The Queen v. Guaranteed Homes Ltd., 78 DTC 6510, [1978] CTC 636 (FCTD)

Smith, DJ:—This action came before the Court on July 12, 1978, by way of appeal from a decision of the Tax Review Board, dated January 31, 1977, which allowed the appeal of the defendant from an assessment for income tax with respect to its 1974 taxation year. In its income tax return for that taxation year the defendant deducted $71,933.81, as expenses incurred in that year which it claimed were deductible under paragraph 20(1)(ee) of the Income Tax Act. By reassessment the Minister of National Revenue added this amount to the defendant’s income. The defendant appealed the reassessment to the Tax Review Board, which allowed the appeal. This action was then begun.

The facts are essentially not in dispute. The defendant was incorporated by Letters Patent under the Companies Act of Manitoba (see Exhibit D-3) on February 7, 1964, its stated objects being “To carry on a general construction business and all other allied businesses thereof.” As stated in evidence by Eric Bergman, its President and General Manager, the business it actually carries on is that of acquiring land, developing it for residential purposes and constructing houses thereon for sale. In the course of developing the land of a subdivision which is subdivided into building lots, streets and lanes, the defendant (developer) is required by agreement with the City of Winnipeg (see Exhibit D-1) to supply and install or to arrange for the supply and installation of various utilities and services to all the building lots in the area being developed, all without expense to the City. These utilities and services include waste water (sanitary) and land drainage (storm) sewers, water mains, electricity and telephone lines. The sewer pipes, water mains, electricity and telephone lines are laid underground in the streets (which are owned by the City) and the defendant (developer) is required to have connections installed in them with pipes and conduits leading to the front lot line of each building lot. As soon as installation of a service pipe, main or conduit has been made the City acquires ownership of the installation.

Mr Bergman stated that at the date in question it was the municipality of Fort Garry that would become owner of the installations. I note, however, that the contract (Exhibit D-1) which is headed “1973 Residential Privately Owned Development” and states that it was made on August 3, 1973 (though not executed by the City until March 28, 1974 nor the defendant till August 3, 1974) is an agreement between the City of Winnipeg and the defendant and contains no mention of the municipality of Fort Garry. Nothing turns on this fact.

In this case the defendant let a contract dated April 19, 1974 (Exhibit D-4) to Red River Construction (1972) Limited, for the construction and installation of water mains, sanitary and storm sewers, and building services in connection therewith. The contractor was to commence work by May 1, 1974 and to complete it by June 26, 1974.

Mr Bergman stated on cross-examination that the installation of services was completed in June, 1974. Up till the date of completion he said few, if any, of his company’s employees were stationed or working on the subdivision. He could not say if any of them were there prior to that time.

Construction work by the defendant commenced almost immediately after the service installations had been installed. From that time till October of that year the defendant maintained a moveable field office on the subdivision, but in October and subsequently the field office was located in a display house which had been completed in ‘that month.

Exhibit D-2 is a plan of the subdivision, outlined in red, with which we are concerned. The lots, numbering 77 according to Mr Bergman, were acquired in February 1974, by registration of the Plan of Subdivision.

The defendant paid Red River Construction (1972) Ltd the total amount of $71,933.81, for supplying and laying in the three streets on which the 77 lots front, viz: Avenue Gendreau, Dorge Drive and Rue Le Maire, the pipes, wires and conduits and connections therefrom to the lot lines, as required by the contract (Exhibit D-4). Its. claim to deduct this sum from its income for the taxation year 1974, is based upon its interpretation of and application to the facts of this case, of paragraph 20(1)(ee) of the Income Tax Act, RSC 1970, c 148. Paragraphs 18(1)(a) and (b) are also relevant to the determination of this case. These portions of sections 18 and 20, both of which were enacted by SC 1970-71-72, c 63 read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made.:in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business.or property;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence of depletion except as expressly permitted by this Part;

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(ee) an amount paid by the taxpayer in the year to a person (other than a person with whom he was not dealing at arm’s length) for the purpose of making a service connection to his place of business for the supply, by means of wires, pipes or conduits, of electricity, gas, telephone service, water or sewers supplied by such person, to the extent that the amount so paid was not paid

(i) to acquire property of the taxpayer, or

(ii) as Consideration for the goods or services for the supply of which the service connection was undertaken or made.

