Date: 19981218

Docket: 97-620-IT-G

BETWEEN:

SUSSEX SQUARE APARTMENTS LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Bowman, J.T.C.C.

[1] These appeals are from assessments made under the Income Tax Act for the appellant's 1989 and 1990 taxation years. The appellant carries on the business of leasing real property. The issue is simply whether the amounts of $9,106,890 and $3,491,410 received by the appellant in 1989 and 1990 respectively represent proceeds from the sale of real property giving rise to a profit under section 9 of the Act or are prepaid rent under paragraph 12(1)(a) of the Act, in which case the provisions of subparagraph 20(1)(m)(iii) would permit the appellant to deduct a reserve. It is obvious that whether the appellant's income is derived from the rental or the disposition of property it is in either case income from a business.

[2] By a lease ("the head lease") made as of October 1, 1984 the appellant (which was then called Lindsay Gardens Properties Ltd.) leased property from two companies to which it was related, Capital Construction Supplies Ltd. and Westsea Construction Ltd.

[3] The property consisted of all but one suite in six three-storey apartment buildings on Lindsay Road in Richmond, B.C. known as "Lindsay Gardens".

[4] Articles 1 and 2 read:

ARTICLE 1 – DEMISE

1.01 WITNESSETH THAT in consideration of the prepaid rent for the Term in respect of all of the Suites, aggregating the sum of $9,557,910.00 now paid by the Lessee to the Lessor (the receipt whereof by the Lessor is hereby acknowledged) and inter alia the covenants and agreements hereinafter reserved and contained on the part of the Lessee to be observed and performed, the Lessor hereby demises and leases unto the Lessee subject to the terms, convenants and conditions as hereinafter set forth, each of the suites known by the suite numbers as more particularly set forth in Column I of Schedule "A" hereto and as each are shown on the Explanatory Plan numbered 68601 and filed at the New Westminster Land Title Office on the 2nd day of October, 1984 including any adjoining balcony (the "Suites") TOGETHER WITH the right in common with Lessor and the Lessees of all suites in the Building and all others having the like right to use for purposes only of access to and egress from the Suites, the entrance hall, staircases, corridors and elevators (if any) in the Building and to use the laundry rooms and storage facilities (as may be designated by the Lessor) in the Building for the purpose for which they are designed.

ARTICLE 2 – TERM

2.01 TO HAVE AND TO HOLD the same unto the Lessee for the term commencing on the 1st day of October, 1984 and ending on the 31st day of December, 2083 (hereinafter called the "Term").

[6] Clause 3.01 of Article 3 provides that the lessee was required to pay for light and power supplied to each of the suites. Generally, the lessee's and the lessor's convenants were those that one would expect to find in a lease of residential property.

[7] Article 6 of the lease provides that the lessee must pay its share of the operating expenses, as defined. The "Lessee's Share" is the ratio which the area of each of the suites bears to the total area of all suites, and this ratio is set out in detail in a schedule to the lease.

[8] It is clear that the head lease contemplated the assignment of the lease on individual suites. Article 8 provided that each of the suites was held separately and independently from each of the other suites. This conclusion is reinforced by Article 9A, which provided:

ARTICLE 9A – PREPAID RENT CONSIDERATION ADJUSTMENT

In the event that the Proceeds received by the Lessee on its assignment of this Lease with respect to any Suite shall be less than the Escalated Consideration for any such Suite, the prepaid rent consideration set forth in page 2 hereof shall be adjusted and reduced by the amount of the shortfall and the Lessor agrees to pay to the Lessee forthwith on demand the amount of such shortfall.

"Escalated Consideration" in this Article means:

a) 103% of the Allocated Consideration with respect to an assignment entered into prior to 31 July 1985;

b) 106% of the Allocated Consideration with respect to an assignment entered into prior to 31 July 1986;

c) 109% of the Allocated Consideration with respect to an assignment entered into prior to 31 July 1987;

d) 112% of the Allocated Consideration with respect to an assignment entered into prior to 31 July 1988;

e) 115% of the Allocated Consideration with respect to an assignment entered into prior to 31 July 1989.

