Date: 20050519
Docket: A-339-04
Citation: 2005 FCA 185
CORAM: NOËL J.A.
NADON J.A.
MALONE J.A.
BETWEEN:
DIANE BAKER, BRONWEN LAPOINTE, MICHAEL STONE AND
TOWN PROPERTIES LTD.
Appellants
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on May 12, 2005.
Judgment delivered at Ottawa, Ontario, on May 19, 2005.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: NADON J.A.
MALONE J.A.
Date: 20050519
Docket: A-339-04
Citation: 2005 FCA 185
CORAM: NOËL J.A.
NADON J.A.
MALONE J.A.
BETWEEN:
DIANE BAKER, BRONWEN LAPOINTE, MICHAEL STONE AND
TOWN PROPERTIES LTD.
Appellants
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal from four decisions of O'Connor J. of the Tax Court of Canada, dismissing Town Properties Ltd.'s appeal on the basis that it was not entitled to the small business deduction pursuant to subsection 125(1) of the Income Tax Act (the Act), and dismissing in turn the individual appellants' appeals on the basis that they were not entitled to the enhanced capital gain deduction under section 110.6 of the Act.
Background
[2] The issue in this appeal is whether the activities of Town Properties Ltd. (Town Properties) fall within the definition of "specified investment business". The term "specified investment business" is defined in subsection 248(1) by reference to the meaning assigned by subsection 125(7) as follows:
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"specified investment business" carried on by a corporation in a taxation year means a business ... the principal purpose of which is to derive income (including ... rents ...) from property but ... does not include a business carried on by the corporation in the year where
(a) the corporation employs in the business throughout the year more than 5 full-time employees, ...
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"entreprise de placement déterminée" Entreprise [...] dont le but principal est de tirer un revenu de biens, notamment [...] des loyers [...]. Toutefois, [...] l'entreprise [...] n'est pas une entrerpise de placement déterminée si, selon le cas:
a) la société emploie dans l'entreprise plus de cinq employés à plein temps tout au long de l'anneé;
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[3] If Town Properties did not have at least five full-time employees then it is a "specified investment business" as defined and was not carrying on an "active business". As a result, it is not a "small business corporation" and its shares are not "qualified small business corporation shares" as defined in subsection 110.6(1) of the Act. Thus, Town Properties did not carry on an "active business", and the individual appellants who were shareholders of Town Properties at the relevant time do not qualify for the capital gains deduction on the disposition of their shares under subsection 110.6(2.1).
[4] The appeal before the Tax Court proceeded on the basis of an Agreed Statement of Facts. It is sufficient for present purposes to outline a brief summary.
[5] Town Properties is a corporation that earns rental income from a commercial office building located in the City of Victoria. Throughout the relevant period, it employed at least six individuals as custodians for the purpose of providing cleaning services for its tenants. These individuals worked from 6:00 pm to 10:00 pm from Monday to Friday, for a total of 20 hours per week.
[6] The appellants assumed that the custodians qualified as full-time employees of town Properties. On that basis, Town Properties claimed the small business deduction and the individual shareholders claimed the enhanced capital gains deduction for qualified small business corporation shares under section 110.6 of the Act.
[7] The Minister of National Revenue reassessed the appellants to deny those claims.
[8] On appeal to the Tax Court of Canada, the trial Judge found that Town Properties' employees worked a total of 20 hours per week and that this did not constitute full-time employment for the purposes of subsection 125(7) of the Act. This is the judgment under appeal.
Analysis and Decision
[9] The appellants rely on the test for full-time employment proposed by the Tax Court in Ben Raedarc Holdings Limited v. The Queen, 98 D.T.C. 1218 where it was held that working less than normal working hours could qualify as full-time if those lesser hours conformed to the standard in the industry and area where the activities take place. Relying on this precedent, the appellants contend essentially that a 20-hour work week is standard in the cleaning services industry in Victoria, British Columbia. As such, a 20-hour week should be accepted as "full-time" employment for purposes of the definition of "specified investment business".
[10] In my respectful view, the test proposed in Ben Raedarc is too narrow and subjective when regard is had to the broad range of circumstances to which the definition of "specified investment business" is to be applied. The definition proposed in R. v. Hughes & Co. Holdings Ltd., 94 DTC 6511 (F.C.T.D.) which was followed in Woessner v. The Queen, 99 D.T.C. 6511 (T.C.C.) (decided subsequent to Ben Raedarc), is to be preferred.
