The Queen v. Canadian-American Loan and Investment Corp. Ltd., 74 DTC 6104, [1974] CTC 101 (FCTD)

Cattanach, J:—This is an appeal from a decision of the Tax Appeal Board (now the Tax Review Board) dated August 14, 1972 whereby the defendant’s appeal to that Board from its assessment to income tax for its 1967 taxation year by the Minister of National Revenue was allowed.

The defendant is a joint stock company incorporated pursuant to the laws of the Province of Alberta and is registered under the laws of the Province of British Columbia as an extra-provincial company by virtue of which registration it is authorized to carry on its business in that province.

The corporate name of the defendant is misdescriptive of the venture carried on by it in British Columbia. The defendant operated a marina known as the “Airport Marina” on the Fraser River.

The defendant had owned a tract of land facing that river on which was constructed a two-storied frame building of sufficient dimensions to store about 250 small-sized boats as well as a large fixed lifting device whereby a boat could be hoisted from the water by means of slings, transported in these slings along an overhead track by motorpower to an appropriate spot to be placed upon a powered dolly on which the boat could be easily moved by one man inside the building for storage. The boat remained on the dolly on which it had been placed originally throughout the period of storage to facilitate the movement of the boat within the building. No boat was allocated a particular space in the building but rather the boats were moved about in the building for the most convenient and maximum use of the storage facilities.

The defendant sold the land, buildings, wharves and equipment that it had used in the marina operation to a major oil company from which it forthwith leased back the land, buildings and other assets which had been sold by an instrument dated February 6, 1966 for a term of two years from March 1, 1966.

in addition the defendant had been the lessee of a water lot fronting on the upland property above mentioned from the North Fraser Harbour Commissioners. The major oil company which had purchased the upland property from the defendant also became the lessee of the water lot. The lease from the oil company to the defendant dated February 7, 1966 also included a lease-back of the water lot.

The rental for the leased premises payable by the defendant to the lessor was $125 monthly and a sum equal to the rentals paid by the lessor to the head lessor for the water lot.

After the lease-back of the premises by the defendant it continued the operation of the marina as it had done formerly. That operation included the inside storage of smaller boats in the building and the water mooring of up to 1,000 boats at facilities in the water lot. In addition the defendant operated two floats from one of which gasoline, oil and grease was sold and from the other a general store was conducted which I assume to be a business somewhat akin to that of a ship-chandler. In the course of the operation of the marina the defendant also rented equipment such as trailers on which the owner of a boat could transport his boat for winter storage at his own home or used to transport his boat to waters of his choice. The defendant also did washing and servicing of boats and some repair work.

The defendant was one of a group of companies with substantially the same shareholders and officers and served by common management and auditors.

Another company included in this group was Georgia Marina Boat Works Ltd (hereinafter sometimes referred to as Georgia). This company had operated a marina on Burrard Inlet in the City of Vancouver, British Columbia or its environs. Georgia ceased its operations in 1962 or thereabouts when its assets were sold and the company then became dormant. However Georgia was in a loss position to the extent of approximately $12,000.

Charles David Christie, a chartered accountant and formerly a bank manager, was the office manager of Western Business Management Limited, a company affiliated with the group and which did the accounting for the corporate members of the group including the defendant herein, Canadian-American Loan and Investment Corporation Limited, and Georgia Marina Boat Works Ltd.

Mr Christie was aware of the tax loss position of Georgia and he also testified that he was aware that after a prescribed period the loss incurred by Georgia would not be available to set off against income.

He thereupon set out to remedy that situation.

He devised an arrangement whereby the defendant leased to Georgia by instrument dated September 30, 1966 the land upon which the frame building used for the storage of small boats was situate for a two-year period. This lease comprised about one-quarter of the premises upon which the defendant conducted its marina operation.

The pertinent portion of this lease reads as follows:

WITNESSETH, the said Lessor doth demise unto the said Lessee, his executors, administrators and assigns, ALL AND SINGULAR that certain parcel or tract of land and premises situate, lying and being in the Municipality of Richmond more specifically designated as Lot A of Lot 14 Block A Section 29 BN 5RW 6 Map 51813F and in particular the frame building thereon used for the purpose of housing boats of all kinds, under rental agreements with the owners, for various periods of time. The rentals accruing from these agreements also are hereby assigned to the Lessee plus the revenue from the machinery used in conjunction with above mentioned building to raise and lower the boats into and out of the said building.

The rent payable to the defendant by Georgia for the premises so leased was $500 monthly.

The revenue from contracts entered into by the defendant with its clients whereby it agreed to accept for storage motor launches and other types of boats for those clients from September 30, 1966 until June 30, 1967, that is, nine months of the defendant’s 1967 taxation year ending June 20, 1967, was $12,653.60.

The revenue for the same period from charges made for the use of machinery to raise and lower boats into and out of the building used for storing boats was $1,375.

