May Bros. Farms Ltd. v. Canada, [1991] 1 CTC 151, [1991] DTC 5070

Reed, J.:—The issue in this case is a very narrow one: did the plaintiff's purchase of the freehold interest in 200 acres of cranberry lots, on October 14, 1980, result in a merger of that interest and a prior profit à prendre the plaintiff held with respect to those same lots. If a merger took place, the plaintiff no longer held, in his 1981 taxation year, Class 14 property and was entitled to a terminal loss with respect thereto.

On December 13, 1977 a corporation by the name of Bell Farms Ltd. ( Bell") leased 200 acres of cranberry lots from Wingly Enterprises Ltd. ( Wingly"). The lease had a five-year term and expired on December 31,1983. Bell subsequently subleased a very small portion of the lands (two acres) to a Mr. Sidhu. This lease was designed to expire on December 31, 1983, the same date as Bell’s head lease. In March 1980, Bell sought to sublease the rest of the land to the plaintiff. Wingly, however, pursuant to the terms of its lease to Bell, had the right to refuse to consent to a sublease. Wingly did refuse. The plaintiff and Bell, on June 27, 1980, therefore, concluded two agreements: a Farming Rights Agreement and an Option and Indemnity Agreement. The second agreement never became operative and both counsel agree that it can be ignored for the purposes of this case.

Both counsel agree that the Farming Rights Agreement granted the plaintiff a profit 4 prendre with respect to the approximate 198 acres in question. The plaintiff paid Bell $1,000,000 for the rights obtained under the agreement. The terms of that agreement provide, in part:

4.00 Manage And Harvest

4.01 During the remainder of the term of the Lease May Bros may enter upon, together with its servants, agents, licencees and invitees and all necessary machinery and equipment therefor, and occupy that portion of the Lands which is not subject to Sukhminder Sidhu and to Gill Growers Ltd. respectively, ("the Cranberry Land”), for the purpose of managing and harvesting the cranberries grown thereon, including without limitation, the rights to maintain all control procedures, apply all necessary insecticides and herbicides, apply all fertilizers, irrigate, weed, cultivate, and harvest crops, and shall incur all costs therefor and receive all proceeds therefrom.

4.02 Bell shall remain in legal possession of the Cranberry Land, but shall not interfere with the managing and harvesting by May Bros in any manner whatsoever save as provided in paragraph 4.03 hereof.

4.03 Bell shall be entitled to all prunings of the Bergman variety of cranberries which are not required to properly fill in upon the Cranberry Land, and may prune such cranberries for that purpose, provided however that May Bros shall have the absolute and unfettered discretion as to the time, standard and method of such pruning.

5.00 Non Assignment Of Lease

In the event that Wingly Enterprises Ltd. consents to the assignment of the Lease to May Bros Bell shall assign the Lease and until that event the Lease shall not be assigned or sublet to May Bros or to any other person, firm or corporation.

6.00 Relationship

6.01 Nothing herein contained, nor any of the acts of the parties hereunder, shall be deemed to create any relationship of landlord and tenant between the parties hereto.

6.02 Bell shall not be entitled to any compensation hereunder save the Price and the rights given in paragraph 4.03.

6.03 Bell shall have legal possession of the Lands and the right to occupy the Lands, and May Bros shall not have legal possession of the Lands.

On October 14, 1980 the plaintiff purchased the fee simple in the 200 acres (including the two acres which had been leased by Bell to Sidhu) from Wingly.

The plaintiff and the defendant agree that the plaintiff's rights under the Farming Rights Agreement fall within Class 14 of Schedule II of the Regulations, C.R.C. 1978, c. 945. 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 Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") triggers a terminal loss for the plaintiff's 1981 taxation year. At the relevant time, subsection 20(16), as enacted S.C. 1977-78, c. 1, s. 14(4), as amended S.C. 1980-81-82-83, c. 48, s. 10(6), 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 (viii) 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 the 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.]

