Citation: 2008TCC261
Date: 20080508
Docket: 2007-4209(IT)I
BETWEEN:
AMIRTHALINGAM SIVASUBRAMANIAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] These appeals are from
assessments made under the Income Tax Act for the appellant’s 2003, 2004
and 2005 taxation years. The assessments deny the appellant’s losses on the
rental of seven condominiums in Scarborough, Ontario created by capital cost allowance (“CCA”).
[2] The appellant is an
accountant. Starting in about 1989 and for several years later, he acquired
seven condominiums in Scarborough and rented them to tenants. He claimed CCA on the
condominiums as well as smaller amounts of CCA on the furniture and equipment.
The condominium units were under Class 1 and CCA at 4% was claimed. The
furniture and equipment were under Class 8 and CCA at 20% was claimed.
[3] Schedule A sets out
the financial results of the rental of the seven units. It will be apparent
that they generated substantial gross revenues (upwards of $85,000 in each
year). The expenses, even before CCA, were substantial and therefore the net
income, before CCA, was not large in comparison to the capital outlay and the
expenses. Indeed, in some years, a loss was created. In all years the deduction
of CCA resulted in a loss on each unit and, overall, a very substantial total
loss.
[4] The loss created by
the CCA was disallowed under subsections 1100(11) and 1100(14) of the Income
Tax Regulations. Essentially these provisions restrict the loss that may be
claimed from rental or leasing properties to losses before claiming CCA. To put
it a little more colloquially, you cannot create or increase a loss from rental
or leasing properties by claiming CCA.
[5] Subsections
1100(11) and 1100(14) of the Income Tax Regulations read as follows:
(11) Rental
properties -- Notwithstanding
subsection (1), in no case shall the aggregate of deductions, each of which is
a deduction in respect of property of a prescribed class owned by a taxpayer
that includes rental property owned by him, otherwise allowed to the taxpayer
by virtue of subsection (1) in computing his income for a taxation year, exceed
the amount, if any, by which
(a) the
aggregate of amounts each of which is
(i)
his income for the year from renting or leasing a rental property owned by him,
computed without regard to paragraph 20(1)(a) of the Act, or
(ii)
the income of a partnership for the year from renting or leasing a rental
property of the partnership, to the extent of the taxpayer's share of such
income,
exceeds
(b) the
aggregate of amounts each of which is
(i)
his loss for the year from renting or leasing a rental property owned by him,
computed without regard to paragraph 20(1)(a) of the Act, or
(ii)
the loss of a partnership for the year from renting or leasing a rental
property of the partnership, to the extent of the taxpayer's share of such
loss.
. . . . .
(14) ["Rental
property"] -- In this
section and section 1101, "rental property" of a taxpayer or a
partnership means
(a) a
building owned by the taxpayer or the partnership, whether owned jointly with
another person or otherwise, or
(b) a
leasehold interest in real property, if the leasehold interest is property of
Class 1, 3, 6 or 13 in Schedule II and is owned by the taxpayer or the
partnership,
if,
in the taxation year in respect of which the expression is being applied, the
property was used by the taxpayer or the partnership principally for the
purpose of gaining or producing gross revenue that is rent, but, for greater
certainty, does not include a property leased by the taxpayer or the
partnership to a lessee, in the ordinary course of the taxpayer's or
partnership'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 or partnership's
goods or services.
[6] There is a similar
provision for leasing properties (depreciable property other than buildings)
and there is an exception for corporations whose principal business is leasing
or renting.
[7] Mr. Sivasubramaniam
contends that the condominiums are not “rental properties” as defined by subsection
1100(14) because they were not, in the taxation years in question
“. . . used by [him] . . . principally
for the purpose of gaining or producing gross revenue that is rent, . . .”.
Rather, he contends, the properties
were acquired by him with a view to selling them at a profit and realizing a
capital gain. He has in fact listed all or most of the condominiums for sale
but has been unsuccessful in selling them or at all events in getting a price
at which he is willing to sell. Interestingly, even in the boom times we have
had in real estate in Toronto, these condominiums have not been moving. Perhaps it is
the location.
[8] There is a problem
with his argument. If, as he contends, his principal purpose was to sell the
condominiums at a profit and not to obtain rental revenues then he runs a risk
that the Canada Revenue Agency may say that they no longer are capital
properties in his hands but have become the inventory of a business or an
adventure in the nature of trade. Mr. Sivasubramaniam argues that they are
inventory but I fear that he has not thought through the implications of that
argument. If the condominiums really are inventory it means that they fall entirely
outside of the CCA system because paragraph 1102(1)(b) of the Income
Tax Regulations provides:
1102. (1) The
classes of property described in this Part and in Schedule II shall be deemed
not to include property
(a) the cost of which would be
deductible in computing the taxpayer's income if the Act were read without
reference to sections 66 to 66.4 of the Act;
(a.1) the cost of which is
included in the taxpayer's Canadian renewable and conservation expense (within
the meaning assigned by section 1219);
(b)
that is described in the taxpayer's inventory;
[9] One might question
whether there is some significance to the words “described in the taxpayer’s
inventory” on the theory that if it is not in fact “described” in the
inventory, but forms part of the property held for sale in the course of a
business, and is therefore “inventory” as defined in section 248,
paragraph 1102(1)(c) does not apply. The short answer, I believe, is
that paragraph 1102(1)(c) is probably unnecessary. If property is
inventory, whether or not so described or described in a list called an
inventory, it is not subject to CCA because it does not have a capital cost and
therefore does not fall into paragraph 20(1)(a) of the Income
Tax Act.