The revenue so received totals $14,028.60.

The defendant, in preparing its income tax return for its taxation year ending June 30, 1967, did not include as income the amount of $14,028.60 but it did include as income the amount of $4,500 being the rent received by it for nine months from Georgia pursuant to the agreement between them dated September 30, 1966 mentioned above.

Mr Christie frankly admitted that the sole purpose of the arrangement he devised and which is described above was to permit of revenue received by the defendant being transferred to Georgia to be set off against the losses of Georgia so that the revenue would not attract tax either in the hands of the defendant or Georgia.

There is no question that a taxpayer may so organize its affairs as to minimize its tax liability so long as the method of so doing is permitted by pertinent provisions of the Income Tax Act.

The question which arises in this appeal is whether the defendant has been successful in so doing.

The Minister of National Revenue contends that the defendant has not.

In assessing the defendant as he did the Minister included in the defendant’s income the sum of $9,528.60 (being the difference between $14,028.60 and $4,500) and he did so on the assumption that:

(a) the sums of $12,653.60 and $1,375.00 were the amounts payable to the Defendant by its customers pursuant to the terms of contracts which it had entered into at the time it had accepted the possession of the boats from them for storage or warehousing;

(b) none of the contracts of storage had been assigned by the Defendant to Georgia Boat Works Ltd;

(c) During the period from the 30th of September 1966 until the 30th of June 1967 the Defendant had held itself out as the operator of, and in fact, had carried on its own behalf, the business of accepting for storage and storing boats and other chattels.

The principal contention of counsel for the Minister was that, at all material times, the defendant held itself out as carrying on the business of storing and warehousing boats and did in fact carry on that business from which it realized income in the amounts of $12,653.60 and $1,375 for storing and lifting boats during the period from September 30, 1966 until June 30, 1967, that the total of those amounts, being $14,028.60 was income earned by the defendant from that business and as such is properly included in the defendant’s income.

Alternatively counsel for the Minister contended that the amounts were also properly included in the defendant’s income by virtue of section 23 of the Income Tax Act since they were amounts which were not income from property but the amounts were payable to the defendant under contracts between it and the owners of boats for lifting and storing those boats and which contracts had not been assigned to Georgia.

On the other hand counsel for the defendant contended that the arrangement initiated by Mr Christie on behalf of the defendant and Georgia falls precisely within the exception contemplated by section 23 of the Act which reads as follows:

23. Where a taxpayer has, at any time before the end of a taxation year (whether before or after the commencement of this Act), transferred or assigned to a person with whom he was not dealing at arm’s length the right to an amount that would, if the right thereto had not been so transferred or assigned, be included in computing his income for the taxation year because the amount would have been received or receivable by him in or in respect of the year, the amount shall be included in computing the taxpayer’s income for the taxation year unless the income is from property and the taxpayer has also transferred or assigned the property.

In short his position is that the right to the amount assigned by the defendant to Georgia was income from property and the defendant had also transferred or assigned the property from which the income arose.

In paragraph 2 of the amended statement of claim it is alleged that at all material times the defendant did not deal at arm’s length with Georgia. That allegation is admitted by the defendant in paragraph 1 of the statement of defence.

As I understand the principal contention advanced on behalf of the Minister it is that, after entering into the arrangement with Georgia, the defendant continued to carry on the business exactly as it had done prior to the arrangement with Georgia.

The principle is well established that, for the purposes of Part I of the Income Tax Act, profits from a business are income of the person who carries on the business and are not, as such, income of a third person into whose hands they may come.

Accordingly it is implicit in the Minister’s submission that the amount of $14,028.60 was income from a business and that business was the business of the defendant.

The contention on behalf of the defendant, as indicated before, is that what the defendant did falls precisely within the exception in section 23 quoted above. The defendant transferred to Georgia the right to receive the total amounts payable for the lifting and storage of boats. Had those amounts not been so transferred they would have been included in the defendant’s income for the taxation year, regardless of whether it was income from a business or income from property. It is admitted that the defendant was not dealing at arm’s length with Georgia. There is no question nor was there any dispute between the parties that, if it were not for the exception in the concluding words of section 23 “unless the income is from property and the taxpayer has also transferred or assigned the property”, the right to the amounts so transferred or assigned to Georgia would be properly included in the defendant’s income.

The property was transferred to Georgia by the defendant by the lease dated September 30, 1966. In my view there was a “transfer” of property by the defendant to Georgia. I do not think it is material that in the head lease between the purchaser of the property and the defendant there was a clause prohibiting the sub-lease of the property without the prior consent of the head lessee. That is a matter between the defendant, as lessor, and the lessee. Neither do I think it is material, in the circumstances of this appeal, that Georgia did not go into possession. Georgia had the legal right to possession under its lease with the defendant.