"Allocated Consideration" in this Article means the allocation of the prepaid rent of $9,557,910.00 allocated by agreement between the parties hereto with respect to any such Suite. "Proceeds" in this Article means the consideration payable by an assignee to the Lessee with respect to any Suite less the selling costs thereof and the costs of renovations to such Suite made prior to such assignment.

[9] It is obvious that from the outset it was intended that the leases on individual suites would be disposed of at a profit over the prepaid rent allocated to such suites and that if that the price at which the leases were to be assigned fell below a pre-arranged minimum the prepaid rent of $9,557,910 was to be adjusted downwards proportionally.

[10] On January 1, 1988, the lessors and the appellant modified the lease by deleting Article 9A, extending the term of the lease to December 31, 2087 and increasing the prepaid rent by $35,000 in consideration of the extension of the lease, so that the entire cost was $9,592,910. Between October 1, 1984 and 1988, the appellant had leased the suites to members of the public under short-term month to month leases.

[11] I digress here briefly to outline certain legislative changes that have a bearing on this case. The Strata Titles Act, S.B.C. 1974 c. 89 permitted the conversion of a previously occupied building only with the approval of the municipality. The administrative practice, according to the evidence of Mr. Ronald Wilson, a solicitor who acted for the appellant and who had a considerable amount of experience in such matters, was generally not to give such approval. The result therefore was, as a practical matter, that previously occupied buildings could not as a rule be converted into strata lots. A similar provision appeared in the B.C. Condominium Act of 1979. Also the Residential Tenancy Act, R.S.B.C. 1979 c. 365, subsection 8(11), prohibited the entering into tenancy agreements with respect to residential premises in a residential property comprising more than two residential premises for a term of more than three years without the approval of the municipal council of the municipality.

[12] In 1984 the Residential Tenancy Act was repealed and a new act substituted in which the restriction on long-term leases did not appear.

[13] In 1990 the Labour and Consumer Services Statutes Amendment Act, 1990 reinstated the restriction on long-term leases, but put a limitation of 20 years on the permissible term of leases.

[14] Therefore, from May 1, 1984 to July 27, 1990 there was no statutory prohibition to long-term leases. The appellant therefore saw this as an opportunity to condominiumize the apartment buildings leased by it by means of long-term leases.

[15] Commencing in 1988 the appellant disposed of 212 of the 213 suites in the three buildings to members of the public. I use the words "disposed of" in a neutral sense to indicate merely that it was paid amounts of money by persons who were thereafter entitled to exclusive possession of the suites, and not to indicate the legal relationship that prevailed between them. It is the manner of such disposition that is central to these appeals.

[16] The first 129 suites were disposed of by assignments of the appellant's interest in the particular suites under the head leases. The document is called an assignment of lease and the price (called the "True Value") was paid in full on closing. In some cases the appellant took a mortgage back, in some cases the assignee borrowed the money by way of mortgage from a third party and in some cases the acquisition was financed under the British Columbia House Purchase Assistance Act.

[17] Recitals A and B of an assignment that is typical of this group of transactions, as well as Clause 1, read as follows:

WHEREAS:

A. By a lease (the "Lease") registered in the New Westminster Land Title Office under number X114174 made between the Lessor of the First Part and the Assignor as Lessee of the Second Part, as modified by agreement registered in such Land Title Office under number AB4652 the Suite bearing the Suite Number in the apartment building located as set out in Form 17 above and shown on Explanatory Plan filed in the New Westminster Land Title Officer under number 68601 (the "Suite"), was, with other suites in the apartment building (the "Building") situate on the Land (the "Land") described in Schedule "1" hereto, demised and leased to the Assignor for the term commencing on the 1st day of October, 1984 and ending on the 31st day of December, 2087, on the terms and conditions therein contained, (a copy of which Lease as so modified forms Schedule "1" hereto).

