Grove Acceptance Ltd. v. The Queen, docket 2000-4726(IT)G

Date: 20021030

Docket: 2000-4726-IT-G

BETWEEN:

GROVE ACCEPTANCE LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1]            This case was presented and argued essentially on the basis of a Statement of Agreed Facts. Also, additional verbal evidence was given by Brian Steven Jessel, the sole shareholder of both Grove Acceptance Ltd., the Appellant, and of Brian Jessel Auto Sport Inc. ("BJAS").

[2]            The Statement of Agreed Facts provides as follows:

For the purposes of hearing Court File No. 2000-4726(IT)G before the Tax Court of Canada, the parties hereto have agreed to the facts set out below:

Parties

1.              The Appellant is a Canadian-controlled private corporation resident in the Province of British Columbia with a fiscal year end of January 31.

2.              Brian Jessel Auto Sport Inc. ("BJAS") is a Canadian-controlled private corporation resident in the Province of British Columbia.

3.              Both the Appellant and BJAS are wholly-owned by Mr. Brian Jessel, an individual resident in the Province of British Columbia, and are therefore related for the purposes of the Income Tax Act (the "Act").

History and Use of the Property

4.              In 1981, Langley Toyotatown Ltd., a wholly-owned subsidiary of BJAS, acquired a Toyota dealership carrying on business as Langley Toyotatown from a location at 19459 Langley Bypass, Langley, British Columbia (the "Property").

5.              Within two or three years of the acquisition of the Langley Toyotatown dealership, the Appellant exercised an option to acquire the Property which included land and a building on the east side of the Property with the civic address of 19459 Langley Bypass. This building housed the Langley Toyotatown dealership.

6.              The Appellant erected two further buildings (the "Westside Buildings") on the west side of the Property in or around 1985, which became the civic address 19447 Langley Bypass.

7.              From 1981 until the Westside Buildings were erected on the Property, the Property was used solely by Langley Toyotatown Ltd. to operate the Langley Toyotatown dealership, although Langley Toyotatown Ltd. did not use the entire Property. The unused portions remained vacant.

8.              From the time of the erection of the Westside Buildings until October 24, 1990, the Property was used entirely and exclusively by BJAS and/or its wholly-owned subsidiaries to carry on various automotive dealerships including Langley Toyotatown on the east side of the Property and at various times (although not necessarily concurrently) Hyundai, Subaru and BMW dealerships on the west side of the Property.

9.              In December 1991, the Appellant borrowed from, and granted a mortgage to, the Royal Bank. This mortgage had a face amount of $1,450,000 with interest at 9.45% per annum and required monthly payments of $12,625 per month commencing January 16, 1992. The mortgage had a two-year term with the balance due December 16, 1993. Upon maturity, the mortgage was renewed with the Royal Bank for a three-year term ending December 1996. The renewed mortgage bore interest at 7.38% and required equal monthly installments of $10,685.

10.            The Royal Bank mortgage in 1991 replaced a mortgage on the Property granted to the Bank of British Columbia which had a similar principal amount. The payments under the Bank of British mortgage would have been very similar to those required by the Royal Bank mortgage, after adjusting for the prevailing interest rates.

Sale of Langley Toyotatown Dealership

11.            On October 24, 1990, Langley Toyotatown Ltd. sold the Langley Toyotatown dealership to 395000 B.C. Ltd., an arm's length party whose major shareholder was Mr. Joseph A. Hurtubise.

12.            Following the sale of the Langley Toyotatown dealership, 395000 B.C. Ltd. continued to carry on the automotive dealership business of Langley Toyotatown from the east side of the Property under a lease between the Appellant and 395000 B.C. Ltd. (the "Toyotatown Lease") dated October 24, 1990 (Appendix 1).

13.            Under the Toyotatown Lease, 395000 B.C. Ltd. leased and occupied approximately 59% of the total land which comprised the Property and buildings with approximately 59% of the total building square footage on the Property.

14.            On August 25, 1992, the Toyotatown Lease was assigned by 395000 B.C. Ltd. to 414067 B.C. Ltd., a party at arm's length with the Appellant, which acquired the Langley Toyotatown dealership. The Appellant consented to the assignment of the Toyotatown Lease from 395000 B.C. Ltd. to 414067 B.C. Ltd.

15.            On November 14, 1995, the Toyotatown Lease was renewed/extended for an additional four years (Appendix 4).

16.            The shares of 414067 B.C. Ltd. were sold subject to the consent of the Appellant as required by the Toyotatown Lease and on July 29, 1996, the Appellant consented to change of control of 414067 B.C. Ltd. (Appendix 6).

BJAS's Continuing Dealerships on the Property

17.            After the sale of the Langley Toyotatown dealership on October 24, 1990, BJAS continued to operate a BMW/Subaru dealership from that portion of the Property not leased to 395000 B.C. Ltd.

