Hamlyn, T.C.J.:—The appellant appeals a reassessment of income tax for his 1986 taxation year. From the pleadings the parties admit that the appellant claimed a business loss of $131,670 in his 1986 tax return and that subsequently a schedule calculating the amount of the business loss was filed at the request of Revenue Canada that revised the business loss claimed to $143,330. This sum was 40 per cent of the net loss ($358,324) arising from a Co-ownership agreement made between the appellant and R.C. Pruefer Co. Ltd. (Pruefer) dated February 1, 1986. Pruefer was the owner of parcels of land that included the City of Windsor Parking Lot No. 7. On this lot Pruefer and the appellant constructed a parking garage. This garage was originally constructed to the third level; at present it is completed to the sixth level ana is designed to eventually reach ten levels. By virtue of the agreement, the appellant acquired a 40 per cent interest in the project as a tenant in common and as a consequence became directly involved in the development and construction of the parking garage. The business loss as claimed was originally described as "management fees" and included, inter alia, development costs, administrative construction costs, permits, interest expenses and fees all incurred prior to the completion of the parking garage.
The parking garage is part of a development project that included the construction of a hotel and commercial podium. The hotel and the commercial podium are adjacent to one another and have pedestrian routes connecting them. An aerial bridge over a street provides pedestrian linkage between the parking garage and the other buildings.
By notice of reassessment dated October 19, 1989, the respondent disallowed the loss claimed. The appellant filed a notice of objection on January 9, 1990. The respondent sent to the appellant a notification of confirmation by the Minister wherein the respondent confirmed the reassessment and stated “The City Centre Parking Garage was not a building described in subsection 18(3.5) or 18(3.6) of the Act and, accordingly, in computing your income for the taxation year no deduction may be made in respect of any outlay or expense made or incurred that may reasonably be regarded as a cost attributable to the period of the construction of the building under the provisions of subsection 18(3.1) of the Act".
The present appeal follows from the Minister's confirmation.
Issue
The issue before the Court is whether the appellant is entitled to deduct the costs relating to the construction of the parking garage from income or must the costs of construction be capitalized and added to the cost of the parking garage.
Facts
The subject parking garage is in downtown Windsor, Ontario on redevelopment lands formerly owned by the City of Windsor and subsequently acquired and developed by Pruefer.
The factual and legal documentation chronology is as follows:
The Council of the City of Windsor adopted a resolution on November 5, 1979, to permit Pruefer to acquire and develop City of Windsor lands in the downtown core. These lands included the subject property. On March 11, 1980, the City of Windsor passed a bylaw authorizing the execution of an agreement with Pruefer for the development of the "lands". Exhibit A-3 is herein reproduced showing the “lands”.
In April 1980, the agreement between the City of Windsor and Pruefer was executed and was to take effect as of February 26, 1980. The agreement provided, inter alia, for the development of certain lands including the construction of a 21-storey hotel, an office building, an apartment building and a commercial podium. The hotel was to be completed within three years and thirty days next following the target date and the developer was to "Complete simultaneously with the completion of the hotel three (3) floors of the parking structure on Parking Lot No. 7 and to deliver to Windsor one hundred and thirty-one (131) spaces therein”. Also clause 7.02 provided: "Whenever and to the extent that the Developer should be unable to commence or substantially complete construction . . . as a result of causes beyond his reasonable control (financial inability or incapacity excepted) . . . then the time for fulfilment of such obligation shall be extended . . .”.
A land transfer deed between the City of Windsor and Pruefer was completed August 6, 1980, wherein all the lands were conveyed to Pruefer.
An application to build the foundation for the Hilton hotel (the first building constructed on the "lands") was issued January 21, 1981. Excavation commenced thereafter.
By agreement dated August 27, 1981, Hilton International Co. and Pruefer agreed to build, as a joint venture, the hotel.
Several amending agreements were signed between the City of Windsor and Pruefer—March 24, 1982; December 1, 1982; May 1, 1983; November 4, 1985; April 28, 1986; July 21, 1986 and August 28, 1987. The latter amending agreements extended time limit completion dates. The agreement of November 4, 1985, specifically referred to "Pruefer has defaulted . . . to complete 3 floors of Parking Structure on Parking Lot No. 7 simultaneously with the completion of the hotel"; that agreement and each agreement thereafter extended time because of the non completion.
The building permit for the superstructure of the Hilton hotel was issued on March 10, 1983.
The building permit to construct the foundations for the City Centre parking garage was issued July 16, 1985.
