Transregent Holdings LTD v. Minister of National Revenue, [1980] CTC 2221, 80 DTC 1212

The Assistant Chairman:—Once again, as in many other appeals, the question as to whether or not the income of a corporation for the year is “from an active business’’ is the issue in this appeal. If the income in question is from an active business, then the income tax return as filed by the appellant for the 1976 taxation year is correct and the appeal is to be allowed accordingly. However, if the income is not from an active business then the assessment as made is correct and the appeal is to be dismissed. The parties agree that all other requirements of section 125 of the Income Tax Act, RSC 1952, c 148 as amended, have been met.

The appellant was incorporated by Letters Patent pursuant to the laws of the Dominion of Canada on March 18, 1959 under the name of Chicago Blower (Canada) Ltd. By Supplementary Letters Patent dated April 18,1969, its name, Chicago Blower (Canada) Ltd, was changed to Transregent Holdings Ltd (hereinafter referred to as “Transregent”). The appellant was changed by further Supplementary Letters Patent from a public company to a private company. That authorization was given on April 30, 1974. By the first Supplementary Letters Patent, the original purposes and objects were expunged and replaced by the following objects:

(a) to purchase or otherwise acquire for investment, and to hold for investment, property, real and personal, of every kind and nature, and any estate or interest therein, and to manage and supervise such investment;

(b) to buy, sell, manufacture, assemble, install, import, export and otherwise deal in fans, blowers, furnaces, refrigerators, ventilating, air conditioning, cooling and heating equipment for commercial, industrial or domestic use and all kinds of filters, electronic or electrical or other power equipment, motors or devices connected or used in connection therewith.

The four individuals who were directors of the appellant in 1976 were by occupation, a chartered accountant, two civil engineers and a lawyer. Mr Martin, the lawyer, gave evidence indicating that, although a lawyer, he has been involved in construction. During World War II he was with the American army working on the Alaska Highway. He returned to Winnipeg and from 1953 on he spent the next ten years “in building houses and apartments, and in the commercial and industrial construction business.” After that, on his own or his family’s account, Mr Martin has been involved in the construction of apartment blocks and the construction and renovation of other types of properties.

The appellant, in the year in question, owned a parcel of land consisting of about 9.3 acres on Regent Avenue in Transcona, which is a suburb of Winnipeg, Manitoba. The size of the building on the property is about 47,000 square feet (covering less than half of the land) and there are facilities for the metal working operations which are conducted on the premises.

The property is leased to Greensteel Hydronics Ltd (hereinafter referred to as “Greensteel”). There are three buildings on the property; one containing the office and factory, another for storage and the third, I believe, plant and storage. The buildings on the property were put up in stages. The original plant was built in 1960, a manufacturing addition in 1967, and a further addition in 1974. There was, at the time of the hearing, a further addition under construction. The families and corporations who are shareholders of the appellant are also shareholders of Greensteel. None of these families is related to each other. The only tenant which the appellant has is Greensteel and, while there are interlocking shareholders between the landlord and the tenant, the rent to be paid is determined by obtaining the fair market value of the property through an appraisal. In 1977 there was an appraisal made by McKeag Realty Ltd of Winnipeg and they calculated that the annual rent to be paid should be $99,300 on an absolute net basis; that is, in addition to rent the tenant was to pay taxes, all utilities, insurance and all repairs. The lease for 1976 called for a rental of $71,500 and yet for the year, based on the financial statements, it was $96,500. All Mr Martin suggested was that the parties, as had happened before, felt with changing times the rent was not fair and adjusted it. Since the lease was a net net net lease, basically all costs in connection with the property, eg flower bed, landscaping, grass cutting, snow removal, painting and major roof repair jobs, were paid for by Greensteel but the supervision of that work was done by Transregent, which supervision was usually by three of the directors of Transregent including Mr Martin. The two other directors were also actively engaged in running the business of Greensteel. However their expertise as engineers was used when additions were being made to the appellant’s plant. The cost of the additions to the plant was paid for by the appellant. The lead time for an addition is three to four years. The planning for the addition under construction in 1979 started in 1975 or 1976. The directors of both the appellant and Greensteel were the same people, and matters between the two companies were usually discussed weekly. The directors of the appellant were all paid a fee for services performed. The company had a listed telephone number in the year in question. Mr Martin put in time and effort as far as the appellant was concerned especially when a construction project was planned and under way. He believes the two other directors who worked in the plant were also at the same time working for the appellant. There was not work every day on account of the appellant but time was spent every week in its offices.

