Hughes & Co. Holdings Ltd. v. Minister of National Revenue, [1990] 1 CTC 2013, 89 DTC 702

Taylor, T.C.J.:—These are appeals heard in Winnipeg, Manitoba, on October 2, 1989, against income tax assessments for the years 1984 and 1985 in which the Minister of National Revenue disallowed the deduction claimed under subsection 125(1) of the Income Tax Act (the "Act").

The notice of appeal deals with the unusual matter in a clear way:

Hughes & Co. Holding Ltd. hereby appeals from the decision of the Minister of National Revenue. Notification mailed August 30th, 1988 wherein for the 1984 & 1985 taxation years the Minister confirmed assessments under the Income Tax Act, as follows:

"Your income in the amount of $88,671.00 for the 1984 taxation year and $131,232.00 for the 1985 taxation year is income from a specified investment business and not income from an active business carried on in Canada and accordingly you are not entitled to a deduction under subsection 125(1) of the Act from the tax payable."

The Taxpayer carries on a property ownership and management business which it has done since incorporation in the late 1920's. It has and its founder, Joseph Henry Hughes caused actual construction and development of a number of properties in the City of Brandon, mainly on 10th Street. These buildings are now quite old and require a great deal of management and maintenance. This is accomplished by a full-time Property Manager, full-time bookkeeper secretary, a permanent part-time secretary, full-time maintenance man, full-time caretaker, regular part-time help in the summer and constant full-time supervision by the President who is the registered real estate broker.

The taxpayer manages its own property and manages numerous outside properties, mainly for the Brandon General Hospital.

It also is in the farming business as the owner and landlord of farm land.

The assessments have been done on the basis of the corporation being covered by the “specified investment business” description. The exemption to this description is Section 125(7)(e-i) which states in part;

"the corporation employs in the business throughout the year more than five full time employees.”

Any more employees than 5 full time employees must meet the definition otherwise the act would have so specified.

The taxpayer did have 5 full time employees plus one permanent part-time employee, as well as additional part-time employees during the 1984 and 1985 taxation years.

The question to be resolved by this Court is does "more than 5 full time employees" mean “6 or more full-time employees" within the provisions of section 125(7)(e)(i).

The taxpayer claims it does not and that it should not be taxable in 1984 and 1985 as a specified investment business.

The situation from the view point of the respondent was equally direct:

— the principal purpose of the Appellant's business in its 1984 and 1985 taxation year was to derive income from property,

— in the business, the Appellant did not employ more than five full-time employees throughout its 1984 and 1985 taxation years,

— at all material timers Barry Hughes owned, directly or indirectly, not less than 10% of the issued shares of the Appellant,

Barry Hughes was a “specified shareholder" within the meaning of paragraphs 125(6)(h) and 125(9)(c) of the Income Tax Act as it applied in 1984.

The Respondent relied on sections 3 and 9 and subsections 125(1), 129(4), 129(4.1) and 248(1) of the Income Tax Act as they read and applied in 1984 and 1985, on paragraphs 125(6)(d), 125(6)(h) and 125(9)(c), as they read and applied in 1984 and on paragraphs 125(7)(a) and 125(7)(e), as they read and applied in 1985.

At the commencement of the hearing, counsel for the appellant informed the Court that the appeal for the year 1984 would be withdrawn and should be dismissed. Counsel agreed that for that year (1984), as a director holding more than ten per cent of the capital stock of the company, he could not qualify for purposes of this appeal, but due to a change in the Act, the appeal was valid for the year 1985. The basic issue remained the same.

The evidence and testimony provided to the Court established that the corporation in 1985 had four full-time employees, totally unconnected with the ownership of the corporation. In addition Mr. Barry Hughes, the principal shareholder, also president and a director, for purposes of this appeal classified himself as a full-time employee. He testified regarding his day-to- day "hands on" involvement with the company albeit that he was a lawyer, in daily practice in Winnipeg, some distance from Brandon. It was his contention that usually at least once a day, often more, and certainly several times each week he reviewed matters that arose with the manager and made decisions accordingly. The site—which consisted of some 52 residential suites, and 24 business premises was all rented out except for one office which was used for the business of the corporation. Mr. Hughes visited it regularly, usually once a week. Mr. Hughes was paid, in 1985 $8,250 for this employment, as an officer of the appellant corporation in addition to his fees as a director. This raised the first question in the appeal—was it appropriate to regard Mr. Hughes, under these circumstances, as the fifth "full- time employee"? The second aspect of the appeal was also raised in the testimony of Mr. Hughes—that in addition to the full time employees noted above —four according to the Minister, five according to Mr. Hughes—there were several part-time employees whose responsibilities varied from time to time, but they were nevertheless, available at all times. The respondent's position was that these part-time "employees" could not be counted, even if Mr. Hughes, as a director was counted, to meet the provisions of the section at issue — ". . . the corporation employs in the business throughout the year more than five full-time employees, — ".

Both counsel agreed there was little in the way of guiding jurisprudence for the Court in this matter, but the basic position came down to that in the notice of appeal above.

The question to be resolved by this Court is does "more than 5 full time employees" mean “6 or more full-time employees" within the provisions of section 125(7)(e)(i).

Counsel for the appellant noted-for the Court Michael K. Taylor v. M.N.R., [1988] 2 C.T.C. 2227; 88 D.T.C. 1571, at page 2230 (D.T.C. 1573):

Thus a directorship is an office: the holder of an office is an officer, and an officer is an employee. Therefore it would appear for the purposes of the Income Tax Act a director is an employee.

Counsel also disagreed with the respondent's interpretation —based on Interpretation Bulletin IT-73R4 which reads:

The Department considers that the phrase ”. . . the corporation employs in the business throughout the (taxation) year more than five full-time employees . . ." means that an employer has six or more employees working a full business day (or a full shift) on each working day of the year, subject to normal absences due to illness or vacation. Employees working part-time (less than a full business day or a full shift) cannot qualify as full-time employees.

Analysis

With regard to the first point at issue—was Mr. Hughes as a director, a full-time employee, in the circumstances of this case, I am of the view that the definition above from Taylor, supra, determines that he was an employee, and there was every indication in the evidence and testimony that this was "full-time" as well as I can comprehend that term. There were apparently no hours, days, weeks, or months when he was not actively involved with the operation. He was continually prepared to make decisions regarding rents, evictions, repairs, etc. and did so on a regular basis when called upon by the manager. The age of the buildings and the condition of equipment required such constant attention in his opinion. There may be circumstances under which a "director" or “officer” of a company should be considered as "part-time", but in my view that would not be an appropriate designation here.

On the second point raised—the meaning of "more than 5 full-time employees" —I can find no justification in the words of the Act themselves to support the interpretation bulletin, supra, which would effectively rephrase the section to read —"6 or more full-time employees". As I read it, those words "more than 5 full-time employees" refer to the verb "employs", and the total number of employees required and employed by this corporation in the operation was certainly in excess of five—it was sometimes seven or eight at different periods of the year. I believe it is clear, that if the corporation had only four employees —and no extra ones (even part-time) this appellant would meet a difficult obstacle. But that is not the case. As I see it, once the "threshold" of "5 full-time employees" has been reached (and I have decided that it was in this case by the inclusion of Mr. Hughes above) then the evidence that there were other employees, even part-time ones, should be sufficient for the deduction claimed.

The appeal is allowed for the year 1985. For the year 1984, the appeal is dismissed. The entire matter is referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to party-and-party costs.

Appeal allowed for 1985 taxation year.