[OFFICIAL ENGLISH TRANSLATION]
Date: 20011127
Docket: 2000-5063(IT)I
BETWEEN:
C.J. BOUCHARD RÉPARATION LTÉE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] These are appeals from assessments
for the appellant's taxation years ending on October 31,
1993, October 31, 1994, and August 17, 1995.
[2] The assessment for the taxation
year ending on October 31, 1993, is no longer at issue.
[3] By the assessments for the
taxation years ending on October 31, 1994, and August
17, 1995, the Minister of National Revenue ("the
Minister") denied the appellant the right to carry over
non-capital losses of $48,391 and $68,925 for each of those
years, respectively. A total loss of $117,316 was reported by the
appellant for its taxation year ending on
October 30, 1996, apparently as a result of capital
cost allowance claimed on a ship that it owned, the NM Cavalier
Maxim. The ship was rented "bareboat" to Les
Investissements Navimex Inc. during the years at issue.
[4] The Minister denied the appellant
capital cost allowance for the taxation year ending on October
30, 1996, on the basis of subsection 1100(15) of the Income
Tax Regulations ("Regulations") and on the
basis that the appellant could not avail itself of subsection
1100(16) of the Regulations because the source of its
income that year was not business but rather property. The
appellant argued that the reverse was true.
[5] In making the reassessments, the
Minister of National Revenue assumed, inter alia, the
facts set out in subparagraphs (a) to (u) of paragraph 15 of the
Reply to the Notice of Appeal. Those subparagraphs read as
follows:
[TRANSLATION]
(a) C.J. Bouchard
Réparation Ltée (hereinafter "the
corporation") was incorporated under the Canada Business
Corporations Act on March 19, 1991;
(b) during the 1993,
1994 and 1995 taxation years (the last of which ended on August
17, 1995), Guy Gagnon owned 85 percent of the
appellant's voting shares and Cyril Bouchard owned
15 percent;
(c) on August 18,
1995, Voyages AML Inc. purchased 100 percent of the
appellant's shares and the shares of Les Investissements
Navimex Inc.;
(d) on October 31,
1996, the corporation amalgamated with Les Investissements
Navimex Inc. to form a new corporation called Les Investissements
Navimex Inc.;
(e) during the
taxation years ending on October 31, 1993, and October 31, 1994,
the only asset in the appellant's "Fixed Assets"
account was a ship called the NM Cavalier Maxim, which was listed
in the financial statements at a cost of $595,400;
(f) for the
fiscal year ending on October 31, 1995, after Voyages AML
Inc. acquired control of the appellant, the cost of the ship was
listed as $1,407,766 in the appellant's financial statements
for that taxation year;
(g) under a contract
called "Addendum to Charterparty" signed on November
14, 1992, the appellant rented the ship "bareboat" to
Les Investissements Navimex Inc. (hereinafter
"Navimex"), the charterer of the said ship;
(h) Navimex also
owns other ships and gives river cruises;
(i) that
contract established the rent and various terms and conditions
and determined its term, that is, from May 1, 1993, to April 30,
2002;
(j) the rent
was thus set at $270,000 for 1993 and 1994, at $410,000 for the
other years until 1999 and at $140,000 for 2000 and 2001;
(k) according to the
contract, Navimex had an option to purchase the ship for ONE
MILLION SIX HUNDRED AND FIFTY THOUSAND DOLLARS ($1,650,000.00)
that could be exercised on October 30, 1996;
(l) according
to the financial statements for the taxation years ending on
October 31, 1995, and October 30, 1996, the only income reported
by the appellant derived from the rental of the said ship, that
is, $410,000 and $115,000, respectively;
(m) Guy Gagnon, the
majority shareholder, was the appellant's only employee
during the 1994 and 1995 taxation years (the last of which ended
on August 17, 1995), and he worked as the sales and marketing
manager for Navimex;
(n) Guy Gagnon has
not worked for the appellant since November 1, 1995,
when he became an employee of Groupe AML Inc.;
(o) the appellant
paid $60,500 in management fees to Groupe AML Inc. for the fiscal
year ending on October 31, 1995;
(p) long-term
debts are used to finance the appellant's only
property¾the above-mentioned ship;
(q) the crew's
wages, insurance, activities expenses and catering costs were
paid by Navimex during the years at issue;
(r) the Minister
considered that the appellant was carrying on a business during
the fiscal year ending on October 31, 1995, since, in addition to
renting the ship, it provided Navimex with a cruise marketing
service by means of its only employee, Guy Gagnon;
(s) the cost of that
service was included in the rent for the ship, that is, $410,000
for the fiscal year ending on October 31, 1995;
(t) the
Minister's view is that the appellant's income for the
taxation year ending on October 30, 1996, is from property and
not business;
(u) the Minister
therefore stood by his decision that the appellant could not
create a net loss for federal income tax purposes by claiming
capital cost allowance;
[6] The only witness was Bruno
Paradis, an accountant who acted as the appellant's agent.
