https://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/316046/index.do
Armour Group Limited v. Canada (July 17, 2018 – 2018 FCA 134, Webb (author), Rennie, Woods JJ.A.).
Précis: In a complex land transaction with the Province of Nova Scotia the taxpayer claimed to have paid $2.24 million by way of set off to cancel a ground lease with the Province under which its wholly-owned subsidiary, Founders Square Limited (“FSL”), was the tenant. FSL acted as a bare trustee for the taxpayer and the taxpayer claimed to deduct the payment made by FSL as a business expense. CRA denied the deduction as being on account of capital, or alternatively, a non-deductible pre-payment of rent. The Tax Court held that the payment was on account of capital and dismissed the appeal with costs to CRA. The taxpayer appealed to the Federal Court of Appeal which affirmed the decision of the Tax Court with costs to the Crown.
Decision: The Court of Appeal rejected the taxpayer’s claim that the amount of $2.24 million was paid to cancel the ground lease and agreed with the findings of the Tax Court:
[35] The position of AGL is that the $2.4 million referred to in the option was payable for the value of the future revenue stream arising under the Ground Lease held by the Province and the present value of the Province’s reversionary interest in the property. However, in my view, this is not an accurate description of the option. The option is for the “Sale of the Property” which is defined as the Lands and Ground Lease. If the Ground Lease is removed (as a result of the surrender of the Ground Lease) the Province then owns the Lands (including the buildings) subject only to the registration under the Heritage Property Act. The Lands (including the buildings) would still be owned by the Province (albeit without the encumbrance of the Ground Lease) and the option would still provide for a sale of these Lands for $2.4 million. There is nothing in the option that indicates that the purchase price for the Lands without the encumbrance of the Ground Lease would be any less than $2.4 million.
[36] There was no indication that any amendments were made to the terms and conditions of the option and, in particular, there is no document that indicates that the obligations of ADL arising from the exercise of the option were changed as a result of the surrender of the Ground Lease. Therefore, there is no document that indicates that the amount payable by ADL for the Lands (which would include the buildings with an appraised value in excess of $14 million) without the Ground Lease as an encumbrance would drop to $160,000. As a result, in this scenario, the purchase price payable by ADL for the Lands would presumably still be $2.4 million (which is the purchase price as set out in the option agreement for the Property) and this amount would be payable in addition to any amount payable by FSL (a different person) in relation to the surrender of lease.
[37] Since there was no indication in the closing agenda that any amount would be paid at the closing (other than payment as a set off against the amount payable by the Province under the minutes of settlement), if, as proposed by AGL in its supplemental submissions, the lease was surrendered immediately before the property was conveyed, this would not support a finding that any amount was paid or payable by FSL or ADL other than the $2.4 million purchase price as contemplated by the option and, in particular, would not support a finding that a lease cancellation fee of $2.24 million was paid or payable by FSL to the Province. The more likely result is that ADL purchased the Lands for $2.4 million and that this purchase price was set-off against the $2.4 million owing by the Province to FSL under the minutes of settlement.
[38] By having the surrender of lease occur before the Lands were conveyed, there would also be a brief moment in time when there was no lease. Having even a moment in time when there was no lease in place would also be inconsistent with the clearly stated intention of FSL that the lease not lapse (paragraph 4(e) from the supplemental submissions of AGL referred to in paragraph 28 above).
[39] The other scenario proposed by AGL was that the transactions occurred simultaneously. If, however, it is assumed that the transactions occurred simultaneously, this would also not support the position of AGL that a lease cancellation fee of $2.24 million was paid or payable to the Province. If a lease surrender fee is payable at the exact same moment in time that the Province conveys title to the Lands, then it is far from clear why the Province would be entitled to that payment. Since, as set out in paragraph 23 above, it is the position of AFL that the only amount payable to the Province (other than the amount payable as a lease cancellation fee) was $160,000 payable by ADL for the purchase of the Lands, without a lease cancellation fee of $2.24 payable to the Province there would not be a sufficient amount to set off against the $2.4 million that the Province owed under the minutes of settlement.
[40] Having the transactions occur simultaneously would also not resolve the issue of why the amount payable by ADL under the agreement arising from the exercise of the option would be reduced from $2,400,000 to $160,000.
[41] As a result, neither scenario would support a finding that there was a surrender of the Ground Lease to the Province for $2.24 million at any time when the Province owned the Lands.
[42] As a result, in my view, the Tax court Judge did not err in his conclusion, as stated in paragraph 50 of his reasons “that upon the proper construction of the agreements that are before me, FSL used the $2.4 million credit under the Minutes of Settlement to pay for the transfer of the Property to ADL”.
[43] Therefore, AGL has not established that there was a lease cancellation fee paid (or payable) to the Province in 2003 in the amount of $2,240,000.
Thus the appeal was dismissed with costs.