Yet another light week for the Court of Appeal. Four civil decisions. Topics covered include contractual interpretation, contempt, stay pending appeal and corporate tax. Have a nice weekend.
First Elgin Mills Developments Inc. v. Romandale Farms Limited, 2014 ONCA 573
[Epstein, Lauwers and Pardu JJ.A.]
J. J. Longo and M. J. Henderson, for the appellant
R. L. Youd and A. J. Wygodny, for the respondents
Keywords: Development Land, Purchase and Sale Agreement, Greenbelt Act, Price Adjustment Clause, Vendor Take-Back (VTB) Mortgage, Standard of Review in Interpretation of Contract
The appellant, First Elgin Mills Developments Inc., purchased development land from the respondents for $12.5 million dollars, secured by an interest-free vendor take-back (VTB) mortgage payable over seven years. The agreement of purchase and sale contained a price adjustment clause by which the purchase price could be reduced if the amount of developable land was less than expected, pursuant to the Greenbelt Act. In order for the purchase date to be finalized, the parties compromised on a horizon date of five years on which the amount of non-developable land would be determined. A “time of the essence” clause was included in the agreement. The appellant applied for a declaration that, as a result of the operation of the price adjustment clause, nothing was owed on account of the purchase price. The appellant also sought a consequential order discharging the mortgage. The respondents cross-applied for a declaration that the price adjustment clause would not operate to reduce the purchase price because it had expired and, as a result, the appellant was obliged to pay the remaining balance of approximately $1.4 million to the respondents. The application judge dismissed the appellant’s application and allowed the respondent’s cross-application. First Elgin appealed.
(1) Was the application judge correct in interpreting the date on which the amount of non-developable land was to be determined as a form of a limitation period to which the agreement’s “time of the essence” clause was applicable?
(2) If so, is First Elgin entitled to relief from forfeiture?
(1) No. The standard of review on this appeal is correctness, since it involves the interpretation of a contract, with due deference to be paid to the application judge on those determinations in which the facts dominate. The application judge erred in his interpretation of the agreement by characterizing the “time of the essence” provision as a hard deadline by which the price adjustment had to be made, similar to a limitation period. Rather, the determination date was best interpreted and understood as an “as of” date for the purposes of calculating the quantum of non-developable acreage, similar to a valuation date. The application judge was correct to say that the parties chose the end of the fifth year of the mortgage as the relevant time for calculating the proportion of the land that was not developable. However, he erred in holding that First Elgin was required to complete, or even commence, determining the proportion of non-developable land by that date. Such a requirement did not make business sense in the context of the rest of the agreement and the overarching land development process. The date of valuation generally has nothing to do with the dates by which the process of valuation must be started and ended.
(2) In light of the answer to (1), there is no need to address this issue.
Boily v Carleton Condominium Corporation 145, 2014 ONCA 574
[Epstein, Lauwers and Pardu JJ.A.]
J. B. Payne, for the appellants Dan Litchinsky, Avis Miller, Jean-Guy Bourgeois and Carol Smale
A. Casalinuovo and P. Elia, for the appellant, Carleton Condominium Corporation 145
R. Escayola and J. Duquette, for the respondent, Juan Escudero
Keywords: Condominium Corporation, Condominium Act 1998 Sections 97(4)-(6) & 97(1), Contempt of Court, Personal Liability
A condominium complex that was built in the mid-1970s required landscape restoration due to garage repairs. The board of directors proposed a new landscaping design. Several condominium owners opposed the suggested new design. These owners argued that under s.97(4)-(6) of the Condominium Act 1998, the new design constituted a “substantial change” for which the corporation must have owner approval. The corporation argued that the landscaping restoration amounted to “repairs and maintenance” and therefore, under s.97(1) of the Act, they could proceed with the new design without notice to owners. A dispute arose which led to litigation and a court order that the landscaping be restored to its original design. In defiance of the court order, the directors authorized the installation of the new design. As a result of the violation of the court order, the condominium corporation and directors were found in contempt of court. In sanctioning the contempt, the motion judge ordered that the area be restored to the original design and also ordered the directors to personally bear the substantial costs of the restoration. The condominium corporation and the directors appealed the finding of contempt. In the alternative, the directors appealed the penalty that the motion judge imposed.
