Sbi Properties Limited v. Minister of National Revenue, [1981] CTC 2288, 81 DTC 263

Roland St-Onge:—The appeal of SBI Properties Limited came before me on January 23, 1981, at the City of Montreal, Quebec and the issue is whether the appellant is allowed to report a portion of its income as being “active” and another portion as being “passive” for its 1972, 1973, 1974, 1975, 1976 and 1977 taxation years.

The facts of this appeal are well set forth in the notice of appeal at paragraphs 1 to 12 inclusive, which read as follows:

1. The Company reported a portion of its income relating primarily to land matters—as being active—and another portion of its business as being passive.

2. The assessment purports to transfer all of the income into the active category.

3. The company’s income which is reported as passive involves income not from the operation of a business but rather from investment in properties.

4. These properties are revenue-bearing properties. As a result of investment by the company, it earns rental income.

5. This rental income accrues to the company while the company exercises an entirely passive role, in view of the fact that the entire business operation and management of the properties are vested in another company (SBI Management Limited) and not in the company itself.

6. The company has no employees and no operations and simply receives the net rent which is collected by the other company hereinabove referred to.

/. The assessment appears to obliterate the distinction between active and passive business which is prescribed in the Income Tax Act.

8. The appellant’s classification of active and passive business income was and is correct and the effective reclassification under which the passive business income is ignored in the assessment is incorrect.

9. Under reserve of the foregoing, the assessment overlooks a preliminary distinction between income from a business and income from property. The provisions of Section 129(4)(a) contemplate a “Canadian Investment income” and, accordingly, entitlement to refundable dividend tax income both from a source in Canada that is a “property” (“other than a property used or held by the corporation in the year in the course of carrying on a business”) as well as “income for the year from a source in Canada that is a business other than an active business”. This reflects the distinction between income from property and income from a business, whether active or passive. In the present instance, the income derived from the ownership of appellant’s buildings is income from property which is different and distinguishable from income from a business. Accordingly, as we are not dealing with income from a business but rather income from property, it become irrelevant to enquire whether the nonexistent business, as distinguished from the income from property, should be classified as active or passive.

10. By hypothesis, Section 129(4) of the Income Tax Act deals with income of a corporation as compared with income from an individual. If, as implied in the assessment, all income of all corporations is ipso facto active business income simply because it is the income of a corporation, then such an interpretation of the section would render it and the various constituent provisions thereof completely meaningless.

11. The relevant Section 129(4) clearly provides for and postulates exactly the kind of distinction that was reflected in the appellant’s returns and which are ignored as though they were nonexistent in the assessments under appeal.

12. For protective reasons, exception is also taken to the reference to the amount of “refundable dividend tax” reflected in the assessment under appeal.

The respondent alleged the following:

4. In assessing the appellant for its 1972 to 1976 taxation years, the respondent relied, inter alia, on the following assumptions of fact:

(a) The appellant owns several shopping centres in Canada;

(b) The purposes and objects of the appellant as set forth in the letters patents creating the appellant, in 1971, include:

“(a) to acquire by purchase, lease, exchange or otherwise moveable and immoveable property and rights including lands, buildings, business or industrial concerns and undertakings mortgages, hypothecs, contracts, concessions, franchises, patents, licenses, securities, and any other interest in moveable and immoveable property; to take, build upon, hold, own, maintain, work, develop, sell, lease, exchange, improve or otherwise deal in and dispose of such moveable and immoveable property;”

(c) Since incorporation in 1971, the main activity of the appellant has been the renting of the properties it owns as evidence inter alia by the following:

(i) the opening balance sheet of the appellant lists revenue properties to have a capital cost of $12,628,684 out of total assets of $14,155,917;

(ii) gross rental income from the date of incorporation to July 1978 have been over $19,000,000 as compared to less than $2,400,000.00 derived from other activities:

(d) The appellant through its employees, does participate in the administration of the shopping centres although most of the work related thereto is done by an associated company SBI Management Limited which acts as agent for the appellant:

(e) The shareholders with voting rights in both the appellant and SBI Management Limited are the following:

		SBI Manage
Appellant		ment Limited
Ezekiel Schouela	40%	40%
Edouard Schouela	20%	20%
Maurice Schouela	20%	20%
Gamil Schouela	20%	20%

(f) Services provided to tenants by the appellant include security and maintenance services to buildings and parking lots;

(g) In addition to those services the appellant’s representatives are active, in association with tenants, in various associations designed to “promote and advertise and otherwise carry out activities to increase the volume of business of the tenants of the Shopping Centre”.