Mr. Paradis said that he disagreed with the facts set out in
subparagraph 15(q) of the Reply to the Notice of Appeal, since
the conditions had always been the same before, during and after
the years at issue. Obviously, he added that he disagreed with
the conclusions set out in subparagraphs 15(t) and (u) of
the Reply. He argued that the appellant always had a business and
that this was acknowledged by the Minister for the taxation years
prior to the one ending on October 30, 1996, since the Minister
did in fact grant the capital cost allowance claimed by the
appellant for those years.
[7] Subsections 1100(15) and (16) of
the Regulations provide as follows:
(15) 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 that is leasing property owned
by a taxpayer, otherwise allowed to the taxpayer under
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, leasing or earning
royalties from, a leasing property or a property that would be a
leasing property but for subsection (18), (19) or (20) where
such property is 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,
leasing or earning royalties from, a leasing property or a
property that would be a leasing property but for subsection
(18), (19) or (20) where such property is owned by 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, leasing or earning royalties from, a property referred
to in subparagraph (a)(i), computed without regard to
paragraph 20(1)(a) of the Act, or
(ii) the loss of a partnership for the year from renting,
leasing or earning royalties from, a property referred to in
subparagraph (a)(ii), to the extent of the taxpayer's
share of such loss.
(16) Subsection (15) does not apply in respect of a taxation
year of a taxpayer that was, throughout the year,
(a) a corporation whose principal
business was
(i) renting or leasing of leasing property or property that
would be leasing property but for subsection (18), (19) or (20),
or
(ii) renting or leasing of property referred to in
subparagraph (i) combined with selling and servicing of property
of the same general type and description,
if the gross revenue of the corporation for the year from such
principal business was not less than 90 per cent of the
gross revenue of the corporation for the year from all sources;
or
(b) a partnership each member of which was
a corporation described in paragraph (a).
(Emphasis added.)
Appellant's position
[8] The appellant's agent
submitted written representations. First, he argued that the
source of the appellant's income was business and not
property and even that the appellant actually had two businesses
rather than one: the rental of the ship and the cruise marketing
service provided through Guy Gagnon, the appellant's
only employee until the end of October 1995.
[9] The appellant's agent referred
to the third paragraph of article 1525 of the Civil Code of
Québec, which provides as follows:
The carrying on by one or more persons of an organized economic
activity, whether or not it is commercial in nature, consisting
of producing, administering or alienating property, or providing
a service, constitutes the carrying on of an enterprise.
On the basis of that definition, he argued that the appellant
carried on an enterprise or business in relation to the ship it
owned and rented, since it administered or managed that property
by negotiating, inter alia, the rental contract and by
providing a rental service.
[10] The appellant's agent also noted
that the concept of business found in subsection 248(1) of the
Income Tax Act ("the Act") is general and
very broad, since it includes an "undertaking of any kind
whatever". In his opinion, the rental of a ship is an
undertaking and therefore a business within the meaning of that
provision.