(1) Did the motion judge err by concluding that the terms of the 2011 Endorsement were sufficiently clear and unequivocal to justify a finding of contempt?
(2) Did the motion judge err in finding that the remaining parts of the test for contempt were met?
(3) Notwithstanding the 2011 Endorsement, did the appellants have authority under the Act to deviate from the original design?
(4) Did the motion judge err by ordering the individual appellants to personally pay the costs of restoring the original design elements?
Holding: Appeal dismissed from the finding of contempt and the order that the landscaping be restored to its original design as it was immediately prior to garage repairs. However, appeal allowed for the portion of the sanction in which the motion judge ordered the directors to bear the costs of restoration. Sentence set aside and replaced with a fine to be paid by each director to the condominium corporation.
Epstein J.A. and Lauwers J.A.
(1) No. The parties met the test for contempt because they understood what had to be done to comply with the order. The 2011 Endorsement was clear and unambiguous in requiring the appellants to restore the landscaping to its original state. By submitting that the 2011 Endorsement was unclear, the appellants were trying to hide behind a restrictive and literal interpretation, circumventing the administration of justice.
(2) No. Since the 2011 Endorsement was clear and unambiguous, it was not necessary to examine this issue. The appellants wilfully violated the obligations imposed on them.
(3) No. While the individual appellants’ authority as a board to manage the common elements in accordance with the Act was otherwise unfettered, they had to comply with the 2011 Endorsement.
(4) Yes. Any contempt is serious. However, the appellants’ contemptuous conduct had to be considered in light of the fact that there was no evidence that it was motivated by personal gain, vengeance, or any reason other than they felt they knew best. Therefore, the financial penalty against each individual appellant was reduced from $100,000 to a fine of $7,500 to the credit of Carleton Condominium Corporation 145.
Pardu J.A. (Dissenting)
The appeal should be allowed and the finding of contempt set aside because the order alleged to have been breached, which stated that “the Board is required to reinstate the Courtyard as it existed after the repairs to the garage” was neither clear nor unequivocal.
Sistem Muhendislik A.S. v Kyrgyz Republic, 2014 ONCA 576
J. B. Casey, for the appellant
S. Frankel, for the respondent
Keywords: Foreign Arbitral Award, Enforcement, Declaratory Order, Stay Pending Appeal, Order for Payment of Money, Rule 63.01(1), Writ of Seizure and Sale
This dispute arises out of the enforcement of a foreign arbitral award. The Superior Court ordered the Kyrgyz Republic to pay Sistem Mühendislik A. S. (“Sistem”) an amount in Canadian currency sufficient to purchase US $9,147,470 to satisfy an arbitral award. Sistem issued a writ of seizure and sale in respect of the property of the Kyrgyz Republic.
The appellant Kyrgyzaltyn JSC is an entity that is wholly owned by the Kyrgyz Republic. It holds shares in Centerra Gold (“Centerra”), a Canadian public corporation with its head office in Toronto. A writ of seizure and sale was served upon Centerra along with a Notice of Enforcement. Centerra resisted Sistem enforcement initiatives by taking the position that the Kyrgyz Republic was not the owner of any of its shares and that Kyrgyzaltyn JSC was the registered and beneficial owner of some of its shares. Sistem obtained an order adding Kyrgyzaltyn JSC as a party respondent and also obtained an interim order and Mareva injunction that has resulted in Centerra holding in trust more than $11 million in dividend monies to the credit of Sistem’s proceeding.
The order under appeal declared that the Kyrgyz Republic has an equitable interest in the Centerra shares issued in the name of Kyrgyzaltyn JSC and ordered that the Sheriff could seize monies held in trust by Centerra to satisfy the award. In this motion before the Court of Appeal, Kyrgyzaltyn JSC sought a declaration that the order is subject to the automatic stay provided by Rule 63.01(1), and in the alternative seeks a stay of the order pending appeal.
(1) Is there an automatic stay in this case?