(h) Clauses in the various leases signed by the appellant and its tenants contain provisions relating to the selling price of merchandise, the hours and days of openings, the personnel requirements, the types of business found in specified areas and advertising;

(i) In addition to shopping centres Appellant also owns commercial buildings, service stations and schools which accounted for 6 or 7% of its gross income in 1976;

(j) During the years in issue the Appellant carried on an active business;

Mr Edouard Schouela, vice-president of the appellant company, testified as follows: the appellant company owns real estate in Canada such as shopping centres, commercial buildings, service stations for a capital cost of some $12,500,000, which properties are administered by another taxpayer, SBI Management Limited (hereinafter referred to as “Management”) for a fixed fee or percentage of the gross income.

The said properties were owned either completely by the appellant or in association with other companies. All the leases were negotiated by using a printed form by Management, with the exception of some leases with the Government who insisted on dealing directly with the owner of the buildings. However, in that last instance, the administration was given to Management.

The appellant had no employees and paid only the Directors and Management fees and also, in some instances, the cost of heating and cleaning the properties in which case the appellant was reimbursed by Management.

Management collected the rents and charged the operating and management expenses to each property and, at the end of each year, remitted the net proceeds to the owner of the properties. Management also paid the mortgage payments and the insurance premiums but the expenses that were deductible from earned rental income were deducted by the appellant company for each year in its income tax return. Management had two clients: Capital City Centre Ltd and the appellant company and hired 50 employees.

Upon cross-examination, the witness admitted: that 80% of the appellant’s assets was rental properties; that the appellant company was the half owner with a Mexican group of Capital City Centre Ltd which owns seven shopping centres in Canada; that the appellant company had a telephone number, an office in Montreal and a permanent establishment in Alberta and lent money to third parties for an amount of $2,000,000 in 1972 and $1,000,000 in 1976.

Counsel for the appellant argued that the most important portion of the appellant’s income was from properties and not from an active business. He first based his argument on sections 3 and 129 to say that the said income was from a source, that is some properties valued at over 12 million dollars and consequently, section 129 would find its application. Alternatively, the said income was not from an active business and in both cases, a taxpayer is allowed to receive a dividend refund.

Prior to the hearing, he sent written submissions to Revenue Canada which were filed as Exhibit A-4 and referred to substantial jurisprudence and enunciate the appellant company’s contention, part of which reads as follows:

The distinction as it applies to real estate is evident in the leading case of Henry Wertman v MNR, [1964] CTC 252. While the issues related to rights as between husband and wife, the main desideratum of the judgment was that the rental income from an apartment building constructed in Vancouver at a cost of approximately $450,000 was income from a property and rules relating to a husband and wife being partners in a “business” were not applicable thereto. As expressed in the Exchequer Court judgment:

“There may well be cases wherein the extent of various services provided by the landlord under the terms of the leasing contract is such that the rental paid by the tenant can be regarded as in a substantial measure a payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum paid could readily be regarded not as mere rental of property but as true receipts of a business of providing apartments and services to tenants but I do not regard this as a case of that kind. The nature of the services provided in my opinion also has a bearing on the question some, such as maid service and linen and laundry service, being more indicative of a business operation than the heating of the building which in my view is so closely concerned with the property itself as to offer no definite indication one way or the other. Nor do I think that the fact that the management of the property occupies the appellant’s time or the fact that he uses his car to go to and from the property indicate that the operation is a business for at most these facts indicate that he renders a service to himself and to the other owners of the building which so far as charged for represents a proper outgoing against revenue for the purpose of ascertaining the net profit divisible among the owners regardless of whether the rentals are mere income from property or income from a business.”

It will be noted that in the foregoing case the taxpayer had actually undertaken certain management activities not applicable in the present instance and, even then, these management activities were not judged sufficient to reclassify the income as being income from a business as distinct from income from a property.

