Lamarre T.C.J.:
These are appeals under the informal procedure from assessments made by the Minister of National Revenue (“Minister”) under the Income Tax Act (“Act”) for the appellant’s 1986, 1987, 1988 and 1989 taxation years. In so assessing the appellant, the Minister disallowed capital cost allowance on rental properties (class 3 assets) for each of the taxation years at issue, the amounts involved being $23,042, $17,907, $12,962 and $10,460 respectively. The Minister relied on the following assumptions of fact:
97-219(T)1 (L536/R4378/T2/BT2) test_marked_paragraph_end (3624) 0.769 0339_4701_4805
(a) During its 1986 taxation year, the Appellant’s gross income was as fol- lows:
| Construction Management | $75,678 |
| Management Fees - Rideau River | 19,923 |
| Homes | |
| Commission earned | 8,089 |
| Interest earned | 4,146 |
| Expenses recovered | 10,623 |
| $118,459 |
(b) During its 1986 taxation year, the Appellant also reported the following rental losses from the following joint ventures:
| Share of loss - Rideau River Homes | $27,454 |
| Share of loss - Blue Heron Shopping | 115,568 |
| Centre | |
(c) At all material times, the Appellant was a 25% partner in the joint venture “Blue Heron Shopping Centre”;
(d) At all material times, the Appellant was a 33 1/3% partner in the joint venture “Rideau River Homes” (“Rideau River”);
(e) During the Appellant’s 1986 taxation year, its principal business was earning management fees.
(f) During the Appellant’s 1986 taxation year, it was not a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it.
(g) During the 1986 taxation year “Rideau River” earned rental income and reported a rental loss before capital cost allowance as follows:
| Rideau River | Appellant’s Share |
| Gross rental | $482,013 | $ 160,671 |
| Net loss | 82,361 | 27,454 |
(h) The Appellant increased its losses from the “Rideau River” operations by deducting capital cost allowance in the amount of $23,042.
(1) The Appellant’s claim for capital cost allowance pertaining to the “Rideau River” operations must be calculated in accordance with subsection 1100(11) of the Income Tax Regulations (the “Regulations’’).
97-894(IT)I (L504/R4352/T2/BT2) test_marked_paragraph_end (4018) 0.852 0340_3939_4069
a) The Appellant’s gross income for its 1987, 1988 and 1989 taxation years is shown in Exhibit A below:
b) The Appellant also reported the following rental losses from the following joint ventures:
| 1987 | 1988 | 1989 | |
| Share of loss - Rideau River | $114,464 | $ 66,419 | $ 52,307 |
| Homes | |
| Share of loss - Blue Heron | 138,046 | 103,534 | NIL |
c) At all material times, the Appellant was a 25% partner in the joint venture “Blue Heron Shopping Centre”:
d) At all material times, the Appellant was a 33 1/3% partner in the joint venture “Rideau River Homes” (“Rideau River”):
e) During the Appellant’s 1987, 1988 and 1989 taxation years, its principal business was earning management fees;
f) During the Appellant’s 1987, 1988 and 1989 taxation years, it was not a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it:
g) For each of the taxation years 1987, 1988 and 1989, “Rideau River” earned rental income and reported a rental loss before capital cost allowance. This information is shown in Exhibit B below:
h) The Appellant increased its losses from the “Rideau River” operations by deducting capital cost allowance in the amounts of $17,907, $12,962 and $10,460 for each of the taxation years 1987, 1988 and 1989 respectively;
i) The Appellant’s claim for capital cost allowance pertaining to its “Rideau River” operations must be calculated in accordance with subsection l 100(1 1) of the Income Tax Regulations (the “Regulations’’).
Exhibit “A”
For each of the taxation years, 1987, 1988 & 1989, the Appellant’s gross income was as follows:
| 1987 | 1988 | 1989 |
| Sale of real property | $1,550,000 | - | - |
| Capital gain - sale of unit in | 144,174 | $ 242,381 | $ 8.190 |
| joint venture | |
| Management fees and com | 63,340 | 101,555 | 196,277 |
| missions | |
| Interest earned | 46,338 | 43,341 | 40,366 |
| Gain on sale of securities | 37,021 | - | - |
| Dividends | 1,355 | 3,527 | - |
| Rentals | 6,639 | 13,515 | 12,051 |
| Expenses recovered | 4,000 | 5,000 | 5,322 |
| Total Gross Income | $1,852,867 | $ 409,319 | $ 262,206 |
Exhibit “B”
During each of the taxation years 1987, 1988 and 1989, Rideau River earned rental income and reported a rental loss before capital cost allowance as follows:
| Rideau River | Appellant’s Share |
| 1987 | |
| Gross Rental | $ 390,228 | $ 130,076 |
| Net Loss | 343,393 | 114,464 |
| 1988 | |
| Gross Rental | $ 279,102 | $ 93,034 |
| Net Loss | 199,258 | 66,419 |
| 1989 | |
| Gross Rental | $ 278,734 | $ 92,911 |
| Net Loss | 156,922 | 52,307 |
With respect to appeal number 97-219(IT)I, the agent for the appellant has admitted paragraphs 8(a), (b), (g) and (h). He has also admitted paragraphs 8(c) and (d), stating however that the appellant was not a partner in the joint ventures but rather held a co-tenancy. With respect to appeal number 97- 894(IT)I, the agent for the appellant has admitted paragraphs (a), (b), (c), (d), (g) and (h) subject to the same comments.