18.            BMW provided new operating standards to its dealers with effect from January 1, 1994. these standards made it difficult for BJAS to operate its BMW dealership from the Property in conformity with the new operating standards or to do so in conjunction with another dealership on the same Property (at that time, Subaru). As a result, BJAS:

                (a)            terminated its dealership with Subaru in 1995;

(b)            entered into a lease dated December 12, 1995 with Court and Brownhill Holdings Ltd. (Appendix 5) to lease land and buildings at 688 Lougheed Highway (the "New Property") to which the BMW dealership was relocated in May 1996; and

(c)            relocated its Land Rover dealership (known as Land Rover of Langley) to that portion of the Property formerly occupied by the BMW/Subaru dealership. This relocation was coincident with the relocation of the BMW dealership in May 1996.

Sale of the Property

19.            On October 30, 1996, the Appellant disposed of the Property to Richmond Holdings Ltd., an arm's length party.

20.            In the six months immediately prior to the sale of Property, the Appellant earned rental income from 414067 B.C. Ltd. (doing business as Langley Toyotatown) at the rate of $12,500 per month and from BJAS's Land Rover dealership at the rate of $9,500 per month.

21.            Both the Toyotatown Lease and the lease with BJAS were on a "triple-net" basis meaning that in addition to the base rent, the tenants were required to pay all occupancy costs, including municipal property taxes. In the case of the Toyotatown Lease, the proportionate share for allocating taxes and other common costs was defined to be 60%.

22.            At the time of sale, the Property was utilized as follows:

                                                                                           Land                                    Buildings

Hectares        %                  Sq.Ft.                 %

Leased to 414067 B.C. Ltd.[1]                                   0.7381            59% 12,431         59%

Leased to BJAS                                                      0.5177          41%                8,755              41%

                                  TOTAL                                   1.2558            100%               21,186              100%              

23.            At the time of sale of the Property, the portion of the Property leased to and occupied by BJAS was used by BJAS for the sole purpose of gaining or producing income from a business, in this case the Land Rover automotive dealership business.

24.            In conjunction with the sale of the Property, BJAS entered into a three-year lease with Richmond Holdings Ltd. dated November 1, 1996 (Appendix 8) at the rate of $10,000 per month which allowed BJAS to continue to operate its Land Rover dealership from the Property after the sale of the Property by the Appellant. BJAS continued to operate the Land Rover dealership on the Property until the dealership was sold by BJAS in the summer of 1998.

25.            At the time of the sale, the Appellant's mortgage on the Property, which had an original principal amount of $1,450,000, had a balance of $1,352,635 meaning that principal of approximately $97,365 had been paid on the mortgage up to that time. The Appellant paid the remaining balance of $1,352,635 at the time of sale out of the sale proceeds.

26.            In conjunction with the purchase of the Property, Richmond Holdings Ltd. assumed the Toyotatown Lease in accordance with its terms (as assigned and as modified and extended by the agreement of November 14, 1995).

The New Property

27.            The lease on the New Property granted BJAS the right to acquire the New Property for a purchase price of $1,575,000.

28.            On January 28, 1997, the option to purchase was exercised and the Appellant (as the assignee of BJAS) acquired the New Property.

29.            BJAS has continued to operate the BMW dealership from the New Property.

Reassessment History

30.            The Appellant realized a capital gain and recapture of capital cost allowance on the sale of the Property as follows:

Capital Gain
Net proceeds			$3,106,959
Adjusted cost base
Land	$303,000
Building	818,873		1,121,873
Realized Capital Gain			$1,985.086

Capital Gain Reported As:
Included in income	$748,807
Deferred under s. 44(1)	$1,236,279
	$1,985,086

Recapture on Buildings
Cost of buildings		$818,873
Undepreciated capital cost		522,979
Recapture (deferred under s. 13(4))		$295,894

31.            In computing its income for the 1997 taxation year, the Appellant elected under subsection 44(1) and subsection 13(4) of the Act to defer a specified portion of the capital gain and recaptured capital cost allowance which would otherwise be included in income in respect of the sale of the Property. The basis for that election was that the Property was a former property for purposes of subsections 44(1) and 13(4) of the Act by virtue of being a former business property as defined in subsection 248(1) of the Act, and that the New Property was a replacement property and replacement for a former business property for purposes of section 44 and subsection 13(4) respectively of the Act and has not been disposed of by the Appellant.

32.            By a Notice of Reassessment dated November 12, 1999 (Appendix 13), the Minister of National Revenue (the "Minister") denied the Appellant's claim for a deferral of a taxable capital gain and recaptured capital cost allowance under subsections 44(1) and 13(4) of the Act respectively on the basis that the Property did not qualify as a "former business property" within the meaning of paragraph 44(1)(b) of the Act immediately before the disposition as it was not, at the material time, used by the Appellant or a related party primarily for the purpose of gaining or producing income from a business, but rather was a rental property of the Appellant used principally for the purposes of gaining or producing rental revenue.

33.            By a Notice of Confirmation dated August 3, 2000 (Appendix 14), the Minister confirmed the Notice of Reassessment thereby taxing to include a taxable capital gain of $927,210 and recaptured capital cost allowance of $295,894 in the income of the Appellant.

Agreement as to Documents

The parties hereto also agree to the authenticity of the following documents attached as appendices to this Statement of Agreed Facts and that such documents are true copies to be accepted as entered

and admitted for purposes of this hearing:

1.               Lease among Grove Acceptance Ltd., 395000 B.C. Ltd. and Joseph Alexander Hurtubise dated the 24th day of October 1990.