(2) Should a stay be imposed?
Order is stayed.
(1) No, the order under appeal is not automatically stayed. Rule 63.01(1) provides that the delivery of a notice of appeal from an interlocutory or final orders stays, until the disposition of the appeal, any provision of the order for the payment of money, except a provision that awards support or enforces a support order. In this case, the order under appeal does not order Kyrgyzaltyn JSC to pay or repay money to Sistem. The only order that requires the payment of any money is an order for the Kyrgyz Republic (as opposed to Kyrgyzaltyn JSC) to pay Sistem.
(2) Yes, a stay should be imposed. The appeal raises a serious issue to be decided. If the order is not stayed Kyrgyzaltyn JSC will clearly suffer irreparable harm. Sistem has no business and no assets in Canada. If Kyrgyzaltyn JSC is successful on appeal it will be unable to recover any monies that the Sheriff pays out to Sistem. Although it is unlikely that Sistem will be prejudiced by a stay because another judgment creditor may file an execution with the Sheriff and thereby share in the proceeds of the shares seized by the Sheriff, such possible harm is legally cognizable. The balance of convenience would best be served by staying the order under appeal on the term that Kyrgyzaltyn JSC file a letter of credit in the amount of the outstanding judgment against the Kyrgyz Republic. If the company fails to file the letter of credit within 15 days of this decision, Sistem may proceed to enforce the order under appeal.
Inter-Leasing, Inc. v. Ontario (Revenue), 2014 ONCA 575
[ Weiler, Hourigan and Pardu JJ.A.]
A. Meghji, M. Biringer, C. D’Elia, A. Hirsh, for the appellant
A. C. Veiga, R. Mak, for the respondent
Keywords: Tax reassessments, Income from business, Income from property, Specialty debt, Corporations Tax Act, General Anti-Avoidance Rule (GAAR), Corporate Minimum Tax, Conflict of Laws, Situs of Specialty Debts
The Minister of Revenue (the “Minister”) issued a series of tax reassessments to Inter-Leasing under Ontario’s Corporations Tax Act (OCTA). Inter-Leasing was required to pay tax on certain interest payments it received during 2001 to 2004 and interest on arrears. Inter-Leasing appealed. The appeal judge held that the interest income was “income from a business carried on in Canada” and that the Minister’s reassessment of corporate income tax was correct. Inter-Leasing appeals that decision.
Inter-Leasing was incorporated in the British Virgin Islands and is a member of the Precision Group of companies. Some of these companies are incorporated in Alberta. Several of the companies entered into a series of non-interest-bearing inter-corporate loans with one another to eliminate provincial tax payable to Alberta. Precision Group’s non-interest-bearing inter-corporate debts were converted into interest-bearing deeds of specialty debt, which were payable to Inter-leasing. The deeds were physically located in the British Virgin Islands.
Precision Group’s Alberta corporations paid interest on the replacement loans to Inter-Leasing and deducted the interest as an expense from their income for tax purposes. Inter-Leasing received the interest income and declared it as income for federal income tax purposes because it became a resident of Canada. Inter-Leasing acquired units in a limited partnership in Ontario which established a “permanent establishment” in Ontario for the OCTA, although it was incorporated in the British Virgin Islands. As a result, it was required to pay tax imposed by OCTA ss. 2(2).
(1) Did the appeal judge err in concluding that the interest income was income from business rather than income from property?
(2) If the interest income was income from property, should it be subject to corporate income tax by virtue of the General Anti-Avoidance Rule (GAAR)?
(3) Should the income from the specialty debt instruments be subject to the Corporate Minimum Tax (CMT) as “property situated in Canada”?
(4) If the specialty debt instruments were not “property situated in Canada,” should Inter-Leasing’s location of the specialty debts in the British Virgin Islands constitute CMT avoidance for purposes of the GAAR?
Appeal allowed. Inter-Leasing’s interest income was from property, not business. Inter-Leasing is not liable for corporate income tax pursuant to the GAAR or liable for paying the CMT on its interest income. The Minister is directed to vacate the reassessments and reverse the amounts added to the appellant’s CMT tax base as “adjusted net income” for the OCTA.
