Delmer
E
Taylor:—This
appeal
was
heard
December
6,1978,
at
the
City
of
London,
Ontario,
and
deals
with
income
tax
assessments
in
which
the
Minister
of
National
Revenue
disallowed
amounts
of
$16,746.81
and
$109,186.95
for
the
taxation
years
1973
and
1974
respectively,
claimed
by
the
appellant
as
capital
cost
allowance
(cca)
on
certain
real
property.
The
sole
point
in
issue
is
the
classification
of
a
building
owned
by
the
appellant
at
60
James
Street,
in
the
City
of
St
Catharines,
in
the
County
of
Lincoln,
in
the
Province
of
Ontario,
as
investment
property
or
as
office
premises.
In
the
reply
to
notice
of
appeal,
the
respondent
relied,
inter
alia,
upon
subsection
9(1),
and
paragraph
20(1)(a)
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63
and
amendments
thereto,
and
upon
subsections
1100(11)
and
1100(14)
of
the
Income
Tax
Regulations.
Facts
The
assessments
were
issued
to
The
Lincoln
Trust
and
Savings
Company
(hereinafter
referred
to
as
“Lincoln”
or
“the
Company”)
which,
during
the
taxation
years
under
appeal,
carried
on
the
business
of
a
trust
company
in
the
Province
of
Ontario.
Lincoln
was
amalgamated
with
The
Canada
Trust
Company
under
the
name
“The
Canada
Trust
Company”
with
effect
from
December
31,
1976.
Contentions
The
following
represents
the
Company’s
position
as
portrayed
in
the
notice
of
appeal:
—The
building
which
is
the
subject
of
this
dispute
was
constructed
by
Lincoln
for
the
purposes
of
its
head
office
and
main
branch
during
its
1973
taxation
year.
At
the
time
of
incorporation,
the
head
office
of
Lincoln
was
established
in
the
City
of
Niagara
Falls,
in
the
County
of
Welland,
in
the
Province
of
Ontario.
This
was
changed
by
a
by-law
approved
by
the
shareholders
of
Lincoln
on
March
1,
1974.
—The
building
was
constructed
for
future
expansion
with
a
view
to
all
of
the
said
building
being
used
by
Lincoln
for
the
purposes
of
its
head
office.
As
evidence
of
this,
there
was
constructed
an
extra
vault
in
the
basement
of
the
said
building,
the
building
was
decorated
in
a
manner
appropriate
to
the
head
office
of
a
financial
institution
and
leases
written
with
respect
to
the
said
building
were
either
written
on
a
five-year
term
basis
or
provided
for
the
termination
at
the
end
of
five
years.
—
For
reasons
of
economic
feasibility,
it
was
decided
necessary
and
in
the
best
interests
of
Lincoln
to
construct
a
building
which
was
more
than
adequate
for
the
immediate
needs
of
Lincoln.
Due
to
the
high
cost
of
land,
it
was
necessary
to
construct
a
five-floor
building
for
the
project
to
be
viable
economically.
—
Lincoln
had
expanded
rapidly
since
its
incorporation
and
it
considered
that
a
prestigious
head
office
building
in
a
prime
location
would
result
in
increased
growth.
—
At
the
time
of
approval
of
the
construction
drawings
and
at
all
times
during
its
1973
and
1974
taxation
years,
Lincoln
expected
that
its
rapid
growth
would
soon
require
it
to
occupy
the
entire
building
for
the
purposes
of
its
own
head
office.
—The
gross
rental
income
from
third
parties
that
rented
space
in
the
building
was
less
than
$5,000
during
the
1974
taxation
year
of
Lincoln
and
less
than
$125,000
during
the
1975
taxation
year
of
Lincoln.
Including
the
internal
imputed
rent
to
the
divisions
of
Lincoln,
the
gross
rental
revenue
during
the
year
the
building
was
first
fully
occupied,
1976,
did
not
exceed
$300,000.
This
gross
rental
amount
is
clearly
insignificant
when
compared
with
gross
income
of
$10,700,000
from
trust
operations
of
Lincoln
during
its
1974
taxation
year
and
$15,400,000
during
its
1975
taxation
year.
—As
a
form
of
investment,
the
building
shows
a
rate
of
return
which
is
most
unfavourable
when
compared
to
other
forms
of
investment.
The
existence
of
the
said
building
cannot
be
justified
as
an
investment
in
rental
property
but
only
as
an
investment
in
property
which
is
used
to
earn
income
from
trust
company
operations.
—The
appearance
of
the
building
clearly
identifies
the
property
as
being
that
of
Lincoln
and
projects
the
image
not
of
a
rental
property
but
rather
the
image
of
the
Lincoln
head
office
building.
The
official
name
of
the
building
is
“Lincoln
Trust
House’’
and
this
name
appeared
over
the
main
entranceway
to
the
building
during
the
taxation
years
under
appeal.
—The
building
was
not
used
by
Lincoln
principally
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent
but
was
used
primarily
as
a
head
office
building
and
the
rental
income
received
was
a
distinctly
secondary
part
of
the
purpose
of
the
said
building.
—
During
the
taxation
years
under
appeal,
Lincoln
and
The
Canada
Trust
Company
were
acting
entirely
at
arm’s
length
as
competitors
in
the
trust
company
and
did
not
become
associated
until
1976,
shortly
before
the
amalgamation
mentioned
above.