2.               Lease between Grove Acceptance Ltd. and Brian Jessel Autosport Inc. made as of the 24th day of October, 1990.

3.               Survey Plan.

4.               Lease extension dated November 14, 1995 between Grove Acceptance Ltd. and Langley Toyotatown.

5.               Lease between Court and Brownhill Holdings Ltd. and Brian Jessel Autosport Inc. made the 12th day of December,1995.

6.               Guarantee and Consent to Assignment of Lease between Grove Acceptance Ltd., 414067 B.C. Ltd., Beachwood Motors Ltd. and Scott Kemp made as of the 29th day of July, 1996.

7.               Letter dated August 22, 1996 amending the contract of purchase and sale between Grove Acceptance Ltd. and Richmond Holdings Ltd.

8.               Lease between Richmond Holdings Ltd., Brian Jessel Autosport Inc. and Grove Acceptance Ltd. made as of the 1st day of November, 1996.

9.               Divisional financial statements for Land Rover of Langley for the period ended December 31, 1996 showing a loss for the year in the amount of $58,627.

10.             T2 Corporate Tax Returns and Financial statements of Grove Acceptance Ltd. for the year ended January 31, 1996.

11.             T2 Corporate Tax Returns and Financial statements of Grove Acceptance Ltd. for the year ended January 31, 1997.

12.             T2 Corporate Tax Returns and Financial statements of Grove Acceptance Ltd. for the year ended January 31, 1998.

13.             Notice of Reassessment for Grove Acceptance Ltd. dated November 12, 1999 in respect of the year ended January 31, 1997.

14.             Notice of Confirmation by the Minister dated August 3, 2000.

[3]            The Appellant's Trial Brief submitted the following:

FACTS

1.              The bulk of the required facts have been agreed to by the parties and are in a Statement of Agreed Facts filed with the Court and appended to this brief as Appendix "A" (without attachments).

2.              Mr. Brian Jessel provided brief supplementary testimony as follows:

(a)            The purpose for the Appellant acquiring the property at 19459 Langley Bypass (the "Property") was to provide a location for related companies to carry on the business of various automobile dealerships. This remained the purpose for which it was used throughout the entire duration of the Appellant's ownership of the Property.

(b)            When new BMW Operating Standards made keeping the profitable BMW dealership on the Property impractical, a new larger location was required. This resulted in a relocation of the BMW dealership to a new location at 688 Lougheed Highway (the "New Property").

(c)            The Property was not sold at the time of the relocation of the BMW dealership to the New Property because the Land Rover dealership operated by Brian Jessel Auto Sport Inc. ("BJAS") needed an improved location from which to operate and Mr. Jessel had always intended that Land Rover would operate from the Property.

(d)            Subdivision of the Property was, as a practical matter unlikely and in any case, the rental of the excess property was helpful to pay the mortgage on the Property.

(e)            The mortgage on the Property of approximately $1.35 million at the time of closing exceeded the original cost of the Property and improvements meaning that the Appellant no longer had any of its own capital invested in the Property.

(f)             At the time of the sale of the Property, the Land Rover dealership had annual revenues in excess of $8.5 million, more than 10 full-time employees and inventories in excess of $1 million. Mr. Jessel had high expectations for the profitability of that dealership.

(g)            The real estate operations of the Appellant required only a small amount of administrative and management time. It has no direct employees and the total time spent was likely less than 30 or 40 hours per year.

(h)            The Property was ultimately sold only when, in Mr. Jessel's view, the unrealized equity in the Property could be better utilized as working capital in the operating businesses to acquire more inventory.

(i)             Even with the sale of the Property, a key sale condition was a long-term lease with the buyer, Richmond Holdings Ltd., to ensure that the Land Rover dealership would have a continuing location on the Property.

ISSUE

3.              The Income Tax Act (the "Act") Act permits the Appellant to elect to defer recaptured capital cost allowance and a portion of the taxable capital gain arising from the disposition of the Property if the relevant statutory conditions1 are satisfied.

4.              The parties are agreed, with one exception, that all of these statutory conditions are satisfied. The exception, which is the sole issue in this appeal, is whether the Property was, immediately before the disposition, a "former business property" of the Appellant.

5.              Former business property as defined in subsection 248(1) of the Act to mean:

"a capital property of the taxpayer that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property of a taxpayer or an interest of the taxpayer in real property, but does not include

(a) a rental property of the taxpayer;

...

and, for the purpose of this definition, "rental property" of a taxpayer means real property owned by the taxpayer, whether jointly with another person or otherwise, and 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 (other than property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose) ... (emphasis added).

(Appellant's Book of Authorities

("Authorities"). Tab 8)

6.              There is no debate that the Property was a capital property of the Appellant or that the Property is real property. Hence, the debate is focussed on the "use" condition and the "rental property" exception.

7.              There are essentially two "use" tests included in the definition of former business property; one in the preamble and one in the definition of rental property, as follows:

(a)            In the preamble, the test is whether the Property was "used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business" (the "Preamble Use Test").

(b)            In the definition of rental property, the test is whether 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 (other than property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose)" (the "Rental Property Use Test").