[11] The appellant's agent referred to
the distinction that exists between business income and property
income, citing the Supreme Court of Canada's decision in
Canadian Marconi Company v. Her Majesty The Queen,
[1986] 2 S.C.R. 522, in which, he said, it was
established that [translation] "a company is incorporated to
carry on a business" and that [translation] "income
generated in pursuit of objects established when the company was
incorporated is presumed prima facie to be business
income". He noted that this presumption has also been
recognized by Revenue Canada (now the Canada Customs and Revenue
Agency ("CCRA")), inter alia in paragraph 8
of Interpretation Bulletin IT-73R5:
If a corporation is incorporated to earn income by doing
business, there is a general presumption that profits arising
from its activities are derived from a business (or from separate
businesses as discussed in the current version of IT-206,
Separate Businesses). Thus, from the time that the
activities contemplated commence (see the current version of
IT-364, Commencement of Business Operations) until they
permanently cease, most corporations carry on or will have
carried on one or more businesses. However, in some
circumstances, a corporation's entire profits can be
characterized as income from property, as might be the case where
the corporation is formed for the sole purpose of holding shares
of a second corporation or holding a property to be rented with
limited landlord responsibilities. . . .
[12] The appellant's agent argued that
the appellant was incorporated to earn income from one or more
businesses and that this is not disputed by the respondent, since
the appellant was considered to be carrying on a business during
the fiscal year ending on October 31, 1995, as stated in
subparagraph 15(r) of the Reply to the Notice of Appeal.
Thus, in his opinion, the rental income should be considered
business income because the appellant was not incorporated
[translation] "for the sole purpose of holding a property to
be rented with limited landlord responsibilities, since it
provided other services in the past".
[13] The appellant's agent also referred
to paragraph 7 of Interpretation Bulletin IT-177R2, which
states:
. . . Generally, however, subject to the comments in the current
version of IT-420, Non-Residents - Income Earned in Canada,
rental income of a corporation will be considered to constitute
income from a business.
[14] In this regard, he noted the exclusion
from rental income of property other than real property for the
purposes of the definition of "specified investment
business" in subsection 125(7) of the Act. In the
same subsection, "income . . . from an active
business" is defined as including any income
"pertaining to or incident to that business, other than
income . . . from a source in Canada that is a
property (within the meaning assigned by subsection
129(4))". Since subsection 129(4) provides that the
income of a corporation from a source that is a property
"includes the income . . . from a specified
investment business carried on by it in Canada", the
appellant's agent concluded that income from the rental of
movable property is not income from property but rather income
from a business.
[15] Finally, the appellant's agent
pointed out that paragraph 9 of Interpretation Bulletin
IT-371 refers to Interpretation Bulletin IT-72R2,
"Meaning of 'Active Business'", which
"indicates the Department's view that a corporation
which derives income from rentals is in the rental business and
thus satisfies one of the criteria of Regulation
1100(12)".
Respondent's position
[16] Counsel for the respondent argued that
the exception in subsection 1100(16) of the
Regulations is applicable only insofar as a
corporation's income is from a business and not from
property. He also relied on the Supreme Court of Canada's
decision in Marconi, supra, which recognizes that
distinction even in the case of a corporation, although the
decision confirms the existence of a rebuttable presumption that
the income of a company incorporated to carry on a business is
considered prima facie to be income from a business.
[17] According to counsel for the
respondent, an analysis of the situation during the taxation year
at issue shows that the appellant was not engaged in any
activities, unlike in previous taxation years when Mr.
Gagnon's contribution meant that the appellant could be
considered to have a business. Thus, in his view, the appellant
had no business during the taxation year at issue and its source
of income was simply property.
Analysis
[18] The rebuttable presumption that
corporate income derives from business, which was recognized by
the Supreme Court of Canada in Marconi, supra, was
relied on again, inter alia, in Hickman Motors
Ltd. v. Canada, [1997] 2 S.C.R. 336. In her reasons at
page 358, L'Heureux-Dubé J., while acknowledging that
the presumption could be rebutted by evidence to the contrary,
found that no such evidence had been adduced. Moreover, although
he dissented, Iacobucci J. referred to the basic distinction
between business income and property income for tax purposes. He
also referred to a number of legal works that address this
question. At page 396, Iacobucci J. stated the
following:
As Professor Vern Krishna notes in The Fundamentals of
Canadian Income Tax (5th ed. 1995), income such as rents may
be either property income or business income. He distinguishes
between the two on the basis that "business" connotes
some kind of activity, at p. 260:
. . . "business" refers to economic, industrial,
commercial, or financial activity and involves more than
mere passive ownership of property. [Emphasis in original.]
