T-348-78
Imperial General Properties Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Toronto, December 7,
1982; Ottawa, January 11, 1983.
Income tax — Agreement of purchase and sale dated 1968
— Transfers of property dated 1970 — Agreement subject to
conditions — Purchaser having express right to waive unful
filled conditions or terminate transaction — Agreement giving
purchaser right to demolish existing buildings, right of access
to construction site and right to accept bona fide offer to
purchase prior to commencement of construction — Plaintiff
submitting conditions subsequent and therefore property sold
in 1968, or deemed sold in 1968 by s. 85E(1) of old Income
Tax Act — Defendant submitting profit from sale realized in
1970 when certain conditions precedent to sale fulfilled —
Judgment for plaintiff — Conditions not true conditions
precedent — Sale taking place in 1968 — General rule that no
contract until true condition precedent satisfied — Parties
intending to allow for possibility of completion of agreement
before fulfillment of conditions — Express right of waiver
taking condition outside realm of true condition precedent —
Turney et al. v. Zhilka, [19591 S.C.R. 578 distinguished —
Income Tax Act, R.S.C. 1952, c. 148, ss. 85B(1) (as am. by
S.C. 1952-53, c. 40, s. 73 and by S.C. 1955, c. 54, s. 26),
85E(1) (as am. by S.C. 1955, c. 54, s. 27), 85E(2) (as am. by
S.C. 1955, c. 54, s. 27).
Contracts — Conditions — Precedent or subsequent —
Basic common law principles reviewed — Agreement of pur
chase and sale of real property containing express right of
purchaser to waive certain conditions — Evidence of parties'
intention to allow for possibility of completion of agreement
before fulfillment of conditions — Not true conditions prece
dent — Turney et al. v. Zhilka, [1959] S.C.R. 578 distin
guished — Judgment for plaintiff.
Real property — Offer to purchase — Conditions precedent
— Mortgage clauses giving purchaser privilege of demolition
and construction before closing — Purchaser given right to
accept offer to purchase prior to construction — Purchaser
allowed to waive unfulfilled conditions — Parties intending to
allow completion without fulfillment of conditions — Not true
conditions precedent — Turney et al. v. Zhilka, [1959] S.C.R.
578 distinguished.
Action to vary reassessment whereby the Minister included
the profit from the sale of a property in the plaintiffs 1970
taxation year. The plaintiff agreed to sell a certain property on
October 29, 1968. The agreement of purchase and sale was
subject to certain conditions, for example, obtaining appropri
ate zoning for construction of apartment buildings. It expressly
stated that if the conditions were not fulfilled within two years
from the date of closing, the purchaser must either complete
the transaction and waive the unfulfilled conditions, or termi
nate the transaction. The paragraphs dealing with mortgage
financing gave the purchaser the right to demolish existing
buildings and to commence construction. The agreement also
gave the purchaser a right of access at all times to the
construction site to carry out construction of the new buildings.
A subsequent agreement acknowledging the original agreement
also provided that if the purchaser received a bona fide offer to
purchase prior to the commencement of construction, he shall
give the plaintiff the prior option to purchase. The actual
transfers of the property were dated September 9, 1970 and the
statement of adjustments was dated September 10, 1970.
Rezoning approval was subsequently received in 1970. The
Minister submits that the profit from the sale was realized in
1970 when certain conditions precedent to the sale were ful
filled. The plaintiff submits that the conditions were conditions
subsequent and that the property was sold in 1968, or deemed
sold in 1968 by subsection 85E(1) of the old Income Tax Act.
The issue is whether the conditions of sale were conditions
precedent or conditions subsequent.
Held, the judgment is in favour of the plaintiff. The condi
tions were not true conditions precedent and the property was
sold in 1968. If a condition is a true condition precedent there is
no contract until it is satisfied, whereas if a condition is a
condition subsequent then in the event of its non-fulfillment
there may still be a binding contract. The parties intended to
allow for possibility of the completion of the agreement before
and without the fulfillment of the conditions of sale. This
intention is indicated by (1) the mortgage clauses permitting
demolition and construction before the final closing and trans
fer of title; (2) the provision permitting the purchaser to accept
a bona fide offer to purchase from any party prior to the
commencement of construction and (3) the express right of
waiver of unfulfilled conditions by the purchaser. In Genern
Investments Ltd. v. Back et al., [1969] 1 O.R. 694 (H.C.) it
was held that an express right of waiver takes the condition
"outside the realm of a true condition precedent". In Dennis v.