[4]            The principal provisions of the Income Tax Act (the "Act") which have a bearing on this matter are subsections 13(4), 44(1), and 248(1), analyzed above and Interpretation Bulletins IT-195R4 and IT-491 analyzed below.

[5]            The issue is as stated above.

SUBMISSIONS OF COUNSEL FOR THE APPELLANT

[6]            The Appellant repeated the Facts, the Issue and the two "use" tests as set forth above. The Appellant then argued as follows. The paragraphs are numbered 8 to 28 as they follow paragraph 7 on page 12 above.

ARGUMENT

                Statutory Interpretation

8.              A preliminary observation is that the definition of former business property was amended for dispositions occurring after July 13, 19902 to add to the words "or a person related to the taxpayer" in the Preamble Use Test and the parenthetical phrase "(other than property leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purposes)" to the Rental Property Use Test.

9.              Prior to these amendments, there was no single reference to parties related to the taxpayer and the provision contemplated a single owner of a property with a mixed use. The issue was whether the taxpayer's use was primarily for business purposes.

10.            Whatever the drafter's intention with respect to the related-party amendments, the words and grammatical structure chosen fundamentally altered the test where there is one owner, but two users, one of whom is a related party, as is the case here.

11.            The Preamble Use Test can be restated using the names of the relevant parties as follows:

"the [Property] was used by [the Appellant] or [BJAS] primarily for the purpose of gaining or producing income from a business....".

12.             The language requires only that the business use be either by the Appellant or BJAS. The word "primarily" modifies the "use" to which the property is put by the taxpayer or the related party. It is indisputable that the Property was used by BJAS primarily (in fact, exclusively) for producing business income as its only use was operating its dealership from the Property.

13.             The Minister's position is consistent with a reading where "primarily" modifies the use of the Property in total by both the taxpayer and the related parties. That would require language such as "a capital property that was primarily used by the taxpayer and any related persons for the purpose of gaining or producing income from a business." This is not, however, the way the provision reads.

14.                             The same drafting problem is found in the parenthetical exclusion to the Rental Property Use Test. Substituting the names of the relevant parties, it reads:

"other than property leased by [the Appellant] to [BJAS] and used by [BJAS] principally for any other purpose [than earning gross rental income]".

               

15.            Again, the only purpose to which BJAS puts the Property is the earning of business income from the automobile dealership. Hence, the parenthetical exclusion applies and the Property is not a rental property.

16.            Hence, the Appellant's submission is that because of the language chosen by the drafter, this matter must be definitively resolved in its favour once it is determined that BJAS used the Property for a business use. This is indisputable on the facts and therefore both the Preamble Use Test and the Rental Property Test are satisfied.

17.            It is submitted that the words chosen by the drafter are clear and must prevail regardless of whether they properly express some normative assessment of the original intention. In Antosko v. Minister of National Revenue,3 the Supreme Court of Canada has held that the clear words prevail, even if that interpretation may seem contrary to any subjective notion as to the object and spirit of the provision:

"The terms of the section were met in a manner that was not artificial. Where the words of the section are not ambiguous, it is not for this Court to find that the appellants should be disentitled to a deduction because they do not deserve a 'windfall', as the respondent contends. In the absence of a situation of ambiguity, such that the normative assessment of the consequences of the application of a given provision is within the ambit of the legislature, not the courts."

(Authorities Tab 1 at page 11)

Use Tests

18.            If, contrary to the interpretation submitted above, this Court concludes that the proper issue is the collective use of the Property as a whole by both the Appellant and BJAS, the Appellant submits that both the facts and the law lead to the conclusion that both the Preamble Use Test and the Rental Property Use Test are satisfied.

19.            While there is no case directly on point, the best guidance for the interpretation of such "use" tests is Gulf Canada Resources Ltd. v. Her Majesty the Queen4 dealing with the definition of "rental property" in Regulation 1100(14). The use test in that Regulation mirrors the Rental Property Use Test; namely, whether the subject of property was used by the taxpayer "principally for the purpose of gaining or producing gross revenue that is rent".

20.            In Gulf Canada, the taxpayer owned a building and occupied only 28.5% of the building. A subsidiary occupied a further 26.5% and third parties occupied the balance. The test in Regulation 1100(14) does not explicitly refer to related parties and therefore the issue for the Court was the principal use of the property by the taxpayer only.

21.            Rothstein J. (as he then was) recognized that in making the determination as to the owner's purpose, both a quantitative and qualitative analysis is to be undertaken. He carefully notes that this two-pronged analysis is also the CCRA's position:

"IT-195R4 also suggests that if more than fifty per cent of a total area is rented, this is an indication [emphasis by the Court] that the property is being used principally for the purpose of producing rent. Paragraph 4 of IT-195R4 states in part:

4. As used in the definition of rental property in subsection 1100(14), the word "principally" means "primarily" or "chiefly". In establishing whether a property is used principally for a given purpose,. . .(an) important factor to be considered is the proportion of the amount of space rented in relation to the total area of the building. Again, if more than 50 per cent of the total area is rented, that is an indication that the property is being used principally for producing rental revenue.

