Arbutus Gardens Apartments Corp. v. R., 98 DTC 1795, [1998] 3 CTC 2972 (TCC)

Bowman T.C.J.:

These appeals are from two assessments made against the appellant, a resident of Canada, under subsection 216(4) of the Income Tax Act in respect of two non-residents.

The facts briefly are as follows:

Arbutus Gardens Limited Partnership is a British Columbia limited partnership which owned the Arbutus Gardens project, an apartment complex consisting of seven buildings containing 302 units situated on 12 acres in Vancouver.

The appellant was the general partner of the partnership. A resident of the Netherlands, Robert John Stoelenga owned 40 of the 400 units of the partnership. Sixty-five units were owned by Valley Apartments Limited Partnership, which was owned, to the extent of 99.98% by another resident of the Netherlands, Eric Albada Jelgersma.

The appellant was assessed a tax of 25% of the two non-resident’s proportionate share of the gross rentals received by the partnership from the apartments. In the case of Mr. Stoelenga the tax assessed was $71,907.75 and in the case of Mr. Albada Jelgersma the tax assessed was $116,847.64.

The two non-residents filed undertakings under subsection 216(4) to file returns of income under Part I within six months of the end of the taxation year. The effect of such an undertaking is that they are relieved of the obligation to pay 25% of the gross rentals paid or credited to them. Rather, they are entitled to file their returns on a “net” basis, that is to say, the gross rentals less permitted deductions such as wages, maintenance costs, capital cost allowance, if applicable, and interest. The effect of a failure to file a return of income within six months of the end of the taxation year is that the resident agent is required to pay 25% of the gross rents received. This is a somewhat harsh result considering that the resident agent has no control over whether the non-resident fulfils the undertaking to file the return.

Counsel for the appellant contends that as a matter of fact the returns for 1993 were filed within six months from the end of the year. He contends in the alternative that the operation of the Arbutus Gardens Apartments constituted the carrying on of a business with the result that Part XIII had no application.

Although it was pleaded that the assessments, for technical reasons, were invalid and that they were contrary to the Canada-Netherlands Tax Convention these points were not pursued at trial.

With respect to the timely filing of the returns, the evidence is that Mr. Hilton Mason, a chartered accountant with the firm Cinnamon, Jang Willoughby & Company sent by letter dated December 14, 1992 undertakings dated January 15, 1993 signed on behalf of Mr. Albada Jelgersma and Mr. Stoelenga. The signature is illegible and purports to be under a “P.O.A.” (which I presume means power of attorney). No witness was able to identify the signature. The undertaking read as follows:

Undertaking by Non-Resident

I hereby undertake to file the prescribed Income Tax Return for the above-noted years(s) within six months from the end of the taxation year and to include all rents from my real property and/or timber royalties and to pay any additional tax

Owing as the result thereof. (Note: A separate Income Tax Return must be filed for each non-resident who is a member of a partnership.)

Eric Albada Jelgersma

Date: January 15, 1993 Signature of Non-Resident: (illegible) by P.O.A.

Also, the appellant signed an undertaking as follows:

Undertaking by Agent

I hereby undertake, should the Non-Resident fail to file a return and pay the tax in accordance with the above undertaking, to pay to the Receiver General, the full amount that I would otherwise have been required to remit in the year minus the amounts that I have remitted in the year in compliance with the provisions of paragraph 216(4)(a) of the Income Tax Act.

Arbutus Gardens Apartments Corp.

Date: January 15, 1993 Signature of Agent: (illegible)

The documents bear a receipt stamp of the Department of National Revenue dated February 4, 1993.

There were adduced in evidence copies of letters dated June 23, 1994 addressed to the International Taxation Office, Ottawa purportedly enclosing the 1993 T1 General income tax returns of Mr. Albada Jelgersma and Mr. Stoelenga.

There is no evidence that they were received and the evidence of Mr. Brian Chow, the assessor, was that there was no record of these letters having been received. There is certainly evidence that someone in Mr. Mason’s office worked on the returns on June 23, 1994. This is confirmed by Mr. Mason’ diary entries and those of the student who worked in the office, Jan Mark. Moreover, Mr. Mason billed the non-residents on June 30, 1994, although the invoice to Mr. Albada Jelgersma does not mention any charge for preparing the 1993 return.