The Minister takes the position that the appellant was not a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it, with the consequence that no part of its capital cost allowance pertaining to its “Rideau River” operations is deductible pursuant to paragraph 20(1)(a) of the Act and subsection 1100(11) of the Income Tax Regulations ^Regulations").
Counsel for the respondent is of the opinion that the fact that the appellant has invested in the two joint ventures either in partnership or in cotenancy is not determinative of the issue. Counsel submits that during the relevant years the appellant was a diversified corporation that operated different businesses. According to counsel, the appellant carried on four different businesses: one consisting in earning management fees, one consisting In earning commissions on rentals, one consisting in selling real property and one consisting in earning rental income. Counsel then says that the rental business could not be viewed as the appellant’s principal business as this source of income produced a negative impact on total income whereas the other income (management fees and commissions) had a positive impact on total income. In so stating, she relies on the case of Combined Appraisers & Consultants Co. v. Minister of National Revenue (1983), 83 D.T.C. 543 (T.C.C.). She further submits that the profits on the different sales do not qualify as business income as they were the result of an investment and were reported as capital gains in the appellant’s tax return. Therefore, these sources of income should not be taken into consideration in determining which is the principal business of the appellant.
The appellant takes the position that it qualifies under subsection 1100(12) of the Regulations as a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it and that it is therefore entitled to increase its losses on the operation of its rental properties by deducting capital cost allowance, which it could not do under subsection 1100(11) of the Regulations. The agent for the appellant is of the view that the appellant operates only one business, which is the leasing, rental, development and sale of real property that it owned, and that the applicable provision is consequently subsection 1100(12).
Mr. Lewis McDonald, president of the appellant, testified that the appellant started building the Rideau River homes as townhouses in the 1960s and developed them. These houses were initially built for investment purposes. They were rented out until they began being sold in 1987 and 1988, when they were converted to condominiums.
The appellant held a one-third interest in the joint venture which owned the Rideau River homes. The profits on the sale of the townhouses were declared by the appellant as capital gains.
Mr. McDonald said that the management fees and the commissions were paid to the appellant for its services in managing and renting the homes.
The construction management fees were received by the appellant in relation to the construction of a six-million-dollar building (the Blue Heron Shopping Centre) in which the appellant had a 25 percent interest. They were paid to the appellant as a development fee to administer the construction.
The sale of real property in 1987 for $1,550,000 related to one property on Bay Street in Ottawa, which appeared to be the only property on the appellant’s balance sheet. The profit was treated in the financial statements as a capital gain.
Analysis (L4/R4928/T0/BT0) test_marked_paragraph_end (606) 1.033 0343_4499_4667
Subsections 1100( 11 ) and 1100( 12) of the Regulations read as follows:
Rental Properties (L508/R3950/T2/BT2) test_linespace (240>217.60) 0.847 0343_5029_5163
(11) Notwithstanding subsection (1), in no case shall the aggregate of deductions. each of which is a deduction in respect of property of a prescribed class owned by a taxpayer that includes rental property owned by him, otherwise allowed to the taxpayer by virtue of subsection (1) in computing his income for a taxation year, exceed the amount, if any, by which
(a) the aggregate of amounts each of which is
(i) his income for the year from renting or leasing a rental property owned by him, computed without regard to paragraph 20(1 (a) of the Act, or
(11) the income of a partnership for the year from renting or leasing a rental property of the partnership, to the extent of the taxpayer’s share of such income,
exceeds
(b) the aggregate of amounts each of which is
(1) his loss for the year from renting or leasing a rental property owned by him, computed without regard to paragraph 20(1 (a) of the Act, or
(ii) the loss of a partnership for the year from renting or leasing a rental property of the partnership, to the extent of the taxpayer’s share of such loss.
(12) Subject to subsection (13), subsection (11) does not apply in respect of a taxation year of a taxpayer that was, throughout the year,
(a) a life insurance corporation, or a corporation whose principal business was the leasing, rental, development or sale, or any combination thereof, of real property owned by it; or
(b) a partnership each member of which was a corporation described in paragraph (a).