In the case of Harry Walsh and Archie Robert Micay v MNR, [1965] CTC 478, the taxpayers had an interest in two large apartment buildings and a shopping centre. The management was entrusted to a company controlled by the taxpayers. The court affirmed that they were receiving income from a property and they were not receiving income from a business. As a result, the court concluded that the rules relating to a “business” in respect of capital cost allowances could not apply. As the Exchequer Court expressed it at pages 484 and 485:—

“In my view, prima facie the perception of rent as landowner is not the conduct of a business, but cases can arise where the extent of the various services provided by the landlord under the terms of a leasing contract and the time and labour devoted by him are such that the rental paid by the tenant can be regarded as in a substantial measure payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum could readily be regarded not as mere rental of property, but as true receipts of a business of providing apartment suites and services to tenants. It is a question of fact at what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.

In the present case I do not consider it necessary to decide whether the appellants engaged Silver Heights Development Co, Ltd as their management agent with respect to the properties in question in the capacity as agent or independent contractor. It is obvious that if the management agent had not been engaged then the services undertaken by it would have been performed by the appellants personally or in such proportions as might be agreed upon among themselves and the other two co-owners.

On the evidence I think that the rentals received by the appellants should be regarded as having accrued to them as owners of the properties rather than as traders and that the rentals accrued from use by the tenants of the property in that the rentals represent payments for their occupation thereof rather than from a combination of such use and the other services from which the tenants benefited. I regard the additional services which were provided to tenants as being relatively insignificant and insufficient to convert the appellants from landowners into the conductors of a business. The services such as the provision of heat, electric stoves and refrigerators, janitorial services to the common hallways, snow removal, carpeting in some rooms of the suites and drapes for windows are those which tenants have come to expect and are those which landlords normally provide in living accommodation of this kind. These are refinements offered to the tenants in connection with the occupation of suites and, in most instances, are also property for the use of which, along with the Suites themselves, rent is paid. The heating of the building and snow removal are ancillary to the property itself and are exercised in the landlord’s capacity as owner of the property rather than as a service to tenants although the tenants incidentally enjoy the benefits therof. While the nature of services provided has a bearing on the question, the services above described are not such as would characterize the rental received therefor as income from a business rather than income from property, as services such as the provisions of breakfast, maid, linen, laundry and such like services might do.”

In the leading cases which have established the now prevailing rules on active versus passive income, the courts were dealing with companies operating mortgage businesses. The distinction above drawn could not be made and did not apply.

Since these leading cases, the issue came out very clearly in Spence Building Ltd v MNR, [1977] CTC 2104. It might be noted that it was the Department which contended in Spence Building Ltd that the company, while receiving income from the operation of a building, was not conducting an active business. The Department’s assessment was affirmed in the judgment. The judgment itself points out the fundamental necessity for first considering whether or not there is income from a business before one determines whether the business is active or passive. The court concluded that in this instance the income was from the property and therefore there was no income from a business whether active or passive.

This same point was made in favour of the Department in Smithers Plaza Ltd v MNR, [1975] CTC 2171 in which the Department successfully affirmed the proposition that the company which operated a shopping centre was not carrying on an active business. In that case, incidentally, they had an employee as a janitor and they undertook a greater measure of activities by far than is applicable in any of the Schouela cases. As expressed at pages 2173-74 of the judgment:

“I do not believe that anyone would seriously quarrel with the definition of an investment as being the investing of money or capital to secure profitable returns in the form of interest or income. Nor, I believe, would anyone disagree with the proposition that a person may invest his money in a business in order to derive a profit from its active operation or he may choose to invest in property and passively derive revenue from rentals or from interest on his investment.

However, the Income Tax Act has made an important and consistent legal distinction between income from a business and income from investment or property, and it seems to me that this basic distinction is an essential consideration in determining whether or not the appellant falls within the meaning of subsection 125(1) of the Income Tax Act.

