A-27-91
May Bros. Farms Ltd. (Appellant)
v.
Her Majesty the Queen (Respondent)
INDEXED AS.' MAT BROS.. FARMS LTD. V. CANADA (TD.)
Court of Appeal, Pratte, Hugessen and Décary M.A.
—Vancouver, February 18; Ottawa, April 24, 1992.
Real property — Income tax case — Appellant, cranberry
farming business, entering into agreements with lessee of land
for right to farm land while lessee remaining in legal posses
sion and requiring lessee to execute option to purchase — Sub
sequently purchasing land in fee simple — Arguing lesser
interest under agreements merging with greater — Common
law doctrine of merger abolished in B.C. by statute — Merger
existing only when required by equity — Equity requiring
determination of intention of parties — Examination of lease,
agreements, transfer of fee simple indicating intention lease,
agreements to survive transfer — Equity also considering
interest of appellant — Entry on and use of land requiring sur
vival of agreement to farm land.
Income tax — Income calculation — Capital cost allowance
— Taxpayer entering into agreements with lessee of land for
right to farm land while lessee remaining in legal possession
and requiring lessee to execute option to purchase interest in
lease — Rights under first agreement within Class 14, Sched
ule II, Income Tax Act — Subsequently acquiring land in fee
simple — Taxpayer arguing lesser interest under agreements
merging with greater interest and thereafter not owning any
Class 14 property — Common law doctrine of merger abol
ished in B.C. by statute.
In June, 1980 the taxpayer entered into two agreements with
the lessee of certain lands that it wanted to farm: (I) a Farming
Rights Agreement under which it had the right to farm the land
while the lessee remained in legal possession; and (2) an
Option Rights Agreement requiring the lessee to execute an
option to purchase its interest in the lease. The Farming Rights
Agreement was to endure until the expiration of the lease on
December 31, 1983. It was common ground that the Farming
Rights Agreement created an interest in the land (profit à pren-
dre) in the appellant. Later that year the appellant acquired the
land in fee simple. The transfer was expressly subject to the
lease and option to purchase the lease.
The rights under the Farming Rights Agreement fell within
Class 14, Schedule II of the Income Tax Act. The appellant
argued that its rights under the Farming Rights Agreement
merged with the fee simple and thereafter it did not own any
Class 14 property. Accordingly, it deducted the consideration
paid for the Farming Rights Agreement in 1980 and 1981. The
respondent's position was that there had not been any merger
and the price paid should be allocated over the life of the
Farming Rights Agreement.
Held, the appeal should be dismissed.
The common law doctrine of merger (when a greater and
lesser estate are combined in one person, the latter is merged in
the former by sole operation of law and without regard to the
intention of the parties) was abolished in British Columbia by
the Law and Equity Act, section 13. Merger now takes place
only when it is required by equity. Merger in equity is depen
dent upon intention, which must be determined from the lan
guage of the deeds when there is no direct evidence thereof.
The taxpayer's rights in the land under the Farming Rights
Agreement and the option were dependent on and subject to
the lease. The transfer was expressly subject to both the lease,
under which taxpayer held a licence, and the option, both of
which rights accordingly survived the transfer of the fee simple
and there was a clear intention that they not be merged. The
Farming Rights Agreement, which was subordinate to the
option and dependent on the lease, must also have been
intended to survive.
Even absent any indication of the parties' intention, the
Farming Rights Agreement would have survived the transfer
because equity looks to the interest of the person affected. So
long as the lease survived, taxpayer's only right to entry on the
land arose under the Farming Rights Agreement. Since entry
on and use of the land was what the appellant had wanted and
paid for, it was to its advantage that its interest in the land
under the Farming Rights Agreement continue.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Law and Equity Act, R.S.B.C. 1979, c. 224, s. 13.
Law of Property Act, 1925 (U.K.), 15 & 16 Geo. 5, c. 20.
CASES JUDICIALLY CONSIDERED
REFERRED TO:
Flanagan v. Bobineau, 125 N.E.2d 231 (S.C. Mass.
1955).
AUTHORS CITED
Megarry's Manual of The Law of Real Property, 6th ed.
by David J. Hayton, London: Stevens & Sons Ltd., 1982.
APPEAL from trial judgment ([1991], 1 F.C. 681;
[1991] 1 C.T.C. 151; (1990), 91 DTC 5070; .15
R.P.R. (2d) 258 (T.D.)). Appeal dismissed.
COUNSEL:
Gordon S. Funt and G. Lisa Heddema for appel
lant.
Max J. Weder for respondent.
SOLICITORS:
Fraser & Beatty, Vancouver, for appellant.
Deputy Attorney General of Canada for respon
dent.
