Queen & Metcalfe Carpark Ltd. v. MNR, 74 DTC 6007, [1973] CTC 810 (FCTD), aff'd [1976] CTC xvi (FCA)

Sweet, D.J.:—The plaintiff was incorporated under the laws of Ontario by letters patent dated November 13, 1964. Included in its objects is:

To acquire by purchase, lease, exchange, concession or otherwise and to own, operate, maintain, rent, lease, mortgage or otherwise to charge or encumber lands;

In filing its income tax returns for its 1967 and 1968 taxation years the appellant, in the computation of its income, sought to deduct $28,408.15 for its 1967 taxation year and $56,527.60 for its 1968 taxation year. The appellant claims those amounts to be expenses for “investigating of site”. The appellant relies upon paragraph 11(1)(ab) of the Income Tax Act, namely:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for ‘a taxation year:

(ab) an amount paid by the taxpayer in the year for investigating the suitability of a site for a building or other structure planned by the taxpayer for use in connection with a business carried on by him.

The respondent admits that during the appellant’s 1967 taxation year it expended $28,408.15 and during its 1968 taxation year it expended $56,527.60. In assessing for 1967 the respondent disallowed the whole of that sum of $28,408.15. In assessing for 1968 the respondent disallowed $55,254.49 of the $56,527.60. Of that sum of $56,527.60 the respondent did not disallow $1,273.11 paid to H Q Golder & Associates Ltd for soil tests.

In his reply to the notice of appeal the respondent stated inter alia:

4. In assessing tax as aforesaid the Respondent did so on the basis that the sums disallowed were not amounts described in Section 11(1)(ab) of the Income Tax Act. The Respondent acted upon the following findings or assumptions of fact:

(a) The sum of $28,408.15 and $55,254.49 were paid, not for investigating the suitability of the site for a building or other structure planned by the Appellant, but were paid for architectural, legal, engineering and other services unrelated to the suitability of the site and performed with a view to:

(i) designing a building appropriate to the financial objectives of the Appellant and in compliance with the requirements of prospective tenants to whom the Appellant proposed to rent part of the building; and

(ii) seeking an amendment to -a Municipal by-law prohibiting the erection of a building of the height planned by the Appellant.

5. At all relevant times the Appellant derived its income from the rental of real property and it did not carry on any business. The building planned by the Appellant was not intended to be used in connection with any business carried on by the Appellant.

The relevant site is in the City of Ottawa. It has frontages of 198 feet more or less on the west side of Metcalfe Street; of 88 feet more or less on the south side of Queen Street; and of 88 feet more or less on the north side of Albert Street.

The westerly 22 feet of the site was acquired together with other lands by the appellant in November 1964. That parcel then acquired had a frontage on the south side of Queen Street of 192 feet more or less and a frontage on the north side of Albert Street of 132 feet more or less. That parcel is referred to as Parcel 1.

By a lease dated January 1, 1965 the appellant leased to City Parking Canada Limited lands which were described as Lots 18, 19 and 20 on the south side of Queen Street and Lots 19 and 20 on the north side of Albert Street numbering eastward as shown on a map drawn by James D Slater, PLS, registered in the Registry Office for the Registry Division of the City of Ottawa as No 3922. Although it is not clear from the evidence it would seem that this lease covered all the lands acquired by the appellant in November 1964. In any event it covered a considerable portion of Parcel 1 if it did not include all of it. The lease was for the term of 5 years computed from January 1, 1965 and, of course, would include the 1967 and 1968 taxation years.

By instrument dated May. 1, 1965 City Parking Canada Limited assigned that lease to High Point Management Services Limited.

Notwithstanding that lease the appellant entered into an agreement for lease dated April 27, 1965 with Vic Tanny (Ottawa) Limited of a portion of the lands in Parcel 1. The lease which was a subject matter of that agreement was to be for a term of 10 years.

In March 1966 the appellant acquired the easterly 66 feet of the relevant site. That parcel is referred to as Parcel 2.