The
respondent
asserted
that:
—The
total
square
footage
of
the
building
available
for
occupancy
is
approximately
55,000
square
feet
of
which
approximately
25,000
square
feet
had
been
leased
to
outside
tenants
at
the
end
of
the
1974
taxation
year
of
Lincoln;
—The
St
Catharines
branch
and
head
office
of
Lincoln
at
all
material
times,
occupied
approximately
18,000
square
feet
of
the
building;
—
Many
of
the
leases
between
Lincoln
and
outside
tenants
are
of
a
five-year
duration
with
renewal
privileges;
—The
building
is
a
rental
property
as
it
was
used
by
Lincoln
principally
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent.
Evidence
Reference
was
made
to
the
relevant
portion
of
Regulation
1100(14)
of
the
Income
Tax
Act
as
it
was
in
force
during
1973
and
1974:
For
the
purposes
of
this
section
and
section
1101,
“rental
property”
of
a
taxpayer
or
a
partnership
means
(a)
a
building
owned
by
the
taxpayer
or
partnership,
whether
jointly
with
another
person
or
otherwise,
or
(b)
leasehold
interest
in
real
property,
if
the
leasehold
interest
is
property
of
class
3,
6
or
13
and
is
owned
by
the
taxpayer
or
partnership,
if,
in
the
taxation
year
in
respect
of
which
the
expression
is
being
applied
the
property
was
used
by
the
taxpayer
or
the
partnership
principally
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent,
.
..
Mr
Leo
Sauve,
now
a
Vice-President
with
Canada
Trust
Company,
had
been
President
of
Lincoln
during
the
years
under
appeal.
mr
Sauve
is
a
chartered
accountant
by
profession
and
had
been
in
public
practice
until
1964
with
the
national
firm
of
chartered
accountants,
Winspear,
Higgins,
Stevenson
&
Co,
in
their
Niagara
Falls,
Ontario
office.
In
that
year
he
joined
Lincoln,
in
fact
he
became
the
first
employee,
and
in
1969
he
was
made
President
of
the
Company.
In
that
capacity
he
supervised
the
company
operations,
including
its
expansion
into
many
of
the
Niagara
Peninsula
municipalities.
The
head
office
had
been
originally
established
in
Niagara
Falls,
Ont,
but
the
prospect
of
relocating
the
head
office
to
St
Catharines,
due
to
the
geography
of
the
area
and
the
greater
ease
with
which
the
surrounding
municipalities
could
be
serviced
and
managed,
had
always
existed.
This
became
more
pressing
in
the
years
relevant
to
this
appeal,
due
to
the
fact
that
the
Niagara
Falls
building
was
no
longer
large
enough
for
the
head
office
requirements.
The
necessary
by-law
had
been
approved
in
March
of
1974
changing
the
head
office
from
Niagara
Falls
to
St
Catharines,
and
when
the
entire
top
floor
was
occupied
for
this
purpose
on
completion
of
construction,
it
was
furnished
and
appointed
in
a
manner
suitable
to
such
an
establishment.
Counsel
for
the
appellant,
with
the
agreement
of
the
Minister’s
counsel,
filed
with
the
Board
a
document
(identified
as
Exhibit
A-3)
containing
excerpts
from
several
meetings
of
the
Board
of
Directors
of
Lincoln.
The
following
extracts
were
specifically
noted
by
counsel
(italics
therein
are
mine):
November
1,
1972
ST
CATHARINES
PROPERTY:
Mr
Sauve
showed
the
Board
a
series
of
sketches
prepared
by
the
Architect
depicting
the
proposed
design
of
the
St
Catharines
building
at
the
corner
of
King
and
James
Streets.
Photo-copies
of
the
sketches
presented
are
attached
to
these
minutes.
The
proposed
building
would
be
six
storeys
in
height
with
a
total
net
rentable
area
of
41,646
square
feet
and
would
also
provide
an
underground
parking
garage
of
14,794
square
feet.
The
designs
as
presented
were
recommended
by
the
Building
Committee
for
acceptance
by
the
Board.
On
Motion
duly
made,
seconded
and
unanimously
carried,
the
concept
and
design
for
the
St
Catharines
building
was
approved
as
presented.
Mr
Sauve
then
discussed
some
initial
cost
factors
that
he
had
prepared.
These
cost
factors
indicated
the
total
dollar
cost
for
the
proposed
St
Catharines
building
including
the
land
and
also
the
BP
Oil
site
for
parking
would
be
$2,100,000.
Applying
various
factors
for
rentals,
etc,
the
return
on
our
investment
under
the
best
of
circumstances
is
indicated
at
7.71%
of
cost.
This
is
not
a
satisfactory
return
and
Mr
Sauve
expressed
a
desire
to
go
into
more
detail
on
the
costs
and
to
provide
at
the
next
meeting
estimates
that
would
be
prepared
from
more
clearly
defined
costs.
December
6,
1972
REPORT
ON
PROGRESS
ON
WELLAND
AND
ST
CATHARINES
BLDGS:
Mr
D
Chapman
of
Donald
N
Chapman
and
Associates—Architects,
was
invited
into
the
meeting
to
review
the
progress
of
the
St
Catharines
building.
Mr
Chapman
reported
to
the
Board
that
the
boring
samples
taken
on
the
St
Catharines
site
indicated
that
there
was
ten
feet
of
fill
and
six
feet
of
crust,
and
then
seventy-five
feet
of
nothing
solid.