The following are the reasons for judgment ren
dered in English by
HUGESSEN J.A.: This case was pleaded both here
and in first instance [[1991] 1 F.C. 681] as though its
resolution turned upon an arcane aspect of the law of
real property, namely the ancient common law doc
trine of merger. In my view, as matters turn out, the
case in fact depends upon the construction of some
relatively straightforward late twentieth century doc
uments.
The appellant (plaintiff in the Trial Division) is in
the business of cranberry farming. It became inter
ested in acquiring some land in Richmond, B.C.
which was presumably suitable for its operations.
The land was owned by a company called Wingly
Enterprises Ltd. which had leased it with greater
extent to a company called Bell Farms Ltd. The term
of that lease expired December 31, 1983. The plain
tiff approached Bell with a view to obtaining a sub
lease of the land. Bell was willing but Wingly, the
head lessor, withheld the necessary consent under the
head lease. In June 1980, the plaintiff and Bell con
trived a method of allowing the plaintiff to farm the
land which would not require Wingly's consent. They
entered into two agreements, both dated June 27,
1980.
The first of these agreements, sometimes in the
materials called the "Farming Rights Agreement" and
sometimes the "Management Agreement", provided
that the plaintiff was to have the right to farm the
land and for that purpose to enter thereon with
machinery and equipment and to do all that was nec
essary for a complete cranberry farming operation.
The agreement specified that Bell was to remain in
legal possession of the land but was not to interfere
with the plaintiff. The agreement also specified that
Bell was to have the right to certain "prunings"
which would result from the plaintiff's operations.
The price for the agreement was one million dollars
paid by the plaintiff to Bell, and the agreement was to
endure for the balance of the term of the lease from
Wingly to Bell, i.e. to December 31, 1983.
The second agreement, called the Option Rights
Agreement, provided for Bell to execute and deliver
to the plaintiff an option to purchase Bell's interest in
the lease from Wingly to Bell. The remaining terms
of this agreement have little bearing on the present
litigation, although it is interesting to note that clause
7.00 provides that Bell's rights in the "prunings"
shall expire December 31, 1982 (i.e. one year prior to
the termination of the lease and of the Management
Agreement) and clause 9.00 provides that, in the
event of inconsistency between the Management
Agreement and the Option Rights Agreement, the lat
ter shall prevail.
It is common ground between the parties that the
Management Agreement created an interest in land in
the plaintiff (a "profit à prendre"). As for the Option
Rights Agreement, it was given effect to by the exe
cution of an option from Bell to the plaintiff. The
operative part of that option reads as follows:
By a lease dated the 13th day of December, 1977, registered in
the New Westminster Land Title Office on the 21st day of Feb-
ruary, 1979 under number RD87899, a copy of which is
annexed hereto, and marked Schedule "A" ("the Lease")
Wingly Enterprises Ltd. leased the Lands to Bell on the terms
and conditions set out therein.
EACH PARTY, in consideration of the execution of this
Agreement by the other party, hereby COVENANTS AND
AGREES with the other, as follows:
2.00 OPTION
Bell shall upon payment of the sum of $1.00 by May Bros.,
within 60 days of the consent by Wingly Enterprises Ltd.,
thereto assign to May Bros. all of its right, title and interest in
and to the Lease. (Appeal Book, Appendix I, p. 34.)
The option was registered in the New Westminster
Land Title Office under number RDI 20430A.
As indicated, these agreements between plaintiff
and Bell were entered into in June 1980. Although
there is no evidence on the point, it seems that plain
tiff continued to attempt to deal with Wingly, the
owners of the land, and that those attempts bore fruit.
At any event, on October 14, 1980, Wingly executed
a deed by which it transferred to plaintiff the fee sim
ple in the land. Such transfer was specifically stated
to be "Subject to Lease and Option to Purchase Lease
under New Westminster Land Title Office Nos.
RD87899 and RD120430A respectively" (Appeal
Book, Appendix I, page 45). Those references are to
the registrations respectively of the lease from
Wingly to Bell and of the option from Bell to plain
tiff.
How does all of the foregoing give rise to income
tax litigation and the invocation of the common law
doctrine of merger? The Trial Judge puts the matter
with her customary clarity and concision [at pages
683-685]:
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 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 tim
ber 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, petro
leum, 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
[1TA] [S.C. 1970-71-72, c. 63] triggers a terminal loss for the
plaintiff'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 subpar-
agraphs 13(21)(fl(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)(fl(iii) to (viii) in respect of depre-
ciable property of that class of the taxpayer, and
(b) the taxpayer no longer owns any property of that class
in computing that 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 business or property. [Underlining by Reed J.]
The plaintiff claims that the $1,000,000 paid for the Farm
ing Rights Agreement should be allocated so that, for the pur
poses of its 1980 and 1981 taxation year [sic], 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 Agree
ment should be allocated over the life of that agreement, pursu
ant to paragraph 20(1)(a), 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:
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 purchase of the fee simple, in
October of 1980, resulted in a merger.