In my opinion investment in movable or immovable property on a long-term basis cannot in general be considered to be a profit-producing business enterprise. Whether the taxpayer invests in one or in a dozen rental properties, whether he leases the premises and collects the rent himself or has an agent do it for him, whether or not he provides janitorial services, does not in my view change the nature of his investment if the services rendered are aimed at and limited to the leasing and the maintenance of his property and the structural upkeep of the leased premises. The provision of usual maintenance services and looking after their attending cost is, in my view, an integral and necessary part of a taxpayer’s investment in property, which gives rise, not to a business profit, but to rental income. I do not believe that the degree or the extent of the _~ taxpayer’s activity in connection with the normal operation and maintenance of a long-term rental property can automatically transform the taxpayer’s investment in such property into an investment in a business. The nature of the two investments is,/in my view, basically and fundamentally different and, for purposes of the Income Tax Act, should not be confused.”

Reference may be made to the Department’s Interpretation Bulletin IT-73R2 on “Income from an Active Business”. Paragraph 5(a) offers illustrations of income derived fro the assets being an incident of an active business. The only relevant illustration/is in subparagraph (g) dealing with “Rent on property which is inventory of thé active business while it is being held for sale”. This is an implicit recognition that where, as in the present case, the property is not being held for sale, the income from such property is not an incident of any active business.

It was established many years ago in a series of cases that, even when a company was carrying on the routine work of maintaining and caring for rented property/ it was held not to be “active”. Amongst cases illustrating this point is Mansori v MNR, 52 DTC 433 and Sawle Estate v MNR, 67 DTC 524.

It is the Tax Department which has to a relentless and extreme degree pursued the policy of assessment exactly the opposite of that which it is seeking to affirm in the present case. While the Department failed to succeed in the Rockmore line of cases, there are a number of instances where the assessments relating to real estate have been upheld. Thus, for example, in Centennial Shopping Centre Ltd, the Department submitted and the Board affirmed that the operation of a shopping centre was not an active business. The Department’s position was expressed in the following terms at 2256 of the judgment:—

“The respondent’s position is that the appellant contracted the management and operation of the shopping centre to an independent organization on a fee basis and accordingly is not in active business itself.”

When it suits its purpose, and notwithstanding the judgment in Cadboro Bay Holdings Ltd (of which more anon), the Department continues in its assessing practices to affirm that the taxpayer is not entitled to advance the interpretation of the law which the Department is seeking to advance in the present instance. Thus, as recently as February 28, 1988, in a judgment rendered four months after the Cadboro Bay Holdings Ltd case, the Department’s position was upheld in denying active business status to the taxpayer company. The judgment observes that, according to the testimony of the principal witness, “It seems that there were not very many employees”. Perhaps you have abandoned judgment in favour of the taxpayer in this case in view of what appears to be a change of policy. However, as the record stands, your position in that instance is in sharp conflict with your present contentions, all the more serious in view of the fact that your position was upheld.

A recent incidental illustration of the first point in the present submissions is afforded by the judgment in March Shipping Ltd v MNR, [1977] CTC 2527. The case did not deal with active business for purposes of section 125. It did decide that the corporate income was not business income but simply investment income. While this related to the appellant’s refundable dividend tax on hand, the underlying distinction is the same.

Apparently the Department seeks to justify its “volte-face”, inconsistent though it may be, by the judgment in Her Majesty the Quenn and Cadboro Bay Holdings Ltd, [1977] CTC 186. Admittedly, in dealing with the second part of this submission, this judgment goes very far in suggesting that once the company has income from a business it does not take very much to constitute such income as active business income. The judgment, however, acknowledges that there must first be income from a business before one can reach the conclusion that it is income from an active business. It also acknowledges in conclusion 5 at the end of the judgment that ‘‘part of the income of a private corporation in Canada can be income from an ‘‘active business’’ within the meaning of subsection 125(1) of the Act and another part of its income can be income within the meaning of section 129 of the Act”. The latter income is obviously not ‘‘active business income”. However, even Cadboro Bay recognized the possibility of a company earning passive income.

All of the judgments generally affirm the proposition that each case must be considered in accordance with its relevant facts. In the Cadboro Bay case you will note that there was no management company to look after the real estate. The characterizations of income from property applied in Walsh and Micay and as would be involved in the present case had no application.