B. The Assignee has agreed to purchase the unexpired leasehold estate of the Assignor in the Suite for the consideration hereinafter set forth.

NOW THIS DEED WITNESSETH:

1. In consideration of the True Value cited in Form 17 above now paid by the Assignee to the Assignor (the receipt whereof by the Assignor is hereby acknowledged) the Assignor hereby assigns unto the Assignee the Assignor's interest in the Suite together with the unexpired residue of the said term of years TO HOLD THE SAME unto the Assignee for all the residue now unexpired of the term created by the Lease with respect to the Suite, subject henceforth to the payment by the Assignee of the monthly sum set out in clause 4 of the subject Offer to Purchase Leasehold Estate during the calendar year therein set out, in lieu of the Lessee's Share of Operating Expenses (as defined by the Lease and pursuant to Article 6 thereof) and thereafter subject to payment of the Lessee's Share of Operating Expenses with respect to the Suite pursuant to Article 6 of the Lease (being in percentage terms as set out in Schedule "A" to the Lease) and subject to the performance of the Lessee's covenants and agreements and the conditions, provisos, rules and regulations in the Lease reserved and contained.

[18] In 1989, the appellant concluded that it had made an error in assigning the full term of the lease of the assignees (presumably because of the different tax consequences of assignments and subleases, described below), and therefore it entered into modification agreements with 112 of the 129 assignees. The parties to these agreements were Capital Construction Supplies Ltd., described as the owner[1], the appellant, the assignees and the mortgagees, if any. Article 1 of the modification agreement reads as follows:

ARTICLE 1 – MODIFICATION OF ASSIGNMENT

1.01 The Assignment is modified by reserving to and for the benefit of Sussex the last day of the term of the Head Lease namely the 31st day of December 2087.

1.02 The Assignment is further modified by the incorporation of the covenant of Capital as Lessor of the Head Lease that it agrees with the other parties hereto and their successors in title that Capital shall have no right hereafter of re-entry or repossession and no right to terminate the Head Lease with respect to the Suite by reason of any default in the part of Sussex as lessee or any successor in title to Sussex as lessee of the Head Lease.

1.03 The Assignment is further modified by the incorporation therein of:

a) all rights and remedies of the Lessor granted by the Head Lease, as rights and remedies of Sussex as sublessor, enforceable against the Assignee as sublesse including but without restricting the generality of the foregoing Article 7.04 of the Head Lease;

b) all of the Lessee's covenants and agreements contained in the Head Lease, as obligations of the Assignee as sublesse in favour of and to the benefit of Sussex as sublessor;

c) all rights, remedies and interests of the Lessee under the Head Lease, as the rights, remedies and interest of the Assignee as sublessee; and

d) all of the Lessor's covenants and agreements in the Head Lease, as obligations of Sussex as sublessor, in favour of and to the benefit of the Assignee as sublessee;

to the same extent and with the same effect as if the whole of the Head Lease of the Suite (except the last day of its term) had comprised the Assignment instead of its original terms and that Sussex had been the Lessor and the Assignee had been the Lessee of such lease, as modified by this Agreement.

1.04 The Assignment as so modified constitutes a sublease and is referred to hereafter as the "Lease".

[19] The provincial Land Titles Office declined to register the modification agreements. The appellant and Capital Construction Supplies Ltd. petitioned the Supreme Court of British Columbia for an order requiring the Registrars of the Land Titles Offices of Vancouver and New Westminster to register the modification agreements. When the matter came on before Mr. Justice Collver of the Supreme Court of British Columbia, the Registrars of the Land Titles Office did not appear, although duly served.

[20] Collver J. made the following order on March 31, 1992:

THIS COURT DECLARES THAT the documents described as assignment and leases modified by modification agreements numbered AE13837-AE13908, AE15218-AE15249 and AE24011-AE24023 that were lodged for filing in the New Westminster Land Title Office have been rectified so that they are now sub-leases.