The land now owned by the appellant was acquired about 1960 and it was then vacant land. The buildings were erected over the subsequent period. There has only been one tenant, Greensteel. The financial statements of the appellant were filed as exhibits and they disclosed that there were no full time employees, no operating expenses; eg office or telephone expenses, and all maintenance and repairs were paid for by the tenant. It could be there was an expense for an accountant, and there were fire insurance premiums paid. While the evidence indicated that, in spite of a three year lease, the rent was adjusted to suit facts during the currency of the lease, on cross-examination it appears the rent was constant in 1975 and 1976 at $96,500 and it was constant at another figure for the prior three years. The time and effort Mr Martin expended on behalf of the appellant was in a large part with problems, one of which was the digging by a subcontractor of a sewer, and another of which was a leaking roof and the hiring of a person to repair it, etc. and the supervision of the selection of a contractor.

With those facts as a background, counsel for the appellant submitted that the income earned by the appellant is from an active business and the appeal should be allowed. The respondent takes two positions on the same facts: firstly, he says that the income of the appellant is not from a business at all but rather it is income from property; and secondly, he says, if it is income from a business, it is not income from an active business.

Counsel for the appellant submitted that the income earned by the appellant was at least income from a business and not from property. In this respect he relied on the case of American Leaf Blending Co v Director- General of Inland Revenue, [1978] 3 All ER 1185, a decision of the Privy Council, as being a case not dissimilar in principle to this appeal. In that case the appellant had been carrying on a tobacco business for many years until the early 1960’s when it fell on hard times. In 1964 it ceased trading and rented out its building and warehouses to others and collected rent. In 1968, 1969 and 1970 it had profits which it wished to write off against prior year losses. According to law it could only reduce the profits by the amount of the losses if the profits were from a business. The Privy Council held that, while they were rents, they were the type of rent that constituted income from a source consisting of a business. At page 1189 of that report, Lord Diplock stated as follows:

In the case of a private individual it may well be that the mere receipts of rents from property that he owns raises no presumption that he is carrying on a business. In contrast, in their Lordships’ view, in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Where the gainful use to which a company’s property is put is letting it out for rent, their Lordships do not find it easy to envisage circumstances that are likely to arise in practice which would displace the prima facie inference that in doing so it was carrying on a business.

The carrying on of ‘business’, no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between. In the instant case, however, there was evidence before the Special Commissioners of activity in and about the letting of its premises by the company during each of the five years that had elapsed since it closed down its former tobacco business. There were three successive lettings of the warehouse negotiated with different tenants; there was the removal of the machinery from the factory area which made it available for use for storage and a separate letting of that area to a fresh tenant; and as recently as October 1968 there was the negotiation of a letting to a single tenant of both the factory area and the warehouse.

Counsel, relying on that case as well as the objects of the company as contained in the Supplementary Letters Patent, submitted that the income of the appellant is from a business and not from property. He continued then to submit that the income was from an active business and so within section 125 of the Income Tax Act.

With respect to the “active” aspect, counsel for the appellant referred to the case of Cosmopolitan Investments Co Ltd v MNR, [1974] CTC 2335; 74 DTC 1252, a judgment of Judge Flanigan when he was Chairman of this Board, and he quoted:

Section 125 of the new tax legislation of 1972, to which I am referring in this appeal, has given me a considerable amount of difficulty. It seems to me that the inclusion of the word “active” in the section really has done nothing but create a problem. One might say: either a company is carrying on a business, or it is not and, once it is found that it is, this implies that the company is actively engaged in doing this. Perhaps one should replace the words “carrying on” by the word “has” in order to show more clearly the significance of the qualification “active” as the opposite of “dormant” or even “stationary”. The business of a corporation, without any further adjective, could then be defined as a more or less permanent organization or arrangement of production factors as a potential source of income. Such an organization may be kept alive in name only, awaiting future reactivation, or be active. In introducing the small business deduction as an incentive to do business, the legislature had, in my opinion, this meaning of an “active business” in mind.

