Tax Court of Canada Judgments

Date: 19980507

Docket: 96-4673-GST-G

BETWEEN:

W.P. BUCK INVESTMENTS INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk, J.T.C.C.

[1] This is an appeal by W.P. Buck Investments Inc. (the Appellant) with respect to an assessment under Part IX of the Excise Tax Act (the Act) for the period February 1, 1995 to April 30, 1995, by notice of assessment number 808485 dated November 10, 1995.

[2] The Appellant and the Respondent, by their respective counsel, for the purpose of this appeal only, agree to the following facts and agree that these facts, and any facts contained in the Book of Documents, will be the only facts relied upon in the trial of this matter. This agreement does not preclude the parties from arguing the relevance of any of the facts set out below:

Date	Description	Document Tab
1.	At all material times the Appellant was in the business of taking mortgages against commercial real property.
2. December 22, 1989	The Appellant entered into a "Charge/Mortgage of Land", as Chargee, with Desbil Management Inc. ("Desbil"), as Chargor, with respect to certain real property known as 50 Northland Road (the "property") located in the city of Waterloo, Ontario: • the agreement was executed on December 22, 1989. • the principal amount of the Charge/Mortgage was $1,143,792. • the Charge/Mortgage was registered on January 4, 1990 in the Land Registry Office of Waterloo North (Instrument No. 1023479).	1, 15
3.	The Charge/Mortgage was a second charge or mortgage on the property.
4.	Desbil leased the property to Mitsubishi Electric Sales Canada Inc. ("Mitsubishi")
5. September 30, 1990	Desbil defaulted on its payment obligations under the Charge/Mortgage which fell due after September 30, 1990.	15
6. November 29, 1990	On November 29, 1990, the Appellant executed a Notice of Attornment of rents directed to Mitsubishi containing a direction to pay all rents due or becoming due to the Appellant.	2
7. December 5, 1990	The Appellant gave a "Notice of Sale Under Mortgage" to Desbil dated December 5, 1990, which provided, inter alia, that the property would be sold unless the amount due under the mortgage was paid on or before January 16, 1991.	4
8. December 31, 1990	By letter dated December 31, 1990, Dubrick Real Estate Ltd. provided an appraisal as to the market value of the property as of that date.	5
9. February 18, 1991	On or before February 18, 1991 the Appellant agreed not to take further steps regarding the power of sale proceedings for a period of two weeks. This was confirmed by the Appellant through its Solicitors (Du Vernet, Stewart, Fenn) by letter dated February 18, 1991.	6
10. March 1, 1991	The Appellant, through its solicitors (Du Vernet, Stewart, Fenn), advised that, inter alia, Mitsubishi had not responded to the direction to pay rents over to the Appellant and that Desbil had received and rejected an offer to purchase the property from a third party. The letter also stated that if Mitsubishi did not respond to the direction to pay rents over, appropriate proceedings would be taken, including the possibility of a motion to appoint an equitable receiver.	7
11. March 26, 1991	The Solicitors for the Appellant advised the Solicitors for the Mortgagor/Chargor, inter alia, • the Appellant has been advised to follow the process normal and accepted in sales under power of sale; namely, to get two independent appraisals and list the property for sale with a competent real estate brokerage firm, which advice the Appellant accepted; • the Appellant had provided to the Mortgagor/Chargor the opportunity to negotiate its own sale or reinstate the mortgage, and would continue to do so; and, • the Appellant had given instructions to the said Solicitor for the Appellant to contact the Solicitor for Mitsubishi to see if Mitsubishi was interested in buying the property, which instructions were acted upon on March 26, 1991.	8