By paragraph 3 of its Statement of Defence the defendant claimed that the lands in the subdivision were at all material times the defendant’s place of business. This would seem to mean that all the lots in the whole subdivision constituted one place of business. At the opening of the trial the defendant asked leave to amend the paragraph by changing the word “place” in the expression “place of business” to “places’’. The result of the change is that the defendant now claims that each of the building lots on which houses were constructed was one of its places of business.

section 20 of the Income Tax Act is a deduction section, which describes a number of situations in which a taxpayer is entitled to deduct from his income, for the purposes of the Act, sums of money which otherwise would be included in his income for the appropriate taxation year. The onus is therefore on the taxpayer who claims a deduction to prove that in the circumstances of his case a right of deduction of the sum claimed is allowed by one or more of the deduction provisions of the Act. In this case, as stated above, the claim is that the deduction is allowed by paragraph 20(1 )(ee).

As applied to this case, in order to bring itself within the terms of paragraph 20(1 )(ee) the defendant must prove, inter alia:

1. That it is a corporation carrying on business in Canada.

2. That it paid Red River Construction (1972) Limited the amount claimed, viz $71,933.81.

There is no dispute about these two points.

3. That the money was paid for making service connections to the defendant’s place of business for the supply, by means of pipes, of water, and for the drainage of surplus and waste water by means of storm and sanitary sewers.

With respect to this point the plaintiff agrees that service connections were made to the front line of the building lots on which the defendant was building or intended to build houses for sale, but says that:

(a) the connections were not made to the defendant’s place of business, because the lots in question were not, either collectively or individually, its place or places of business.

(b) the language of paragraph 20(1 )(ee) requires, in order that the deduction authorized thereby shall be allowed, that the person who makes the service connections to the taxpayer’s place of business, for the supply of services by means of wires, pipes or conduits, shall also be the person who supplies the electricity, gas, telephone service, water or sewers for the supply of which the service connections were made;

(c) much of the money was paid for work not included in the terms of paragraph 20(1)(ee), and the defendant has not proved how much of it was paid for work included therein.

(d) paragraph 20(1 )(ee) is not intended to authorize deduction of moneys paid in the kind of situation with which this section is concerned.

(a) The first of these four submissions is vital to the decision to be made in this action, for unless the defendant proves that the money paid to Red River Construction (1972) Limited under its contract (Exhibit D-4), $71,933.81, was paid to it for the purpose of making water and sewer connections to the plaintiffs place of business, it has failed to prove point 3 (supra) and judgment must be given against it. I must therefore determine what is the meaning of the expression “his place of business” as used in paragraph 20(1 )(ee) of the Income Tax Act and as it applies to the defendant’s business and the circumstances of this case.

The Income Tax Act contains no definition of “his place of business”. Nor have I found any provision in that Act that clearly indicates the meaning which is to be given to that expression in paragraph 20(1)(ee). However, the expression is used in subsection 230(1) of the Act in a context which to my mind is significant, as will be indicated below.

It appears that the present paragraph 20(1 )(ee) had its origin in SC 1957, c 29, subsection 6(4), which added a new subsection (15) to what was then section 11 of the Act. This subsection was repeated in the Income Tax Act, RSC 1970, c 1-5, where it appears as subsection 11(23). It is similar to the present paragraph 20(1)(ee) except that it is concerned with income from “a business” only, not with income from “a business or property”, as is the present paragraph (ee).

There is very little jurisprudence concerning the meaning of “his place of business” in paragraph 20(1 )(ee). One such case is Canadian Utilities Limited v MNR, [1969] Tax ABC. 378; 29 DTC 297, a decision of the Tax Appeal Board. The appellant, Canadian Utilities Limited, was an electric power utility company. It had agreed to supply electric power to a new plant for a gas company. The new plant lay outside the appellant’s exclusive service area. The appellant did not itself build the power lines to the new plant, but made an agreement with Calgary Power Limited, within whose exclusive area the new plant lay, for the lines to be built by that company. The appellant agreed to buy the power for the new plant from Calgary Power Limited and resell it to the gas company. It also agreed to pay Calgary Power Limited $9600 toward the cost of the new power lines, which would be owned by Calgary Power Limited. The appellant was to have a metering station near the new plant.