Evans, [1972] 1 O.R. 585 (H.C.) specific performance was
ordered where there was a provision entitling the purchaser to
waive the condition and where the condition was for the benefit
of the purchaser. Turney et al. v. Zhilka, [1959] S.C.R. 578
does not apply because it does not deal with an express right of
waiver.
CASES JUDICIALLY CONSIDERED
APPLIED:
Genern Investments Ltd. v. Back et al., [1969] 1 O.R.
694 (H.C.); Dennis v. Evans, [1972] 1 O.R. 585 (H.C.).
DISTINGUISHED:
Turney et al. v. Zhilka, [1959] S.C.R. 578.
REFERRED TO:
The Mihalis Angelos, [1970] 3 All E.R. 125 (C.A.);
Smallman v. Smallman, [1971] 3 All E.R. 717 (C.A.);
Barnett v. Harrison et al., [1971] 3 O.R. 821 (H.C.);
F.T. Developments Limited v. Sherman et al., [1969]
S.C.R. 203; O'Reilly et al. v. Marketers Diversified Inc.,
[1969] S.C.R. 741.
COUNSEL:
Wolfe D. Goodman, Q.C. and Joanne E.
Swystun for plaintiff.
Brian Evernden for defendant.
SOLICITORS:
Goodman & Carr, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DuiÉ J.: The main issue to be resolved here is
whether the sale of the plaintiffs property to one
Jack Mendlewitz took place on October 29, 1968
as alleged by the plaintiff, or on September 10,
1970 as assumed by the Minister, and therefore
whether the profit in the amount of $633,727
realized by the plaintiff was realized by him in his
taxation year 1968 or in his taxation year 1970.
The property in question is situated in the Bor
ough of Scarborough, in the Municipality of Met
ropolitan Toronto, at the intersection of Birch-
mount Road and Sheppard Avenue East. The
property was purchased in the year 1967 by
Brampton Realty Limited ("Brampton"), now
amalgamated into the plaintiff company. On Octo-
ber 29, 1968 Brampton agreed to sell the property
to Jack Mendlewitz. The monetary terms of the
agreement of purchase and sale (hereinafter the
"original agreement") dated October 29, 1968
were that the purchase price was $844,250 to be
paid as follows: $20,000 on signing the agreement,
$50,000 on October 31, 1968, $145,000 upon
registration of a plan of subdivision concerning
Mendlewitz' proposed development of the prop-
erty, and the balance "as then determined" by way
of two mortgages back to Brampton once certain
conditions have been fulfilled.
The opening paragraph of the original agree
ment reads as follows:
The undersigned, JACK MENDLEWITZ (as Purchaser) hereby
agrees to and with BRAMPTON REALTY LIMITED (as Vendor)
through Drillich & Company Realty Limited, agent for the
Vendor, to purchase all and singular the lands and premises
owned by the Vendor lying in the Borough of Scarborough,
being on the north side of Sheppard Avenue East and the East
Side of Birchmount Road, and being sufficient lands for two
apartment buildings containing 307 suites (each site of approxi
mate equal size), one of which sites is at the corner of Sheppard
and Birchmount Avenues, at the price or sum of EIGHT HUN
DRED AND FORTY-FOUR THOUSAND TWO HUNDRED AND
FIFTY DOLLARS ($844,250.00) of lawful money of Canada,
payable as follows.
The agreement provides that the said purchase
price is based upon the sum of $2,750 per suite for
307 suites, and that after the registration of the
plan of subdivision, building permits will be
secured for the construction of two apartment
buildings containing the 307 suites, with a gross
minimum area of 900 square feet for each suite.
The following paragraph reads as follows:
This agreement is conditional upon the following conditions,
and if the same are not fulfilled within two years from the date
of closing the Purchaser must either complete the within trans
action and waive such unfulfilled conditions, or terminate the
within transaction, in which event he shall be entitled to the
return of any and all moneys paid hereunder without deduction
and without interest.
The four conditions are to the effect that: (1)
the Borough will zone the subdivision to permit the
construction of the buildings; (2) the soil condi
tions will allow for the construction of the build
ings with no increase in costs; (3) the lands will be
fully serviced; and (4) the subject property will be
approved by Central Mortgage and Housing Cor
poration for mortgage purposes.