By lease dated October 1, 1966 the appellant leased to City Parking Canada Limited property described as Lot 21, south side of Queen Street and Lot 21 on the north side of Albert Street, both numbering eastward, as shown on a map drawn by J D Slater, PLS and registered in the Registry Office for the Registry Division of the City of Ottawa as No 3922. There is also a lack of preciseness in the evidence on the point, but it would seem that this lease covered all of Parcel 2. It was for the term of 5 years to be computed from October 1, 1966 and, of course, would also cover the 1967 and 1968 taxation years.

According to copies of the appellant’s operating statements filed, its receipts for the years 1965, 1966,1967 and 1968 were:

Although all three of the appellant, City Parking Canada Limited and High Point Management Services Limited, are separate corporate entities it would appear that there is a very close, practical association between them, that they belong to a group of companies which have similar control and that a witness, Mr William Bernard Herman, is the predominant figure in all of them.

Mr Herman gave evidence to the effect that in his view the site had high potential for development primarily because of its location; that it would provide a good commercial mix for office use, ground floor retail, an hotel and a cinema. Having this in mind, apparently, Mr Herman instituted negotiations with the Canadian operator of the Holiday Inns and with Famous Players. Although the planning in that connection never achieved fruition, it does appear that much planning, work and extensive negotiations resulted. It also appears that there was considerable in the nature of representations made to municipal and regulatory bodies. Among the difficulties in connection with the planned development was a restriction affecting the site which limited buildings on it to 150 feet in height, a restriction which, unless it were varied, would prevent use of the site for a Holiday Inn.

Set out below are the various sums included in the amounts sought to be deducted in the computation of income, the respective payees and the times of payment. Included also are findings in respect of them.

Mr Kohl is an architect whose office is in Toronto.

He was to ascertain the type of edifice the Holiday Inn operators would wish and which would meet its standards, particularly in Ottawa, in connection with rooms, public rooms, pools etc. He met with Famous Players’ architects in the attempt to work out designs and layouts.

He dealt with various regulatory bodies.

He, or his staff, made preliminary sketches, drawings and specifications for submission to the Holiday Inn corporation and Famous Players. Preliminary sketches, drawings and specifications were also prepared by him or his staff in connection with design, configuration and traffic patterns in the attempt to persuade regulatory bodies as to the suitability of the project.

Sketches were changed and refined in the attempt to show the requirements of the prospective tenants. These did not include working drawings or specifications. Material was prepared for Concordia Construction Incorporated so that that firm could provide figures in connection with cost of the proposed structure.

Another of his responsibilities was to attempt to have changed the 150 foot height restriction attached to the site.

This is a firm of architects in Ottawa. Evidence of details as to what this firm did is sparse. They were engaged by Mr Kohl with Mr Herman’s approval. Often they would go to meetings in Ottawa instead of Mr Kohl. Mr Herman said he regarded Ala Kantti as an extension of Mr Kohl.

Concordia Construction Incorporated

February 23, 1968	$18,036.97
February 23, 1968	$16,875.09

The main function of Concordia Construction Incorporated was to provide an estimate as to cost of the structure. According to Mr Herman it was required to determine whether expenditures on the building were warranted in relation to expected rents and financing costs. They attended meetings with the Holiday Inn people for the purpose of suggesting things which might be done or what might not be done which would reduce costs.

Newton Photographic Associates Limited

March 1967

$ 55.86

Public Relations Services Limited

There is little evidence as to what this firm actually did. Mr Herman said in effect that he engaged it because he believed that it would be very helpful towards the success of the project if the press and other media looked favourably upon it and that it would also be helpful in getting the regulatory bodies to look favourably upon it. There is evidence that they made models and photographs.

Smith, Winston, Wolman, Roth & Smith

November 7, 1967

$500.00

This is a firm of chartered accountants. Their function was to prepare a feasability study in the attempt to satisfy Holiday Inn operators and long-term lenders. According to Mr Herman it was also felt that the appellant should have it.

Nobel and Bibac is a firm of solicitors. Mr. Herman said in effect, that his recollection and understanding was that they were involved in drawing documents and letters of intent in connection with Holiday Inn and Famous Players. He also said that Mr. Noble attended before regulatory and planning committees.

A H Fitzsimmons & Co Limited

December 22, 1967	$1,025.30
March 30, 1968	$1,307.17

Mr. Fitzsimmons, apparently a member of the above firm, attended with people representing the appellant before regulatory bodies.

Apparently this firm did some photographic work.

