The Queen v. Mount Robson Motor Inn Ltd., 81 DTC 5188, [1981] CTC 345 (FCA)

Pratte, J:—This is an appeal from a judgment of the Trial Division allowing the respondent’s appeal from an income tax reassessment for its 1975 taxation year. That judgment held that the respondent was entitled, in computing its income for that year, to deductions of capital cost allowance in respect of its buildings and a paved parking area as assets which do not fall within Class 13 of Schedule B to the Income Tax Regulations but fall within Class 6 and 1 respectively of that Schedule.

The sole issue to be determined on this appeal is whether the trial judge was right in holding that the respondent’s interest in certain buildings and improvements (paving) on leased lands was not in the nature of a leasehold interest within the meaning of Class 13 of Schedule B to the Income Tax Regulations.

By lease dated June 22, 1959, Her Majesty the Queen in Right of Canada leased to Mount Robson Motels Ltd a certain parcel of land situate in Jasper National Park, Alberta, for a period of 42 years, commencing on April 1, 1959. The lease required the payment of an annual rent of $500 and contained the following provisions:

1. The Lessee will during the said term pay the said rent and all taxes, rates, duties and assessments charged upon the land or upon the Lessee in respect thereof.

2. The Lessee will, within six months of the commencement of the said term, submit to the Superintendent in triplicate plans and specifications of the building to be erected upon the land and a plan indicating its proposed location on the land.

3. Upon approval by the Superintendent of the said plans and specifications the Lessee will erect the building described therein on or before the first day of April, 1960.

4. The Lessee will use the land for the purpose of a motel only, and will not use or permit the use of the land in any way that in the opinion of the Superintendent is immoral or constitutes a nuisance.

6. The Lessee may not sublet the premises or any part thereof or assign or transfer this lease without the consent of the Minister in writing.

10. The Lessee may on the termination of this lease sever and remove from the land all structures, fixtures and improvements which during the said term have been affixed or placed on the land at the expense of the Lessee.

13. This lease enures to the benefit of and is binding upon Her Majesty, Her Heirs and Successors and the Lessee, its successors and assigns.

Pursuant to its obligations under the lease, Mount Robson Motels Ltd built two frame buildings on poured concrete foundations. It also paved a parking area.

By an agreement dated May 15, 1973, Mount Robson Motels Ltd. assigned and transferred to the respondent all its rights under the lease of June 22, 1959, together with its rights in the motel buildings and other improvements it had constructed since the commencement of the lease.

In computing its income for the year 1975, the respondent claimed capital cost allowances with respect to those buildings and improvements under Classes 1 and 6 of Schedule B to the Regulations as if it had a proprietary interest in them. The Minister reassessed the respondent on the basis that its interest in those buildings and improvements was merely a leasehold interest (Class 13 of Schedule B). On the appeal of the respondent, the Trial Division, as I have already said, set aside the reassessment and held that the respondent’s interest in the buildings and improvements here in question was not a leasehold interest within the meaning of Class 13 of Schedule B.

The appellant argues that the buildings and asphalt pavement were fixtures since they had become part of the land and that, consequently, as the respondent’s interest in the land was a leasehold interest, its interest in the buildings and pavement was also a leasehold interest.

The respondent’s position, as I understand it, is that the various clauses of the lease as well as the surrounding circumstances show that it was the common intention of both parties to the lease of 1959 that the improvements to be made by the lessee would remain its property in spite of their incorporation to the land and that effect must be given to that intention.

The law on the subject seems to be reasonably clear.* [1]

When chattels are physically attached to land they may either retain their identity and remain chattels or become part of the land, in which case they are called fixtures. As fixtures are really part of the land, once attached to the land, they become the property of the owner of the land; and this is true, as long as the articles remain attached to the land, whether or not the person who affixed them to the land has retained the power to sever and remove them.

It may be difficult, in certain cases, to determine whether or not a chattel has been so attached to the land as to become a chattel. However, it is clear, I think, that ordinary buildings and an asphalt pavement like the improvements here in question are normally considered to be fixtures. When such improvements are constructed by a tenant, they become the property of the owner of the land. In order for the buildings and pavement here in question to have retained their identity as chattels and remained the property of the lessee, if it were at all possible, a clear indication of that intention should have been found in the lease. Now the sole clause of the lease which, at first sight, would appear to have a bearing on the subject is clause 10 which gives to the lessee the right to remove the buildings and improvements at the end of the lease. That clause, however, has in effect no bearing at all on this question since, as long as it remains attached to the land, an improvement made by a tenant remains a fixture even if it may be removed by the tenant either during or at the end of the lease.

Respondent’s counsel argued that other circumstances (like the fact that the buildings were insured by the respondent and not by the Crown) showed that the parties to the lease had intended that the improvements remain the property of the lessee. That argument does not convince me. Even if it were permissible to look outside of the lease to determine the common intention of the parties who made it, the circumstances referred to by counsel would not show that the intention was but, rather, what views some of the employees of the parties entertained as to the legal effect of that contract.

I am therefore of opinion that, at common law, the buildings and improvements here in question were fixtures and were, therefore, as long as they were not severed from the land, the property of Her Majesty. As long as that situation persisted the respondent’s interest in those fixtures was merely that of a lessee.

If the learned trial judge decided the case as he did, it is not, I think, because he differed from the opinion that I have just expressed. Indeed he expressly found that the buildings and improvements in question were fixtures. His decision, as I read it, rests on his opinion that the expression “leasehold interest” in Schedule B to the Income Tax Regulations has a special meaning that does not include a right of the kind held by the plaintiff in the buildings and improvements in question. With that opinion, I respectfully disagree. The expression “leasehold interest” in Schedule B to the Regulations does not have, in my view, such a special and restrictive meaning. In my view, the question whether a person has, for the purposes of Schedule B, a proprietary or a leasehold interest in a property must be answered in the light of the rules of the common law. If, under those rules, the interest of that person is that of a lessee, that is the answer to the question.

For those reasons, I would allow the appeal with costs, set aside that part of the judgement of the Trial Division relating to the respondent’s 1975 taxation year and dismiss the respondent’s action with costs.