Esskay Farms LTD v. Minister of National Revenue, [1973] CTC 2218, 73 DTC 169

A W Prociuk (orally):—The appellant incorporated under the laws of the Province of Alberta in 1960, carries on a business of real estate in the said province.

In 1961 the appellant acquired a parcel of land adjacent to the City of Calgary, hereinafter referred to as “the City”, and over a period of years sold portions thereof, declaring the net proceeds in each appropriate year. In June of 1969 it received a cash offer from the City for the purchase of the remaining parcel consisting of 117 acres, more or less, for a price of $247,000 (see Exhibit R-1). The appellant counteroffered, asking that the purchase price be paid over a period of 8 years. Evidence establishes that the appellant was cognizant of the income tax implications, and it sought to avail itself of the provisions of subparagraph 85B(1)(d)(ii), which reads as follows:

85B. (1) In computing the income of a taxpayer for a taxation year,

(d) where an amount has. been included in computing the taxpayer’s income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not receivable,

ii) where the property sold. is land, until a day that is after the end of the taxation year, there may be deducted a reasonable amount as a reserve in respect of that part of the amount so included in computing the income that can reasonably be regarded as a portion of the profit from the sale;

There followed a series of conferences and negotiations between the appellant and the City, and on July 29, 1969 the City offered, by letter, to purchase the said acreage on terms acceptable to the appellant. This offer was filed as Exhibit A-1, and reads as follows:

c/o Messrs. Fleming, Neve, Kambeitz & Pottinger

Barristers and Solicitors

700 Texaco Building

600 — 6 Avenue, S.W.

Calgary 1, Alberta

Dear Sir:

Re: Portion of the west half ot

35-24-2-W5M which lies to the

east of the Bow River

Based on our discussions last week, we hereby confirm that we are prepared to recommend the purchase of the above described property containing 117 acres, more or less, for the sum of $247,000.00, payable on the following basis:

1. Interest on $247,000.00 at 7 /2 per cent per annum to be paid ‘annually from the date of purchase, on the anniversary date of the purchase, in each of the years 1970 to 1975 inclusive;

2. Interest at the same rate on $247,000.00 to be paid for the period from the anniversary date of purchase in 1975 to July 1, 1976 at which time the principal sum of $123,500.00 wiI also be paid;

3. Interest at the same rate from July 1, 1976 to July 1, 1977 on $123,500.00 as well as the unpaid principal balance of $123,500.00 to be paid. July 1, 1977.

If this proposal is acceptable to you, please endorse your acceptance on the attached copy of this letter, and we will send this matter forward to the Land Committee for their approval.

Yours very truly

(Sgd.) W. R. Chilton

W. R. Chilton

(for) R. O. Leitch

Superintendent

Land Department

This offer was accepted by the appellant, but on August 12, 1969 the City, by letter filed as Exhibit A-2, advised the appellant’s solicitor, F J Fleming QC, that it could not enter into a 5-year purchase agreement by reason of the provisions of The Municipal Government Act. The appellant then approached Crown Trust Company, of Calgary, Alberta, and undoubtedly apprised the officers of that company with the situation that existed. Following a series of conferences and negotiations, Crown Trust Company agreed to purchase that parcel of land for the same price and on pretty well the same terms as the appellant wanted from the City. Crown Trust Company requested and received the right to elect to back out of the agreement within 60 days from the date of execution or such further time extension as the appellant may grant; and the agreement for sale would be treated as null and void in that event. Evidence disclosed that Crown Trust Company required this concession to assure itself that it in fact could resell the property to the City, or to someone else, before it obligated itself irrevocably to the appellant. The agreement for sale dated September 23, 1969, and the covering letter dated September 22, 1969 containing the 60-day period for election, were filed as Exhibits A-4 and A-3 respectively. Crown Trust Company then proceeded to deal with the City for the resale of the acreage. On or about October 16, 1969 the City offered to purchase the acreage from Crown Trust Company for $247,000 cash, which was accepted by Crown Trust Company (see Exhibit R-5). Due to various delays occasioned by the City the said purchase price was not paid to Crown Trust Company until May of 1970. The respondent added to the appellant’s declared income in the years 1969 and 1970 the total net proceeds of the said sale, and assessed accordingly. From this assessment dated July 18, 1972 the appellant has appealed to this Board.

