Buonincontri v. The Queen, 85 DTC 5277, [1985] 1 CTC 370 (FCTD)

Addy, J:—The issue before the court is whether the plaintiff is entitled to benefit from the rollover provisions of paragraph 44(1 )(b) of the Income Tax Act with regard to an eleven-suite apartment building situated at 119, 29th Avenue NW, in Calgary (hereinafter referred to as the subject property), which he sold in June 1978 after having purchased it in 1974 with his brother-in-law, as tenants- in-common. They each owned a one-half interest in the property.

The building was in a very poor condition when originally purchased. They had to carry out numerous substantive repairs over a period of some one and one-half years before renting it. In 1978 the plaintiff quarrelled with his brother- in-law who had decided to add a twelfth suite to the building without obtaining a municipal permit. It was therefore decided to sell the building. To replace it, the plaintiff subsequently purchased, in 1979, a ten-suite apartment house which, if paragraph 44(l)(b) applied would have allowed him to benefit from the rollover provisions of that section. The relevant provisions read as follows:

44. (1) Where at any time in a taxation year (in this subsection referred to as the “initial year”) an amount has become receivable by a taxpayer as proceeds of a disposition of a capital property (in this section referred to as his “former property”) that is either. ..

(b) a property that was, immediately before the disposition, a former business property of the taxpayer. . .

The case turns on the interpretation of the expression “business property” in the above-mentioned provision. There is really no dispute as to the facts.

The plaintiff is a tailor by trade. He has, since a year and a half following his arrival in Canada in 1966 as an immigrant from Italy, been working constantly as a tailor on a full-time (37 to 40 hours a week) basis either as an employee or as owner of his own tailoring business.

Between 1967 and 1981 he purchased in the city of Calgary, for the purpose of retaining them and obtaining rental income therefrom, nine different properties including the subject property. Some of those properties were single-family dwelling houses, some were duplexes and others were apartment houses. He has since then sold three of the properties (including the subject property), although he originally intended to retain them all for rental purposes at the time of purchase. During a few years, he rented the upstairs and occupied the basement of his first property, namely, a duplex, which he acquired in 1967. However, he now occupies the entire building as his personal residence.

During the whole period, he supplied no services to the tenants and engaged no employees, except that in three of the apartment buildings, including the subject property, he had a tenant who acted as caretaker. He deducted a certain amount of rent which would otherwise be payable for the premises occupied by the caretaker to compensate for the services. The duties of the caretaker in each case were limited to merely keeping an eye on the place, replacing burnt light bulbs in the hallways and keeping the halls tidy to some extent although he himself did most of the cleaning. In the apartment houses the heat was supplied by the plaintiff but the electric, gas and water services were on meters and were paid directly by each tenant. The plaintiff personally carried out all general repairs but hired tradesmen with specialized skills when required.

Counsel for the plaintiff argued that, notwithstanding the fact that his client was a tailor, he was also truly and actively engaged to a very considerable extent in the business of renting houses and apartments and that the subject property was therefore, previous to its disposition, one of his business properties within the meaning of paragraph 44(1)(b). This would automatically qualify him for the rollover provisions of that section.

In my view, the answer is to be found in the definition of “former business property” found in subsection 248(1):

“Former business property’’ of a taxpayer means a capital property that was used by him primarily for the purpose of gaining or producing income from a business, and that was real property or an interest therein of the taxpayer, but does not include,

(a) a rental property of the taxpayer, . . .

and, for the purposes of this definition, “rental property” of a taxpayer means real property owned by the taxpayer, whether jointly with another person or otherwise, if the property was used by the taxpayer in the taxation year in respect of which the expression is being applied principally for the purpose of gaining or producing gross revenue that is rent, but, for the greater certainty, does not include a property leased by the taxpayer to a lessee, in the ordinary course of the taxpayer’s business of selling goods or rendering services, under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer’s goods of services. (Emphasis added.)

It is clear that the subject property was purchased and kept “for the purpose of gaining or producing gross revenue, that is rent” . . . I agree with counsel for the defendant that the exception which follows those words in the above mentioned definition is of no assistance to the taxpayer: it is meant to cover special cases where the tenant agrees to sell or promote the landlord’s goods or services or where the rental of the property is connected with and linked to the ordinary business of the lessor whose business is other than the business of merely renting property, such as where an oil company in the business of retailing gasoline, rents one of its properties to a gas station operator in conjunction with a franchise to sell its gas.

Rent is not specifically defined in the Income Tax Act. There does not seem to be much difficulty in determining the common ordinary meaning of the word “rent”. We find the following dictionary definitions:

Oxford English Dictionary (1970):

The return or payment made by a tenant to the owner or landlord, at certain specified or customary times, for the use of lands or houses.