Mr. Mason testified that he always sent the client a copy of the return as filed. There is, however, no covering letter. Moreover, he testified that Mr. Stoelenga sent back a signed copy of the return and that he (Mr. Mason) sent it to the Department on October 6, 1994 with a letter which stated:

Please find enclosed a copy of the above named client’s 1993 Non-Resident Rental Income Tax Return which we believe was filed with your office in June, 1994 but are filing a further copy just in case.

I recognize the difficulty in proving that a letter was sent by ordinary mail, particularly where one is dealing with an office in which a large volume of mail is sent out every day. The best that one can usually do is to establish that the usual procedures for dealing with mail were followed (as, for example, in Schafer v. R. (June 3, 1998), Doc. APP-478-96-GST (T.C.C.)). I also recognize that mail sometimes get lost and that occasionally documents become lost in the department itself. However the chance that two separate letters would go missing is very low.

lam not satisfied that it has been established that the returns were filed on June 30, 1994. There are simply too many unanswered questions. As Ms. Truscott aptly observed, there are too many pieces in this puzzle that do not fit. I agree. The failure to produce any covering letters to the clients, the mysterious appearance of a signed return of Mr. Stoelenga in October, the fact that a T-5013 form for Valley Apartments Limited Partnership was not included with the return when it was allegedly filed, whereas a T-5013 was included with Mr. Stoelenga’s 1993 return (I am not satisfied that the T- 5013 was even prepared by June 30, 1994) and the fact that neither nonresident was called are all facts that make it impossible for me to conclude that the returns were filed by June 30, 1994.

I turn now to the second branch of the appellant’s argument. It is contended that the two non-residents carried on business through the partnership in respect of their interest in the Arbutus Apartments and that accordingly the provisions of Part XIII do not apply.

Subsection 215(4) reads:

(4) The Governor in Council may make regulations with reference to any nonresident person or class of non-resident persons who carries or carry on business in Canada, providing that subsections (1) to (3) are not applicable to amounts paid to or credited to that person or those persons and requiring the person or persons to file an annual return on a prescribed form and to pay the tax imposed by this Part within a time limited in the regulations.

Subsection 805(1) of the Income Tax Regulations reads:

(1) Every non-resident person who carries on business in Canada shall be taxable under Part XIII of the Act on all amounts otherwise taxable under that Part except those amounts that

(a) may reasonably be attributed to the business carried on by him through a permanent establishment (within the meaning assigned by subsection 400(2) or that would be assigned by that subsection if he were a corporation) in Canada; or

(b) are required by subparagraph 115(l)(a)(iii.3) of the Act to be included in computing his taxable income earned in the year in Canada.

It is clear that the non-residents, if they carried on business through the partnership, did so through a permanent establishment within the meaning of subsection 400(2) of the Regulations, which reads in part as follows:

(2) For the purposes of this Part, “permanent establishment” in respect of a corporation means a fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and

(b) where a corporation carries on business through an employee or agent, established in a particular place, who has general authority to contract for his employer or principal or who has a stock of merchandise owned by his employer or principal from which he regularly fills orders which he receives, the corporation shall be deemed to have a permanent establishment in that place;

(d) where a corporation, otherwise having a permanent establishment in Canada, owns land in a province, such land shall be deemed to be permanent establishment.

Can the operation of the Arbutus Apartments be regarded as the carrying on of a business? Clearly, if the limited partnership carried on business, the inactive non-resident limited partners carried on business: see Robinson (Trustee of) v. R. (1998), 98 D.T.C. 6065 (Fed. C.A.); Grocott v. R. (1995), [1996] 1 C.T.C. 2311 (T.C.C.); Goldstein v. R. (1995), 96 D.T.C. 1029 (T.C.C.) .

The question whether income is from property or from the carrying on of a business is one that has occupied the attention of lawyers and judges for almost a century. Two of the leading cases are Walsh v. Minister of National Revenue (1965), 65 D.T.C. 5293 (Can. Ex. Ct.) and Wertman v. Minister of National Revenue (1964), 64 D.T.C. 5158 (Can. Ex. Ct.).