That paragraph (paragraph 4) concludes as
follows:
Provided that if such conditions are not satisfied within one
year from the date of closing the purchaser can declare the
within agreement null and void in which event he shall be
entitled to a return of all monies paid hereunder.
The agreement then provides for the remainder
of the purchase price "as then determined" to be
payable by way of two separate mortgages. Each
paragraph dealing with the two separate mort
gages includes a clause to the effect that the
mortgagor (Mendlewitz) shall have the privilege of
demolishing any buildings standing on the subject
property and to commence construction, "without
such demolition and/or construction being deemed
an act of waste so as to cause the said mortgage to
be considered in default". A proviso to the same
effect appears earlier in the document, in the
paragraph dealing with the payment of the balance
of the purchase price. On the last page of the
eight-page document it is provided that "the Pur
chaser shall at all times have access to the con
struction site to enable the Purchaser to carry out
construction on the said lands".
The original agreement was followed by an
agreement dated August 8, 1969 between Jack
Mendlewitz as purchaser and Imperial General
Properties Limited as vendor. This agreement
acknowledges the original agreement and refers to
the amalgamation of Brampton by the plaintiff.
This agreement also provides that "if prior to
the commencement of construction of the apart
ment buildings ... the Purchaser [Mendlewitz]
receives an acceptable bona fide offer to purchase
from any party .. . [he] shall give the Vendor [the
plaintiff] ... the prior option to purchase" at the
price of the bona fide offer.
A further agreement of purchase and sale, dated
September 9, 1969, was entered into between the
plaintiff and Mendlewitz dealing with additional
lands adjacent to the subject property for the price
of $289,250. That agreement is also conditional
upon certain conditions to be fulfilled by October
29, 1970, or for the purchaser to terminate the
transaction or to waive the unfulfilled conditions.
This agreement further provides that default by
the purchaser or the vendor under the within
agreement shall constitute default under the origi
nal purchase agreement.
On September 10, 1970, Mendlewitz authorized
and directed the plaintiff to engross a deed in
favour of Palmyra Holdings Limited and a deed in
favour of St. Giles Developments Limited, two
parties to which had been assigned each a portion
of the subject property by Mendlewitz. The actual
transfers under The Land Titles Act of Ontario
[R.S.O. 1960, c. 204] are dated September 9,
1970.
A statement of adjustments, dated September
10, 1970, shows the total purchase price of 307
suites and 83 suites to be $1,070,750, from which
sum are deducted several mortgages leaving a
"balance due on closing payable to Imperial Gen
eral Properties Limited" of $154,000.
The actual adoption by the Council of the Bor
ough of the Board of Control recommendations to
amend the subdivision agreement, as requested by
the plaintiff, is dated September 14, 1970, and was
transmitted by the plaintiffs attorneys to Mendle-
witz's attorneys on September 22, 1970.
Many other documents were filed at the hear
ing, but the essential elements of the case, as I
assess the situation, are as outlined and afford a
sufficient background against which to appreciate
the arguments of both parties and to arrive at a
decision.
The plaintiffs principal submission is that the
property was sold on October 29, 1968 or was
deemed by virtue of subsection 85E(1)' of the
former Income Tax Act [R.S.C. 1952, c. 148 as
am. by S.C. 1955, c. 54, s. 27] to have been sold by
that date. The plaintiff adds that paragraphs (a)
and (b) of subsection 858(1) 2 of the former Act
[as am. by S.C. 1952-53, c. 40, s. 73, and by S.C.
1955, c. 54, s. 26] required Brampton to include in
its 1968 income the $70,000 it had received from
Mendlewitz as down-payment in 1968, and the
$774,500 balance receivable from Mendlewitz on
account of the property. He further says that it
matters not that the original contract of sale was
subject to conditions, because those conditions
were subsequent.
85E. (1) Where, upon or after disposing of or ceasing to
carry on a business or a part of a business, a taxpayer has sold
all or any part of the property that was included in the
inventory of the business, the property so sold shall, for the
purposes of this Part, be deemed to have been sold by him
(Continued on next page)
In the alternative, the plaintiff alleges that the
consideration under the original agreement was
partly for the sale of the property and partly for
the plaintiffs assistance in developing the prop
erty. He submits that subsection 85E(2) 3 of the
former Act [as am. by S.C. 1955, c. 54, s. 27]
prescribes the method for making the required
allocation. He adds that properly to compute
Brampton's 1968 income there should have been
an allocation of the consideration between the
property Brampton was selling and the assistance
it agreed to render. I will deal with the alternative
later in my judgment, if it remains useful so to do.