It is understandable that practitioners are looking for more precise guidelines which will be supported by the courts.

Mr Fien submitted that the inference seemed to be that if you have a source of income of a continuing nature you have an active business. This he continued seemed to be supported by the decision of Gibson, J in Her Majesty the Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115, and in this respect referred to pp 197 and 5122 respectively where Gibson, J States:

(For reasons that are stated later in this judgment, what is income from “a business other than an active business” must mean income from a business that is in an “absolute state of suspension”—see quotation from The Queen v Rockmore Investments Limited, that is, devoid of any quantum of business activity, but which has some asset which produces income.)

Counsel also referred to two other portions of the reasons of Gibson, J at pp 198-9 and 5123 respectively:

The question therefore, in attempting to ascertain such intention, is what quantum of activity must there be in a taxation year that gives rise to income that should be categorized as income from an “active business” within the meaning of section 125. Nowhere in the Income Tax Act is there an indicium of how much that quantum must be.

Accordingly, implementing this principle it must be assumed judicially, in interpreting the meaning of section 125 and its relationship with section 129 and with the whole scheme of the Income Tax Act, 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 carried on in Canada”.

Mr Fien stressed that, in the course of his reasons, Gibson, J frequently states “any business activity” causes the income produced to be from an active business. Counsel stated that not only was that judgment not appealed,

it has not been questioned by any court and has been followed by this Board in the appeal of Charwood Investments Limited v MNR, [1978]

CTC 2545; 78 DTC 1411. As to business activity of the appellant in the instant appeal it is noted, as counsel pointed out, that because of additions to the buildings the square footage of the buildings in 1960 of 16,000 had increased to 47,000 square feet, with a further addition under way in 1979. The cost of the real property rose from $253,000 in 1973 to $531,000 in 1976. While two of the directors of the appellant were employees of Greensteel

and on the premises in effect all the working day, they were still concerned with the appellant’s interest in the property. The fact that salaries were not paid nor were there large expenses should not determine the issue, but rather what effort or work was put in by the company or officers attending to the affairs and the business of the appellant. The directors were concerned at all times with the affairs of the appellant but there were periods when they did not have to actually do anything concerning the affairs of the appellant.

Counsel for the respondent commenced her submission by admitting that since the appellant was a corporation it might appear that any activity of the appellant is a business activity, and referred to the well-known Reasons of Duff, J (as he then was) in Anderson Logging Company v The King, [1925] SCR 45 at 56; [1917-27] CTC 198 at 207:

The sole raison d’etre of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.

Counsel continued and quoted from the decision of Noël, ACJ in Lois Hollinger v MNR, [1972] CTC 592; 73 DTC 5003, at pp 600 and 5008-9 respectively:

If income from property has any meaning at all, it can only mean the production of revenue from the use of such property which produces income without the active and extensive business-like intervention of its owner or someone on his behalf. I have in mind, for instance, property such as bonds or debentures or shares or real property which do not require the exertion of much activity or energy in order to produce the revenue.

Further reference was made to the decision of this Board in Smithers Plaza Ltd v MNR, [1975] CTC 2171, 75 DTC 137. That decision upheld the assessment of the Minister holding that the rentals (on the facts of that case) do not constitute a business. Paraphrasing from the case of Harry Walsh and Archie Robert Micay v MNR, [1965] CTC 478; 65 DTC 5293, counsel for the respondent submitted that what the appellant and/or its officers or directors did were activities ancillary to the ownership of the property itself and not a service to the tenant, although the tenant might enjoy the benefits thereof. In addition counsel questioned whether or not there was in this case any day-to-day activity by the appellant, and submitted that day to day there clearly was not and effectively reiterated that whatever the appellant did, since the lease was a net net net lease, was done not as a service to the tenant but related to the ownership of the property. As to the Cadboro Bay case, counsel submitted the facts in that case were clearly stronger than the facts in this case. There were seven tenants and seven leases in that case, while here there was one tenant with a three year lease, and even if in the early years the rent might have been renegotiated during the course of the lease, at least in the five years examined from the financial statements there was only one change in rental and that was when the new lease was executed. In addition in that case, as Gibson, J pointed out, services were supplied. While the appellant did have a telephone listing, it had no leasing or operating expenses and counsel also submitted it had no offices, no employees, no advertisements and no promotional work. As to the additions, while they would increase rent and income, they were a landlord activity and not a service to the tenant.