Both in the Trial Division and in argument before
us, the matter proceeded as though it turned upon the
application of the doctrine of merger; reliance was
placed on ancient authority to support the view that
when a greater and a lesser estate are combined in
one person the latter is merged in the former by sole
operation of law and without regard to the intention
of the parties.
Since none of the panel hearing the appeal had a
working familiarity with the law of real property as it
applies in British Columbia, we reserved the matter
on the basis on which it had been pleaded. Shortly
thereafter, however, we became aware of the terms of
section 13 of the Law and Equity Actl of British
Columbia. That section reads:
13. There shall not be any merger by operation of law only
of any estate the beneficial interest in which would not be
deemed to be merged or extinguished in equity.
Accordingly, we required further written represen
tations from the parties as to the relevance of section
13 and its impact upon the decision we have to
render. Those representations have now been
received.
Clearly, the effect of section 13 is to abolish the
common law doctrine of merger in British Columbia.
Merger is only to take place when equity requires it.
Merger in equity does not take place by sole opera
tion of law. Indeed, there is even authority that
merger is "odious" to equity. 2
In equity, merger is dependent upon intention. The
rule is well and concisely stated by Megarry: 3
2. Merger. At common law, if a rentcharge became vested
in the same person as the land upon which it was charged, the
rentcharge became extinguished by merger, even if this was
not the intention. For this to occur, both the rent and the land
must have been vested in the same person at the same time and
in the same right. This automatic rule of the common law no
R.S.B.C. 1979, e. 224.
2 Flanagan v. Babineau, 125 N.E.2d 231 (S.C. Mass. 1955).
3 Megarry's Manual of the Law of Real Property, 6th ed. by
David J. Hayton (London: Stevens & Sons Ltd., 1982), at pp.
394-395.
longer applies for, by the Law of Property Act 1925, 4 there is
to be no merger at law except in cases where there would have
been a merger in equity, and the equitable rule is that merger
depends upon the intention of the parties. Even if an intention
that there should be no merger cannot be shown, there will be a
presumption against merger if it is to the interest of the person
concerned to prevent it. [Footnotes omitted.]
The burden of proving that merger took place here
lay on plaintiff. There was no direct evidence of
intention (assuming that such evidence would be use
ful), so we are driven back to determining the parties'
intention from the language used in the deeds. That
language, in my view, indicates that in October 1980,
at the time of the acquisition by plaintiff of the fee
simple, the intention was that both the lease, and the
Management Agreement which depended upon it,
should survive the transfer. I can give no other inter
pretation to the provision quoted above from the deed
of transfer itself. Such transfer is made subject not
only to the lease but also to the option by which the
transferee of the fee simple was entitled to acquire
the lessee's interest in the lease.
The effect of this, as I see it, is that plaintiff had
acquired rights in the land from Bell under both the
Management Agreement and the option; those rights
were dependent on and subject to the lease from
Wingly to Bell. Plaintiff then acquired the fee simple
from Wingly, expressly subject to both the lease,
under which it held a licence, and the option, which
was in its favour. Accordingly, both of these rights
survived the acquisition of the fee simple and there
was a clear intention that they not be merged. There
is no evidence that plaintiff ever exercised its option
(which might have given rise to merger), but since
both the lease and the option survived the transfer, it
seems to me that the Management Agreement, which
was subordinate to the option and dependent on the
lease, must likewise have been intended to survive it.
Even absent any indication of the parties' inten
tion, it would be my view that no extinguishment of
4 The text of section 13 of the Law and Equity Act (supra) is
identical to that of the English Law of Property Act [1925
(U.K.), 15 & 16 Geo. 5, c. 20] referred to by Megarry in the
quoted text.
the plaintiff's interest in the land under the Manage
ment Agreement took place upon the acquisition of
the fee simple. Where there is no evidence of inten
tion, equity looks to the interest of the person con
cerned, in this case the plaintiff. For so long as the
lease, whose existence was expressly preserved by
the deed of transfer, continued to be held by Bell,
plaintiff's only right to immediate entry on the land
arose under the Management Agreement. As owner
of the fee simple, plaintiff had no right to enter the
land as against Bell the lessee who was in possession.
Since entry on and use of the land was what plaintiff
wanted, and had paid $1,000,000 to obtain under the
Management Agreement, it was manifestly to plain
tiff's advantage that the interest in land created in its
favour by the latter should continue in full force and
effect for the balance of its term. That plaintiff should
now assert, long after the lease has run its course, that
it is in its interest that the Management Agreement
should be extinguished by merger is, of course, noth
ing to the point.
I would dismiss the appeal. Since I consider that
counsel for both parties have failed in their duty to
the Court (and indeed have led the Judge of the Trial
Division into deciding this case on a wrong basis,
albeit with the right result), I would award no costs
on the appeal.
PRArrE J.A.: I agree.
DÉCARY J.A.: I agree.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.