THIS COURT ORDERS that the Registrar of Titles in the Land Title Office located in New Westminster, without prejudice to rights acquired bona fide for value, upon presentation of a certified copy of this order, registrar said series of documents numbered AE13837 through AE13908, AE15218 through AE15249 and AE24011 through AE24023 as modification of the assignments of leases referred to in said series of documents such that they now constitute sub-leases.

[21] This order applied to 63 of the 129 assignments. A further 49 modification agreements were registered after the court order without the necessity of an application to the court.

[22] Seventeen of the original assignments were not modified. The appellant concedes that it cannot succeed in respect of these.

[23] The remaining 83 suites were disposed of by way of sublease for a term that ended on December 30, 2087, one day before the expiry of the head lease. The result is that the appellant retained a one day reversionary interest in respect of these 83 leases. The consideration, described as the True Value, was paid on closing. Unlike the preceding 129 assignments, which were described as assignments, the documents in the group of 83 were described as "Leases".

[24] In all 212 transactions, the agreement that preceded the formal demise was described as an "Offer to Purchase Leasehold Estate" I do not think that anything turns on this. The essential question is the nature of the relationship between the parties under documents described as leases or assignments of lease.

[25] On assessing, the Minister of National Revenue treated the entire proceeds of $9,106,890 and $3,491,410 received by the appellant in 1989 and 1990 as business income in the year of receipt. He allowed as the cost of the leases $6,860,997 and $2,243,817, the portion of the prepaid rent of $9,592,910 paid by the appellant allocable to the suites disposed of in each year. He also treated as part of the cost of the lease amounts expensed by the appellant of $1,452,106 and $585,401 in 1989 and 1990 respectively. These amounts were for the costs of preparing the suites for disposition, costs of disposition such as repairs, advertising, real estate commissions, legal expenses, mortgage buydowns and sales office expenses.

[26] It was not surprising that the assessor saw these transactions as being in substance sales rather than leasing transactions. The sales campaign carried out by the appellant through a real estate agent that specialized in the sale of condominiums advertised the suites as if they were selling freehold interests. In the advertisements nothing was said about assignments of leases or subleases. The appellant in its financial statements treated the profit as a gain on the sale of leasehold interests. The assessor did not draw a distinction between an assignment of a lease and a sublease.

[27] I can see no reason for applying some vague principle of "economic substance" over form.

[28] In Continental Bank of Canada et al. v. The Queen, 94 DTC 1858 at 1871 I summarized my view of the substance versus form doctrine as follows:

The principle to be deduced from these authorities is simply this: the essential nature of a transaction cannot be altered for income tax purposes by calling it by a different name. It is the true legal relationship, not the nomenclature that governs. The Minister, conversely, may not say to the taxpayer "You used one legal structure but you achieved the same economic result as that which you would have had if you used a different one. Therefore I shall ignore the structure you used and treat you as if you had used the other one".

[29] Once it is determined that the legal relationships are what they purport to be the court must give effect to them. I find that the legal relationships in this case are valid, binding and real. They were certainly not shams.

[30] In Continental Bank Leasing Corporation v. The Queen et al., 98 DTC 6505 at 6513-4 Bastarache J. (with whom the other members of the court agreed on this point) said:

141 After it has been found that the sham doctrine does not apply, it is necessary to examine the documents outlining the transaction to determine whether the parties have satisfied the requirements of creating the legal entity that it sought to create. The proper approach is that outlined in Orion Finance Ltd. v. Crown Financial Management Ltd., [1996] 2 B.C.L.C. 78 (C.A.), at p. 84:

The first task is to determine whether the documents are a sham intended to mask the true agreement between the parties. If so, the court must disregard the deceptive language by which the parties have attempted to conceal the true nature of the transaction into which they have entered and must attempt by extrinsic evidence to discover what the real transaction was. There is no suggestion in the present case that any of the documents was a sham. Nor is it suggested that the parties departed from what they had agreed in the documents, so that they should be treated as having by their conduct replaced it by some other agreement.