The crux of the defendant’s contention is that the amount transferred by the defendant to Georgia was income from property.

The evidence is clear that Georgia did nothing. It had no employees.

I therefore turn first to this contention.

The operation was carried on by the defendant exactly as it had carried on prior to the lease of the land and building to Georgia. The defendant held itself out to its customers as conducting the operation. Its employees did all the work involved in the lifting of the boats, placing them on dollies and moving them about in the building for the most appropriate storage. The contracts for lifting and storage were entered into between the defendant and the customers. The defendant collected payment of all accounts from the customers. The contracts for storage and incidental lifting were not transferred by the defendant to Georgia.

All that Georgia did was to pay the monthly rental of $500 to the defendant and to receive each month the amounts paid to the defendant by the customers which in the nine months in the defendant’s taxation year totalled $14,028.60.

These amounts were meticulously and carefully recorded in the books of account of the defendant and Georgia by Mr Christie in his capacity as accountant common to both companies.

The mere fact that there was no handing of money back and forth and the embodiment of the transactions consisted of book entries is still the equivalent of the payment and receipt of money. (See Lord Wright in Trinidad Lake Asphalt Operating Co, Ltd v Commissioners of Income Tax for Trinidad-Tobago, [1945] AC 1 at 10 et seq.)

At this point I cannot refrain from commenting that the foregoing evidence lends substantial suport to the contention of the Minister that the amounts received were income from the operation of a business by the defendant and which continued to be operated by the defendant without any external change from the operation as conducted by the defendant before the lease to Georgia. I find it difficult to perceive how one part of the marina operation, namely the lifting and storage of the boats in the building, can be segregated from the operation as a whole.

In Henry Wertman v MNR, [1965] 1 Ex CR 629; [1964] CTC 252; 64 DTC 5158, Thurlow, J had occasion to consider the question of whether receipts from the letting of real property are to be considered to be receipts from a business or receipts from property. He carefully reviewed and analysed the leading United Kingdom and Canadian cases on the subject. He was particularly conscious of the fact that in Great Britain income from real property is computed for taxation purposes on a special basis prescribed under Schedule A and that, because of this, cases in which the revenue authorities have sought to bring the rentals of real property into the computation of profits under Schedule D as profits of a trade are not strictly parallel and thus not applicable in considering a case arising under the provisions of the Canadian Income Tax Act. He did conclude, however, that they offer light on the subject of what is income from property as distinguished from income from trading.

He concluded that when the question arises it is one that must be resolved on the facts of the particular case. I am in complete agree- ment with this conclusion and the reasoning by which it was arrived at.

In my view, prima facie the perception of rent as land owner is not the conduct of a business, but cases can arise where the extent of the various services provided by the landlord under the terms of a leasing contract and the time and labour devoted by him are such that the rental paid by the tenant can be regarded as in a substantial measure payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum could readily be regarded not as mere rental of property, but as true receipts of a business of providing apartment suites and services to tenants. It is a question of fact as to what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.

Reverting to the facts in the present case it is significant, in my view, that the charges to customers were for the lifting and storage of their boats. The lifting of the boats was a service and was an integral part of the storage operation. The boats could not be stored indoors without being lifted and extensive facilities were constructed for that purpose. In addition dollies were provided. The dollies and small power engine operated by one man permitted the boats to be moved about indoors to ensure maximum storage space. In my view it is of still greater significance that the customer was not allocated to specific space nor could he demand a specific space. The customer’s boat was stored in a space most convenient to the defendant and could be moved by the defendant from space to space at the defendant’s discretion.

In my view the defendant was a warehouseman. A warehouseman has been defined as a person who receives goods to be stored for which storage he receives compensation. He is also a bailee for hire.

As a warehouseman the defendant is bound to use ordinary diligence in the care and preservation of the property entrusted to him. He is not an insurer. Where goods are damaged while in his custody the onus is upon him to prove that this did not occur from his negligence.

At common law a warehouseman has a lien on the goods for his service of storing.

It follows that a warehouseman is engaged in a recognized business of warehousing. As pari of that business a warehouseman, and as part of the standard of care that a warehouseman is bound to exercise, it is logically incumbent upon him to take reasonable care to see that the place where the goods are kept is fit and proper for the purpose. In the case of the defendant that is the provision of a suitable building. The provision of a building fit and proper for the indoor storage of the boats owned by customers of the defendant is essential but incidental to the conduct of the business of a warehouseman by the defendant and is not in itself the business of warehousing. What the defendant provides to its customers is the service of storage of their boats.

In my view the income so generated is income from a business and not income from property.

Because of the conclusion I have reached it is not necessary for me to reach a conclusion on the issue raised by the Minister that the income here in question continued to be income earned by the defendant even after the lease of the premises to Georgia and I do not purport to do so.

For the reasons above expressed the appeal is allowed and Her Majesty is entitled to taxable costs.