12. April 12, 1991	Royal Lepage Real Estate Services Ltd. provided to the Appellant a marketing proposal in respect of the property.	9
13. April 16, 1991	The Appellant, through its Solicitors (Du Vernet, Stewart, Fenn), advised that, inter alia, • Desbil had defaulted in paying the payments due on its mortgage to the Appellant in November, the default continuing; • a Notice of Attornment had been served and power of sale proceedings had been commenced; • the Appellant had sought and was then seeking appraisals of the value of the property and was then trying to determine the best price for the property; • the Appellant had numerous conversations with Desbil, or its representatives, to seek a compromise; • the Appellant had received and rejected an offer to purchase the property; and, • the Appellant, neither having listed the property for sale nor having received an acceptable offer to purchase the property, would continue with the sale process.	10
14. May 24, 1991	The Appellant enters into an "Exclusive Authority to Sell" agreement, dated May 24, 1991, with Royal Lepage Real Estate Services Ltd. in respect of the property.	11
15. October 15, 1991	An Agreement of Purchase and Sale is executed in favour of Patrick George in Trust in respect of the property.	12
16. December 13, 1991	On December 13, 1991, a further direction to pay was issued to Mitsubishi.	3
17. December 13, 1991	Desbil Management Inc. writes to William P. Buck and W.P. Buck Investments Inc., the Appellant, to confirm the understanding reached as between the parties which included that "From January 1, 1992 the rental income generated from the real estate presently occupied by Mitsubishi Electric Sales Canada Inc. (Mitsubishi) shall be collected directly by Buck".	13
18. February 28, 1992	By letter dated March 3, 1992, the Appellant was advised by its Solicitors (Du Vernet, Stewart, Fenn) through a letter to William P. Buck, that, inter alia, the sale to Patrick George was completed on February 28, 1992.	14
19. December 10, 1992	By letter dated December 10, 1992, the Appellant was advised by its Solicitors (Du Vernet, Stewart, Fenn) through a letter to William P. Buck, that, inter alia; • the closing date of the sale of the property to Patrick George was February 27, 1992; • the said Solicitor did not collect GST from the purchaser; and, • both the Appellant and the purchaser of the property were registered under the GST.	15
20. October 25, 1995	By letter dated October 25, 1995, Revenue Canada advised the Appellant that, inter alia, the notional input tax credit in the amount of $574,000 claimed by the Appellant pursuant to subsection 183(7) of the Act was denied on the basis that the real property to which the claim related had not been seized or repossessed by the Appellant prior to March 28, 1991 as required by the said subsection.	16
21. October 25, 1992	A Summary of Assessment and Statement of Audit Adjustments, both dated October 25, 1992, was issued by Revenue Canada to the Appellant adjusting the input tax credits claimed by the Appellant in the amount of $574,000.	16, 17
22. November 10, 1992	A Notice of Assessment, dated November 10, 1992, was issued to the Appellant which disallowed the input tax credit claimed in the amount of $574,000.	17
23. February 5, 1996	The Appellant filed a Notice of Objection, dated February 5, 1996.	17
24. September 30, 1996	The Minister of National Revenue issued a Notice of Decision, dated September 30, 1996, to confirm the assessment on the basis that the input tax credit provided for under subsection 183(7) was not available to the Appellant because the real property was not seized or repossessed before March 28, 1991.	18
25. February 26, 1992	The Appellant was registered for the purposes of Goods and Services Tax (the "GST") effective as of February 26, 1992 (Registration No. R119932838).	19