The co-ownership agreement between Pruefer and the appellant wherein the appellant acquired a “40% interest in the garage as a tenant-in-common with Pruefer" was executed on February 1, 1986.
The application to build a five-storey parking garage was dated April 9, 1986.
Significant Dates
The construction of the first building, the Hilton hotel, was commenced in January 1981 and was substantially completed in November 1983. Thereafter, Pruefer eventually conveyed away its interest in the Hilton hotel.
The construction of the parking garage commenced on or about July 16, 1985.
On or about October 16, 1986, the parking garage opened.
The Viva Voce Evidence
William Docherty, the president of Pruefer, was the chief witness for the appellant. He outlined in elaborate detail the complex fact development and consequent negotiations that took place with Pruefer's proposal to develop the City of Windsor land assembly in downtown Windsor.
The essence of Mr. Docherty's evidence is that the redevelopment was dealt with by both the City of Windsor and his company as one project, that the lands were treated as one site, that parking was a necessary ingredient to his proposal and if he had not provided parking including eventually 300 parking places for the City of Windsor, his company would not have concluded the agreement with the City of Windsor. He also stated parking was essential for the Hilton hotel. Without parking, he said, there would not be a hotel. He suggested that if Pruefer had not lived up to the agreement between itself and the City of Windsor including the completion dates, it was subject to penalties, possible forfeiture of all accomplishments and foreclosure of the lands. His evidence further emphasized the progress at times was slow but it never stopped and the several delays in completion were always documented and resolved. He further explained factors beyond his control slowed progress including the economic downturn of the early eighties, the political environment as he found it in relation to certain approved loan applications and local journalistic opposition to his parking garage plans that frustrated his financing proposals. In summary, on this point the witness emphasized interest rates, the energy crunch and the loss of jobs in the automobile industry made the task more difficult.
He also described in precise detail his view of the project as being one property all connected and that the parking garage was an integral part of the hotel notwithstanding the garage was across the street and connected to the hotel by way of pedestrian passageways through another hotel and a commercial podium, as well as a pedestrian bridge over the street. Throughout his testimony the witness maintained that the parking garage was not a building but a structure, that the project was not on several sites but one site, that the progress delays were all explainable and that virtually the parking garage and the Hilton hotel were one integrated unit.
The second witness was the retired former City Solicitor for the City of Windsor. His evidence was related to the events preceding and up to the concluding agreement between the City of Windsor and Pruefer as well as certain specific events after the agreement.
He maintained, as did the witness Docherty, the project was one project, one redevelopment scheme and was the largest scheme of this nature undertaken by the City of Windsor.
He confirmed some of the difficulties encountered by Pruefer and he further confirmed that the City of Windsor did not consider that the progress was such that the agreement should be declared in default so as to invoke penalty or forfeiture clauses.
The third witness for the appellant was a Chartered Accountant and the former Commissioner of Finance for the City of Windsor; he was involved with several of the negotiations and confirmed in large measure the evidence of Mr. Docherty in relation to these negotiations; he also described the economic downturn as observed by his department in the early eighties, as well he described the economic base of the City of Windsor and how the economic cycles were reflected in the automobile industry cycles (the automobile industry being a mainstay of the Windsor industrial base).
The fourth witness was the Chartered Accountant who had the responsibility for the financial statements for the parking garage. He described the two methods of determining the costs before the Court. The first method (the one utilized by the taxpayer in his return) was that of percentage completion. The second method was that of determining the actual cost by way of a record audit and record reconstruction. His conclusion was that the actual attempt by himself to reconstruct the record from the records of Pruefer showed amounts in excess of that which was claimed by the taxpayer in his return as amended. He also advised that his review of accounting procedures that the percentage completion method was the most accurate way of accounting for construction costs [sic].
The last witness was the appellant, a lawyer in private practice. He outlined his relationship with Pruefer, his involvement with Mr. Docherty and his understanding of the documents filed before the Court that he was either a party to or the author. He also described the ownership structure of the parking garage, that is, a trust relationship between the numbered company that was the registered owner of the parking garage and himself as a 40 per cent beneficial owner.
The Appellant's Position
The appellant's first position is that the parking garage is not a “building” as the term is defined in subsection 18(3.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and accordingly the construction costs restrictions are not applicable.
Also the appellant argues, if, however, the Court finds the parking garage is a building within the meaning of subsection 18(3.1) then the grandfather provisions of subsections 18(3.5) and 18(3.6) apply and the appellant is entitled to deduct the business loss.