H Q Golder and Associates Limited

April 30, 1968

$1,273.11

This was for soil tests. The item was allowed as a deduction by the respondent.

Parking Design and Development Limited

October 31, 1968

$290.00

This, according to a copy of an invoice filed, was for meetings with city solicitor, planning staff and city traffic director in Ottawa in company with H B Kohl and A Fitzsimmons to settle terms of agreement with the city as prerequisite to amendment to zoning by-law to permit height increase and for some disbursements.

On cross-examination Mr Herman gave evidence to the effect that the preparation of sketches and plans and the persuasion of municipal bodies and determining the financial viability of the proposed building project occupied the time and attention of most of the persons listed above, and that at one time or another they directed themselves towards persuading municipal and other bodies that the proposed project was a very desirable project from the point of view of Ottawa.

It seems to me that the intent motivating the enactment of paragraph 11(1)(ab) was to afford relief by permitting deductions in computing income in respect of outlays which might not otherwise be deductible because of what might be their capital nature. On the other hand in Bowater Power Co Ltd v MNR, [1971] CTC 818; 71 DTC 5469, Noël, ACJ said at pages 837-8 [5481]:

I do not indeed feel that merely because the expenditure was made for the purpose of determining whether to bring into existence a capital asset, It should always be considered as a capital expenditure and, therefore, not deductible. In distinguishing between a capital payment and a payment on current account, regard must always be had to the business and commercial realities of the matter. While the hydroelectric development, once it becomes a business or commercial realty is a capital asset of the business giving rise to it, whatever reasonable means were taken to find out whether it should be created or not may still result from the current operations of the business as part of the every day concern of its officers in conducting the operations of the company in a business-like way. I can, indeed, see no difference in principle between all of these cases.

Of course, to have the benefit of paragraph 11(1)(ab) the taxpayer must come within its terms. That gives rise to certain questions.

1. Is the taxpayer carrying on a “business” within the meaning of that provision?

2. Does “use in connection with a business carried on by him” limit the planned structure to one which would be a facility in connection with the taxpayer’s business, for example premises in which an insurance company would conduct its insurance business? IS the phrase sufficiently broad to include any structure the operation of which would be all or part of the taxpayer’s business per se?

3. Need the planned structure actually be used in connection with the taxpayer’s business in the taxation year in which the outlay is made? In this connection what is the effect of the leases previously referred to?

4. What expenditures would qualify as amounts paid “for investigating the suitability of a site”?

It is convenient to refer to the above questions by numbers.

Question 1

The evidence was that all of the appellant’s income down to the time of the trial came either from rentals or as interest. Furthermore the evidence points strongly to a situation where the appellant’s rental income was income from the property itself rather than as payment in substantial measure for services in connection with the property. Associated with this phase of the matter there is the judgment of Thurlow, J, as he then was, in H Wertman v MNR, [1964] CTC 252: 64 DTC 5158. Associated also is the judgment of Cattanach, J in Walsh and Micay v MNR, [1965] CTC 478; 65 DTC 5293. In both of these cases the profits from rentals were held not to be profits from a “business”.

In Wertman, Thurlow, J said at pages 266-7 [5166-7]:

Under the Canadian statute what is taxed as income from a property or a business is the “profit therefrom” for a taxation year, and this poses the question “what is the profit from the property or business?” In the great majority of cases it is quite immaterial whether the profit Is regarded as arising from a business or from property, but when the question does arise, it is my opinion simply one that must be resolved on the facts of the particular case and I know of no single criterion on which it may be determined. That the rentals are primarily or entirely receipts from property may be a factor of great importance but it is not necessaily conclusive for the question in a case such as the present one is not so much what the income is derived from but whether the income can be fairly described as income from a business within the meaning of that term as used in the Act. Moreover, cases are I think readily conceivable where particular income may be accurately regarded as income from a business.

On the whole there appears to me to be nothing in the situation which affects the rentals with a trading character as distinct from mere income receipts from property and I am accordingly of the opinion that the profits from the Park Strand were not profits from a business and that the operation of the Park Strand was not a business in which the appellant and his wife were partners. Section 21(4) therefore cannot be invoked to support the assessment.

In Walsh and Micay v MNR, Cattanach, J said at page 484 [5296]:

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.