[3] The parties have agreed that the issue is whether the Appellant seized or repossessed the property prior to March 28, 1991 within the meaning of subsection 183(7) of the Excise Tax Act.

[4] The relevant provisions of the Act[1]read:

183(1) Where at any time after 1990 property of a person is, for the purpose of satisfying in whole or in part a debt or obligation owing by the person to another person (in this section referred to as the "creditor"), seized or repossessed by the creditor under a right or power exercisable by the creditor (other than a right or power that the creditor has under, or because of being a party to, a lease, licence or similar arrangement by which the person acquired the property),

(a) the person shall be deemed, for the purposes of this Part, to have made, at that time, a supply of the property for no consideration; and

(b) the creditor shall be deemed, for the purposes of this Part, to have acquired the property at that time for no consideration.

183(7) For the purposes of this Part, where a creditor who has seized or repossessed property from a person in circumstances in which subsection (1) applies makes at any time a particular taxable supply of the property by way of sale (other than a supply deemed, under any provision of this part other than section 177, to have been made), the creditor was not deemed under subsection (4), (5), (6) or (8) to have made or received a supply of the property at an earlier time and the creditor provides evidence satisfactory to the Minister that the person has not received and is not entitled to claim an input tax credit or a rebate in respect of the property, the creditor shall be deemed

(a) to have received a supply of the property immediately before that time for consideration equal to the consideration for the particular supply; and

(b) to have paid, immediately before that time, tax in respect of the supply deemed under paragraph (a) to have been received equal to the amount determined by the formula

A - B

where

A is tax calculated on that consideration, and

B is the total of all amounts each of which is an input tax credit or a rebate under this Part that the creditor was entitled to claim in respect of the property or an improvement thereto.

Although subsection 183(1) of the Act speaks of seizure and repossession, the parties are agreed there was no seizure in the circumstances of this appeal.

Appellant’s Position

[5] The Appellant’s argument is based solely on the proposition that there was not in fact a repossession during the “limited window period”, i.e. March 1 through March 28, 1991. Counsel for the Appellant submitted that the relevant points in time are September 30, 1990 when Desbil defaulted on the mortgage payments; November 29, 1990, the date on which the Appellant executed a notice of attornment of rents directed to the tenant requiring it to pay all of the rents to the Appellant (Exhibit A-1, Tab 2); December 5, 1990, the date of a notice of sale under the Mortgages Act which provided that the property would be sold unless the amount due under the mortgage was paid on or before January 16, 1991 (Exhibit A-1, Tab 4); and December 13, 1990, the date on which a direction made at the joint request of both the mortgagor and the mortgagee that payments be made to A. Farber Associates, in trust. Thus, the Appellant contends that January 16, 1991 was the date at which the repossession was effectively chrystallized since the expiry of the notice under the power of sale vested the Appellant with authority to deal with the property.

[6] Counsel further submitted that the date of the sale of the property, October 15, 1991, is not relevant since it is not necessary for the property to be actually sold to finally deprive the mortgagor of any rights to redeem the property. He argued that

... when we say that it is necessary for the mortgagee to have demonstrated or taken steps to exercise control and to be in a position to transfer rights in the property, just being in the position of being able to transfer rights should be sufficient.

It should not be necessary then to require the next logical -- or the final logical step in that process, namely, the actual sale of property, for both the legal reasons as to the wording on subsection 183(7), and because there is a big difference between vested with the ability to transfer rights and actually transferring those rights.

Thus, it was argued, commencing with the notice of attornment, the Appellant acted upon its intention to assume control over the property, which was followed by the expiry of the notice period under the power of sale on January 16, 1991, during the “window period”. It is the Appellant’s position that on this date, it was vested with the ability to transfer title to the property to a third person. All of the subsequent steps to ultimately consummate the sale, which took place outside of the “window period” are not relevant to the primary issue in this appeal.

Respondent’s position

[7] Counsel for the Respondent relied on the well established proposition that “a mortgagee takes possession when he deprives the mortgagor of the control and management of the mortgaged property”.[2] This, the Respondent contends, did not take place until, at the very earliest, January 1, 1992 from which date onward it was agreed that the rental income generated from the property would be collected directly by the Appellant (Exhibit A-1, Tab 13), or on February 27, 1992, the closing date of the sale of the property by the Appellant. Neither of these periods fall within the time frame stipulated by the relevant provisions of the Act.

[8] Counsel for the Respondent argues that what a mortgagee must do to take possession in circumstances such as those before this Court has been well established in law. Reference was made to the following comments in Noyes v. Pollock:[3]

In order to hold that a mortgagee not in actual possession is in receipt of the rents and profits, in my opinion, it ought to be shown, not only that he gets the amount of the rents paid by the tenants, even although he gets their cheques or their cash, but that he receives it in such a way that it can be properly said that he has taken upon himself to intercept the power of the mortgagor to manage his estate, and has himself so managed and received the rents as part of the management of the estate.