At the hearing of this appeal, learned counsel for the respondent argued that Crown Trust Company acted merely as agent for the appellant and the moneys paid by the City to Crown Trust Company were in fact received by the appellant and properly taxable; and the appellant was properly denied the application of the provisions of subparagraph 85B(1)(d)(ii), referred to above. The respondent further alleged that the transaction (Exhibit A-4) was artificial and not bona fide. He further drew to the Board’s attention the fact that Crown Trust Company’s treatment of this transaction was yet another factor pointing to agency rather than to it being a bona fide, independent purchaser acting on its own accord, in that the first entry in its ledger was not made till after the sale to the City.

The appellant called two witnesses, namely, F J Fleming, Esq, QC, solicitor for the appellant, and who later acted as solicitor for Crown Trust Company in this transaction, and also Elmer F Shepherd, Esq, assistant manager of Crown Trust Company, in Calgary, Alberta. Their evidence in-chief, as well as in cross-examination, was clear, unambiguous and forthright. Mr Fleming stated that under no circumstances was his client, the appellant, prepared at any time to make a cash sale; that the tax factor was the major consideration; that when Crown Trust Company agreed to buy the land from the appellant and later sold it to the City, it asked him to be its solicitor as well, because he was already thoroughly familiar with the transaction. It paid Mr Fleming half of his fees; and on the evidence of Mr Shepherd did not recover it from the appellant, nor from anyone else.

Mr Shepherd stated that his company was interested in this transaction because it stood to gain at least 1% interest over the entire period over and above the amount of interest it obligated itself to pay to the appellant. He further stated that the money received from the City was not received in trust for the appellant but was the property of his company, and the appellant had no legal right to it. The appellant’s rights and the company’s obligations to the appellant are set out in the agreement (Exhibit-A-4) and nowhere else. Crown Trust Company discharges its obligations to the company accordingly.

It is obvious from the above that the issue to be decided by me in this case is whether or not the moneys were in fact received by the appellant when paid by the City to Crown Trust Company.

The appellant based his argument primarily on the oft-quoted statement of Lord Tomlin in Commissioners of Inland Revenue v Duke of Westminster, [1936] AC 1 at 19:

Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.

This principle has often been used and abused by the would-be taxpayers, and it therefore appears necessary to exercise a careful scrutiny of the method and form used to effect that purpose. As Lord Denning stated in Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue, 45 TC 519 at 536:

The Courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind.

It follows that the substance of the transaction must be looked at, not its mere words. The substance must be ascertained by a consideration of the rights and obligations of the parties to be derived from the consideration of the whole agreement.

In Dominion Telegraph Securities Ltd v MNR, [1946] CTC 236; 2 DTC 875, Mr Justice Kellock, at 243 [878], ‘stated:

While surrounding circumstances may be regarded for the purpose of construing an instrument, the true legal position arising upon the instrument so construed may not be ignored in favour of the supposed “substance”.

I therefore have to ask myself the question whether we are here confronted with a concoction and an unrealistic set of transactions aimed to conceal the real facts.

In viewing all the evidence, I- find as a fact that the appellant from the outset intended to sell this property for a price of $247,000 payable over a period of 8 years. When one considers that the tax on a cash sale would be well over $100,000 it is understandable why the appellant never deviated from its intention. The appellant succeeded in entering into an agreement for sale with Crown Trust Company on September 23, 1969. Its rights and obligations stem from that instrument only. The fact that Crown Trust Company could elect to withdraw within a specified period of time in no way alters the appellant’s position. The appellant was entitled to receive payments pursuant to the terms of that agreement only. Crown Trust Company was not obligated under that agreement to deal with the City. It was perfectly within its rights to sell the land to any other party at any price in excess of the price it agreed to pay to the appellant and to retain such excess. The fact that Crown Trust Company chose to deal with the City for the same price does not, in my humble opinion, alter the situation.

I find as a fact that Crown Trust Company did not act as an agent of the appellant, but on its own behalf as it had the legal right to do.

In conclusion, I find that there was nothing artificial in these transactions.

The appeal, accordingly, is allowed, and the matter is referred back to the respondent for reassessment and necessary adjustment.

Appeal allowed.