Possibly the most extensive, learned and illuminating consideration of the matter is found in Professor John Dunford’s article The Distinction Between Income from a Business and Income from Property and the Concept of Carrying on Business in the Canadian Tax Journal, 1991 Volume 39 Issue No. 5 page 1131.

Essentially it is a question of fact depending on all of the circumstances. I think that the operation of the Arbutus Apartments goes well beyond the mere passive perception of rentals. It is clearly a business. It involved the hiring of five full time managers, who lived in the project with their spouses, two full time maintenance persons, and two full time gardeners.

During and prior to the year in question the project was having problems, with a high vacancy rate and high turnover of tenants. Mrs. Janet Roethe was brought in, in an attempt to turn the project around and she was apparently successful. In addition to the work done by the full time staff, many services were contracted out, such as gardening, painting and pool maintenance. There were eight acres of gardens, with elaborate landscaping and two outdoor swimming pools, games rooms, a health spa, and a number of party rooms.

Far more services were provided to the tenants (many of whom were seniors) than would normally be the case in an apartment building. Mrs. Roethe testified that in the early part of the seven years in which she worked at attempting to rehabilitate the project she spent five days a week at the property.

It is true that the source of rental income is property, but this does not make it any the less income from a business.

In Weintraub v. R. (1975), 75 D.T.C. 5050 (Fed. T.D.) Walsh J. held that the income from two commercial buildings was income from a business because of the extensive services provided by the taxpayer. He quoted from the decision of Cattanach J. in R. v. Canadian-American Loan & Investment Corp. (1974), 74 D.T.C. 6104 (Fed. T.D.) at pages 6108-9:

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.

The fact that the income is rental income and on one view of the matter might be seen as income from property is not inconsistent with the income being from the carrying on of a business. In Goldstein (supra), the court stated:

Even if any commercial pursuit of a partnership must be characterized as the carrying on of a business, there is no reason why that business cannot consist in the holding of property for the purpose of deriving rental income therefrom. While there may be cases in which it is necessary to decide whether a source of income is business and not property, or vice versa there is no reason in principle for assuming that the two concepts are mutually exclusive or that they exist in watertight compartments.

See also Canadian Marconi Co, v. R, (1986), 86 D.T.C. 6526 (S.C.C.) . Similarly, in Prosperous Investments Ltd. v. Minister of National Revenue (1992), 92 D.T.C. 1163 (T.C.C.) it was stated at page 1165:

Prosperous Investments did not at any time employ more than five full-time employees. Accordingly, the sole question is whether the “principal purpose’* of its business was to derive income from property. At first blush the section would appear to contain a contradiction in terms if one regards the two sources of income, business and property, as mutually exclusive (see, for example, Wertman v. M.N.R., 64 D.T.C. 5158; Walsh and Micay v. M.N.R., 65 D.T.C. 5293. They are, however, not mutually exclusive. It is obvious that an individual or a corporation can actively engage in a business whose sources of revenue such as interest or rentals are property. This is implicit in paragraph 125(6)(A) and is consistent with the decision of the Supreme Court of Canada in Canadian Marconi Company v. Her Majesty the Queen, 86 D.T.C. 6526.

The facts in this case bear a strong similarity to those in two cases decided by my colleague Lamarre Proulx J. in Étoile Immobilière S.A. v. Minister of National Revenue (1992), 92 D.T.C. 1984 (T.C.C.) and Valec S.A. c. R. (1997), 98 D.T.C. 1266 (Eng.) (T.C.C.).

I need not repeat the thorough analysis which she made of the jurisprudence which led her to conclude that the extent of the services provided by the owners of a rental operation, and their active involvement therein, made the income from the operation income from a business. The same is equally true here.

On the facts of this case it is clear that the limited partnership carried on a business through a permanent establishment in Vancouver. Accordingly the two non-residents were obliged to file returns and pay tax not under Part XIII but rather under subsection 2(3) and section 115 of the Income Tax Act.

It should be observed that the limited partnership had extensive losses in 1993 and so the two non-resident partners had no income from the business of the Arbutus Gardens Apartments.

The appeals are therefore allowed, with costs, and the assessments made under Part XIII are vacated.

Appeal allowed.