Subsection 1100(14) in its entirety and IT-195R4 suggest that the words "used...principally for the purpose..." are to be considered having regard to two approaches, one quantitative and the other qualitative. Under the quantitative approach, regard is to be had to the proportion of a building that is used to produce rent. This is essentially the approach referred to in paragraph 4 of IT-195R4. If more than fifty per cent of a building is rented, this is an indication that the building is used by the taxpayer mainly for the purpose of producing rent and it would likely be "rental property"; if less than fifty per cent is rented, it would likely not be "rental property".

Under the qualitative approach, the owner's main purpose in using the property in the taxation year must be considered; hence, the words following "but for greater certainty..." in subsection 1100(14) and the service station example in IT-195R4. Thus, even if a property is leased and rent is collected, if the use of the property is mainly for a purpose other than the producing of rent, e.g., the selling of the owner's goods and services as in the service station example, the property will not be "rental property". While each case must be decided on its own facts, I would think that this qualitative assessment requires taking into account evidence as to the owner's business and the business carried out in the rented premises and the relationship between the two. Where there is little or no relationship between the owner's business and the business carried on in rented premises, the presumption would be that the owner was using the rented premises principally for the purpose of producing rent and it would be "rental property". Where there is a relationship between the owner's business and the business carried on in the rented premises, the nature of the relationship between the businesses would have to be considered. Where it could be demonstrated that the leasing of the rented premises was for a business purpose other than for producing rent, the property would likely not be "rental property".

As I understand the purpose of subsection 1100(14), it is to restrict taxpayers from using the capital cost allowance on real property, essentially buildings, to shelter unrelated business income. It is the qualitative assessment that most directly addresses this rationale that lies behind subsection 1100(14) and it is therefore important that this assessment be accorded significant weight.

Application of what I have termed the quantitative and qualitative approaches is consistent with paragraph 16 of IT-331R under the heading "Meaning of 'Primarily' and 'Principally'" which states:

In the case of a building, the amount of space dedicated to the different purposes is usually a reliable indicator of degree of use attributable to those purposes but this cannot be considered in isolation. The purpose of the activities of those persons accommodated in the building, as well as the purpose and value of properties protected by the building, are also relevant factors". (emphasis added, except as noted)

(Authorities, Tab 2 at page6)

22.            A similar analysis, though not as clearly stated, was applied in Canada Trust Company v. M.N.R.5 where the taxpayer constructed a head office but only used a portion for that purpose. The Minister assessed to restrict the taxpayer's claim for capital cost allowance under Regulation 1100 (14) on the basis that the property was principally for earning rent. The findings of the Tax Review Board are best summarized in the headnote:

"The Board noted that the important point was whether or not the building was used for the purpose of producing rent regardless of whether it did produce rent and with only limited importance put on the financial and physical dimensions involved. While the Board found that provision of a new head office was not dominant in the decision-making which lead to construction of the building (there being additional concerns regarding accommodation of a branch office and return on the money expended), it concluded that the principal purpose of the building was to serve the company's business rather than its investment needs. The building was used principally for company business and not to gain rent income." (emphasis added)

(Authorities, Tab 3 at page 1)

23.            The published position of the CCRA in the specific context of the rental property definition within the definition of former business property expresses the same position as Rothstein, J. It is the intent of the taxpayer that is paramount (Interpretation Bulletin IT-491, "Former Business Property" dated September 13, 1982, at paragraph 4):

The word "principally" is considered to mean "mainly" or "chiefly" and, accordingly, one should look to the main or chief purpose or intent for which the property is used by the owner. Although a pure quantum measurement, in and by itself, may not necessarily be conclusive in every case, one of the prime factors to consider is the actual or physical proportion of the property used in the two income earning processes. In addition, it may be necessary to consider other factors that are both relative and subjective. These may include:

(a)     income or gross revenue from each operation;

(b)     profits realized from each operation;

(c)     capital employed in and rate of return from each operation;

(d)     time, attention and effort expended in each operation;

(e)     motivation or intent of the taxpayer in making the investment together with the ultimate utilization of the property. (emphasis added)

(Authorities, Tab 5 at page 1)

24.            Applying the Minister's own criteria from Interpretation Bulletin IT-491 to the current case: [The Appellant then analyzes the Bulletin as it pertains to paragraphs (a) to (e) above and concludes as follows]:

25.            The first four of these factors are objective and measurable and favour the Appellant. The evidence also establishes that the all important fifth factor, although in part subjective, strongly favours the Appellant.

26.            The only factor which favours the Minister, and evidently the sole basis for the reassessment of the Appellant, is the square footage of land and building dedicated to the dealerships of BJAS (41%) versus rented to an arm's length party (59%).

27.            This one-dimensional analysis ignores the commercial reality. The Property was originally acquired as a location from which various automobile dealerships could be operated. When Langley Toyotatown was sold in 1990, this remained the primary reason for retaining the Property. BJAS's most profitable dealership, the BMW dealership, needed to continue operating from this location.

28.            No outside observer could reasonably conclude that the Appellant and BJAS had, with the sale of Langley Toyotatown, become landlords with an ancillary automobile dealership. They were automobile dealers with property which, by historical circumstances, was connected to its principal operation but surplus to its own needs. The rental aspect was clearly the incidental undertaking. The primary and principal use of the Property was to operate automobile dealerships. Or to repeat the excerpt from Canada Trust cited above "the building was to serve the company's business rather than its investment needs."

