Wood Motors (1972) Limited v. Minister of National Revenue, [1987] 1 CTC 2408, 87 DTC 290

Taylor, T.C.J.:—This is an appeal heard in Fredericton, New Brunswick, on January 5, 6, 7 and 9, 1987, against income tax assessments for the years 1978, 1979, 1980 and 1981, in which the Minister of National Revenue disal- lowed a deduction claimed as rent paid. Certain sections of the initial documents filed with the Court portray the base of the issue.

From the notice of appeal:

— The Taxpayer carries on an automobile dealership under a Ford Motor Company Franchise at the City of Fredericton, in the County of York and Province of New Brunswick.

— The Taxpayer has premises on Prospect Street in the City of Fredericton aforesaid from which the said business is conducted. The premises consist of a large building for display, office and service. In addition there is a lot on which cars, both new and used, are stored for purposes of the business. The lot attached to the premises is not large enough to accommodate the Taxpayer's business and as a result the Taxpayer rents additional space to park cars directly across the street from another Company named John Mor Corp. Ltd.

— The space available in the Taxpayer’s lot itself on Prospect Street is not sufficient to accommodate the inventory carried during the prime months.

— Without the rental lot across the street there would be serious congestion on the Taxpayer's lot during most of the year and operations would be hampered and curtailed.

— There is evidence to indicate that there is a direct relationship between volume of new vehicle sales and inventory . . .

— The Taxpayer says there is no justification for the use of the Department's method of arriving at rental value under the Income Tax Act.

— The Taxpayer would further state that in making its appraisal the Department has ignored the concept of “special value” as it applies to the present situation.

From the amended reply to notice of appeal:

— In computing its income for the years at issue, the Appellant sought to deduct rental payments to John Mor Corp. Ltd. in the amount of $57,600 for each of the years at issue.

— In assessing the Appellant for the years at issue, the Minister of National Revenue reduced the rental payments by the following amounts:

Taxation Year	Amount Disallowed
1978	$41,583.00
1979	40,090.00
1980	37,542.00
1981	34,748.00

— In assessing the Appellant for the years at issue, the Minister of National Revenue assumed that the rental payments were not reasonable in the circumstances . . .

— the Appellant loaned $115,000 to John Mor Corp. Ltd. which loan was used to purchase the property leased by the Appellant;

— the Appellant and John Mor Corp. Ltd. are related corporations;

— the basis of the rental payments approximate the total cash outlays of John Mor Corp. Ltd.;

— the fair market value of the land rental was no more than $12,000 at July 1, 1977.

— The Respondent relied inter alia, on the provisions of sections 3, 9, 18, 67 and 69, and subsection 245(1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by s. 1 of c. 63, S.C. 1970-71-72 as they applied to the 1978 to 1981 taxation years.

— The Respondent submitted that the rental payments were not reasonable in the circumstances and, consequently, were properly disallowed by reason of section 67 of the Act.

— The Respondent further submitted that the deduction by the Appellant of the rental expenses incurred by it in connection with leasing additional space directly across the street from John Mor Corp. Ltd., if allowed, would artificially reduce the Appellant’s income for 1978, 1979, 1980 and 1981, with the consequence that the deduction of such rental expenses is prohibited by subsection 245(1) of the Income Tax Act.

The hearing of the appeal and the argument covered four days, during which officers and officials of the appellant and of John Mor Corp. Ltd. (“John Mor”) provided historical and contemporary information regarding the two companies, the business requirements, and the use and value of the rented lot in issue. In addition, for the appellant a valuation report was presented and examined. For the Minister there were officials of the Department of National Revenue to provide the perception behind the assessments in issue, and also detailed appraisal information given in report forms.

Essentially the effort of counsel for the appellant was directed toward establishing for the Court that for the business purposes of the appellant this was a uniquely suitable piece of property and its value to the appellant greatly exceeded the rental cost at issue. Counsel for the appellant also established to my satisfaction, that the two corporations — the appellant and John Mor were not related corporations as that term is understood in income tax matters. In addition, I find nothing “artificial” about the transactions surrounding the appeal, which would permit the application of subsection 245(1) of the Act.

For the Minister, the witnesses' efforts followed a line which would lead to a conclusion that the rental charges for somewhat similar property in Fredericton, were considerably less than the amounts at issue in this appeal.

