Gestions Calce – Court of Quebec departs from written terms of lease to find that a rental property was used principally in the active business of a related person

One of the exceptions from the rule that a rental property cannot qualify as a “former business property” for purposes of the replacement property rules in ITA ss. 13(4) and 44 references the situation of a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.” The property in question had been rented by the taxpayer to third parties and to a related person (“CR”) for use in CR’s business of reselling used buses. The ARQ denied the Quebec replacement property rollover on the basis that the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents.

Cameron JCQ nonetheless found that the “principally” test was satisfied:

  • Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet”
  • As the only major tenant, CR’s use of the property was qualitatively more significant
  • There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50%
  • CR’s rent was somewhat arbitrarily low given that the lessor (the taxpayer) received, in addition, a substantial amount as management fees”).

Neal Armstrong. Summary of Gestions Calce Ltée v. Agence du revenu du Québec, 2019 QCCQ 7377 under s. 248(1) – former business property.