In a similar vein, Harris, supra, says at p. 143:
Passive income from the mere holding of property is classified
as income from property rather than income from business.
And Peter W. Hogg and Joanne E. Magee say in Principles of
Canadian Income Tax Law (1995), at p. 195:
A gain acquired without systematic effort is not income from a
business. It may be income from property, such as rent, interest
or dividends.
Unless the taxpayer actually uses the asset "as
part of a process that combines labour and capital"
(Krishna, supra, at p. 276), any income earned therefrom
does not qualify as income from a business, but rather falls into
the category of income from property.
[19] It should be noted that subsection
15(1) of the Canada Business Corporations Act provides as
follows:
A corporation has the capacity and, subject to this Act, the
rights, powers and privileges of a natural person.
[20] Thus, a corporation, like a natural
person, may simply be the owner of property that is rented to
another person. This is true for both movable and immovable
property. Where a long-term lease involves no activity by
the owner, who merely receives the rent, it is my view that it
can rightly be concluded that the source of income is the
property itself and not a business carried on in relation
thereto. It is the activity required to generate business income,
although it may be minimal in some cases, that distinguishes this
source from the source that is simply property. The distinction
based on the level of activity and recognized by both writers and
the courts is moreover reflected in the last part of
paragraph 8 of Interpretation Bulletin IT-73R5
reproduced in paragraph 11 of these Reasons for
Judgment.
[21] In the case at bar, the Minister
assumed that the appellant did not engage in any activities
during the year at issue. The appellant did not adduce evidence
of any activity associated with the rental of the ship. On the
contrary, the appellant's agent merely argued in his written
representations that the appellant had signed a lease and that it
provided a rental service. The signing of a long-term lease
in 1992 is not an activity that could make it possible to
conclude that the appellant had a business in 1995. Moreover, the
appellant did not provide a "rental service" that year
specifically because it had rented the ship bareboat several
years earlier. The only possible conclusion is that the
presumption that the appellant earned business income rather than
property income has been rebutted.
[22] It is interesting to note that article
2007 of the Civil Code of Québec defines a bareboat
charter as follows:
A bareboat charter is a contract of affreightment by which a
lessor places an unmanned and unequipped or partly manned and
partly equipped ship at the disposal of a charterer for a
determinate time, and transfers to him the navigation,
management, employment and agency of the ship.
This definition is supplemented by article 2010 of the
Code, which provides as follows:
The charterer may use the ship's stores and equipment.
He insures the ship and bears all operating costs. He hires and
maintains the crew.
[23] According to the commentary by the
Minister of Justice, this article [translation] "confirms
the rule that the charterer is responsible for the navigation,
management, employment and agency of the ship".[1]
[24] As the appellant's agent himself
acknowledged, the bareboat rental of a ship, which is movable
property, is comparable to a net-net-net lease of an
immovable. In this case, an eight-year bareboat lease or
charter with respect to the NM Cavalier Maxim was
entered into in 1992. The rent for each year was set in advance.
Although some activities may have been viewed by Revenue Canada
as indicating that the appellant had or carried on a business in
previous years because of Mr. Gagnon's cruise marketing
activities, the evidence adduced shows that it did not engage in
any activities during the taxation year ending on
October 31, 1995, since Mr. Gagnon was no longer
working for it. In the circumstances, the only conclusion that
can be reached is that the appellant earned property income (in
the form of rent) and not business income that year. That being
the case, the exception in subsection 1100(16) of the
Regulations is not applicable here. It is the rule in
subsection 1100(15) that must be applied.
[25] As a result of the foregoing, the
appeals are dismissed.
Signed at Montréal, Quebec, this 27th day of November
2001.
J.T.C.C.
Translation certified true
on this 19th day of February 2003.
Sophie Debbané, Revisor
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