[11] The requirement that the taxpayer employ five full-time employees, as embodied in the definition of "specified investment business", must be analysed in the light of the object and purpose of this definition. This purpose was identified by Bowman J. (as he then was) in Lerric Investments Corp. v. The Queen, at paragraphs 23 and 24 :
[...] The concept of specified investment business seems to have been a response to certain decisions of the courts which treated virtually any commercial activity of a corporation, however passive, even where it was carried [sic] under contract by independent contractors who were not employees, as an active business (see, for example, The Queen v. Cadboro Bay Holdings Ltd., 77 DTC 5115 (F.C.T.D.); The Queen v. Rockmore Investments Ltd., 76 DTC 6157; E.S.G. Holdings Limited v. The Queen, 76 DTC 6158; The Queen v. M.R.T. Investments Ltd., 76 DTC 6158).
The result was the introduction of the concept of specified investment business the purpose of which [sic] to ensure that "active" meant truly active and that the word not be, in effect, judicially written out of the Act. Therefore the object of the new legislation was to ensure that the business of a corporation that invested in rental properties would not be considered "active" unless there was sufficient activity in the corporation's business to justify the employment of over five full-time employees.
[12] In the appeal from that decision to the Court of Appeal, Rothstein J.A. writing on behalf of the Court quoted the above passage with approval (2001 D.T.C. 5169) and added the following comment (paragraph 9):
Section 125 distinguishes between active and inactive corporations, only the former being eligible for the small business deduction. Ordinarily, a business whose income is primarily derived from property is treated as inactive and therefore ineligible for the deduction. Subparagraph 125(7)(e)(i) provides an exception to this rule and allows the small business deduction to a corporation that derives income from property where that corporation is sufficiently active - employment being the indicia of activity. As Bowman T.C.J. explained, the requirement that the corporation employ more than five full-time employees simply operates as a test to ensure that a corporation is sufficiently active such that it should qualify for the deduction.
[13] Defining "full-time employment" to be equivalent to the standard number of hours worked in an industry and area where the activities take place as proposed in Ben Raedarc, supra, is inconsistent with the scheme which is to ensure that a certain minimum level of activity exists in a corporation prior to allowing it the small business deduction. Such a test would lead to differing criteria for "full-time employment" between industries and regions. Section 125 would thus be applied in an inconsistent and subjective manner, violating the principle that similarly situated taxpayers should be taxed equally.
[14] In my view, the conclusion by Muldoon J. in Hughes and Co., supra, at page 6517, that the term "full-time" employment in the definition of "specified investment business" is used in contra-distinction with "part-time" employment, is correct. This distinction reflects the broad consideration which Parliament had in mind when it provided for a minimum of five full-time employment throughout the year. Only full-time employment, as opposed to part-time employment, qualifies.
[15] While Town Properties employees worked five days a week, and to that extent were regularly employed, they did not work the normal working hours of each day, week and month. Indeed, their schedule of four hours per day allowed them to pursue more than one job with relative ease.
[16] Counsel for the appellants pointed out that it is difficult to equate the normal working hours of each day with a precise number of hours. He suggested that a range of hours best identifies the number of hours which come within that description. It may be that a narrow range is appropriate. However, this is not the case to deal with this as regardless of the approach, four hours a day falls short of the normal working hours of each day.
[17] I would dismiss the appeals with costs.
"Marc Noël"
J.A.
"I agree.
M. Nadon J.A."
"I agree.
B. Malone J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
Appeal from a Judgment of the Tax Court, dated May 28, 2004. Tax Court Docket:
2002-114(IT)G heard on common evidence with the appeals of Diane Bake (2001-4371 (IT)G, Bronwen Lapointe (2001-4372(IT)G, and Michael Stone (2001-4373(IT)G
DOCKET: A-339-04
STYLE OF CAUSE: Diane Baker, Bronwen Lapointe, Michael Stone and Town Properties Ltd. -and- Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: May 12, 2005
REASONS FOR JUDGMENT BY: NÖEL J.A.
CONCURRED IN BY: NADON J.A.
MALONE J.A.
DATED: May 19, 2005
APPEARANCES:
Mr. J. André Rachert FOR THE APPELLANTS
Mr. Eric Douglas FOR THE RESPONDENT
Ms. Shawna Cruz
SOLICITORS OF RECORD:
Dwyer Tax Lawyers FOR THE APPELLANTS
Victoria, British Columbia
John H. Sims, Q.C. FOR THE RESPONDENT
Deputy Attorney General of Canada
Ottawa, Ontario
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