Lastly, in the further alternative, if the Court should conclude that subsection 18(3.5) applies then the Court should find from the evidence the parking garage is an adjunct to and forms an integral part of the Hilton hotel and should not be considered a separate building for the purpose of the statutory provision.
The Respondent's Position
The parking garage is a building. The costs of the construction of the parking garage are required to be included in the capital cost of the parking garage (subsection 18(3.1)). The Hilton hotel and the parking garage are not one building nor should they be deemed to be one. The parking garage is not on the same site nor is it on a contiguous site to the Hilton hotel, and there was undue delay in constructing the parking garage. The amount claimed represents the costs of construction which must be capitalized and added to the cost of the garage as required by paragraph 18(3.1)(b) of the Act.
The Scheme of Subsections 18(3.1), 16(3.5) and 18(3.6)
Subsection 18(3.1) of the Act provides that certain outlays or expenses attributable to the period of the construction, renovation or alteration of a building must be added to the cost of the building and/or the related land rather than deducted on a current basis. However, certain grandfather subsections (subsections 18(3.5) through (3.7)) provide for transitional provisions with respect to undertakings which were under construction or in the planning stage to a prescribed extent before November 12, 1981.
Legislation
At the relevant time, subsections 18(3.1), 18(3.5) and 18(3.6) provided:
(3.1) Notwithstanding any other provision of this Act, in computing a taxpayer's income for a taxation year,
(a) no deduction shall be made in respect of any outlay or expense made or incurred by the taxpayer, other than an amount deductible by virtue of para- graph 20(1)(a) or (aa) or section 37 or 37.1, that may reasonably be regarded as a cost attributable to the period of the construction, renovation or alteration of a building and relating to the construction, renovation or alteration or a cost attributable to that period and relating to the ownership during that period, of land
(i) that is subjacent to the building, or
(ii) that
(A) is immediately contiguous to the land subjacent to the building,
(B) is used, or is intended to be used, for a parking area, driveway, yard, garden or any other similar use, and
(C) is necessary for the use or intended use of the building; and
(b) the amount of such outlay or expense shall be included in computing the cost or the capital cost to the taxpayer of the land or building, as the case may be.
(3.5) Subsection (3.1) does not apply in respect of an outlay or expense in respect of a building or the land described in clause (3.1)(a)(i)(A) or (B),
(a) where the construction, renovation or alteration of the building was in progress on November 12, 1981,
(b) where the installation of the footings or other base support of the building commenced after November 12, 1981 and before 1982,
(c) if, in the case of a new building being constructed in Canada or an existing building being renovated or altered in Canada, arrangements evidenced in writing, for such construction, renovation or alteration were substantially advanced before November 13, 1981 and the installation of footings or other base support for the new building or the renovation or alteration of the existing building, as the case may be, commenced before June 1, 1982, or
(d) if, in the case of a new building being constructed in Canada, the taxpayer was obligated to construct the building under the terms of an agreement in writing entered into before November 13, 1981 and arrangements, evidenced in writing, respecting the construction of the building were substantially advanced before June 1, 1982 and the installation of footings or other base support therefor commenced before 1983,
and the construction, renovation or alteration, as the case may be, of the building proceeds after 1983 without undue delay (having regard to acts of God, labour disputes, fire, accidents or unusual delay by common carriers or suppliers of materials or equipment).
(3.6) For the purposes of subsection (3.5) where more than one building is being constructed under any of the circumstances described in that subsection on one site or on immediately contiguous sites, no undue delay shall be regarded as occurring in the construction of any such building if construction of at least one such building proceeds after 1982 without undue delay and continuous construction of all other such buildings proceeds after 1983 without undue delay.
[Emphasis added.]
Analysis
Real Estate Construction Costs
The deductibility of real estate construction costs in the computation of income for tax purposes is governed by the Act. A taxpayer's income for a taxation year from business or property is his profit therefrom (subsection 9(1)). Paragraph 18(1)(a) provides in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred for the purpose of gaining or producing income. Paragraph 18(1)(b) provides in computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as permitted by this part.
In Canada Starch Co. v. M.N.R., [1968] C.T.C. 466; 68 D.T.C. 5320, at 472 (D.T.C. 5323) Jackett, P. commented on the:
. . . distinction between expenditure and outgoings on revenue account and capital account...
(a) on the one hand, an expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to such an entity, structure or organization, is an expenditure on account of capital, and
(b) on the other hand, an expenditure in the process of operation of a profitmaking entity, structure or organization is an expenditure on revenue account.