The issue here is whether the appellant’s principal business was, throughout the years in question, the leasing, rental, development or sale, or any combination thereof, of real property owned by it. If the answer is affirmative, the appellant will be able to offset against its income from other sources the loss on the operation of its rental properties created by the adding of capital cost allowance.
To determine what is the principal business of a corporation, a number of criteria may be examined in relation to each of the corporation’s activities. For example, profits, volume and value of gross sales or transactions, assets, capital employed and the time, attention and effort expended by the employees, agents or officers of the corporation (see Combined Appraisers & Consultants Co. v. Minister of National Revenue, and Thomas Co. (Niagara) v. Minister of National Revenue (1984), 84 D.T.C. 1641 (T.C.C.).
The evidence in the present case is very limited. It is virtually reduced to the income figures reported in the Reply to the Notice of Appeal and accepted by the appellant as reflecting what is shown in its financial statements. The earnings from the appellant’s leasing activities amounted to $6,639 in 1987, $13,515 in 1988 and $12,051 in 1989. (See Exhibit A to the Reply to Notice of Appeal 97-894(IT)I). The appellant also shared in a proportion of one third in the rental losses incurred on the Rideau River homes. The appellant’s share of gross rentals on these houses amounted to $160,671 in 1986, $130,076 in 1987, $93,034 in 1988 and $92,911 in 1989. (See paragraph 8(g) of the Reply to the Notice of Appeal 97-219(IT)I and Exhibit B to the Reply to the Notice of Appeal 97-894(IT)I). The appellant’s total gross income for each year was $118,459 in 1986, $1,852,867 in 1987, $409,319 in 1988 and $262,206 in 1989.
It is not contested that the capital gains reported on the sale of the property on Bay Street, on the sale of units of the Rideau River homes and on the sale of securities, as well as the dividends and interest, are investment income. Thus, they are not to be taken into account in the computation of the appellant’s business income. Therefore, the appellant’s business income would come solely from construction management, from management fees for the Rideau River homes, from commissions on rentals, from expenses recovered and from rentals.
Total gross business income would amount roughly to $105,000 in 1986, $75,000 in 1987, $120,000 in 1988 and $215,000 in 1989. If we add the appellant’s share of gross rentals on the Rideau River homes to other rentals, we find that gross rental income was higher than gross income from construction management, management fees and commissions in 1986 and 1987, approximately equal thereto in 1988, and much lower in 1989. As was said by Judge Christie of this Court in the Thomas Co. (Niagara) case, supra (at p. 1643), status in relation to subsection 1100(12) can, depending on the facts, shift from one taxation year to another.
From the balance sheet in the financial statements, we notice a fall in the appellant’s equity in the Rideau River rental properties and land held for development purposes from approximately $830,000 in 1986 to $153,000 in 1989.
Furthermore, the evidence did not reveal how much time, attention and effort was expended by the appellant’s employees in the rental activities. According to Mr. McDonald, the appellant had only one or few employees and he considered all the operations as being only one business.
On this latter point, I do not think I can conclude that all the appellant’s operations consisted in only one business. The joint venture (of which the appellant held a one-third share) owning the Rideau River homes, and that in which the appellant had a 25 percent interest, owning the Blue Heron Shopping Centre, could have hired an independent entity to handle the management function and to administer rentals. It was decided, however, that the appellant would do it. Its income from management services and the commissions received on rentals should therefore be considered as coming from a different source of income than the rentals.
Accordingly, the income from these sources does not constitute income from leasing, rental, development or sale, or any combination thereof, of real property within the meaning of subsection 1100(12) of the Regulations.
The only tangible evidence I have for the purposes of determining whether the appellant’s principal business during the relevant years was the leasing or rental of property consists of the gross income from those activities, the net losses or profits from those same activities, and the assets of the appellant from which the rental income flowed. Taking into account what I have summarized above, I am of the opinion that in 1986, 1987 and 1988, the appellant’s principal business can be characterized as leasing and rental.
Indeed, during those years, even if it is true that the appellant did not generate profits from its rental activities, these activities certainly were important judging from the gross income figures and the considerable assets devoted to rentals.
Therefore, I am of the opinion that the appellant was a corporation described in subsection 1100(12) of the Regulations for the above-mentioned years. However, the same cannot be inferred from the evidence for the 1989 taxation year.
In conclusion, the appeals are allowed for the 1986, 1987 and 1988 taxation years on the basis that the appellant is entitled to deduct capital cost allowance in the amounts of $23,042, $17,907 and $12,962 in respect of the Rideau River rental operations for each of these taxation years respectively, pursuant to subsection 1 100(12) of the Regulations.
The appeal is dismissed for the 1989 taxation year and the appellant is not entitled to deduct capital cost allowance in the amount of $10,460 in respect of the Rideau River rental operations for that year, pursuant to subsection I 100( 11 ) of the Regulations.
Appeal allowed in part.
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