In
order
to
proceed
with
the
present
building
design
which
has
underground
parking,
it
will
be
necessary
to
sink
piles
down
to
solid
ground
and
this
could
add
an
estimated
$70,000
in
cost
to
the
building.
Mr
Chapman
then
advised
the
Board
that
his
office
had
looked
into
various
alternatives
in
order
to
avoid
the
cost
of
the
piles.
He
then
presented
drawings
to
the
meeting
showing
a
proposal
for
putting
parking
at
the
rear
of
the
building
which
would
allow
for
two
rows
of
cars
on
each
of
two
levels,
with
twenty-two
cars
on
each
level.
This
design
would
lessen
the
area
for
rental
on
the
ground
floor
but
all
upper
floors
remain
the
same,
however,
Mr
Chapman
also
indicated
on
his
drawings
how
we
would
be
able
to
build
at
the
rear
to
provide
additional
rental
space.
On
motion
duly
made,
seconded
an
unanimously
carried,
Mr
Chapman
was
instructed
to
proceed
along
the
lines
that
he
had
presented
and
to
bring
back
further
designs
for
approval.
SEE
Building
Committee
Meeting
of
January
12,
1973.
January
24,
1973
ST
CATHARINES
BUILDING:
Mr
Donald
N
Chapman,
the
architect
for
the
St
Catharines
building
joined
the
meeting
to
give
his
report.
Mr
Chapman
reviewed
the
progress
to
date
covering
the
problems
that
we
have
encountered
with
the
site,
describing
the
proposed
building
and
showing
a
model
thereof
utilizing
bronzed
mirrored
glass
as
the
main
exterior.
He
pointed
out
that
the
new
design
provided
excellent
prime
rental
space
along
both
King
and
James
Streets.
Another
feature
of
the
building
was
the
ground
floor
with
a
sixteen-foot-high
ceiling.
The
directors
studied
the
model
and
asked
Mr
Chapman
a
number
of
questions
concerning
the
design
of
the
building.
After
Mr
Chapman
had
left
the
meeting,
Mr
Sauve
gave
the
report
from
the
Building
Committee.
He
indicated
that
initial
cost
figures
produced
by
the
Project
Manager
indicated
a
cost
of
$1,512,000
exclusive
of
architect
fees,
interest,
land
costs
and
contingencies.
Including
these
items
Mr
Sauve’s
estimate
brought
the
cost
up
to
$2,024,000
which
would
provide
a
return
on
a
cash
flow
basis
of
9.34%.
February
28,
1973
ST
CATHARINES
BUILDING:
Mr
Sauve
reported
that
the
work
on
plans
for
the
St
Catharines
building
had
been
temporarily
halted
until
an
assessment
could
be
made
concerning
the
possibility
of
renting
a
substantial
amount
of
space
to
the
Bell
Telephone
Company.
If
space
is
rented
to
the
Bell
Company
then
it
is
conceivable
that
the
lightwell
at
the
rear
of
the
building
would
be
closed
in
to
provide
additional
rental
space,
and
also
that
it
would
make
it
feasible
with
a
prime
tenant
such
as
Bell,
to
construct
a
five-storey
building.
It
is
imperative
that
an
early
decision
be
made
in
this
matter
and
figures
will
be
developed
immediately
so
that
a
minimum
of
delay
will
be
experienced.
March
28,
1973
ST
CATHARINES
BUILDING:
Mr
Sauve
discussed
the
background
and
considerations
in
the
construction
of
our
St
Catharines
building.
He
discussed
the
rental
possibilities
with
Bell
Telephone
in
that
they
wanted
considerable
space
and
would
solve
the
major
portion
of
our
rental
problems
if
we
could
obtain
them
as
a
tenant.
However,
he
pointed
out
that
they
would
not
have
an
answer
for
us
for
perhaps
four
or
five
weeks
and
that
to
await
this
decision
would
cause
delays
which
are
unwarranted.
The
economics
of
building
a
five-storey
building
and
enclosing
the
light
well
at
the
rear
were
discussed
in
comparison
with
the
previously
approved
plan
for
four
stories.
It
was
pointed
out
that
the
incremental
cost
of
the
five-storey
building
concept
did
not
create
a
serious
cost
exposure
and
that
advantages
to
be
gained
in
constructing
a
building
in
this
manner
would
certainly
outweigh
the
additional
cost
exposure.
It
was
explained
that
there
was
urgency
in
getting
underway
because
of
the
competition
for
Bell
as
a
tenant
from
the
owners
of
two
other
buildings
in
the
downtown
section.
On
motion
duly
made,
seconded
and
unanimously
carried,
the
recommendation
of
the
Executive
Committee
was
accepted
and
it
was
resolved
to
proceed
with
the
building
in
St
Catharines
on
the
basis
of
five
storeys
and
on
the
basis
of
enclosing
the
light
well
at
the
rear
to
provide
additional
floor
space.
April
25,
1973
ST
CATHARINES
BUILDING:
Construction:
Mr
Sauve
advised
the
meeting
that
the
cost
considerations
have
all
been
determined
and
for
a
building
five
stories
high
and
with
the
rear
lightwells
filled
in,
the
estimated
cost
of
construction
would
be
$1,785,346.