The purpose of the construction of the parking garage was to provide premises to operate the business of parking cars for profit. The amount described by the taxpayer as a business loss was originally characterized as "management fees". At the hearing of this appeal the business loss was further detailed and described. This description included development costs, inter alia, administrative construction costs, permits, fees and other related expenses incurred prior to the completion of but leading to the creation of the parking garage. The expenditures related therefore to the creation of the parking garage and as such were costs of construction. The costs so detailed are not deductible in the computation of income unless they are permitted by way of a specific provision of the Act.
Subsections 18(3.5) and 18(3.6) provide under certain limited circumstances involving time, space and accomplishments that certain outlays or expenses may be deducted in the computation of income in respect of costs related to the construction of a building or ownership of land. Thus it is necessary to examine key elements of these subsections in the light of the facts of this case.
Is the Parking Garage a "Building"?
The parking garage is a free standing independent structure located across the street and a short distance from the Hilton hotel. At present the structure has five and one-half storeys and has a foundation that will allow the garage to be ten storeys in height. The garage has parapet walls, is not heated, is partially open to the elements and at present does not have a roof on its top floor. The garage is serviced by an elevator and stairs. The garage provides several hundred parking spaces for cars and is used continually for this purpose.
Black's Law Dictionary 6th edition (1990) page 194 defines a building as a “Structure designed for habitation, shelter, storage, trade, manufacture, religion, business, education and the like. A structure or edifice enclosing a space Within its walls, and usually, but not necessarily, covered with a roof."
The Oxford English Dictionary 2nd edition (1989), vol. Il (BBC- Chalypsography), page 631 defines a building as that which is built; a structure or an edifice. In McKenzie v. Ferguson, [1923] 3 W.W.R. 1089, the Manitoba Court of Appeal found the word building has been defined as, in law, anything by art, ana fixed upon or in the soil, composed of different pieces connected together and designed for permanent use in which it is so fixed.
It is clear the garage is a structure designed, built and used on the land for the carrying on of the business of parking of cars, that is, the storage of cars. It is a permanent structure and is considerable in size. It is self-contained and functions independently of any other structure. In my view, the appellant's parking garage is a “building” within the provisions of subsections 18(3.1), 18(3.5) and 18(3.6).
Is the Parking Garage Part of the Hilton Hotel Building?
Is the parking garage part of the hotel building i.e., part of the supporting structures of the Hilton hotel, such that "building ' within the relevant subsections includes the parking garage as part of the Hilton hotel building?
The appellant asks the Court to consider the parking garage as a part of the Hilton hotel in that the appellant submits it is a supporting structure. The appellant relies on Nova, an Alberta Corporation v. The Queen, [1988] 2 C.T.C. 167; 88 D.T.C. 6386, wherein the Court concluded that in the natural Ba industry certain pipes and valves were not considered pipeline but were in fact considered an integral part of the compressor stations (this categorization was for the purpose of determining the asset class for the purpose of determining the appropriate capital cost allowance).
The parking garage is a building; the Hilton hotel is a building. The two buildings are not physically connected. Each business has a separate economic life. The parking garage has its own sources of income including patrons of the Hilton hotel, patrons of other hotels and downtown facilities as well as the public in general. The businesses are dependent to some degree on one another but there is nothing here to lead to the conclusion that buildings are to be categorized as one. The parking garage building stands alone. It is not an integral part of the Hilton hotel building.
Are the Parking Garage and the Hilton Hotel on one "Site"?
The City of Windsor in terms of land assembly treated the lands as one for the purposes of urban downtown redevelopment. Pruefer treated the land assembly as one for the purposes of a redevelopment proposal. The agreement was that both the City of Windsor and Pruefer treated the lands as one site with several aspects to it. The lands were conveyed by the City of Windsor to Pruefer in one deed. The development agreement is part of the title documents and the terms therein continue with the title. Pruefer in terms of construction treated the project on the basis of one building at a time.
Black's Law Dictionary (ibid) defines "site" as a “plot of ground suitable or set apart for some specific use. A seat or ground plot. The term does not of itself necessarily mean a place or tract of land fixed by definite boundaries". However, the parking garage and the Hilton hotel are separated by a street. As a consequence, the parking garage and the Hilton hotel are not on one plot of ground. They are on distinct plots as such, the parking garage and the Hilton notel are not the same site.
Immediately Contiguous
In Flanagan v. M.N.R., [1989] 2 C.T.C. 2395; 89 D.T.C. 615, Rip, T.C.J. in a decision involving a principal residence exemption claim on a sale of fend found that the two properties in question were separated by a roadway and were not touching. Underground piping under the road and serving as a connection between the two properties did not make the properties contiguous. In the subsection under consideration "immediately" precedes "contiguous". A dictionary review leads to a conclusion "immediate" means without an intervening agent in space . While the pedestrian passage between the Hilton hotel fends and the parking garage fends is by way of an aerial bridge, the lands, however, are not “immediately contiguous”, in that there is a street between.