The appellant sought to deduct, under subsection 11(15), then applicable, the $9600 from its income for the year of construction of and payment for the new power lines. It was held that the appellant’s place of business was its exclusive service area, and that as all the work had been done outside that area, the connection to the new gas plant was not to the appellant’s place of business. In his judgment St-Onge, QC, distinguished between “place of business’’, “permanent establishment” and “Head Office”. At pages 383 and 300, he said the appellant:

was not carrying on business at his place of business (ie: in connection with the new power lines), because a place of business is where business is being done and the expense was incurred outside the appellant’s exclusive service area.

He. added:

The appellant is not a consumer but a supplier and apparently subsection 15(11) was enacted to allow a consumer to deduct the expense incurred when it was too far away from the supplier which caused it to pay for a part of the installations. In its efforts to. have the expense under review deducted, the appellant tried to identify itself with one of its own consumers.

A decision of the Tax Appeal Board is not binding on this Court, but to my mind the reasoning is sound. The facts are in some respects analogous to those in the present case and differ in other respects. Thus in our case the defendant at the date of filing its Plan of Subdivision acquired all the land in the subdivision but at the same time the streets and lanes became the property of the City. This was shortly before the defendant’s contract with Red River Construction (1972) Limited was made. All the work under that contract was done in or under the streets of the subdivision, ie: on City property. Again the real purpose of the contract was not to make available water and sewer services to the defendant as a consumer, but to make those services available for the purchasers of the houses to be constructed by the defendant on the 77 building lots. These purchasers would be the consumers of the services. It can be argued that, as was said in the Canadian Utilities case, by seeking to have the expenses under review deducted, the defendant is trying to identify itself with its prospective purchasers.

On the other hand the defendant was not simply a supplier of services but was the owner of all. the building lots to the front line of which the service connections were made, and would remain so until the several houses built on the lots were respectively sold. Its interest in the services was to have them available to the purchasers of the houses. It was temporary. The services would not provide continuing revenue for the defendant as was the situation in the Canadian Utilities case.

The most notable point of distinction between the facts of the two cases is that in the Canadian Utilities case the services were provided for a plant that was outside that company’s exclusive area of service, which led to the finding that the electric power connection was not made to the company’s place of business, whereas in the present case the service connections were to the front line of lots on which the defendant was to build and did build houses. The defendant’s business is building houses for sale. The question to be answered therefore is whether the facts in. this case make the lots on which the defendant built houses “his place of business”.

In considering this question I turn first to subsection 230(1) of the Income Tax Act. This subsection, quoted in part, requires:

Every person carrying on business . . . to keep records and books of account . . . at his place of business or residence in Canada or at such other place as may be designated by the Minister . . .

This is the only place in the Income Tax Act, other than paragraph 20(1)(ee) where I have found the expression “his place of business”. In subsection 230(1) these words obviously indicate one place of business, not several. Certainly I cannot think that they are intended to mean that a building contractor who is erecting 77 houses on 77 building lots is obliged to keep the required records and books of account on each of the 77 lots, on the ground that each of them is, as contended by the defendant in this case, under its amended Statement of Defence, “his place of business”. Words used more than once in a statute may not always have the same meaning, but they are normally considered to have the same meaning unless the context shows they are being used in a different sense. No such difference in meaning has been shown by the defendant to exist in this case. Nor do I see any sufficient reason to come to such a conclusion.

I have quoted the opinion of St-Onge QC in the Canadian Utilities case that “a place of business is where business is being done”. It has also been described as “a place where business is carried on”. This clearly applies to simple cases such as a single retail store or wholesaling or manufacturing establishment. But a person, firm or corporation may have several, or many places of business, in the sense of places where business is carried on, eg: a supermarket chain store corporation. The words “a place of business” have a wider meaning than “Head Office”, though some aspects, at least, of a company’s business are normally carried on at its Head Office. The same is true of a company’s “Principal Establishment”. A person, firm or corporation may also have branch offices which are places of business in the same sense. Some businesses, eg: engineering and construction businesses, may have what is often called a “field office”, which conducts some or all of the firm’s business in the locality in and for which it has been set up, and which is properly described as “a place of business”. Other examples of a company having more than one place of business could easily be cited.