[10] Moreover, if, as Mr. Sivasubramaniam
contends his purpose in acquiring the units was not to earn rental income but
to realize capital gains (arguably, if I may say so, something of an oxymoron)
then the condominiums are excluded from the CCA regime by paragraph 1102(1)(c)
of the Income Tax Regulations which reads:
(c) that
was not acquired by the taxpayer for the purpose of gaining or producing
income;
[11] That paragraph would
be applicable because of subsection 9(3) of the Income Tax Act.
(3) Gains and losses not
included. In this Act, “income from a property” does not include any
capital gain from the disposition of that property and “loss from a property”
does not include any capital loss from the disposition of that property.
[12] These are entirely
theoretical conjectures but the fact remains that the use to which the units
were put in the year was the production of rental income. They fall within the
definition of rental properties. Nor do I think the condominiums were
inventory. Most investments are bought in the hope that they will be disposed
of at some time at a profit. That does not make them inventory or trading
assets. In Irrigation Industries Limited v. M.N.R., 62 DTC 1131, the
Supreme Court of Canada said at pages 1134 to 1135:
The only operations of the
appellant in the present case were the purchase of 4,000 treasury shares
directly from Brunswick and their subsequent sale,
presumably through brokers. This is not the sort of trading which would be
carried on ordinarily by those engaged in the business of trading in securities.
The appellant's purchase was not an underwriting, nor was it a participation in
an underwriting syndicate with respect to an issue of securities for the
purpose of effecting their sale to the public, and did not have the
characteristics of that kind of a venture. What the appellant did was to
acquire a capital interest in a new corporate business venture, in a manner
which has the characteristics of the making of an investment, and subsequently
to dispose, by sale, of that interest.
But it may be contended
that persons may make a business merely of the buying and selling of
securities, without being traders in securities in the ordinary sense, and that
the transactions involved in that kind of business are similar, except in
number, to that which occurred here. It has, however, been pointed out in the
well known case of Californian Copper Syndicate v. Harris, (1904) 5 T.C.
159 at 165, that, where the realization of securities is involved, the
taxability of enhanced values depends on whether such realization was an act
done in the carrying on of a business. In that case the Commissioners had held
that the transaction there in question was an adventure or concern in the
nature of trade. The judgments on appeal make no reference to that point, but are
based on the ground that the turning of the investment to account in that case
was not merely incidental, but was the essential feature of the appellant's
business. The passage in question reads as follows:
It is quite a well settled principle
in dealing with questions of assessment of Income Tax, that where the owner of
an ordinary investment chooses to realise it, and obtains a greater price for
it than he originally acquired it at, the enhanced price is not profit in the
sense of Schedule D of the Income Tax Act of 1842 assessable to Income
Tax. But it is equally well established that enhanced values obtained from
realisation or conversion of securities may be so assessable, where what is
done is not merely a realisation or change of investment, but an act done in
what is truly the carrying on, or carrying out, of a business. The simplest
case is that of a person or association of persons buying and selling lands or
securities speculatively, in order to make gain, dealing in such investments as
a business, and thereby seeking to make profits. There are many companies which
in their very inception are formed for such a purpose, and in these cases it is
not doubtful that, where they make a gain by a realisation, the gain they make
is liable to be assessed for Income Tax.
In my opinion, the
transaction in question here does not fall within either of the positive tests
which the authorities have suggested should be applied.
[Question of intention]
The only test which was
applied in the present case was whether the appellant entered into the
transaction with the intention of disposing of the shares at a profit so soon
as there was a reasonable opportunity of so doing. Is that a sufficient test
for determining whether or not this transaction constitutes an adventure in the
nature of trade? I do not think that, standing alone, it is sufficient. I agree
with the views expressed on this very point by Rowlatt J. in Leeming v.
Jones, supra, at p. 284. That case involved the question of the
taxability of profits derived from purchase and sale of two rubber estates in
the Malay Peninsula. The Commissioners initially found that there was a concern
in the nature of trade because the property in question was acquired with the
sole object of disposing of it at a profit. Rowlatt J. sent the case back to
the Commissioners and states his reasons as follows:
I think it is quite clear that
what the Commissioners have to find is whether there is here a concern in the
nature of trade. Now, what they have found they say in these words (I am
reading it in short): That the property was acquired with the sole object of
turning it over again at a profit, and without any intention of holding the
property as an investment. That describes what a man does if he buys a picture
that he sees going cheap at Christie's, because he knows that in a month he
will sell it again at Christie's. That is not carrying on a trade. Those words
will not do as a finding of carrying on a trade or anything else. What the
Commissioners must do is to say, one way or the other, was this -- I will not
say carrying on a trade, but was it a speculation in the nature of trade? I do
not indicate which way it ought to be, but I commend the Commissioners to
consider what took place in the nature of organizing the speculation, maturing
the property, and disposing of the property, and when they have considered all
that, to say whether they think it was an adventure in the nature of trade or
not.
The case was returned to the
Commissioners, who then found as a fact that there had not been a concern in
the nature of trade. Ultimately it reached the House of Lords, [1930] A.C. 415,
where the main issue was as to whether the profits were taxable under Case VI
of Schedule D of the Income Tax Act, 1918. There is, however, a general
statement of principle by Lord Buckmaster, at p. 420, which aptly applies
to the present case, when he says:
an accretion to capital does not become
income merely because the original capital was invested in the hope and
expectation that it would rise in value; if it does so rise, its realization
does not make it income.
[13] In the result I
think the condominiums were rental properties and the restrictions in subsection
1100(11) of the Income Tax Regulations apply.
[14] The appeals are
therefore dismissed.
Signed at Toronto, Ontario, this 8th day of May 2008.
“D.G.H. Bowman”
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