Undue Delay
The appellant's argument to the Court was that there was no undue delay because notwithstanding the lengthy period of construction (it is noted the
The Oxford English Dictionary, 2nd edition (1989) vol. VII (hat-intervacuum), page 682.
project has yet to be totally completed) Pruefer and the City of Windsor were always able to extend through negotiation the time limitation terms. At no time did the City of Windsor invoke the default provisions of the agreement. As such, the appellant concludes as between himself and the Minister of National Revenue there was no undue delay.
The appellant argues that the extensions granted were always as a result of matters beyond Pruefer's control. The developer maintained he was always aware of the political climate of the agreement and from time to time made concessions in order to obtain extensions. The developer further maintained the project never totally stopped. Also, the developer's evidence that this was the largest project undertaken of this nature in Windsor, and as such, justified time extension considerations.
The legislation requires that the construction must not be put off or postponed more than necessary.
In The Concadoro, [1916] 2 A.C. 199, the Privy Council looked at the expression "force majeure" and whether "force majeure” was available to "an enemy merchant ship" seeking an unconditional pass under article 1 of the Hague Convention No. VI. of 1907. At page 202 Lord Parmoor found:
... it was argued that the inability of the master to procure the necessary funds for his voyage brought the Concadoro under art. 2, and that she was unable to leave the enemy port within the days of grace "par suite de circonstances de force majeure." In their Lordships' opinion, this contention cannot be maintained. The "force majeure" contemplated in the article is one which renders the vessel unable to leave the port, and cannot be construed to include the circumstance that the master has not been provided by the others with sufficient financial resources to continue his voyage.
[Emphasis added.]
It is clear, in this case from the evidence, there were financial reversals, economic downturns, loss of backers (one withdrew from the hotel project) and difficult publicity including opponents to the development and opponents to the parking garage. It is further clear the parking garage was not commenced until after the completion of the hotel and the garage was not ready for occupancy until three years after the opening of the Hilton hotel.
The legislative intent is clear that projects relying on the transitional provisions must proceed without excessive delays. The parking garage did not proceed with due dispatch as a result of funding delays and as well, the choice of the developer as to how the development was to be carried out in relation to the parking garage.
Funding difficulties as a result of underfunding, economic downturns and a loss of backers as well as adverse publicity should be anticipated factors in the development industry. The delays encountered in terms of the parking garage should have been foreseen by Pruefer and the late start was clearly in the control of Pruefer.
According to subsection 18(3.6) for the construction costs to be deductible the parking garage should have proceeded after 1983 without undue delay. The parking garage was not started until 1985 and three floors were completed for occupancy in 1986. The parking garage on Parking Lot No. 7 did not proceed without undue delay. In other words there was undue delay in the construction of the parking garage.
Conclusion
The land on which the parking garage is built is used for the purpose of parking. The parking garage has several clients including the Hilton hotel. The parking garage is a building. Therefore, certain costs attributable to the period of construction must be added to the cost of the garage rather than be deducted on a current basis unless the transitional provisions apply.
In relation to the transitional provisions, the parking garage construction was not in progress on November 12, 1981, nor were the footings or other base support of the parking garage commenced after November 12, 1981, and before 1982. There were some arrangements evidenced in writing in relation to the parking garage before November 13, 1981, but the installation of the footings or other base support was not commenced before June 1, 1982. It does appear that the taxpayer was obligated by agreement to construct the parking garage and this obligation existed before November 13, 1981. There was some evidence of arrangements being advanced before June 1, 1982, but the installation of footings or base support of the parking garage (being an independent building and not part of the Hilton hotel) was not advanced before 1983. The construction of the parking garage did not proceed without undue delay after 1983. The parking garage was constructed on one site. The Hilton hotel was constructed on another site. The parking garage was not constructed on lands immediately contiguous to the Hilton hotel lands. Between the construction of the Hilton hotel and the parking garage there was undue delay in the construction proceeding to the construction of the parking garage. This undue delay occurred after 1983. The conclusion is that therefore transitional provisions do not assist this taxpayer. The amount claimed by the taxpayer represents the costs of construction and must be added to the cost of the garage as required by paragraph 18(3.1)(b) of the Act.
Decision
The appeal is therefore dismissed.
Appeal dismissed.