SUBMISSIONS OF THE RESPONDENT

[7]            I believe the submissions of counsel for the Respondent given orally at the hearing of this appeal can be summarized as follows.

[8]            The definition of former business property is certainly at issue and that issue is whether or not it was used by the Appellant or a person related to the Appellant primarily for the purpose of gaining or producing income from a business.

[9]            Counsel for the Appellant refers to the amendment of the legislation and suggests that because BJAS used the property exclusively for producing business income, that that ends the matter.

[10]          The property is a single property. There are not two properties and it was never subdivided. Subdivision may be relevant to what the Appellant's intention was to do with the property, why he was holding it but there was never a subdivision of the property. The fact is that 40 percent of the property was being used by BJAS at the relevant time, running a dealership business but also paying market rent.

[11]          There may well have been originally, prior to 1990, a time when this property might qualify as a former business property, because before 1990, BJAS or its related companies were running two dealerships on either side of the property. That was not the case for six years prior to the disposition. For six years prior to the disposition, both sides of the property were being leased out at arm's-length rates, including the 40 percent of the property that was being leased to BJAS, which was of course related to the Appellant.

[12]          The issue is how was the property being used in the period immediately before the disposition.

[13]          The split of 40-60 is very significant. It is on that basis that the Court has to make its determination. One need not go into these qualitative factors. But even if one did in this case, they are not persuasive enough. They are not sufficient to displace the space quantitative factor.

[14]          Sections 13 and 44 are exceptional provisions. Normally, when a property is disposed of, there is capital gain (almost $2 million in this case) and a deferred recapture of almost $300,000. Normally, a taxpayer has to pay the tax on the capital gain and has to pay the tax on the recapture. This is an exceptional provision allowing for deferrals. Indeed, this Court has said that, in the case of Edwynn Holdings Ltd. v. Minister of National Revenue, [1990] 1 C.T.C 2108, it allows a person to essentially defer tax that should otherwise be paid at that time. As a result, the taxpayer has to fit within the four corners of the provisions.

[15]          "Primarily for the purpose of" are words used in section 248 defining former business property. That phrase has been the subject of jurisprudence in relation to other sections, and some quite recently. Amongst them are the Burger King Restaurants of Canada Inc. v. R., [2000] F.C.J. No. 16, which was a decision of the Federal Court of Appeal in 2000, (Tab 1), the decision of this Court in Burger King Restaurants of Canada Inc. v. Her Majesty the Queen, [1996] T.C.J. No. 1307, (Tab 2), and the Mother's Pizza Parlour (London) Ltd. v. R., (1988) 97 N.R. 314 decision (Tab 3), again, a decision of the Federal Court of Appeal.

[16]          Now, admittedly, it is a different section. It is subsection 127(9) which was being considered by the Burger King and the Mother's Pizza's decisions.

[17]          Section 127 considered by Burger King and Mother's Pizza involves a definition of qualified property, and if it is a qualified property, the taxpayer is entitled to certain investment tax credits.

[18]          Both of those decisions had to consider whether or not these food service chains were housed in a building used primarily for the purpose of manufacturing or processing goods. The test is otherwise directly applicable here, and certainly the findings of the Federal Court of Appeal are equally applicable.

[19]          These decisions endorse a quantitative approach, the building space approach, and that approach should be applied here.

[20]          In the Burger King decision at Tab 1 ultimately the Federal Court of Appeal found that essentially the situation was that the restaurant was used 53.7 percent for purposes other than the processing of goods for sale, the processing of food. So the split there was essentially 53.7 versus 46.3, which the Federal Court of Appeal found was the most favourable split to the taxpayer.

[21]          In the end, quite simply, at paragraph 24 of the decision of the Tax Court of Canada, Judge Bonner says in the last sentence:

...My impression from a review of the layout plans entered in evidence is that in the event of such exclusion the processing area in all layouts will be less than 50 per cent.

[22]          He goes on to say:

It may well be that, from the standpoint of the appellant's overall business, the activities which take place in the kitchen and in areas of the building used in direct support of the kitchen activities are of very great importance. There can be no doubt on the evidence that maintenance of consistent levels of product quality is of overriding importance to the success of the appellant's business. Nevertheless the statutory test looks to primary use of a building. Where the building accommodates more than one use, the focus must be on the area devoted to each of the uses which must be weighed.

And then he goes on to dismiss the appeal.

[23]          So, ultimately, the Court is saying that the area of focus is the use to which, in that case, the building is being put. This primarily use approach should apply equally to this appeal.

[24]          The Federal Court of Appeal did consider that decision on appeal. In the judgment delivered by Mr. Justice Rothstein he states at paragraph 14 regarding the quantitative against the qualitative test:

In accordance with Mother's Pizza, use of the space in the buildings is the most important consideration in determining the use primarily made of the buildings. However, that does not exclude other considerations and we are prepared to assume, without deciding, that in a case such as this, a qualitative assessment is also relevant.

