equal in amount.

Respondent" s position

Counsel for the respondent argued that the appellant’s gain was made when the interim agreement was signed because, according to him, from this time on, the sale price was collectible, with the parties entitled to take action to have the deed executed, and the promissor-purchasers acting as true owners as regards their respective condominium units. Here is how this final aspect is described in paragraph 6h) of the reply to the notice of appeal:

(h) Moreover, during the period between October 1, 1985 and September 30, 1986, the various purchasers began to occupy their respective units, and from this point on, these purchasers in fact assumed all the risks and obligations normally vested in an owner, notwithstanding the fact that the transfer of title in the property was delayed until the notarized signing of the contract;

[Translation.]

Counsel for the respondent wrote the following in his notes on the applicability of the decision of the Federal Court of Appeal in The Queen v. Imperial General Properties Ltd., [1985] 1 C.T.C. 40, 85 D.T.C. 5045, which considers that in a sale of real estate property, the vendor includes the amount of deposits received when they have lost their character as deposits, or in other terms, that they are no longer precarious rights but legal rights. I cite counsel for the respondent:

The respondent’s position is not to contend that a deposit should be taxable in a year other than the year in which the balance is receivable, but the question remains whether the amount received is acquired by the recipient legally rather than precariously.

In the instant case, the Minister of National Revenue considers both from the business and legal standpoints that contractual relations between the vendor and the purchaser were definitely concluded in the interim agreement. The only deposit in the instant case was the amount paid at the time of the agreement to purchase, but this amount lost its status as a deposit when the interim agreement was signed. As for the additional amount paid when the interim agreement was signed, it was never a deposit but a partial payment of the sale price collectible by the vendor, and which the purchaser had to pay because he was contractually obliged to sign the interim agreement.

In addition, from the moment the purchaser took possession of his condominium unit, the sale price became legally payable, and hence the vendor had a receivable. In other words, the vendor then had legal entitlement to payment of the sale price, subject to payment terms, 1.e., until the signing of the final contract. Moreover, is it not reasonably clear that if a purchaser were to refuse to sign the interim agreement, the contractor vendor could immediately take legal action to recover that portion of the purchase price to be paid at that time, and then to take further action to obtain the balance upon presentation of the notarized contract.

[Translation.]

At the hearing, counsel for the respondent referred to the book entitled Récents développements en droit de la copropriété divise published for the Chambre des notaires du Québec by Les éditions Thémis, and more particularly the paper by Mr. François Brochu entitled "La vente sur plans de copropriétés" and drew the attention of the Court to the following passage on page 75:

On the other hand, "potential co-owners", who obtain from their developer authorization to take possession of the future unit set aside for them, sign the agreement if they are unable immediately to sign the deed of sale. The failure of one or other to follow the agreement with the signature of a deed of sale may even leave them open to an action in respect of execution of the deed. Moreover, the developers are not interested in having strangers occupy the building for a few days or weeks prior to the registration of the declaration of co-ownership. Lastly, the promissor-purchasers behave more like genuine owners than tenants....

[Translation.]

Analysis

It is nevertheless interesting to note that the statement: "and, unfortunately too often, give the deposits to the developer" [translation] follows the passage cited by counsel for the respondent.

Counsel for the respondent cited the passage to corroborate the Minister’s legal assumption that the promissor-purchasers had in fact assumed the risks and obligations of an owner. This is possible to a certain extent. But they had surely not acquired the rights of an owner. It is thus interesting to note that for the author of the above text, payments made prior to the transfer of title remained deposits.

I would nevertheless like to return to the argument put forward by counsel for the respondent. If I understand it correctly, it is that the interim agreement is an enforceable contract and that the amounts paid under such an agreement are not deposits against the sale price, but the payment of amounts owing under the agreement itself, both for the payment out of personal funds and for the mortgage payment. The initial payment was made at the time the interim agreement was signed. The second amount, 1.e., the mortgage payment, was not made. But according to the respondent, the appellant was entitled to it because of the right to an action in respect of execution of the deed. From this standpoint, it is not necessary to concern oneself about the date that the sale contract was signed, because it is not pursuant to this contract that the amounts in question are owing and paid, but rather the interim agreement.

I believe that there is confusion about the legal consequences of the various instruments at issue in the instant case. It would therefore be useful to examine the facts and the terms of the agreements. If we look at the agreements between the appellant and S. Frenette, those cited above, which are similar to all the other agreements, with the exception of a number of changes with respect to the amounts, the amount of $11,280 was paid when the interim agreement was signed, but not the mortgage payment of $48,780 which was not owing. The latter amount became due when the deed of sale was signed.

It is true that when the declarations of co-ownership were registered the parties were entitled to take action in respect of execution of the deed. They did not, however, have a right to the payment of the sale price. The payment of the sale price became due when the deed of sale was executed, 1.e., the sale contract, not before. This is when the transfer of title occurs.

It is also correct to say that the interim agreement is binding. It involves certain rights and obligations, but as with the agreement to purchase with respect to the transfer of ownership, it gives entitlement only to take action in respect of execution of the deed, not to payment of the sale price. The agreement is not a deed of sale. It is not an instrument for a transfer of title. The interim agreement does not state that there is a change in the status of the $11,280.

On the contrary, a specific clause in the interim agreement prescribes that the agreement shall take effect without substitution or derogation of all the rights of the seller and the purchaser as created under the offer to purchase. We recall that in the offer to purchase, clause 3.14 prescribed that the failure by the vendor to execute any of his obligations pursuant to the offer entitled the purchaser to terminate the offer, in which case the vendor was to reimburse the purchaser for deposits. I am of the opinion that the payments made were deposits against the sale price and that even if they were not held in trust, that they did not lose their status as deposits. (Atlantic Engine Rebuilders Ltd., cited above.) (These payments do not include payments already mentioned with respect to monthly charges, taxes and 10 per cent interest on the outstanding mortgage loan.)

For the vendor of a building, as decided by the Federal Court of Appeal in The Queen v. Imperial General Properties, cited above, until the sale is completed, amounts received as deposits against the sale price are amounts whose ownership remains uncertain and which cannot be included in computing the vendor’s income. These are included when they lose their status as deposits against the price and become part of the payment of the sale price at the moment the property is transferred.

Payments made as work progresses in a business contract ought not to be confused with the nature of payments received for a purchase contract prior to the execution of the deed of sale. In the former, the person for whom the contractor is building becomes the owner as the work progresses, and when the builder is paid, the payments are not conditional.

Although it would appear that people who buy on the basis of plans can seek remedy in warranty against the builder according to pages 93 ff. of the article "La vente sur plan de copropriétés" cited above, the payments made by the appellant’s purchasers were not payments made to a building contractor but to a vendor of condominium units. The purchasers did not become owners of the premises built as they were built. They become owners of the premises when the deed of sale was signed. In conclusion, pursuant to paragraph 12(1)(b) of the Act, the amounts receivable by the appellant are receivable upon the sale of property and such sales occur when the sale contracts are executed.

For these reasons, the appeal is allowed with costs.

Appeal allowed with costs.