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) of the Act, Regulation 1100, and Class 14 of Schedule II of the Income Tax Regulations. The defendant's allocation of the $1,000,000 is as follows:

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

It is stated in Cheshire and Burn, Modern Law of Real Property, 14th ed. (1988), at page 875:

The term merger means that, where a lesser and a greater estate in the same land come together and vest, without any intermediate estate, in the same person and in the same right, the lesser is immediately annihilated by operation of law. It is said to be” "merged", i.e. sunk or drowned, in the greater estate.

[Emphasis added.]

In Anger and Honsberger, Law of Real Property, 2nd ed. 2 vols. (Aurora, Ont: Canada Law Book, 1985), at page 1493 it is stated:

At common law, whenever a particular estate and a subsequent greater estate become vested in the same person, with no intervening estate in another person, the smaller particular or preceding estate became merged or drowned in the greater subsequent estate.

[Emphasis added.]

Counsel for the plaintiff cites: Manitoba v. Senick, [1982] 3 W.W.R. 589; 134 D.L.R. (3d) 586; British Columbia v. Tener, [1985] 1 S.C.R. 533; [1985] 3 W.W.R. 673; 17 D.L.R. (4th) 1; Burton v. Barclay, [1824-34] All E.R. 437; R. v. Compagnie Immobilière BCN Ltée, [1979] C.T.C. 71; 79 D.T.C. 5068.

None of these cases assist the plaintiff. The Senick case, supra, merely establishes that a profit à prendre can be irrevocable in the sense that it is not terminable at will as a licence might be. The Tener case, supra, determined that a person who held mineral rights (a profit à prendre in gross) and who could not exploit them because the Crown refused to grant a park use permit, allowing access to the minerals, was entitled to compensation for the " expropriation" of the mineral rights which had occurred. In the course of this decision, Madame Justice Wilson, by way of dicta, commented, at page 691 (D.L.R. 17):

Profits à prendre in gross are extinguished by unity of seisin, i.e., if the holder of the profit either:

(a) releases it in favour of the owner of the land in which the profit subsists; or

(b) becomes the owner of the land in which the profit subsists.

The extinguishment arises from the fact that if the ownership of the profit and the ownership of the land in which the profit subsists devolve on the same person, the profit can no longer exist as a separate interest in the land. The profit merges in the fee and is extinguished.

[Emphasis added.]

I do not think this explanation assists the plaintiff. In the first place, the plaintiff's profit à prendre carried with it a right of access or entry on to the land in order to exploit the right given to cultivate and harvest the cranberries. More importantly, however, the comment by Madame Justice Wilson was made in the context of a case where there was no issue raised with respect to the possibility of an intervening estate. The comment simply cannot be taken out of context to support the broader interpretation which is sought to be put on it.

The Burton case, supra, deals with a situation in which a merger did not occur because a reversionary interest remained with the lessee as a result of a sublease which was not co-extensive in time with lessee's head lease. An intervening estate was held to exist becuase there was a reversionary right for a period of 21 days. The Compagnie Immobilière BCN case, supra, deals with a situation in which a merger did occur but there is no suggestion in it that an intervening estate might be involved.

As I understand counsel's argument, it is that because the Farming Rights Agreement between Bell and the plaintiff terminated on the same date as Bell’s head lease and because of Madame Justice Wilson's comments in Tener, supra, a merger has occurred. This is not my understanding of the law. As noted above, I do not think Madame Justice Wilson’s comments can be interpreted in the fashion that is suggested. In addition, more than coincidence of time is required for a merger to occur. The interests in the estates themselves must also coalesce. As Cheshire and Burns indicate: The lesser interest is annihilated or drowned in the greater.

In the present case Bell retains through its head lease and the Farming Rights Agreement, legal possession of the land in question, together with the right to take certain prunings from some of the cranberry bushes (paragraph 4.03 of the Farming Rights Agreement). An intervening estate, therefore, exists because the two interests in the land have not coalesced. The lesser is not "drowned" in or "annihilated" by the greater.

For the reasons given, the plaintiff's claim will be dismissed.

Appeal dismissed.