(Continued from previous page)
(a) during the last taxation year in which he carried on the
business or the part of the business, and
(b) in the course of carrying on the business.
2 85e. (1) In computing the income of a taxpayer for a
taxation year,
(a) every amount received in the year in the course of a
business
(i) that is on account of services not rendered or goods
not delivered before the end of the year or that, for
any other reason, may be regarded as not having
been earned in the year or a previous year, or
(ii) under an arrangement or understanding that it is
repayable in whole or in part on the return or resale
to the taxpayer of articles in or by means of which
goods were delivered to a customer,
shall be included;
(b) every amount receivable in respect of property sold or
services rendered in the course of the business in the
year shall be included notwithstanding that the amount
is not receivable until a subsequent year unless the
method adopted by the taxpayer for computing income
from the business and accepted for the purpose of this
Part does not require him to include any amount receiv
able in computing his income for a taxation year unless
it has been received in the year;
3 85E....
(2) Where a person who has been carrying on a business has
sold all or part of the property that was included in the
inventory of the business (whether or not he has disposed of or
ceased to carry on that business or a part of that business) to a
person who has used all or part of the property so sold as
inventory of a business carried on or to be carried on by the
purchaser, and the amount of the consideration paid by the
purchaser is, in part, consideration for the property so sold and,
in part, consideration for something else, the following rules are
applicable:
(Continued on next page)
On the other hand, the Minister submits that
the plaintiff realized a profit in the sum of $633,-
727 in its 1970 taxation year, in which year certain
conditions precedent to the sale of the property
were fulfilled, after which the balance of the pur
chase price was received and the property was
transferred to Mendlewitz.
The whole issue rests on the determination as to
whether the conditions of the sale were conditions
precedent or conditions subsequent. It therefore
becomes necessary to return to the basic common
law principles in the matter.
Prior to the English Sale of Goods Act of 1893
[56 & 57 Vict., c. 71] the Courts used the expres
sion "condition precedent" to refer to a term in a
contract by virtue of which the contract could be
postponed, or not take effect, unless or until a
certain event or occurrence took place. That condi
tion was also called "suspensive" because it sus
pended the potential operation of the contract. The
expression "condition subsequent" referred to a
term in a contract by virtue of which the contract
could be rendered invalid and non-binding ab
initio, if a certain event or occurrence happened.
That condition was also called "resolutive"
because it acted to dissolve or render ineffective a
contract that had already become operative."
Halsbury 5 defines the word "condition" as
follows:
(Continued from previous page)
(a) such part of the consideration as the vendor and the
purchaser have, in writing, agreed to be the price paid
for the property so sold shall be deemed, both for the
purpose of computing income from the business of the
vendor and for the purpose of computing income from
the business of the purchaser, to be the price so paid;
and
(b) where an agreement as contemplated by paragraph (a)
has not been filed with the Minister within 60 days after
notice in writing by the Minister has been forwarded to
the vendor and the purchaser that such an agreement is
required for the purpose of any assessment of tax under
this Part, such part of the consideration paid as is fixed
by the Minister shall be deemed to be the price agreed
upon by them as the price paid for the property so sold.
° See Fridman, The Law of Contract in Canada, 1976, c. 9.
5 Halsbury's Laws of England, Vol. 9, para. 511 (4th ed.
1974).
A contractual promise may be either absolute or conditional.
A conditional promise is one where the liability to perform the
promise depends upon some thing or event; that is to say it is
one of the terms of the contract that the liability of the party
shall only arise, or shall cease, on the happening of some future
event, which may or may not happen, or one of the parties
doing or abstaining from doing some act.
An instance of a condition precedent can be
found in The Mihalis Angelos, 6 where the expect
ed readiness of a chartered ship to load was found
to be a condition precedent of the charterparty. An
instance of a condition subsequent is found in the
case of Smallman v. Smallman. 7 There an agree
ment between husband and wife in the process of
divorce "subject to approval by the Court" was
held to be a binding agreement "right away", but
to become invalid if the Court did not approve.
Lord Denning M.R. said that the agreement was
suspended in operation until the Court approved
its terms, but in the meantime neither party could
disavow it.
If the condition is a true condition precedent
there is no contract until it is satisfied, whereas if
the condition is a condition subsequent, then in
event of its non-fulfillment there may still be a
binding contract upon the parties. A distinction
between the two conditions seems to lie in the fact
that if, on its true construction, a term is a condi
tion precedent its performance cannot normally be
waived unilaterally by either party. (See Barnett v.