Once the documents are accepted as genuinely representing the transaction into which the parties have entered, its proper legal categorisation is a matter of construction of the documents. This does not mean that the terms, which the parties have adopted, are necessarily determinative. The substance of the parties' agreement must be found in the language they have used; but the categorisation of a document is determined by the legal effect which it is intended to have, and if when properly construed the effect of the document as a whole is inconsistent with the terminology which the parties have used, then their ill-chosen language must yield to the substance.

[31] It is trite law that there is a fundamental legal difference between an assignment of a lease, where the assignor retains no reversion, and a sublease where the lessee sublets a portion of the term to a sublessee and retains a reversionary interest. The matter is succinctly put in Anger and Honsberger, Law of Real Property, second edition at pages 259-260:

Because of the differences in the legal relationships created by an assignment of lease on one hand, and a sublease on the other, the distinction between the two must be carefully noted. When a tenant enters into a lease with a landlord there is privity of estate (and privity of contract between the two as the lease operates both as a conveyance and a contract). When the tenant assigns the lease to a third party, the assignee becomes the tenant of the landlord with resulting privity of estate between the two. If there is privity of contract, all covenants are enforceable. If there is privity of estate, but not privity of contract, only those covenants which touch and concern land are enforceable, but no others. If there is no privity of estate or contract, then, apart from restrictive covenants running with the land and apart from the right of an assignee to enforce the benefit of the covenant in certain cases, no covenants are enforceable. Thus, in the case of an assignment, covenants, which touch and concern the land are enforceable between the assignee and the landlord.

A sublease creates no direct relationship between the subtenant and the landlord. Hence, there is neither privity of estate nor privity of contract between them. Rather, as between the head tenant and the subtenant, the head tenant stands in the position of landlord vis-à-vis his subtenant, while retaining his position as tenant vis-à-vis his own landlord.

It has been decided that a "sublease" of the entire term operates as an assignment, not a sublease, as there is no reversionary interest left in the original tenant to support a tenurial relationship between the tenant and the third party. In other words, to create a valid sublease, notwithstanding the words used, the tenant in creating the sublease must reverse the last day of his original term. [footnotes omitted]

[32] The legal difference between an assignment and a sublease results as well in a difference for income tax purposes. An assignment of the entire term is a disposition of property and the consideration for that disposition constitutes a receipt on income or capital account, depending on the circumstances. In this case, in light of the appellant's business and the marketing campaign it carried on, the amounts received on the dispositions are obviously income and it is not suggested otherwise. Amounts received for a sublease of property are rent and where the rent for the entire period of the sublease is paid, as here, at the beginning of the term of the sublease they must be included in income under paragraph 12(1)(a), which reads:

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(a) Services, etc., to be rendered — any amount received by the taxpayer in the year in the course of a business

(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or

(ii) under an arrangement or understanding that it is repayable in whole or in part on the return or resale to the taxpayer of articles in or by means of which goods were delivered to a customer.

[33] Although paragraph 12(1)(a) does not refer specifically to rent, I think it applies to rent and that the words following "for any other reason" are not to be construed eiusdem generis. I draw this inference from subparagraph 20(1)(m), which reads:

20(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

...

(m) Reserve in respect of certain goods and services — subject to subsection (6), where amounts described in paragraph 12(1)(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a reasonable amount as a reserve in respect of

(i) goods that it is reasonably anticipated will have to be delivered after the end of the year,

(ii) services that it is reasonably anticipated will have to be rendered after the end of the year,

(iii) periods for which rent or other amounts for the possession or use of land or chattels have been paid in advance, or

(iv) repayments under arrangements or understandings of the class described in subparagraph 12(1)(a)(ii) that it is reasonably anticipated will have to be made after the end of the year on the return or resale to the taxpayer of articles other than bottles.