[25]          But what he is saying there is that a qualitative approach may, in some circumstances, be relevant. In this particular case, the split of the use of the building was fairly close. It was 53.7 versus 46.3. There was only a difference of about six or seven percent of the use.

[26]          We are, in this case, dealing with a situation where there is a 20 percent split. So we are talking about a fairly substantial amount and a certainly substantial difference from the Burger King decision. Even in the Burger King decision, the Court said:

...we are prepared to assume, without deciding, that in a case such as this, a qualitative evidence must be sufficiently persuasive and must be capable being analysed in such a way as to cause the Court to displace the result of the quantitative space test.

The Court ultimately considers what qualitative factors there were and ultimately dismisses the appeal.

[27]          Mr. Justice Rothstein says the following at paragraph 15:

However, the qualitative evidence must be sufficiently persuasive and must be capable of being analysed in such a way as to cause the court to displace the result of the quantitative space test.

[28]          What he is saying, in essence, is that the quantitative space test is most indicative of what the property is primarily being used for.

[29]          Because there was a very small difference between the split, the Court went on to consider that evidence and ultimately did not even decide that that was necessary.

[30]          Unfortunately for the Appellant, the very simple approach is the correct one in this case.

[31]          There was an issue with respect to how much inventory and how much space Land Rover was actually using. In essence, Land Rover had substantially less vehicles on the property at the same time, and Mr. Jessel did not disagree that it was perhaps under-utilized in the six months while it was there.

[32]          The inventory count does not make a big difference because we are talking about almost a 20 percent difference in the actual quantitative space used, and Mr. Justice Rothstein seems to quite clearly indicate that is the most important factor, and there are only some cases where one looks at the qualitative factors to see if they displace the result of that quantitative test.

[33]          Interpretation Bulletin 491 is consistent with the approach taken by Mr. Justice Rothstein most recently in the Burger King decision at paragraph 4, second sentence:

The word 'principally' is considered to mean 'mainly' or 'chiefly' and accordingly one should look to the main or chief purpose or intent for which the property is used by the owner.

It goes on to say:

Although a pure quantum measurement, in and by itself, may not necessarily be conclusive in every case, one of the prime factors to consider is the actual or physical proportion of the property used in the two income earning processes.

[34]          Counsel submitted that the Appellant had 60 percent of the property from as far back as 1990, used purely for a rental operation to an arm's-length party. One does not need nor should one go further to apply the qualitative assessment which is not something done in every case. That is clearly set out by the Federal Court of Appeal in Burger King and by the Interpretation Bulletin of the Canada Customs and Revenue Agency itself.

[35]          There is no reported case where qualitative factors were looked at on a split such as 60-40.

[36]          Further the qualitative analysis is not sufficient to displace the quantitative approach which is the test. We have to look, again, immediately prior to the disposition, a six-month period when the Land Rover dealership was operating, because there is obviously a distinct change of use from 1990 onwards.

[37]          In Canada Trust v. The Minister of National Revenue, 85 DTC 322, 35.1 percent of the space was used by a related taxpayer and 64.9 percent was leased to other tenants. Also the gross rental income from third parties that rented space in said building was less than $125,000. The gross rental revenue during the year of the said building was first fully occupied did not exceed $217,406. This gross rental amount is clearly insignificant when compared with the gross income of approximately $18,427,893 from the trust operations of Lincoln Trust, a company related to Canada Trust.

[38]          So, in that case, in terms of the gross revenue, there was no contest. The rental income was insignificant. Nevertheless, this Court ultimately dismissed the appeal. At paragraph 38 of that decision, Judge Tremblay says:

I share the opinion of Mr. Taylor that the square footage of occupancy is not the only criteria. However, it is a good one.

[39]          So this case illustrates that this gross revenue test, although perhaps relevant in some circumstances, is not always relevant. When it is going to skew the results because of the nature of the business of the taxpayer, then it simply is not significant.

[40]          If one is going to consider the financial comparison at all, it ought to consider the second item which is the profit. In this case, there is not much of a difference in terms of profitability. The Appellant did not see a profit in 1996. There was a loss of $25,000 in that year. See Tab 11 of A-1.

[41]          It is quite obvious that the principal business of the Appellant in the time period we are looking at was the rental of land, and that is where most of the income comes from. Now, admittedly, there are small amounts of income coming from the leases of cars or interest. But clearly, the main source of income, the main source of revenue was from the rental of the land and buildings. That is certainly how the business was described on all the tax returns which provided that it was 85 percent rental.

[42]          Langley Land Rover, when it was operating on the property for six months, was not profitable. It had a loss in 1996. And, in fact, it was never profitable.

[43]          The point of all of this is that when one is looking at these qualitative factors, it is not a one-for-one comparison. One does not look at which one weighs slightly in favour of one or the other. These factors have to completely displace the quantitative space test. The gross revenue in this case skews the results and simply is not particularly relevant. The profit, however way you want to look at it is comparable. Arguably, the Appellant had a profit and Land Rover did not.

[44]          Also a capital comparison is not particularly significant. Counsel for the Appellant acknowledges this.