The
Building
Committee
has
thoroughly
discussed
the
costs
with
Mr
Bignucolo
and
are
satisfied
that
they
are
reasonable.
Also,
Mr
Bignucolo
has
indicated
that
he
would
be
prepared
to
enter
into
a
contract
to
construct
the
building
at
a
price
that
will
not
exceed
the
foregoing
estimate.
The
Building
Committee
recommended
to
the
Board
that
we
enter
into
such
a
contract
with
Mr
Bignucolo
and
also
in
order
to
provide
an
incentive
to
reduce
the
costs,
Mr
Bignucolo’s
firm
should
be
allowed
25%
of
any
reduction
in
the
guaranteed
contract
price.
When
drawing
the
contract
with
Mr
Bignucolo,
care
is
to
be
taken
to
completely
define
those
costs
that
are,
or
are
not
included,
and
to
have
a
clear
understanding
of
what
will
constitute
a
savings
from
the
guaranteed
price.
By
motion
duly
made,
seconded
and
unanimously
carried,
it
was
resolved
that
a
contract
be
entered
into
with
A
Bignucolo
and
Sons
Limited
to
construct
the
basic
building
at
James
and
King
Streets,
in
St
Catharines,
at
a
cost
not
to
exceed
$1,785,346
with
25%
of
any
savings
below
this
figure
to
be
awarded
to
the
contractor.
Leasing:
Mr
Sauve
advised
than
an
answer
would
not
be
forthcoming
from
Bell
Telephone
until
the
end
of
June.
We
have
submitted,
at
Bell’s
request,
a
proposal
for
a
twenty-year
lease
as
opposed
to
the
ten-year
proposal
originally
submitted.
ORDER-IN-COUNCIL,
ST
CATHARINES
BUILDING:
Mr
Sauve
explained
the
regulations
concerning
the
requirements
to
obtain
an
Order-in-Council
for
a
trust
company
to
construct
a
building
larger
than
is
required
for
its
own
use.
On
motion
duly
made,
seconded
and
unanimously
carried,
It
was
Resolved
to
apply
for
the
necessary
Order-in-Council
for
the
construction
of
the
St
Catharines
Building.
June
6,
1973
ST
CATHARINES
BUILDING:
Financing:
Mr
Sauve
reported
that
he
was
able
to
arrange
financing
through
Bankers
Securities
for
a
mortgage
with
the
CBC
Pension
Fund
in
the
amount
of
$1,700,000
at
9%
for
a
20
year
term
with
a
30
year
amortization.
An
important
factor
in
the
mortgage
is
that
there
is
no
rental
achievement
clause.
Press
Release
and
Ground
Breaking:
Mr
Sauve
explained
that
we
were
delayed
in
starting
the
construction
of
the
St
Catharines
building
due
to
the
fact
that
the
City
of
St
Catharines
would
not
issue
a
Building
Permit
because
of
concern
regarding
the
height
of
our
building
compared
to
adjacent
buildings
whereby
additional
snow
load
problems
may
exist
for
the
lower
buildings
and
the
City
wants
to
be
sure
that
they
are
not
enjoined
in
any
future
legal
proceedings
should
any
problems
develop.
The
matter
is
in
the
hands
of
our
Lawyer
who
will
resolve
it
as
quickly
as
possible,
keeping
in
mind
that
we
want
to
retain
a
good
relationship
with
the
Building
Inspector.
An
invitation
list
is
being
developed
concerning
the
ground
breaking
ceremony
and
it
is
to
be
hoped
that
we
may
involve
the
Mayor
of
St
Catharines
in
a
prominent
role.
An
entire
program
of
press
releases
is
being
developed
so
that
the
story
of
our
building
will
progress
along
with
the
construction
of
the
building.
JANUARY
12,
1973—BUILDING
COMMITTEE
MEETING
ST
CATHARINES
BUILDING:
The
architects
presented
a
model
for
the
proposed
St
Catharines
building.
This
model
was
for
a
four-storey
building
with
mirrored
glass
and
Mr
Bignucolo
projected
that
the
cost
of
this
building
would
be
$1,512,000
which
included
the
project
manager’s
fee.
Mr
Bignucolo
indicated
that
all
factors
had
been
taken
into
consideration
including
an
allowance
for
increased
labour
costs.
The
interior
finishes
were
standard
and
any
special
finishes
would
increase
costs
accordingly.
Also,
each
floor
was
costed
on
the
basis
of
the
shell
only
with
no
partitions.
There
had
not
been
enough
time
for
Mr
Bignucolo
to
prepare
these
figures
for
distribution
and
accordingly
he
was
asked
to
do
so
showing
full
breakdowns
as
to
the
components
of
each
area
of
cost
and
these
figures
were
to
be
made
available
by
Wednesday,
January
17,
1973
so
that
the
Building
Committee
could
proceed
to
study
them
in
preparation
for
a
recommendation
to
the
Board
of
Directors
on
January
24,
1973.
After
excusing
the
architects
and
project
manager,
Mr
Sauve
reviewed
figures
that
he
had
prepared
to
determine
the
economics
involved
in
constructing
and
renting
a
four-storey
or
a
five-storey
building.
These
figures
indicated
a
net
return
on
investment
for
a
four-storey
building—9.34%
and
fora
five-storey
building—10.20%.
Members
of
the
committee
requested
that
returns
be
calculated
using
depreciation
and
amortization
of
the
mortgage.