Harrison et al. 8 )
Contracts for the sale of land often include a
provision that the performance of the obligation of
the vendor, or the purchaser, or both, is condition
al upon the happening of some event beyond their
control, for example the express condition that the
subject property will be rezoned by a local author
ity for the uses intended for it by the purchaser.
The Supreme Court of Canada in Turney et al. v.
6 [Maredelanto Compania Naviera SA v. Bergbau-Handel
Gm b H (The Mihalis Angelos)] [1970] 3 All E.R. 125 [C.A.].
[1971] 3 All E.R. 717 (C.A.).
8 [1971] 3 O.R. 821 [H.C.].
Zhilka 9 in 1959 has held that such a "true condi
tion precedent", even if included in the contract
solely for the benefit of the purchaser, cannot be
waived by that party, and the vendor is thus free to
treat the contract as at an end and may resell the
property to somebody else. That contract did not
include an express clause to the effect that the
purchaser could waive the condition and take the
land as is, without the desired rezoning. Of course,
such is not the situation in the case at bar.
The rule in Turney et al. v. Zhilka was reaf
firmed by the Supreme Court in F.T. Develop
ments Limited v. Sherman et a1., 1 ° O'Reilly et al.
v. Marketers Diversified Inc." and Barnett v.
Harrison et al. [Ont. H.C.]. 12 That rule defined a
"true external condition precedent" as being an
external and uncertain future event upon which
the contractual obligations of both parties depend,
such as the sale and purchase of land, subject to
the land being rezoned. In other common law
jurisdictions the jurisprudence is to the effect that
if a condition is inserted for the benefit of one
party, that party may waive it, whether or not
there is a waiver clause in the contract. 13
What concerns us here, however, is not the
waiver issue—which is explicitly resolved in the
agreement in favour of the purchaser—but the
determination as to whether the conditions in the
agreement are true conditions precedent.
In my view, they are not. Three elements in the
agreement indicate the intention of the parties to
allow for the possibility to complete the agreement
before and without the fulfillment of the
conditions.
Firstly, the mortgage clauses in the agreement
extend to the purchaser the privilege to demolish
9 [1959] S.C.R. 578.
10 [1969] S.C.R. 203.
" [1969] S.C.R. 741.
12 Supra [footnote 8] at page 154.
13 See Waiver of Conditions Precedent in Contracts, Law
Reform Commission of British Columbia, 1977, p. 4.
buildings standing on the land and to commence
construction before the final closing and the trans
fer of legal titles: "The purchaser shall at all times
have access."
Secondly, a proviso allows the purchaser to
accept a bona fide offer to purchase from any
party (with prior option to the plaintiff) prior to
the commencement of the construction.
Thirdly, the agreement includes a waiver allow
ing the purchaser "to waive such unfulfilled condi
tions" and to complete the transaction. Such a
waiver was considered by Hartt J. in Genern
Investments Ltd. v. Back et al. 14 wherein he said
at pages 699-700:
The agreement itself expressly gave to the purchaser a right of
waiver and the contract was thereby made conditional upon the
municipality rezoning the land unless so waived by the purchas
er. This power of waiver takes the condition outside the realm
of a true condition precedent for the purchaser was given the
express right by the vendors to relinquish that benefit. The
rezoning condition did not form the basis for completion of the
contract because the parties consented to the possibility of its
waiver by the purchaser. The vendors having so agreed cannot
now claim that the performance of the agreement terminated
solely on the enactment of a rezoning by-law.
In Dennis v. Evans 15 Addy J. (then of the
Ontario High Court of Justice and now of this
Court) ordered specific performance where a pro
viso entitled the purchaser to waive the condition
and where the condition was for the benefit of the
purchaser. He distinguished the Genern Invest
ments decision from the Turney et al. v. Zhilka
decision.
My conclusion, therefore, is that the conditions
were not true conditions precedent and therefore
that the property in question was sold by the
plaintiff company in its taxation year 1968. Under
the circumstances it becomes unnecessary for me
to consider the alternative proposition of the plain
tiff. The subject reassessment shall therefore be
varied or vacated accordingly. Judgment in favour
of the plaintiff with costs.
14 [1969] 1 O.R. 694 [H.C.].
15 [1972] 1 O.R. 585 [H.C.].
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.