[45]          To operate a dealership would take more time, effort and attention than the rental operation. But the holding of the property was not without time, effort and attention. There were landlord/tenant duties, renovations, and lease negotiations. There were significant management fees paid by the Appellant to a related party. See Tab 11 of A-1. There were roof repairs, and the excavation of tanks that were primarily on the tenant's property. Again, this test simply does not favour the Appellant in this case.

[46]          The last factor is motivation and intent. The argument of the Appellant is that the land was bought and used primarily for the running of dealerships on the property. Now, firstly, it should be important to note that Mr. Jessel ran other dealerships. These were not the only dealerships he ran. Further, not all the dealerships that he operated were on the Appellant's land. There were several others which were operated on leased lands. So he was certainly prepared to operate dealerships on leased land. Secondly, that was the case with this particular land because he bought the Toyota dealership in 1981, and he leased the property for two or three years. In 1983 or 1984, he bought the property and, at that point, he had the Toyota dealership on one side, and later developed the other side, which was not used before that point, erected a building, and ran another dealership. That happened around 1985 or 1986. In 1985, 1986, he had two dealers, both operating on each side of the property.

[47]          In 1990, Mr. Jessel had a professional surveying company prepare a subdivision to see if he could sell 60 percent of the property to Toyota because they had expressed an interest in buying that part of the property. But it became impractical to subdivide, and selling to Toyota was really not an option, so he kept the property and the Appellant entered into two separate leases; one with Toyotatown, at a rent of $12,500 per month, and later $13,500 per month for a long term lease of five years. Similarly, the Appellant had a lease with the related company, which paid an arm's-length rent of $8,500 a month. By 1990, things had substantially changed. The Appellant was leasing on both parts of the property and even to its related company at an arm's-length rent. That at least gives some indication as to the relative intent at that point in 1990. It points to a rental operation.   

[48]          It is one indicator as to what the relative intentions of the Appellant were. At this point ­market rate rents were being charged to its own related company. It is quite clear that, by 1990, there was more than one intention here. It may well be that originally the property was purchased by the Appellant through Mr. Jessel, essentially to run dealerships. But clearly, by 1990, that had changed. He was not running his dealerships. He was running a dealership on 40 percent of the property, and he was leasing out 60 percent of the property, to other parties.

[49]          The 60/40 split truly existed. Sixty percent of the property taxes were paid by the arm's-length tenant. Again, all the way through, before and after the property was sold by the Appellant - which shows that 60 percent was not just an arbitrary figure that was picked by Mr. Jessel or the Appellant. Those were the same figures that were being used by the purchaser of that property, Richmond Holdings, in or after 1996. Proportionately, 60 percent of the taxes were being paid by the Toyotatown dealership and only 40 percent were being paid by Land Rover.

[50]          Moreover, when asked, Mr. Jessel admitted that part of the reason for acquiring the property in 1983 was because it was a good investment, and he specifically referred to the fact that property values were rising.

[51]          In conclusion, one need not go beyond the quantitative space assessment and there is nothing that has been brought forward that is so compelling as to displace that quantitative test. But even if one goes to these factors, they simply do not support the taxpayer's position. The qualitative factors are not persuasive enough to displace the quantitative space approach.

[52]          None of the qualitative factors weigh heavily in favour of the Appellant, and clearly, whatever the original intent in purchasing the property in 1983 was, it did include investment because that is what Mr. Jessel said. Moreover, quite a bit changed in 1990. At that point, the property was used primarily for the purposes of rental and clearly carried on that way for six years.

ANALYSIS AND CONCLUSION

[53]          I do not believe the arguments advanced by counsel for the Appellant based on the addition of the words "or a person related to the taxpayer" are sufficient to displace the quantitative measurement approach.

[54]          In my opinion the qualitative factors present in this factual situation are not sufficiently influential to displace the quantitative analysis based upon the fact that approximately 60 per cent of the property was leased to a non-related party and only 40 per cent was used for the businesses of the Appellant and/or related companies.

[55]          As counsel for the Respondent has pointed out, the quantitative test is the principal test to be looked at and in my opinion for all the reasons submitted by counsel for the Respondent, it should govern in this matter. Consequently the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 30th day of October, 2002.

"T. O'Connor"

J.T.C.C.COURT FILE NO.:                                   2000-4726(IT)G

STYLE OF CAUSE:                                               Grove Acceptance Ltd. v. The Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           August 27, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge T. O'Connor

DATE OF JUDGMENT:                                       October 30, 2002

APPEARANCES:

Counsel for the Appellant: Douglas H. Mathew

Counsel for the Respondent:              David Jacyk

COUNSEL OF RECORD:

For the Appellant:                                                

Name:                                Douglas H. Mathew

Firm:                  Thorsteinssons

                                          Vancouver, British Columbia

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-4726(IT)G

BETWEEN:

GROVE ACCEPTANCE LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on August 27, 2002 at Vancouver, British Columbia, by

the Honourable Judge Terrence O'Connor

Appearances

Counsel for the Appellant: Douglas H. Mathew

Counsel for the Respondent:              David Jacyk

JUDGMENT

                The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is dismissed, with costs, in accordance with the attached Reasons for Judgment.

                Signed at Ottawa, Canada, this 30th day of October, 2002.

"T. O'Connor"

J.T.C.C.