Mr
Sauve
agreed
to
prepare
additional
figures
for
the
next
meeting.
In
addition
to
the
above,
counsel
for
the
appellant
identified
and
filed
through
Mr
Sauve
the
following
documents:
Exhibit
A-1—Annual
Report
1974
(with
comparative
information
for
the
years
1964
through
1973).
Exhibit
A-2—Minutes
of
the
Board
meeting
of
May
29,
1968.
Exhibit
A-4—Costs
and
Financial
Returns
for
proposed
St
Catharines
Office
Building—Prepared
as
of
October
31,
1972.
Exhibit
A-5—St
Catharines
Building
calculated
Jan.
12,
1973.
Exhibit
A-6—Schedule
of
Rent
Area—Lincoln
Trust
House—September
1,
1974
and
November
1,
1974.
ARGUMENT
In
reinforcing
the
positive
aspects
of
the
building
and
its
use
which
were
brought
out
by
Mr
Sauve,
counsel
for
the
appellant
made
the
following
points:
_..
in
Exhibit
A-5
you
have
a
calculation
made
by
the
witness
in
1973
about
the
rate
of
return
to
be
anticipated
and
it
talks
return
on
investment
of
10.2%.
I
draw
to
your
attention
that
this
includes
imputed
rent
from
Lincoln
Trust’s
own
utilization.
Lincoln
Trust
and
Savings
Co
is
shown
here
as
renting
part
of
the
first
floor
and
all
of
the
fifth
floor
and
the
approximate
cost
in
this
schedule
in
this
figure
is
about
$107,000.
I
submit
it
should
be
taken
out
of
the
calculation.
The
(actual)
return
(on)
investment
is
substantially
less
than
10.2%.
.
.
.
You
have
heard
evidence
that
even
assuming
the
rate
of
return
was
10.2%,
the
average
return
on
capital
for
this
company
in
1972
and
1973
was
(in)
the
area
of
14
to
15%.
.
.
.
that
is
strong
evidence
thast
the
building
was
not
built
for
investment
purposes.
.
.
.
you’ve
also
heard
evidence
this
afternoon
that
the
company
did
not
engage
in
the
practice
of
buying
real
estate
for
investment
purposes
and
I
believe
Mr
Sauve
indicated
in
his
evidence
to
you
that
the
reason
was
they
could
make
better
money
doing
other
things,
loaning
money
on
mortgages
and
helping
develop
the
area.
_..
it
was
the
head
office
building
built
at
a
substantial
cost
to
the
company,
a
flag
ship
building
the
word
used
by
the
witness,
for
its
own
purposes,
which
primarily
was
in
the
Niagara
Peninsula
area
as
a
developing
trust
company
in
competition
with
the
giants
of
the
industry.
They
built
Lincoln
Trust
House
knowing
they
could
not
use
it
entirely
themselves
in
the
foreseeable
future,
but
having
been
forced
out
of
their
smaller
building
in
Niagara
Falls
and
relocating
in
a
new
city,
they
wanted
to
make
an
impression
in
the
industry
that
is
known
for
its,
shall
we
say,
fancy
buildings.
Financial
institutions
and
insurance
companies
do
not
build
small
buildings.
They
build
very
large
and
fancy
ones.
The
appellant’s
argument
and
of
course
it
is
my
argument
in
this
case
too
is
that
the
principal
use
of
the
building
was
an
office
building
and
the
receipt
of
rental
income
was
a
secondary
or
auxiliary
part
of
the
main
or
principal
business
carried
on
in
the
building.
In
no
way
can
it
be
considered
the
principal
use
of
the
building
as
for
the
purpose
of
gaining
or
producing
gross
revenue
that
is
rent.
It
was
built
for
the
purpose
of
a
head
office
building
of
a
going
financial
institution
in
the
Niagara
Peninsula
and
the
rental
income
in
the
years
in
question
was
only
an
auxiliary
purpose
and
indeed
the
entire
rentable
area
and
the
income
to
be
gained
over
the
years
from
rental,
from
the
rental
of
that
property
was
secondary
to
building
a
flag
ship
for
the
use
of
a
financial
institution.
.
.
.
Lincoln
Trust
only
occupied
25%
of
the
rental
space
for
their
own
purposes.
That
is
true.
Twenty-five
per
cent
of
the
gross
rentable
area
of
the
building.
However,
Exhibit
A-6
reveals
that
Lincoln
Trust
occupied
14,019
square
feet
in
1974,
but
at
the
end
of
1974
taxation
year
of
the
appellant,
October
31,
1974,
there
were
only
19,000
square
feet
of
that
building
occupied.
.
.
.
they
were
occupying
73.69
per
cent
of
the
amount
of
that
building
that
was
in
fact
occupied
in
1974
and
that,
I
think,
is
all
we
are
going
to
look
at
today.
We
are
not
talking
about
1975
or
1976
or
anything
else.
In
1974
they
were
occupying
73
per
cent
of
the
occupied
area
of
that
building.
Reference
was
made
by
counsel
to
the
case
of
John
M
Turner
v
MNR,
[1975]
CTC
2198;
75
DTC
190,
and
it
was
urged
upon
the
Board
that
the
instant
case
was
on
all
fours
with
the
Turner
case
(supra)
and
the
appeal
should
be
allowed.