I have only very briefly above summarized the evidence and testimony, and I do not wish that to be a reflection of any kind on the efforts exerted either by the witnesses or by counsel. It is simply that I have reached a basic conclusion in this matter, which at least for me, focuses all the available information in one direction. I am satisfied that there are [sic] no property suitable for the appellant’s purposes, to anything like the extent that the subject property lends itself. There can be no question that other methods of the appellant accommodating its surplus parking space requirements could have been made. Suggestions of purchases of adjacent property, use of other lots further away, etc. were made, but in my mind this comes very close to the Minister second guessing the business decisions of the appellant, or substituting an outside opinion for that of the responsible officers of the company. I am quite sure from their candour and comportment in Court that none of the Revenue Canada officials meant to do that, but that seems to be the result. Since the Minister did not establish — as a precondition to the assessments — that the two corporations, the appellant and John Mor were related, the question only becomes — was the rental charge “reasonable, in the circumstances”? (I do not rule out that it still might be the same question, even if the corporations were related, but that is not the issue). For the record I would simply list certain of the salient factors which lead me to conclude that the rental charge was reasonable in the circumstances. I have already noted that the evidence does not support a conclusion that the two corporations were related.

(1) The Minister has agreed that Wood Motors required additional parking spaces during the years under review, and that the subject property served that purpose. The appraisal reports which were submitted by both parties did not show that there was other similar parcel of property in the same area, providing the same facility to the appellant.

(2) The appellant’s evidence leads to a conclusion that on a daily basis an average of 60 cars or trucks were parked on the subject property, and that storage space (if available) near that area, could have been $2 per day, per vehicle. That comes to about the $4,800 per month charged by John Mor to Wood Motors — totalling the $57,600 per year at issue. Further the evidence does indicate that the business volume and revenues from operations in all categories were substantially improved by the availability and use of the subject property. That calculation $4,800 per month (admittedly an estimate of use) was made in 1974, and charged each subsequent year up to and including the years under appeal — with no provision made for inflation, etc. — or even the fact that sometimes many more than 60 cars were being parked on the property.

(3) The facts that the property in question only cost about $117,000 and that it was acquired by John Mor rather than Wood Motors have no critical bearing on this issue in my view. Whether it was a “bargain’’, or its real value to the appellant not recognized by the vendor, or for whatever reason, I am satisfied that relating any rental "charge" almost solely to the original cost of the property would not be adequate in the circumstances.

(4) As I see it, this is a highly unusual in fact unique situation. This is a specific business, which itself cannot easily relocate and indeed by 1974 (the date of purchase of the subject property) had only been established on this site for 2 years, and additional property for legitimate business purposes was required. By good fortune a precisely suitable piece of property was available to the appellant on a rental basis, directly across the street from the main business operation site. The subject property in my mind had a great attraction for parking automobiles — not only to the appellant perhaps, but also for the other immediate area competing automobile dealerships.

(5) There can be such a situation termed a “special purchaser" — although it is difficult to substantiate. I would refer to Dominion Metal & Refining Works Ltd. v. M.N.R., [1983] C.T.C. 2386; 83 D.T.C. 322, and Dominion Metal & Refining Works Ltd. v. The Queen, (after appeal) at [1986] 2 C.T.C. 47; 86 D.T.C. 6311 (F.C.T.D.), where such a proposition was rejected. Equally there can be a situation considered as a “‘special user" as I see it and the charge appropriate thereto — a "special" yet nevertheless legitimate charge. This appeal represents just such a special situation. No other available property would have been as suitable to the appellant as the subject property — and I must leave to the judgment of the businessmen involved what value to attach to that singular suitability. I recognize that the amount at issue in this appeal might well cause questions and concerns in some quarters, and I am all too aware that an alternate method was available to Wood Motors of buying the property for itself — rather than allowing it to be purchased by John Mor, and then rented. Clearly that could have resulted in the prospect of less direct cost to the appellant for the use of the property, but that is not what was done in the wisdom of the proprietors of the appellant corporation.

(6) It is possible that at the root of this problem there is a misnomer — the use of the term "rent" — even equated and further distinguished by the respondent as some form of “ground rent”. Other methods of calculating the charge to be used might have been available. But, the method of calculating the charge at issue was at the base of use — even though it was almost similar to a royalty as opposed to a rent. However, that method of calculating the charge — $2 per day, on an average of 60 cars is quite as acceptable and reasonable as any “ground rent” basis.

Accordingly the appeal is allowed, in all respects for all four years at issue. The appellant is entitled to costs on a party and party basis.

Appeal allowed.