Both of those cases dealt with situations where the taxpayers were individuals and not corporate entities. Accordingly they differ from this case wherein the appellant is a corporation. In my opinion they are, for that reason, distinguishable.

Dealing with the situation where the taxpayer is a corporation there is Anderson Logging Company v The King, [1917-27] CTC 198; 52 DTC 1209. Duff, J, in that case, said at page 207 [1214]:

The sole raison d’être of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.

An appeal to the Judicial Committee of the Privy Council was dismissed.

Although Anderson Logging was heard under the former Income and Personal Property Taxation Act (British Columbia) and not the Income Tax Act it is my view that the quoted extract from the judgment of Duff, J is applicable to the present case.

Furthermore it would seem to me that the principle stated in connection with a public company, would, so far as the issues in this case are concerned, also be applicable to a private company, as was the appellant.

In Sutton Lumber & Trading Co Ltd v MNR, [1953] CTC 237; 53 DTC 1158, Locke, J, giving the judgment of the Court, said at page 244 [1161]:

The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in.

Included in the objects of the appellant as set out in its letters patent of incorporation was the power “to . . . lease . . . lands” and lease lands it did. In my opinion it was engaged in the business of leasing lands.

I find that the appellant was carrying on business within the meaning of paragraph 11 (1 )(ab) of the Income Tax Act.

It might, incidentally, be pointed out, although I do not base my conclusion upon it, that the respondent’s action in allowing as a deductible item the sum of $1,273.11 paid to H Q Golder & Associates Limited is consistent with this conclusion.

Questions 2 and 3

These may conveniently be dealt with together.

The answer to the question as to whether “use in connection with a business carried on by him” limits the planned structure to one which would be a facility in connection with the taxpayer’s business may be found in Commissioner of Income Tax v Hanover Agencies Limited, [1967] 1 AC 681. Although the wording of the statute there under consideration differed from the wording of the legislation being considered here, it seems to me that some of the reasoning in the Hanover Agencies case is applicable here. The following are extracts from the judgment of Lord Guest who delivered the judgment of their Lordships:

The second requirement under section 8(o) is that the building must be used by the respondents for the purpose of acquiring the income from the business carried on. Discussion took place on the meaning to be attributed to the word “used”. Here again the word must be given its ordinary meaning in the absence of any indication to the contrary. In the ordinarily accepted meaning of the word a building is “used” for the purpose of acquiring income if rents are derived from it.

The appellant’s contention really amounted to saying that “used” must mean “occupied”, but this is not what the section says, although it would have been simple for the legislation so to provide. Their lordships adopt with approval the view of Waddington J to the effect

“it is my view that an owner of premises who leases them is making use of these premises by employing or applying them for the purpose of letting, and it follows therefore, that if he carries on a business of letting premises then he is using the premises for the purpose of acquiring any income which he may derive therefrom.”

The purpose of the planned structure was to rent it to tenants. The business of the appellant, according to its history up to the time of trial, was to rent premises and to receive the rentals therefrom. The renting out of the planned structure would therefore have been consistent with the nature of the business which has been carried on by the appellant.

Accordingly, I consider that the phrase “use in connection with a business carried on by him” does not limit the planned structure to one which would be a facility in connection with the taxpayer’s business. On the contrary it is my opinion the phrase is sufficiently broad to include any structure the operation of which or leasing of which would be all or part of the taxpayer’s business per se.

In my opinion the fact that the realty handled and leased by the appellant is of a different type or kind from that contemplated by the structure makes no difference. It is quite true that the evidence does not indicate that the appellant had previously owned or let hotel premises, a cinema or for the retail occupation contemplated for the planned structure. In any event, so far as the evidence discloses, it was not at any time intended that the appellant would itself operate an hotel on the premises, nor a cinema nor carry on a retail business there. What was in contemplation was the erection of a structure for those purposes in order that it might be leased to others.

Furthermore, in my opinion, there is nothing in the provision which requires the contemplated structure to be completed within the year in which the outlay is made. Indeed the whole provision contemplates a building or other structure to be erected some time in the future and that might be in the year in which the outlay is made or might be in some subsequent year.