[34] It is clear that subparagraph 20(1)(m)(iii) is premised upon the assumption that paragraph 12(1)(a) covers rent for periods beyond the year of receipt.

[35] There are four categories of transaction to be considered:

(a) the 17 original assignments that were not modified. The appellant concedes that it is entitled to no relief in respect of these and nothing more need be said about them;

(b) the 83 subleases in which a one day reversion was reserved to the appellant. I can see no reason to disregard the form or legal effect of the transactions covered by these subleases. In my view the amounts represent prepaid rent that must be included in income under paragraph 12(1)(a). Accordingly, the appellant is entitled to a reserve in accordance with subparagraph 20(1)(m)(iii).

The remaining 112 transactions that were the subject of the modification agreements themselves fall into two categories:

(c) the 63 that were covered by the order of Collver J. and were registered in the Land Titles Office in accordance with that order; and

(d) the 49 that were, after the order of Collver J., registered in the Land Titles Office without being specifically the subject of a court order.

[36] I shall deal first with the group of 63 that were covered by the court order. Whatever might have been the legal consequences that flowed from the modification agreements, they were not purely contractual. They also were buttressed by a court order of a superior court. In a broad sense the modification agreements converted assignments of leases made prior to about February 1989 to subleases. It is not clear just when the modification agreements were signed. The "error" was discovered in January or February of 1989 and thereafter the transactions took the form of subleases. The mistake seems to have consisted in the failure to appreciate the very different tax consequences that flowed from an assignment (immediate full taxability) and a sublease (a spreading of the recognition for tax purposes of the prepaid rent over the term of the sublease). I place no importance on the fact that the modification agreements were entered into solely to accommodate the appellant's tax requirements. No other reason is apparent. The question is the legal effect of what the parties did, not why they did it.

[37] In Dale et al. v. The Queen, 94 DTC 1100, I held that a consent order of a Nova Scotia Court in 1992 could not retroactively affect the tax consequences of an event that occurred in 1985 with respect to the share register of a company that at that time was subject to the law of Prince Edward Island. The Federal Court of Appeal (97 DTC 5252) disagreed and I am bound by that decision.

[38] I shall quote a number of passages from the judgment of Robertson J.A., speaking for the majority, at page 5255.

In determining whether a legal transaction will be recognized for tax purposes one must turn to the law as found in the jurisdiction in which the transaction is consummated. Often that determination will be made without the aid of guiding precedents, which are on point, and, hence, the effectiveness of a transaction may depend solely on the proper application of general common law and equitable principles. In some instances it will be necessary for the Tax Court to interpret the statutory law of a province. As for the Minister, he must accept the legal results, which flow from the proper application of common law and equitable principles, as well as the interpretation of legislative provisions. This leads me to the question of whether the Minister is bound by an order issued by a superior court, which order has its origins in the interpretation and application of the provisions of a provincial statute.

In the court below, the Minister argued that the order of the Nova Scotia Supreme Court might be binding as between the taxpayers and the Dale Corporation but not on him. Judge Bowman rejected that argument, and in my opinion rightly so, but went on to reason that an order allegedly having retroactive effect "cannot create a state of affairs in an earlier year that did not in fact exist" (at 1112). As I understand his reasons, this is so even though the Nova Scotia court was acting under the provisions of the Companies Act of that province. Counsel for the taxpayers now relies on the decision of the Supreme Court of Canada in Wilson v. The Queen, [1983] 2 S.C.R. 594, to support the argument that the Minister and Tax Court are bound by the terms of the Nova Scotia order. That decision establishes the general rule that an order of a superior court cannot be attacked collaterally unless it is lawfully set aside. In Wilson the Supreme Court was called on to determine whether a provincial court judge could look behind the apparently valid search order of a superior court and rule inadmissible the evidence obtained thereunder. In the course of delivering its reasons for judgment the Supreme Court made some general statements of the law concerning the binding effect of orders issued by superior courts.