While all that is said in the foregoing paragraph is true it does not follow that the mere fact that some of the taxpayer’s employees are working for a time on a building lot or building lots to which service connections are made constitutes that lot or lots his (the taxpayer’s) place of business for the purposes of paragraph 20(1)(ee). For example, if a construction firm is working on a contract to build a house on a lot owned by the person for whom it is being built, the firm may be Said to be carrying on its business of housebuilding on that lot, but it cannot be said to be doing so at its place of business.

In my opinion the words “his place of business” in paragraph 20(1 )(ee) narrow the area in which the deduction authorized by it may be allowed much more than is indicated in the example just given. To me they indicate a single place which is already the taxpayer’s place of business. As applied to the circumstances of this case they mean not simply the place where the defendant is building a house or houses, but also the place which will be the recipient of the services which the connections to be made under the contract are intended to make available and in which the defendant will have the benefit of those services. They further mean the place in and from which control and direction of the housebuilding work on the 77 lots will be exercised. I do not understand how they can properly be said to mean 77 places of business (the taxpayer’s places of business), comprised separately of the 77 building lots, or the subdivision considered as constituting one whole place of business. The 77 lots, over a period of time are all places in which the defendant will work at the business of housebuilding, but neither they nor one of them is indicated by the words “his place of business” in paragraph 20(1)(ee).

In my view the only place that could be described by the words “his place of business” in the circumstances of this case is the field office. In Mr Bergman’s evidence, for several months until October 1974 this was a movable field office which could be moved from place to place in the subdivision as might be desired: We have no evidence as to whether any of the services to be made available by the contract with Red River Construction (1972) Limited were ever connected to or made available or intended to be connected with or made available to this movable office. In October 1974 one of the houses that had been completed was set up as a display house to assist in selling the houses in the subdivision. At that time it became and continued during the balance of the construction period to be the field office and no doubt the water and sewer services were supplied to it. From that month this house and the lot on which it stands, but no others, could be described as the defendant’s place of business. We have, however, no breakdown showing the cost of making the service connections to the front lot line of the lot on which this house stands. It must have been a very small percentage of the total cost of making the connections to all of the 77 lots. Under these circumstances I cannot find that any amount has been proved to have been paid to Red River Construction (1972) Limited for service connections to this field office.

One further case should be mentioned here. It is Dartmouth Developments Ltd v MNR, [1967] Tax ABC 780; 67 DTC 551. This is also a decision of the Tax Appeal Board. The Board held that money spent for the purpose of making service connections was spent for the purpose of making the appellant’s inventory of land more saleable and therefore was properly a business cost and not an expenditure on capital account. The appellant was. therefore entitled to deduct the amount spent for this purpose in the taxation year in question. The claim for deduction in the present case is based solely on the language of paragraph 20(1)(ee) and not on any argument about inventory. There are also material differences in the facts in the two cases. In my view they are clearly distinguishable and the Dartmouth decision affords little assistance in this case.

In view of the conclusion I have come to concerning the meaning of the words “his place of business” the other three points of argument submitted by counsel for the plaintiff need not be considered at length.

Points (b) and (d) may be considered together.

With respect to point (b) it may be said that paragraph (ee) of subsection 20(1) of the Income Tax Act is not as well worded as it might have been. Whether or not it means precisely what Parliament intended to enact, to my mind what it does enact is precisely what counsel for the plaintiff contends, viz: that in order for the taxpayer to be permitted to make the deduction referred to in the paragraph, the person to whom the money is paid for the purpose of making the service connections. must be the person who supplies the electricity, gas, telephone service, water or sewers for the supply of which the connections are made.

In the present case we are concerned with the amount paid for water and sewer connections. The person (Red River Construction (1972) Limited) who made the connections and was paid for so doing, IS a private construction company. The water that will flow through the water and sanitary sewer. pipes will be supplied by the City of Winnipeg, not by Red River Construction (1972) Limited, and the water that will flow through the storm sewers will originate in natural causes and obviously will not be supplied by Red River Construction.

On this basis I consider the submission of the plaintiff’s counsel to be correct, that paragraph (ee) of subsection 20(1) is not intended to authorize deduction of money paid in the kind of situation with which this action is concerned.

Only one case involving consideration of the argument in point (b) was cited to me. That case was Curlew Limited v MNR, [1970] Tax ABC 28; 70 DTC 1017.