Counsel
for
the
respondent
emphasized
that
only
a
small
part
of
the
total
building
was
used
by
Lincoln;
that
the
construction
plans
had
been
rejected
until
an
acceptable
rate
of
return
had
been
calculated
as
possible;
that
the
prestigious
character
of
the
building
had
only
been
to
attract
higher
quality
of
tenants;
and
that
the
tenants’
leases
for
space
in
the
building
were
normally
for
five
years.
According
to
counsel,
extending
the
appellant’s
plea
in
this
appeal
to
other
examples
could
produce
preposterous
results—a
taxpayer
constructing
a
“one-hundred-floor”
building,
and
using
one
floor
and
renting
ninety-nine
floors,
or
the
reverse,
using
ninety-nine
floors
and
renting
one—and
then
claiming
either
a
business
or
investment
purpose
in
either
case,
depending
upon
which
would
be
most
beneficial
from
a
tax
viewpoint,
considering
profit
or
loss
from
the
operation.
In
effect,
counsel
asserted
that
the
intent
in
the
construction
was
not
important,
the
ultimate
use
was
the
critical
factor—“that
use
has
to
be
looked
at
in
a
direct
sense
.
.
.
Lincoln
Trust
built
after
great
consideration
a
five-storey
building
and
the
rental
revenue
that
could
be
achieved
from
that
building
was
always
of
paramount
interest
to
them.
The
building
itself,
considering
the
rent
achieved,
produced
an
acceptable
return.
Most
importantly,
a
little
over
three-fifths
of
the
building,
in
fact,
three-quarters
of
the
building
was
actually
used
for
the
purpose
of
producing
gross
revenue
that
is
rent
and
therefore
that
is
its
principal
use.”.
Counsel
distinguished
the
present
case
from
that
of
Turner
(supra)
by
virtue
of
the
fact
that
in
Turner,
while
the
appellant
only
occupied
about
25%
of
the
building
himself,
he
did
rent
approximately
another
25%
(making
a
total
of
50%)
to
a
related
business
operation.
Findings
It
would
appear
to
me
that
two
aspects
of
this
appeal
were
touched
on
in
the
evidence
presented
and
reinforced
by
counsel
in
argument.
The
first
of
these
is
the
motivation
or
intent
of
the
taxpayer
in
making
the
investment,
emphasized
by
counsel
for
the
appellant,
and
the
second
is
the
ultimate
utilization,—highlighted
by
counsel
for
the
respondent.
The
Board
has
already
quoted
extensively
(with
italics)
from
the
Minutes
of
the
meetings
of
the
Board
of
Directors,
and
some
points
should
be
made
therefrom
with
regard
to
motivation.
References
therein
are
entirely
to
“St
Catharines
Building’,
and
on
occasions
they
are
intermingled
with
references
to
other
branch
office
buildings
in
the
surrounding
municipalities.
There
is
only
one
reference
to
a
“head
office
in
St
Catharines”,
(Minutes
of
May
11,
1973
not
reproduced):
..
and
also
how
much
more
valuable
it
would
be,
if
any,
for
us
to
have
our
head
office
in
St
Catharines,
located
in
our
own
building”.
The
contract
for
construction
of
the
building
had
been
approved
by
the
Directors
some
two
weeks
earlier
on
April
25,
1973.
Exhibits
A-4
and
A-5
are
financial
projections
related
to
the
building
prepared
October
31,
1972
and
January
12,
1973
respectively,
and
both
show
that
the
only
space
to
be
occupied
by
Lincoln
in
the
building
being
planned
was
a
part
of
the
first
floor—the
top
floor
being
treated
as
ordinary
rentable
space.
The
important
point,
as
I
see
it,
is
whether
or
not
the
building
was
used
(in
the
sense
of
being
available
and
promoted)
for
the
purpose
of
producing
rent,
whether
or
not
it
produced
any
rent
and
with
only
limited
weight
put
on
the
financial
and
physical
dimensions
involved.
The
Regulation
does
not
read
.
.
used
principally
for...
producing
.
.
.
rent”,
it
reads
.
.
used
principally
for
the
purpose
of
producing
.
.
.
rent
..
A
critical
argument
made
by
counsel
for
the
appellant
was
that
the
estimated
returns
on
investment
figures
(7.71%,
9.34%,
10.20%)
show
that
the
purpose
of
the
investment
in
the
building
could
not
have
been
to
produce
rent
but
rather
to
provide
the
company
head
office
location
since
for
the
production
of
rent,
a
cheaper
building
would
have
been
constructed,
thereby
providing
a
greater
return
potential;
and
the
same
funds
could
have
been
more
beneficially
invested
(allegedly
at
14
or
15%
return)
in
mortgages,
loans,
etc.
(the
regular
business
of
Lincoln).
I
am
not
impressed
with
either
point
in
that
argument.
With
regard
to
the
“cheaper
building”
position,
one
should
note
that
in
the
proposal
submitted
to
the
Building
Committee
on
January
12,
1973
by
Mr
Bignucolo
(the
successful
contractor),
it
was
noted:
“The
interior
finishes
were
standard
and
any
special
finishes
would
increase
costs
accordingly.
Also,
each
floor
was
costed
on
the
basis
of
the
shell
only
with
no
partitions.”.
It
is
difficult
to
see
that
at
the
time
of
contract
award,
the
provision
of
a
building
of
an
exceptional
(although
admittedly
good)
quality
was
contemplated.