... But in the case where an estate is let to tenants, of course the mortgagee does not enter upon actual occupation of the demised premises. He may fall under the principle as a person who enters and takes possession of the rents and profits; but only, as it seems to me, if he does something which goes beyond the mere receipt of sums of money to which the rents and profits may amount, and reaches a point at which he displaces, for the purpose of realizing the security, the mortgagor from the control and dominion of the reversion of the estate which is demised. Unless the dominion and control is taken in that sense, the mere receipt of the produce of the management may be taken by the mortgagee, and yet he may stop short of taking the management itself. ...

[9] The Respondent also takes the position that the rights of a mortgagor do not expire or terminate with the issue by the mortgagee of a notice of sale under mortgage. Such a notice of sale serves as nothing more than a limitation on the rights of the mortgagee.[4]

Conclusion

[10] As was observed by Counsel for the Respondent, the test of whether a mortgagee has obtained possession, actual or constructive, of the mortgaged premises is a question of fact and turns on whether the mortgagee has acted to take such steps as are necessary to deprive the mortgagor of the control and management of the property. Since a mortgagee is not compelled by law to take possession upon default, and because possession entails obligations on the part of the mortgagee vis à vis the mortgagor,[5] the steps taken must evidence an intent to take possession. No such evidence exists in the present case.

[11] It is important to note that as of the end of March, the only steps that had been taken by the Appellant were to issue a notice of sale under the terms of the mortgage; to issue a notice to the tenant of the property as to the attornment of rents, which notice was not acted upon, and to seek a marketing proposal from a realtor regarding the sale of the property.

[12] The position advanced by the Respondent is correct in law. As was observed in 165852 Canada Inc.:[6]

In the Modern Realty judgment, I note the provision that “he must assume the management”. Surely, this puts a positive obligation on the plaintiff in respect of the management of the property after default.

The evidence before me clearly indicates this Appellant neither entered into possession nor took upon itself in any manner to intercept the power of the mortgagor to manage its estate. An intention to deprive the mortgagor of the ability to redeem the property without taking any steps to put that intention into effect is not sufficient. As was observed by Wilson J.A. in Municipal Savings & Loan Corp. v. Wilson:[7]

It is the service on the mortgagor of the notice of the mortgagee’s intention to sell the property that triggers the mortgagor’s equitable right to redeem. The mortgage is security only: the mortgagee’s principle right is to its money ... : Lord Nottingham in Thornborough v. Baker (1675), 3 Swans. 628 at p. 630, 636 E.R. 1000 - if the mortgagee elects to resort to its security, then equity steps in to protect the mortgagor and, if he is able to pay the money, permits him to do so and get his land back.

[13] With respect to the Appellant’s contention that the mortgagor’s rights expired or terminated with the issue by it of a notice of sale, I make reference to the decision in Re Artibello et al. and Standard Trust Co.[8]In that case, Steele J. made the following comment:

It was argued that the notice of power of sale with a date set out therein was a window within which the rights of the mortgagee were waived and that if the mortgagor did not take advantage of this within the time period, he was barred from so doing afterwards. I reject this argument. Once the mortgagee has waived his rights by giving the notice of power of sale then the mortgagor has the right to make the payments and reinstate the mortgage, or pay it in full as in this case and failing that, the mortgagee may proceed to sell. The mortgagor’s rights continue up until the time that a sale is actually made. The mortgagee, once having given notice, cannot maintain an option whether to accept the payment or continue with the sale. The time period that is set out in the notice given under the power of sale is to comply with the provisions of the mortgage and of the Mortgages Act, R.S.O. 1980, c. 296, prohibiting a sale prior to that time. It has nothing to do with fixing a time-limit within which the mortgagor has rights which cease after that time. ...

[14] I am satisfied that if a mortgagee does not take possession, the rights of the mortgagor in and to the property continue until such time as a third party acquires those rights. This would occur upon sale or, perhaps, upon the execution of an agreement of purchase and sale which is subject to specific performance. This did not occur in the present appeal.

[15] The appeal is dismissed, costs to the Respondent, to be taxed.

Signed at Ottawa, Canada, this 7th day of May, 1998.

"A.A. Sarchuk"

J.T.C.C.

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