Counsel continued that while she submitted the income of the appellant is from property and not business, even if that income were from business it was not an active business. In the case of Morbane Developments Ltd v MNR, [1979] CTC 2794; 79 DTC 674, the Board held that the income of the appellant arising from a sale of land to the province of Ontario in 1973 was not income from an active business. The Chairman of this Board summarized the facts of this case at pp 2797-8 and 677 respectively and stated therein that the income was not from an active business. His summary is:

The fact that the appellant had no office, no staff and no telephone are not, in themselves, determinative of whether or not the appellant’s business was active. The facts, in my opinion, that are very much more indicative of the nature of the appellant’s business are that: the appellant, in the pertinent period, made but one purchase of land and did not renew its land inventory; that it did not actively advertise (other than by a sign on the land) land for sale; and, that it sold land to only one customer, and from 1960 to 1969 had engaged in an average of less than three sales a year. Considering all of the facts together, I cannot conclude that the appellant was carrying on an active business from 1960 to 1969. The evidence is clear to me that the appellant was in fact holding land and acting as a land bank, disposing of its principal asset as required by its only customer. An average of three sales per year cannot, in my opinion, be considered as an active business within the meaning of Section 125. The appellant’s only other income was rent from the lease of an industrial building which, as I understand it, was considered by the Minister as income from an inactive business.

It should be noted that this decision is under appeal.

I must decide whether or not the income of the appellant for the 1976 taxation year was active business income. Were I to conclude that the income of the appellant for that year was income from property I would then dismiss the appeal as with such a finding it would be impossible for that same income to be income from an active business. From a reading of subsection 125(1) of the Income Tax Act, RSC 1952, c 148 as amended, and its use of the word “income” and the phrase “an active business”, it is obviously contemplated that the income from some businesses is not income from an active business.

Accepting, but without deciding, that the income of the appellant is from a business, I then must decide whether or not it was from an active business. It would appear at first reading that, from the statements made by Gibson, J in the Cadboro Bay appeal, Transregent’s income is income from an active business. However, the facts of the two cases must be examined.

As to the Cadboro Bay case (supra), Gibson, J sets forth the salient facts at pp 187-8 and 5115 respectively:

It was established in the proof that the defendant private corporation in its 1972 taxation year earned income. It was a landlord. It received rental income from its tenants. It operated a small shopping centre. There were seven separate tenants. Only one of them was what is sometimes referred to as a “Triple A’’ tenant, namely, a Canadian bank. The defendant corporation by its principal officer negotiated all the leases, took care of all the complaints from the tenants, arranged for the maintenance of the shopping centre and did all the things that were necessary to “run” the shopping centre. The evidence was that in this case it required some activity on the part of the defendant almost daily. On the facts the rental income of the defendant was in the main for use of the property but also to a much lesser extent it was for services and other things supplied, such as heat, repairs etc, by the defendant.

The facts in this case as I find them are: there was only one tenant; the landlord did not have any concern with the complaints of the tenant; nor did it arrange for the maintenance of the property; nor did it do anything with respect to the running of the property except that, those things which were to be done by the tenant at the tenant’s expense, were supervised by the landlord. As far as daily activity was concerned, while there was evidence that officers of the appellant did things on the property, eg supervise snow removal, lawn cutting, and the repairing of the roof after finding a workman to do so, that activity was much removed from “almost daily”. I doubt that these activities could be held to be almost “monthly”. As I view the facts of this appeal, it is entirely different from the facts in the Cadboro Bay case.

The result is that, assuming but not deciding that the income the appellant earned in 1976 was income from a business, I am of the view that it was not income from an active business. The result is that judgment will go dismissing the appellant’s appeal.

Appeal dismissed.