T-386-90
May Bros. Farms Ltd. (Plaintiff)
v.
Her Majesty The Queen (Defendant)
INDEXED AS: MAY BROS. FARMS LTD. V. CANADA (T.D.)
Trial Division, Reed J.—Vancouver, December 11
and 14, 1990.
Income tax — Income calculation — Capital cost allowance
— Farming Rights Agreement granting taxpayer profit Ã
prendre with respect to approximately 198 acres of cranberry
lots and allowing it to manage and harvest cranberries —
Agreement within Class 14 of Schedule II of Income Tax Act
= Taxpayer subsequently purchasing fee simple in 200 acres
of same lots — Whether taxpayer's rights under Farming
Rights Agreement merged with fee simple and whether still
owner of Class 14 property — If so, entitled to terminal loss
for 1981 taxation year — Allocation of amount paid for
Farming Rights Agreement — Conditions for merger not met
— Action dismissed.
Real property — Whether purchase of freehold interest in
200 acres of cranberry lots resulting in merger of interest with
prior profit à prendre — Meaning of "merger" in law of real
property — More than coincidence of time required for merger
— Interest in estates must coalesce with lesser interest
drowned in greater — In instant case, intervening estate exist
ing as two interests in land not having coalesced.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, s. 20(16) [as
am. by S.C. 1977-78, c. 1, s. 14; 1980-81-82-83, c. 48,
s. 10].
Income Tax Regulations, C.R.C., c. 945, Schedule II,
Class 14.
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Re The Queen in right of Manitoba and Senick (1982),
134 D.L.R.' (3d) 586; [1982] 3 W.W.R. 589; 17 Man. R.
(2d) 257 (Man. C.A.); R. in right of the Province of
British Columbia v. Tener et al., [1985] 1 S.C.R. 533;
(1985), 17 D.L.R. (4th) I; [1985] 3 W.W.R. 673; 32
L.C.R. 340; 59 N.R. 82; 36 R.P.R. 291; Burton v.
Barclay and Another (1831), [1824-34] All E.R. Rep.
437 (C.P.); R. v. Compagnie Immobilière BCN Ltée,
[1979] 1 S.C.R. 865; (1979), 97 D.L.R. (3d) 238; [1979]
CTC 71; 79 DTC 5068; 25 N.R. 361.
AUTHORS CITED
Cheshire, Geoffrey Chevalier and Burn, E. H. Cheshire
and Burn's Modern Law of Real Property, 14th ed.
London; Edinburgh: Butterworths Co. Ltd., 1988.
Oosterhoff, A. H. and Rayner, W. B. Anger and Hons-
berger Law of Real Property (2nd ed. vol. 2, Aurora,
Ontario: Canada Law Book Inc., 1985).
COUNSEL:
Gordon S. Funt for plaintiff.
M. J. Weder for defendant.
SOLICITORS:
Fraser & Beatty, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
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 Limited ("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 subse
quently subleased a very small portion of the lands
(2 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 of 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 agree
ments: a Farming Rights Agreement and an
Option and Indemnity Agreement. The second
agreement never became operative and both coun-
sel 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 à prendre
with respect to the approximate 198 acres in ques
tion. 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 there-
for, 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 al!
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 2 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 Agree
ment fall within Class 14 of Schedule II of the
Income Tax Regulations [C.R.C., c. 945]. Class
14 property, at the relevant time, was described as:
CLASS 14
Property that is a patent, franchise, concession or licence for
a limited period in respect of property, except
(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 distribu
ting 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 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) [as am.
by S.C. 1977-78, c. 1, s. 14; 1980-81-82-83, c. 48,
s. 10] of the Income Tax Act [ITA] [S.C. 1970-
71-72, c. 63] triggers a terminal loss for the plain
tiff's 1981 taxation year. At the relevant time,
subsection 20(16) read:
20....
(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 subpara-
graphs 13(21)(J)(i) to (ii.1) in respect of depreciable prop
erty of a particular prescribed class of a taxpayer exceeds the
aggregate of all amounts determined under subparagraphs
13(21)(J)(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 deter
mined under paragraph (a), and
(d) no amount shall be deducted for the year under para
graph 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 busi
ness or property. [Underlining added.]
The plaintiff claims that the $1,000,000 paid for
the Farming Rights Agreement should be allocat
ed 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
occured 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), Regulation 1100, and
Class 14 of Schedule II of the Income Tax Regu
lations. The defendant's allocation of the
$1,000,000 is as follows:
1980 $ 2,341
1981 284,711
1982 284,711
1983 284,711
1984 143,526
$ 1,000,000
There is no dispute concerning the respective
calculations. The only dispute is whether the pur
chase of the fee simple, in October of 1980, result
ed in a merger.
It is stated in Cheshire and Burn, Modern Law
of Real Property (14th Edition, 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.
[Underlining added.]
In Anger and Honsberger Law of Real Property
(2nd edition, 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. [Underlining added.]
Counsel for the plaintiff cites: Re the Queen in
right of Manitoba and Senick (1982), 134 D.L.R.
(3d) 586 (Man. C.A.); R. in right of The Province
of British Columbia v. Tener et al., [1985] 1
S.C.R. 533; Burton v. Barclay and Another
(1831), [1824-34] All E.R. Rep. 437 (C.P.); R. v.
Compagnie Immobilière BCN Ltée, [1979] 1
S.C.R. 865.
None of these cases assist the plaintiff. The
Senick case merely establishes that a profit Ã
prendre can be irrevocable in the sense that it is
not terminable at will as a licence might be. The
Tener case 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, com
mented, at page 542:
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. [Underlining added.]
I do not think this explanation assists the plain
tiff. In the first place, the plaintiff's profit Ã
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 impor
tantly, 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 deals with a situation in which
merger did not occur because a reversionary inter
est 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 because there was a reversionary right for
a period of 21 days. The Compagnie Immobilière
BCN case 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 Jus-
tice Wilson's comments in Tener, 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 fash
ion that is suggested. In addition, more than coin
cidence of time is required for a merger to occur.
The interests in the estates themselves must also
coalesce. As Cheshire and Burn 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, there
fore, 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.
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