Moreover, I do not think that, so far as the situation or circumstances in this case are concerned, the fact that the site on which it was contemplated that the structure would be erected was all or partly under lease for a term which would not expire until sometime after the expiration of the year in which the outlays were made alters the situation.

The contemplated structure was of a complex nature and would require some time in planning.

I am quite satisfied, too, that the actual control over the affairs of the appellant, City Parking Canada Limited and High Point Management Services Limited, was for all practical business purposes in the same hands and that there would not be any obstacle in the way of alteration of the terms of the leases to permit the construction and leasing of the contemplated structure by the appellant.

Accordingly, if I am right in connection with the foregoing it only remains to determine which, if any, of the items claimed by the appellant to be deductible in the computation of its income for its 1967 and 1968 taxation years were amounts paid by the taxpayer for investigating the suitability of the site within the meaning of the legislation.

Of the wording “for investigating the suitability of a site” all three words “investigating”, “suitability” and “site” are key words and words to which full effect must be given. What may be included in the words “investigating” and “suitable” may vary and vary substantially, depending on circumstances, the nature of the site and the structure which is planned for the site. Nevertheless it is the suitability of the site which is to be investigated not a building to be erected on the site.

For a simple structure, say a small private garage on a small level parcel for temporary parking of automobiles of employees of a small business concern, the investigation of the site’s suitability might generally be expected to be a simple matter. On the other hand investigating the suitability of a site for a complex structure which would involve very substantial cost such as the structure planned in this case would be expected to be extensive. Nevertheless to qualify under the legislation the outlays must always be related to all three basic elements namely “investigation”, “suitability” and “site”.

it would be futile, and indeed undesirable, to attempt an exhaustive listing of the nature of outlays which would qualify. Circumstances could be expected to vary greatly in many cases. Nevertheless reference might be made to some matters which might have to do with an investigation to determine the suitability of this site for the planned purpose.

These could include matters of topography and geology. However it would not be expected that the physical characteristics of the site would be the only indicated matters for such an investigation. One might expect a prudent developer to have regard to such things as building restrictions by by-law, zoning, limitations on use created by registered instruments, traffic flows, convenience and present and potential market in the area of the site for the service to be rendered.

So far as the circumstances of this case are concerned amounts paid for the following purposes would be among those which, in my opinion, would not be incurred in investigatory proceedings within the meaning of the legislation and, accordingly, would not be deductible in computing income:

1. To attempt to have prospective tenants consider renting or to persuade them to rent the proposed structure or parts of it and related negotiations.

2. To attempt to persuade a municipal or other authority to alter a zoning, building or other by-law, restriction or regulation.

3. To attempt to obtain approval of the proposed development from municipal, regulatory and other officials, committees and authorities.

4. For the preparation of plans, specifications, briefs and other material in connection with, associated with or incidental to the above- mentioned activities.

5. For the attendance of representatives of the appellant at meetings with prospective tenants, and municipal, regulatory and other officials, committees and authorities in connection with, associated with or incidental to the above purposes.

6. Services of solicitors for documentation in connection with the above matters.

7. For the services of public relations counsel in the attempt to create a receptive climate for the proposed project.

I find that of all the outlays claimed by the appellant to be deductible in computing its income for its 1967 and 1968 taxation years by virtue of paragraph 11(1)(ab) of the Income Tax Act (and disputed by the respondent) only the $500 paid to Smith, Winston, Wolman, Roth and Smith on November 7, 1967 is so deductible.

I am not unmindful that the evidence of Mr Herman was to the effect that this outlay was for a feasibility study in the attempt to satisfy Holiday Inn operators and hoped for long-term lenders as well as for the appellant’s purposes. Still for a project of the magnitude and complexity of that planned, a feasibility study is something a prudent and even knowledgeable developer could reasonably be expected to procure for his own guidance in investigating the suitability of the site regardless of what other use he might have for it.

Accordingly the appeal is allowed but only to the extent of that outlay of $500 and in all other respects the appeal is dismissed.

The matter is referred back to the respondent for reassessment in accordance with the foregoing.

Because the allowed item of $500 is so small a percentage of the total of $83,662.65 claimed by the appellant to be deductible I do not consider the appellant is entitled to costs of the appeal.

The appeal is allowed to the extent stated without costs.