The first principle is that the record of a superior court is to be treated as "absolute verity so long as it stands unreversed" (per McIntyre, J. at 599, quoting Monnin, J.A. in the Manitoba Court of Appeal). Second, an order, which has not been set aside, must receive full effect according to its terms (at 604). Third, the order is binding on all the world (at 601, citing Bird, J.A. in Canadian Transport (U.K.) Ltd. v. Alsbury, [1953] 1 D.L.R. 385 (B.C.C.A.) at 418). Fourth, a collateral attack is deemed to include proceedings other than those whose specific object is to effect a reversal or nullification of the order.

...

It seems only logical that a court would decline the invitation to grant a retroactive order, which has the clear legal effect of rewriting fiscal history. Assuming that such an order were granted then it would be proper to ask whether the Minister is entitled to ignore it for taxation purposes. One might be tempted to permit an attack on the ground of fiscal revisionism where it could be shown that the order was obtained by non-disclosure or misrepresentation. More likely than not revisionist orders will be obtained on consent, or in circumstances where it is likely that the tax ramifications of the order were not placed squarely before the judge, or where the judge was obviously sympathetic to the taxpayer's situation. There are two reported tax cases decided prior to Wilson which aptly illustrate the judicial sympathy scenario: see Bently v. Canada (M.N.R.), 54 DTC 510 (T.A.B.) and Hobbs v. Canada (M.N.R.), 70 DTC 1744 (T.A.B.). In both cases it is obvious that there was no legal foundation, statutory or otherwise, for making the retroactive orders requested. Assuming without deciding that those decisions some within the exceptional category recognized in Wilson, they are readily distinguishable from the case under appeal.

On the facts of this appeal, the Nova Scotia court granted the June 25, 1992 order on the basis of section 44 of the Nova Scotia Companies Act. In my view, any objection that the court lacked jurisdiction to issue that order is without foundation. If the legislature of a province authorizes its courts to deem something to have occurred on a date already past, then it is not for the Minister to undermine the legislation by refusing to recognize the clear effect of the deemed event. In any case I am not prepared to concede that section 44 has the revisionist effect advanced by the Minister. This is not a case where a court order deems shares to have been issued when in fact they were not. This is a case where shares were issued, but not validly so until such time as either supplementary letters patent were obtained in Prince Edward Island or the Nova Scotia court granted the June 25, 1992 order. After all, no one has argued that the share issuance constituted a nullity, nor could it be so argued.

I disgress here for a moment to point out that while the common law may treat the share issuance as being ineffective a different result could be reached in equity, vis-à-vis the validity of the share issuance as between the taxpayers and the Dale Corporation. In other words, it may well be that in equity the share issuance would be viewed as effective. The maxim that "equity looks on that as done which ought to be done" is of some import. Its impact is revealed in the seminal decision of Walsh v. Lonsdale (1882), 21 Ch.D.9. Since that decision imperfect agreements for value have often been treated as if they had been performed at the time they ought to have been, thus yielding the same consequences as if they had been completely performed: see P.V. Baker and P. St. J. Langan, Snell's Principles of Equity (London: Sweet & Maxwell, 1982) at 41. I say no more on this point as it was not raised in argument.

[39] Robertson J.A. then went on to set out his reasons for disagreeing with Pratte J.A., dissenting, who held that an assessment must be based upon facts that existed at the end of the taxation year. He states at page 5257:

My colleague Justice Pratte is also of the view that the Nova Scotia order is not subject to collateral attacks. Nonetheless he concludes that the Minister is not bound by that order for the reason that it is not permissible to take into consideration orders based on facts that occur after the end of the taxation year. This logically follows from Justice Pratte's earlier premise that if there is an appeal from the Minister's assessment then the correctness and validity of that assessment must be decided on the basis of the facts that existed at the end of the taxation year. Thus, if the Minister may not take into account facts, which arise outside the taxation year for assessment purposes then neither, can he take into consideration orders based on such facts. In the present case Justice Pratte notes that the Dale Corporation had become a Nova Scotia company with an increased capital stock and that its shareholders had ratified the issuance of the preference shares before and after the continuation of the company in that province. Some of these events clearly took place outside the relevant taxation year. Thus, Justice Pratte reasons that the June 25, 1992 order was based on evidence of facts that may not properly be taken into account for taxation purposes.