The Random House Dictionary of the English Language (1970):

A payment made periodically by a tenant to an owner or landlord in return for the use of land, a building, an apartment, an office, or other property.

Funk & Wagnails Standard College Dictionary (1982):

Compensation made in any form by a tenant to a landlord or owner for the use of land, buildings, etc, especially when paid in money at regular or specified intervals.

The Oxford Companion to Law (1980):

The consideration, usually in money, paid to a landlord by a tenant of land, buildings, or other corporeal hereditaments for exclusive possession of them for a period. Prima facie rent is fixed by negotiation and it is usually payable weekly, monthly, quarterly, or half-yearly.

The definitions found in the cases referred to by counsel, namely, CI Burland Properties Limited v MNR, [1967] CTC 432 at 436-37; 67 DTC 5289 at 5291-92 and the Australian case Junghenn v Wood, [1958] SR (NSW) 327 at 330, do not, in my mind, add any clarification to what really seems to be a well understood word.

It seems to me that the definition of “former business property” contained in subsection 248(1) to which I have just referred, finally and ultimately disposes of the issue before me in favour of the defendant.

Additionally, however, and altogether apart from section 248, the issue might well be resolved by examining whether rental income has been found to constitute “income from property” or “income from a business” in cases where the issue was examined and where the distinction had to be drawn in order to apply various other provisions of the Income Tax Act. Jurisprudence on the subject has constantly affirmed the principle that, when such a distinction becomes necessary, each case will depend on its own particular circumstances and no firm general rule can be laid down pursuant to which a clear formula can be determined which would govern all cases. One of the leading decisions is that of Thurlow, J, as he then was, in the case of Henry Wertman v MNR, [1964] CTC 252; 64 DTC 5158. The learned judge summarized that part of the facts which is relevant to our case as follows, at 262 (DTC 5165):

The evidence discloses that the Park Strand has 49 apartments and that the rentals for the year 1956 amounted to $55,716.50. The appellant devotes the whole of his working time to its affairs and he said that it keeps him busy from morning to night. He arranges the letting of apartments to tenants and for necessary repairs even to doing some of the painting himself and he collects the rents and pays the expenses. A janitor is employed who looks after the boiler room and the sweeping and cleaning.

At 266 (DTC 5167), he made the following remarks in considering those facts:

On the evidence in the present case the sum received as rentals from the Park Strand should I think be regarded as having accrued to the appellant and his wife and son predominantly, if not entirely, in their capacity as owners of the property rather than as traders, and I also think that the rentals should be regarded as having accrued predominantly, if not entirely, from the use by tenants of the property in the sense that they represent payments for the tenants’ occupation thereof rather than payments arising from the process of letting apartments and providing certain limited services such as heat of which the tenants have the benefit. To my mind while there is a sense in which the rentals can be said to be revenues from a business of letting apartments or operating an apartment building for the purpose of securing rentals, it is a fanciful and unrealistic way of describing them for it puts the emphasis of the description of their source where it does not belong viz, on the mere sine qua non or conduit pipe of the letting activity rather than on the fact that they arise from the use or exercise of the owners’ right of occupation of the property by tenants who pay not for the letting but for the use of the property. There may well be cases wherein the extent of various services provided by the landlord under the terms of the leasing contract is such that the rental paid by the tenant can be regarded as in a substantial measure a 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 paid could readily be regarded not as mere rental of property but as true receipts of a business of providing apartments and services to tenants but I do not regard this as a case of that kind.

On the same page, he is quoted as coming to the following conclusion:

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.

The following year Cattanach, J in Harry Walsh and Micay v MNR, [1965] CTC 478; 65 DTC 5293, approved the Wertman case and stated at 484 (DTC 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.

It is true that on a reading of the case of The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115, Gibson, J in considering the rental income of the owner of a shopping centre seemed to go somewhat beyond the limits mentioned in the Wertman case to characterize the income as income from a business rather than income from property. On the other hand, Urie, J in delivering judgment for the Court of Appeal in the case of King George Hotels v The Queen, [1981] CTC 87 at 88-89; 81 DTC 5082 at 5083; certainly appears to have agreed that the term “active business” can be interpreted more restrictively than one might conclude from reading the Cadboro case.

In any event, I consider the Wertman case still to be good law as it has not in any way been overruled by the Court of Appeal. In that case, the taxpayer, unlike the case at bar, was devoting all of his time to the rental of his apartments yet the income from the rent was held to be income from property and not from a business. On this ground also I would therefore dismiss the plaintiffs case.

Costs will follow the event.

Appeal dismissed.