The deduction claimed in that case was $8,200 paid to a contractor for work and materials related to a storm sewer connection to a shopping centre then being constructed. The Board said that the water in the storm sewer could not be said to be supplied by anyone and on this ground the appeal against the disallowance of the deduction by the Minister was allowed. Bearing in mind that in relation to a deduction section the onus is on the taxpayer to show that all the conditions under which the deduction will be permitted exist, the fact that the water in the storm sewer could not be said to' be supplied by anyone might conceivably have led the Board to the opposite decision, on the ground that the appellant had not satisfied the onus of proving that the water in the sewer was supplied by the person who made the service connection. However, in my view the Board’s decision was correct on the facts, because it is scarcely possible to believe that Parliament, in giving a right to a tax deduction, would attach to it a condition which is totally outside human control and can never be discharged. None the less the decision does not affect the plaintiff's argument in point (b), in respect of the water and sanitary sewer connections.

The plaintiff submits further arguments in support of his contention that paragraph 20(1 )(ee) of the Income Tax Act is not intended to permit the deduction from a taxpayer’s income of money paid in the kind of situation with which this action is concerned, viz: where the taxpayer has purchased land which he has subdivided into building lots and which he is developing as a Subdivision by building houses thereon for sale. The first of these submissions is that paragraph (ee) is clearly intended to grant a right of reduction to a person who has his place of business at a certain location, to which location the service connections are made, and in which location that person, as. operator of the business, will be the recipient of the services that are made available by the installation of the connections. The plaintiff submits that there is nothing in paragraph (ee) or in any other provision in the Act which suggests that the subparagraph is intended to have a wider meaning; in particular that there is nothing to suggest that a developer who is building houses for sale, in respect of which houses the purchasers and not the developer will be the recipients of the services, is granted a right to deduct from his income the cost of connecting the services to the front lot line of the lots on which he ts building the houses.

I am persuaded that this is a meritorious argument. What the defendant does in his business, with respect to the costs of making these service connections, is to add them to the cost of the land, or alternatively to the total cost of the development, in the expectation of recovering them proportionately, with a margin of profit, in the selling prices of the houses as they are sold. This being so, why should anyone conclude, in the absence of a clear indication to that effect in the legislation, that Parliament intended to grant to a developer, in such circumstances, a right to deduct from his income for the appropriate taxation year, the money paid by him to someone else for making such service connections. In addition, granting such a right of deduction would constitute discrimination in favor of a particular industry. Parliament has the power to enact discriminatory legislation, but its intention to do so should certainly be clear, which in my view is not the case in paragraph 20(1 )(ee).

One additional point should perhaps be mentioned. Counsel for the defendant was asked if he knew what purpose Parliament intended when it enacted paragraph 20(1)(ee). The only thing he could suggest was that Parliament wished to give this right of deduction to developers aS an incentive to them in their business. In view of the well-known fact that during the last 25 or 30 years the business of developers in Canada has, generally speaking, been quite profitable, I find this suggestion unconvincing

By reason of the conclusion I have reached, as indicated supra, I propose to deal very breifly, and with one aspect only, of the plaintiff’s submission (c), viz-, that much of the money was paid for work not included in the terms of paragraph 20(1)(ee) and the defendant has not proved how much of it was paid for work included therein. As I understood counsel’s argument on this one aspect, it was that paragraph 20(1 )(ee) did not allow the taxpayer (developer) to deduct the cost of laying water and sewer mains in the streets of the Subdivision, but only the cost of making connections from those mains to the front lot lines of the building lots in the subdivision.

I am not basing my decision on plaintiff’s submission (c), and anything I say about it is ob/ter dictum, but if my understanding of counsel’s submission on the above aspect of submission (c) is correct, I do not agree with it. If I had held that each of the lots in the Subdivision was “the defendant’s place of business’’, I would have held that paragraph 20(1 )(ee) was intended to cover the cost of laying water and sewer pipes from the appropriate City water and sewer mains along the streets in the subdivision as well as the cost of the connections from those pipes to the lot lines, because the laying of such pipes is a necessary part of the process of making service connections with the front lot line of the building lots.

In the result the plaintiff is entitled to succeed in this action. The decision of the Tax Review Board is set aside and the reassessment by the Minister of National Revenue of the defendant’s income for income tax for the taxation year 1974 is restored.