My initial difficulty with the above analysis is that the likelihood of finding an order being issued without the applicant relying on subsequent facts is remote. For example, it would not have been unreasonable for the Nova Scotia Court to insist in 1992 that existing shareholders ratify the issuance of the preference shares, as in fact they did, given the nature of the order sought. Presumably, the purpose of the ratification was twofold: to ensure both that the state of affairs that existed on December 31, 1985 continued to exist as of June 25, 1992 and that no shareholder at that latter time would be adversely effected by the ex parte order being sought. Had it been necessary for the taxpayers to seek specific performance surely they would have had to establish that no existing shareholder would be prejudiced by an award of that remedy. In my opinion, to impose the requirement that retroactive orders not be based on facts arising after the end of the taxation year, if such orders are to have any force in tax proceedings, is to unduly restrict the effectiveness of such orders and provide the Minister with a more effective means of avoiding the rule against collateral attacks. Finally, I have serious reservations about adopting an inflexible rule requiring that facts be established as of the end of the taxation year. I prefer to leave that issue for another day.

[40] As stated above, I am bound by the decision in Dale, both by its ratio and by the broad principles that it enunciates.[2] It would be inappropriate for me to endeavour to whittle away its effect by fine distinctions and spurious quibbles. One such fine distinction is the fact that in Dale the order of the Nova Scotia Court on its face purported to be retroactive whereas the order of Collver J. does not so clearly purport to have retroactive effect. I think however that reading the order and modification agreements together it is clear that the intent was that the documents called assignments be treated ab initio as subleases. Any other conclusion would mean that the assignees were reconveying to the appellant a one day reversion. Although such a result is not a legal impossibility, it is a remote and strained conclusion.

[41] So far as the remaining 49 transactions are concerned, I should have thought that it was impossible by agreement alone to rewrite fiscal history, on the authority of Rowlatt J. in Waddington v. O'Callaghan (1931) 16 T.C. 187 at pages 197-198 he said:

I do not think I need trouble you, Mr. Hills. I think this is a plain case. There is no sort of doubt at all about the legal position as I understand it. When people enter into a deed of partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mention as from which the deed provides that they shall be partners. There is no sort of doubt at all that that is the only effect, which such a deed can have. No deed can alter the past, but of course, it is quite possible that before the deed was executed the partners may in point of fact have been carrying on business in partnership which would give rise to partnership accounts and which would give rise to partnership liabilities and so on; and when the deed is executed and said to relate back to an earlier period, that means that the provisions of the deed as to the partnership rights and partnership accounts shall supersede the rights which have accrued under the partnership which de facto had existed before the date of the deed. All that is perfectly clear and perfectly simple.

(emphasis added)

[42] Although a number of the statements in Dale quoted above might arguably support the proposition that this court is entitled and indeed obliged to take into account the modification agreements which had the intended effect of making the assignments subleases ab initio, I think that the better view is that it would be pushing the Dale principle too far if I applied it to contractually agreed fiscal revisionism without the benefit of a court order.

[43] The appellant is therefore entitled to the reserve provided by paragraph 20(1)(m) in respect of 63 of the 129 subleases as well as the 83 that were entered into as subleases originally.

[44] The appeals are therefore allowed with costs and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.

Signed at Ottawa, Canada, this 18th day of December 1998.

"D.G.H. Bowman"

J.T.C.C.

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