Joan Colbert and Robert Colbert v. Minister of National Revenue, [1989] 2 CTC 2197, 89 DTC 289

Taylor, T.C.J.:—These are appeals heard on common evidence in Toronto, Ontario on February 27, 1989 from income tax assessments for the years 1984 and 1985 in which the Minister of National Revenue included in income certain amounts of reported capital gains, recaptured depreciation and reserves which arose out of the transactions noted below. The respondent relied on particulars contained in the reply to notice of appeal and, in particular, on the provisions of subsections 9(1), 13(1), 13(4), 14(1), 14(6), 14(7), 44(1) , 44(5) and 248(1) of the Income Tax Act.

Certain sections taken from the notice of appeal provide the basis of the dispute, and I will refer to the notice of appeal, particularly paragraph 2 which commences, "We respectfully submit . . ."; paragraph 5 which commences, "Section 248(1) .. ." and that continues through paragraphs 6 and

7. Then paragraph 9 which commences, "There is, in our submission . . ." and that continues through paragraphs 10, 11, 12 and 13 and ends at ". . . not to produce rent for the taxpayer".

The position of the Minister was simply stated, as outlined in paragraph 8 of the reply to notice of appeal, specifically subparagraphs (b), (c), (d) and (e).

Counsel for the appellants noted that the primary requirement from the Court was a determination of whether the term "former business property" was applicable with respect to the real property sold. Only thereafter might it be necessary to address the other point raised by the Minister, that is, whether the new acquisition qualified as “replacement property".

Mr. Colbert provided some background with regard to the transactions at issue, and his major point in evidence was that the formation of the corporation in 1981 had been solely for the purpose of providing some form of legal liability protection for the operation. It had not been as a tax planning procedure.

The Corporation (75853788 Ontario Limited) deducted "rent" as an expense and the appellants reported "rent" as income, but the rent paid by the Corporation to the appellants served only to effectively reimburse them for expenses related to the upkeep of the land, buildings and chicken quota. There did not seem to be any net profit from the rental operation.

In argument, counsel for the appellants reiterated the positions outlined in the excerpts from the notice of appeal, indicated earlier, and stressed in particular that portion of subsection 248(1) of the Act, defining "former business property", and that part, reading from subsection 248(1) (the "exclusion from the exclusion", as it might be termed) says this:

. . . but, for greater certainty, does not include a property leased by the taxpayer to a lessee in the ordinary course of the taxpayer's business of selling goods or rendering services, under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.

Mr. Nolan also made reference to certain explanatory income tax publications which examined the impact of this "exclusion from the exclusion”, and counsel related these to the situation before the Court.

Counsel for the Minister provided the Court with a copy of Buonincontri v. The Queen, [1985] 1 C.T.C. 370; 85 D.T.C. 5277, a judgment of the Federal Court-Trial Division in which the question of "rent" was examined. Counsel did agree that in Buonincontri, supra, the subject property had been an apartment building from which it might be easier for the Court to see the clear rental connection.

Counsel also noted and emphasized strongly that in subsection 248(1) definition of “former business property", supra, certain words in the preamble were very significant, these words being ”. . . that was used by him . . .” Counsel contended that, in the context of this appeal, the "by him" could not apply, to these appellants but would apply to the corporation.

[Analysis]

In my view, both the Buonincontri judgment, supra, and the reference by counsel for the Minister to the "by him” wording in subsection 248(1) are helpful but perhaps not decisive. As noted, Buonincontri, supra, dealt clearly with a rental property whereas the "rent" in this appeal is slightly clouded by the fact that it appears to only cover and reimburse expenses to the appellants. With respect to the "by him” words, it might at least be noted that these appellants had indeed before 1981 used the real property at issue to produce income from a business.

However, the real crux of this matter rests in the "exclusion from the exclusion" noted above, and the final phrase thereof:

. . . by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.

I might be convinced that the corporation, formed in 1981, could be considered a “lessee” under these circumstances, and it is possible one could find an agreement, even if unwritten, providing for an undertaking. I say I might be so convinced but I have no reason to further examine that possibility. The real problem does rest with the term "the taxpayer's goods”. In this case, the goods — the product for sale — would be the chickens when grown and ready for market. These chickens would not be "the taxpayer's goods"; they would be the property of the corporation.

The reasons for which these appellants decided to alter the structure of their business, inserting a corporation to which certain assets and responsibilities were transferred and retaining others for themselves is not a matter of question before the Court. The result of that decision, however, cannot be limited to some form of protection from liability. It brought with it, from an income tax viewpoint, an entirely different reporting structure, including built-in advantages and disadvantages. The appellants cannot now assert that these transactions and aspects of the situation should be ignored simply because now it might well be to their advantage to do so. There is no basis in either the legislation or the case law of which I am aware which would permit the amounts received by these appellants from the corporation, in connection with the corporation's use of assets belonging to these appellants, to be characterized as anything other than rent. That does not allow for the terminology "former business property" to be applied to them for purposes of describing the assets which were sold.

The appeals are dismissed.

Appeals dismissed.