For the Department to proceed from one extreme to another is scarcely warranted by the Cadboro Bay Holdings Ltd judgment in the context of all of the applicable jurisprudence. It also violates general principles of consistency and uniformity in assessing practice. When it suits its purpose the Department does not mechanistically adhere to the dicta pronounced by the courts, let alone those dicta which are characterized by lawyers as “obiter dicta”. The very same judge who rendered the judgment in Cadboro Bay Holdings Ltd was the author in another case of very sharp criticism of the departmental practice of pleading in the alternative. In N C Brewster v Her Majesty the Queen, [1976] CTC 107, Mr Justice Gibson observed:—

“It seems therefore that it is fundamentally wrong in law to plead assumptions in the alternative. In like manner, it is fundamentally wrong in law for any assessors of the Minister of National Revenue to assess or reassess and not tell precisely the basis for such assessment or reassessment but instead as certain assessors often do, namely assess or reassess in the alternative, or merely record the basis as contrary to the Income Tax Act, on the premise that thereby they are keeping their options open, and that they are entitled in law to do so.”

Notwithstanding this very categoric observation, the Department seems to have no hesitation in continuing the practice which he so sharply criticizes. In the last case but one that I had occasion to plead before the courts, within the past month or so, the Department not only proceeded on the basis of two alternative assumptions but with varying degrees of persistence, withdrawal and reiteration on four types of alternative assumptions.

It can thus be seen tht there is nothing in departmental precedent or the way In which it has reacted to past judgments of the courts or of the same judge which would require it to apply the Cadboro Bay Holdings Ltd conclusion with such rigidity as to reverse completely the standard it had previously taken in cases such as those with which we are now concerned.

An added responsibility devolves upon the Department to avoid an overly rigid approach in a situation of this kind. It was the government which chose, in the face of previously prevailing inconsistent, shaky and insecure jurisprudential foundations about the difference between an active and a non-active business, to adopt this distinction as an important element of its 1972 tax reform program. This was done, as it were, “en pleine connaissance de cause”. It scarcely seems appropriate to come forward seven years after the law has been in operation to assert with inflexible rigidity against the taxpayer that by reason of the Cadboro Bay Holdings Ltd judgment the law does not mean anything at all approaching what the Department and everybody elso understood and was told that it means. This inflexibility is all the more striking in that the Department seems perfectly capable of sensing variations depending upon the facts when these variations are invoked in assessments which contest the taxpayers’ returns.

May I respectfully draw your attention to another serious contradiction in departmental policy and interpretation if it now throws up its hands and applies the Cadboro Bay judgment to mean that all income is active income. The whole structure of the Foreign Accrual Property Income concept for offshore investments is based upon an intensely regulated, detailed, complicated series of rules designed to subject to immediate Canadian taxation the passive investments of subsidiaries or affiliates in offshore locations. There is excluded from all of this the income from ‘‘an active business of a foreign affiliate”. If practically everything is an active business, which you have now indicated to be the departmental reaction to Cadboro Bay Holdings, does this mean that the Department is abandoning without any effort application of all of the FAPI rules except in relationship to those companies where, under Cadboro Bay Holdings standards as you now postulate them, there is passive income? I think you can take it for granted that you and your lawyers will argue, as I am arguing, that Cadboro Bay Holdings has a more limited application.

Indeed, your assessing practice has been such that it might be said (and I am amongst those who have said it) that you have even been inclined to apply the FAPI rules before they were legally operative. In any event, when viewed from this context, I am sure that the Department would be the first to affirm that neither the Cadboro Bay Holding judgment nor the combination of all the applicable jurisprudence has had the effect which you are claiming is applicable in the present case: that for all practical purposes all corporate income is active business income.

I would respectfully request you to apply to the present case the arguments which you will be invoking and have invoked in those situations where the Department has asserted that the corporate income is passive.

Counsel for the respondent referred among other cases to the decision in King George Hotels Limited v The Queen and R Cavalier Enterprises Ltd v The Queen, a 1980 Federal Court decision ([1981] CTC 78; 81 DTC 5062.)

In this decision, Mr Justice Smith referred to The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186, 77 DTC 5115, in which Mr Justice Gibson made a thorough study of the Court of Appeal decisions in The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156; ESG Holdings Ltd v the Queen, [1976] CTC 295; 76 DTC 6158, and The Queen v MRT Investments Ltd, [1976] CTC 294; 76 DTC 6158.