(1) Canadian income tax legislation distinguishes between income from business and income from property. The jurisprudence has two approaches to distinguishing them. The first is the “level of activity test” from Canadian Marconi Company v. R,  2 SCR 522. The court in that case applied a rebuttable presumption that income earned by a corporate taxpayer in the exercise of its authorized objects is income from a business. The second approach was developed in Ensite Ltd. v. R,  2 SCR 509 where the court in that case focused on whether the property was “employed and risked” in the company’s business rather than its level of activity. The appeal judge considered both but the rebuttable presumption from Marconi is not helpful in determining whether Inter-Leasing’s interest income was from business of property.
Ontario’s corporate taxation regime envisages that ss. 2(2) corporations will be taxed on income from business but not on income from property. Inter-Leasing’s objects prohibit it from carrying on a business in Canada, except through limited partnership.
The appeal judge erred when applying the Ensite test. He erred in finding that Inter-Leasing was in the business of reducing Precision Group’s after-tax cost of capital and that since the specialty debt instruments were essential to and used in achieving that goal, interest on the income was income from business. The appeal judge listed factors supporting the conclusion but many were irrelevant.
The interest paid to Inter-Leasing on specialty debt instruments was not income from business.
(2) The appeal judge decided he did not need to determine whether the interest income was caught by the GAAR (now part of the OCTA,) but still commented on it. He said the purpose of ss. 2(2) of the OCTA was to raise revenue and define the tax base broadly to generate tax revenue. Therefore, Precision Group’s refinancing was inconsistent with the object, spirit and purpose of the tax provisions.
The Court of Appeal disagreed because Inter-Leasing’s interest income is not subject to corporate income tax by virtue of the GAAR. The anti-avoidance measures in the OCTA provide a response to abusive tax avoidance. The onus is on the government to establish that the tax avoidance was abusive. If it is unclear whether there was abuse, then the benefit goes to the tax payer. The result of Precision Group’s refinancing is that the Alberta corporations can deduct the interest paid to Inter-Leasing for tax purposes. While Inter-Leasing must include the interest in its income for federal income tax, it is not subjected to Ontario corporate tax from 2001-2004. Even if Precision Group’s transactions are assumed to have been created for a benefit or for avoidance, they were not abusive.
(3) The CMT was introduced to “ensure that large, profitable corporations do not use tax preferences to completely eliminate or unduly minimize their corporate income taxes.” The CMT is calculated based on the corporations adjusted net income (OCTA, ss. 57.3(1)). For Inter-Leasing, net income is defined to be the net income calculated by carrying on business in Canada and property situated in Canada or used in carrying on a business in Canada (OCTA ss. 57.1(2)(b)).
The adjustments to net income are not relevant. The CMT would only be applicable if it was property situated in Canada, but the debt instruments were physically stored in the British Virgin Islands.
There is a common law distinction between ordinary debts and specialty debts. Under conflict of laws principles, an ordinary debt is usually situated where the debtor resides. Ontario argues that the common law situs principle does not apply because it was developed in estate taxation governing specialty debts and because it facilitates avoidance of taxes. However, corporations resident in Canada are taxed on their world-wide income for federal income tax. In this context, situs of the specialty debt may have no impact on a liability for Canadian income tax.
The location of specialty debts arises in the context of Ontario’s decision to limit CMT to income from property situated in Canada. The Court concluded that an analysis based on category of property and type of taxation was appropriate. Ontario amended its basis for corporate taxation in 2005 to eliminate gaps in provincial taxation, but did not make the amendments retroactive. Changing the situs of specialty debts could have unforeseen consequences.
A change in the application of the common law principles of the situs of specialty debt instruments is not necessary nor appropriate.
(4) The location of the specialty debt instruments in the British Virgin Islands does not violate the object, spirit or purpose of the CMT regime. This conclusion is based on (1) the rule governing the situs of specialty debts instruments is a long-standing and well-established rule; (2) the situs for the instruments was not arbitrary; and (3) the level of Inter-Leasing’s activity in Ontario to generate income from property was minimal.