It
is
at
least
possible
that
some
of
the
more
substantial
appointments
to
the
entrance
lobby
and
to
the
fifth
floor
were
considered
and
approved
after
March
1,
1974
(a
year
later)
when
it
was
determined
that
the
head
office
move
should
be
made.
On
the
other
point,
it
was
completely
in
keeping
with
the
exercise
of
their
public
responsibilities
that
the
Directors
would
not
approve
a
project
at
an
estimated
return
of
7.71%
(Exhibit
A-4),
and
chose
one
with
a
potential
of
10.20%
(five-storey)
over
one
showing
9.34%
(four
stories)
(Exhibit
A-5).
I
fail
to
see
therein
any
evidence
that
the
persuasive
factor
was
in
any
way
related
to
an
intangible
value
to
be
associated
with
a
head
office
location.
The
contention
by
the
appellant—“the
(said)
building
(clearly)
shows
a
rate
of
return
which
is
most
unfavourable
compared
to
other
forms
of
investment”—is
based
on
the
assertion
that
the
rate
of
return
from
the
building
of
10.20%
(Exhibit
A-5)
was
lower
than
the
14%
or
15%
return
allegedly
realized
on
the
regular
trust
company
operations.
The
Board
would
first
note
that
these
amounts
do
not
lend
themselves
easily
to
any
comparison,
the
one
(10.20%)
is
really
a
cash
flow
percentage
of
total
capital
asset
cost,
while
the
other
(14
or
15%),
although
no
specific
calculations
were
made,
apparently
represents
a
percentage
relationship
between
net
earnings
and
common
shareholders’
equity.
My
own
rough
calculations
of
the
latter
indicate
something
in
excess
of
13%
(rather
than
14
or
15%)
for
the
years
1972
and
1973,
dropping
to
below
10%
for
the
year
1974
(Exhibit
A-1).
Whatever
limited
comparative
value
these
calculations
may
have
in
the
form
put
to
the
Board,
it
might
be
considered
excessive
to
term
the
relationship
most
unfavourable
to
the
rental
rate
of
return.
It
is
also
instructive
to
note
from
Exhibit
A-5
that
when
allowance
is
made
for
the
mortgage
at
9%
in
the
amount
of
$1,700,000
(later
acquired
to
provide
for
construction),
the
return
on
Company
funds
invested
in
the
building
(approximately
$655,000)
would
have
been
greater
than
14%
in
the
first
year
of
operation,
after
allowing
for
the
mortgage
amortization
payment.
One
might
be
persuaded
that
the
investment
in
fact
was
a
very
good
one
from
the
perspective
of
its
financial
return
prospects
alone.
The
simple
fact,
however,
is
that
Regulation
1100(14)
deals
with
“‘gross
revenue
that
is
rent”.
It
could
well
be
argued
that
it
is
quite
immaterial
whether
or
not
the
investment
is
sound
and
profitable,
there
is
no
question
that
gross
revenue
was
produced
and
that
it
was
rent.
To
summarize
up
to
this
point,
the
Board
would
say:
—
During
at
least
the
period
of
planning
and
early
construction,
consideration
that
the
building
would
be
the
location
of
the
head
office
was
not
a
dominant
factor.
—The
dominant
factor,
to
whatever
degree
one
can
be
ascertained,
was
to
provide
appropriate
permanent
accommodation
to
house
the
local
St
Catharines
Branch
operations
in
a
building
on
the
land
already
owned
by
the
Company,
which
building
would
be
constructed
to
size
and
standards
which
would
be
viable
economically.
—The
critical
investment
decisions
were
made
with
the
utmost
consideration
accorded
to
return
on
investment
from
total
estimated
rental
revenue
from
the
space
not
needed
for
the
local
operation.
—The
decision
of
the
appellant
to
locate
the
head
office
of
the
Company
in
the
building
(whenever
that
decision
was
made)
resulted
in
a
reduction
of
the
space
which
could
be
used
for
external
rental
purposes,
but
did
not
materially
change
anything
else.
—The
rental
income,
including
the
imputed
rent
from
Lincoln,
by
the
year
1976
did
reach
a
level
approaching
that
originally
estimated.
—
Even
acknowledging
the
exceptional
growth
record
of
the
Company,
it
would
have
been
difficult
to
forecast
that
it
could
have
a
requirement
for
head
office
space
totalling
that
available
in
this
building
in
the
immediate
or
even
medium-term
future.
—These
factors,
however,
are
of
limited
value
in
deciding
the
matter
before
the
Board—they
only
eliminate
the
head
office
feature
as
dominant
in
the
decision-making
process.
They
do
not,
however,
minimize
the
fact
that
for
a
portion
of
the
fiscal
year
1974,
the
building
in
question
housed
both
the
local
and
head
office
operations
of
Lincoln
and
provided
external
rental
space.
In
my
view,
Regulation
1100(14)
canot
be
dealt
with
on
purely
mathematical
grounds.
Rather,
the
relevant
wording
of
Regulation
1100(14)
might
be
interpreted
to
ask
the
question:
“What
was
the
principal
purpose
of
the
building
during
the
year?’’
In
the
instant
case,
that
question
can
be
made
even
more
specific:
“Would
the
building
have
been
constructed
solely
for
the
rental
purposes,
with
no
consideration
given
to
its
use
to
house
the
local
office
and
(possibly)
the
head
office
operations?”