In Rockmore, the concept of active business is not used to exclude a business, ie for an absolute state of suspension because subparagraph 125(1)(a)(i) is dealing with income from an active business and it must be assumed that the word “active” was used to exclude some business having sufficient activity in the year to give rise to income. Mr Justice Gibson further said: ‘‘What quantum of activity must there be in a taxation year that gives rise to income from an active business?” The answer was: “That any quantum of business activity that gives rise to income in a taxation year for a private corporation in Canada is sufficient to make mandatory the characterization of such income as income from an active business.”

In King George Hotels Limited decision, Mr Justice Smith then concluded that: “There was nothing in section 125 to justify a conclusion that a corporation whose entire income came from investment could not be considered as carrying on an active business when the making of investment was the very purpose for which it was incorporated.”

In the case of ESG Holdings Ltd whose business was merely turned over to another company without further intervention or supervision, the Federal Court decided that it was not active business but the Court of Appeal, on a unanimous decision, stated that there was no material difference in principle if it was carried on through the agency of an independent contractor. from a ‘business other than an active business’ must mean income from a business that is an ‘absolute state of suspension’ . . . (that is devoid of any quantum of business activity, but which has some assets which produces income)”.

Counsel for the appellant then cited the following pages of the King George Hotels Limited decision:

The only person who was called as a witness at the trial was Donald R Leier. He is the president of both plaintiffs an also of JP Management Services Ltd, whose function will be indicated below. He and his brothers and sister held, at all relevant times, the great majority of the shares of all three companies. Donald R Leier was and still is manager of JP Management Services Ltd, in which he holds 50% of the shares, which company, for convenience, is herein generally referred to as JP. The plaintiff companies are generally referred to respectively as King George and Cavalier. Donald R Leier is paid a salary by JP and is also paid $50 per year by King George, but receives no salary from Cavaier.

The leases with which we are concerned all relate to premises located in one or other of three buildings situate on portions of the land described as Lots 16 to 25, both inclusive, all in Bolck 149 in the City of Saskatoon in the Province of Saskatchewan, according to a plan of record in the land titles office for the Saskatoon land registration district as No. (Q 2) C195.

Exhibit P-7 is a master lease for 10 years of all the land described in the foregoing paragraph, from Cavalier to King George at a rental of $228,000 for the first year, payable $19,000 monthly. Under the lease King George, has the right to assign or sublet all or any part of the demised premises and all the leases in question herein have been made by it (through the agency of JP) to various tenants for various business enterprises. The King George Hotel itself is one of the buildings on part of the described land, as are the King George Arcade and the King George Parkade. Some of the premises leased to tenants by King George are in the hotel, but most of them are in the Arcade, or Parkade, and one is a lease to the Royal Bank of a building known as the Royal Bank building. Some of the stalls in the Parkade are also leased on a monthly basis.

While the plaintiffs operate their own hotels, the overall management of the plaintiff companies is not handled by King George or Cavalier, but is in the hands of JP as it has been since about 1965. Both King George and Cavalier pay JP for its services. Donald R Leier, as manager of JP, looks after this business himself, including the leased premises. In nearly all instances he negotiates with prospective tenants both for new leases and for renewals, settles the rent and other terms and draws the leases. When vacancies occur there is generally a new tenant either waiting or readily available to take over the vacated premises. In the rare instances where this is not so, JP engages McClocklin Real Estate Limited to find a tenant. The experience has been that, practically speaking, all those premises have been fully occupied at all times.

Cavalier owns the land and buildings of the King George Hotel, including the Arcade, and also the Royal Bank building. The net income from the commercial leases we are concerned with is turned over to Cavalier, which has always shown it aS inactive income on its income tax returns.

Under the leases the tenants are responsible for taking care of the buildings, including the replacement of plate glass windows. They pay the electricity bills for their premises. The lessor is responsible for structural defects in the buildings, including the replacement or repair of broken or leaking water or gas pipes, electric wiring or fixtures, lavatories, radiators, heating and air-conditioning apparatus, but is not responsible for damage to persons or property in the premises, whether caused by non-repair, dis-repair, or negligence of the lessor, its servants or agents, unless the lessor disregards a reasonable notice thereof and fails to repair. The tenants undertake to repair damage caused by the misuse of any of the foregoing or by any negligence of the lessee.

The lessor is responsible for supplying adequate heat to the demised premises. In the few premises that do not have bathrooms the tenants are accorded the right to use the public facilities of the hotel. The lessor is responsible for hallways and interior approaches to leased premises. On the other hand the tenants are responsible for removing snow and ice from their premises and for cleaning windows.

One marked difference between these cases and the Transregent Holdings case is that there was only one tenant in the Transregent case whereas in the present cases there are, as indicated by Exhibits P-6 to P-26 about a dozen premises, perhaps more, leased to as many separate tenants.

Mr Leier stated that about 5% of the total income of King George was from the commercial rentals, varying from the commercial rentals, varying from about $90,000 to $104,000 per year. The balance was from the hotel business proper, ie: rooms, meals and beverages, varying from about $1,800,000 to $2,000,000 per year. The net income from the leases is about 40% to 50% of the gross, while that from the hotel business is about 20% to 30% of the gross. In the result the net rental from the leases is about 10% of total net income. Assuming that these figures are approximatey correct, it is clear that the income from the leases is not insignificant.

The fee paid to JP by King George and Cavalier, is in both cases, a lump sum fee for all JP’s services, and is not broken down so as to show separate charges for the leasing business. The amounts of the fees charged to them are not disclosed in the evidence.

Mr Leier stated that the time devoted by JP to work in connection with the leases averages about one hour per month or twelve hours per year. It is not clear whether these times refer to the work of Mr Leier alone or include work by stenographers or other employees of JP. Mr Leier said JP had five employees during the years in question. If all the time worked by all five employees of JP is included, the time required for the work is very short.

The leases vary in length from six to ten double spaced pages of typewritten foolscap. Many of the clauses in them are similar, but there are many differences due to the nature of the tenant’s business and the location of the particular premises. In some leases there are escalator clauses, under which the tenant is required to pay a specified portion of increases in taxes and fuel costs for the building in which the tenant is located. In one there are special over-ride provisions which call for increased rental payments related to increases in the tenant’s volume of business. These things require the attention of JP from time to time. In one case JP assisted a new tenant who was opening a beauty parlor by lending her the money to renovate and decorate the premises. These are examples of services rendered by JP in connection with the leases.

The activities of JP in connection with the leases must be treated, in so far as these cases are concerned, as activities of King George. Those activities, according to the evidence, are not extensive or onerous, and they do not require daily attention. In total, however, with other activities, they involve a not inconsiderable amount of activity. I consider the facts and circumstance here to be clearly distinguishable from those in the Transregent case. In my view they are more nearly in line with those in the Cadboro Bay case, and certainly within the language used in that case and those cited therein, more particularly in the Federal Court of Appeal decision in the Rockmore case, in describing what the term “active business” means.

My conclusion is that the income from the leased premises received by JP for King George for the years 1973, 1974, 1975 and 1976 was income from an active business and it remained income from an active business when remitted to Cavalier.”

According to the King George Hotels Limited decision, there is no doubt that because the appellant company was incorporated, among other things, for the purpose of investment income, any quantum of business activity that gives rise to income in a taxation year is sufficient to make mandatory the characterization of such income as income from an active business. The evidence has revealed that the appellant company received substantial rental income; that it paid directors and management fees and, in some instances, the cost of heating and cleaning the properties; that 80% of the appellant’s assets was rental properties; that the appellant company was the half-owner with a Mexican group of “Capital City Centre” which owns seven shopping centres in Canada; that the appellant company had a telephone and an office in Montreal and a permanent establishment in Alberta and that some substantial leases with the Government were negotiated directly with the appellant company.

As may be seen, this activity in the light of the above decisions was sufficient to brand the appellant as being in an active business.

Also, the fact that the management was transferred to other taxpayers is immaterial in the light of the ob/ter dictum mentioned in the Court of Appeal decision to the effect that there was “no material difference” in principle if it is carried on through the agency of an independent contractor.

In the case at bar, the situation is worse since the management was not carried on through the agency of an independent contractor but by an affiliated company.

For these reasons, the appeal is dismissed.

Appeal dismissed.