I
don’t
see
that
the
evidence
would
permit
that
question
to
be
answered
in
the
affirmative
but
I
do
believe
the
opposite
question
could
be
so
answered,
given
equivalent
economically
viable
projects—“Would
the
building
have
been
constructed
solely
to
house
the
local
and
(possibly)
head
office,
without
any
external
rental
revenue
potential?”
Such
a
prerequisite
(the
Company’s
business
rather
than
its
investment
needs),
in
my
view,
deserves
consideration
as
the
“principal
purpose”
under
these
circumstances.
Some
further
support
for
this
perspective
may
be
found
in
an
examination
of
Interpretation
Bulletin
IT-371
dated
April
25,
1977,
issued
by
the
Department
of
National
Revenue.
I
recognize
it
is
not
precisely
related
to
the
interpretation
of
the
question
before
the
Board,
but
it
is
headed
“Rental
property—Meaning
of
principal
business”
and
therefore
it
deserves
some
weight.
If
paragraphs
5,
6,
7
and
8
from
that
Bulletin
(quoted
below)
are
read,
considering
the
building
in
this
appeal
as
a
business
in
itself,
some
clarity
may
be
attained.
Principal
Business
5.
Whether
or
not
a
business
is
a
“principal”
business
is
a
matter
of
significance
only
where
the
taxpayer
carries
on
more
than
one
business
in
the
taxation
year.
The
phrase
“principal
business”
is
not
defined
by
the
Act
or
the
Regulations
and
accordingly
the
words
must
be
given
their
usual
meaning
and
the
identity
of
a
taxpayer’s
principal
business
determined
from
the
facts
of
the
particular
case.
6.
Regulation
1100(12)
requires
that
the
business
be
the
taxpayer’s
principal
business
“throughout
the
year”.
In
this
respect
it
is
similar
to
subsection
18(8)
of
the
Act
but
it
is
unlike
other
references
to
‘principal
business’
in
the
Act
(for
example,
subsection
66(2)
and
subparagraph
133(8)(d)(iv))
which
only
require
the
particular
business
to
have
been
a
principal
business
in
the
taxation
year.
Nevertheless
it
is
the
Department’s
view
that
the
criteria
for
identifying
a
principal
business
for
the
purposes
of
Regulation
1100(12)
are
not
different
from
those
set
out
in
Interpretation
Bulletin
IT-290,
“Non-Resident-Owned
Investment
Corporation-Meaning
of
Principal
Business”.
7.
There
is
no
standard
set
of
criteria
that
may
be
looked
to
where
the
nature
of
each
of
a
taxpayer’s
businesses
is
known
but
it
must
be
determined
which
of
them
is
his
principal
business;
the
significant
factors
of
each
case
must
be
searched
out
and
evaluated.
In
the
Department’s
view
the
following
are
among
the
factors
which
may
be
relevant:
(a)
the
profits
realized
by
each
of
the
businesses;
(b)
the
volume
and
the
value
of
the
gross
sales
or
transactions
of
each
business;
(c)
the
value
of
the
assets
of
each
business;
(d)
the
capital
employed
in
each
business;
and
(e)
the
time,
attention
and
effort
expended
by
the
employees,
agents,
or
officers
in
each
business.
8.
Although
the
determination
of
which
of
a
taxpayer’s
businesses
is
the
principal
business
is
made
in
respect
of
a
particular
taxation
year,
it
is
often
necessary
to
consider
patterns
over
several
years.
Thus,
if
a
particular
business
has
been
the
principal
business
and
in
a
particular
year
(evaluated
in
isolation
from
preceding
and
succeeding
years)
it
fails
to
satisfy
many
of
the
tests,
it
does
not
necessarily
follow
that
another
business
has
become
the
principal
business
in
that
year.
For
example
it
may
be
that,
because
of
economic
conditions
and
not
because
of
a
change
in
management’s
policies,
there
has
been
in
a
particular
year
a
reduction
in
the
level
of
activities
of
the
business
which
was
the
principal
business,
so
that
another
business
appears
to
have
assumed
that
role.
If
this
condition
continues
only
in
the
short
run
and
thereafter
the
business
again
satisfies
the
tests
of
being
the
principal
business,
the
Department’s
view
is
that
the
principal
business
may
not
have
changed
during
that
period.
Whether
this
is
so
in
any
particular
case
can
only
be
determined
by
a
review
of
the
circumstances
of
that
case.
In
the
instant
case,
the
taxpayer
is
saying
(in
layman’s
terms)
“We
conducted
only
one
business
in
that
building—that
of
our
regular
trust
company
operations—and
revenue
from
rentals
was
incidental
to
the
provision
of
adequate
accommodation
for
servicing
our
own
clients
in
a
building
appropriate
to
the
nature
and
scope
of
that
business”.
Conversely,
the
Minister
is
asserting:
“The
taxpayer
conducted
two
businesses
in
the
building—that
of
a
trust
company
and
that
of
gaining
or
producing
revenue
from
the
rental
of
real
property—and
the
real
property
rental
was
the
“principal
business”.
If
the
factors
enumerated
in
paragraph
7
above
have
any
validity
in
the
determination
discussed
in
Bulletin
IT-371,
then
at
the
minimum
they
have
some
relevance
to
this
question
even
though,
earlier
in
this
decision,
I
have
indicated
my
reluctance
to
view
as
decisive
any
mathematical
or
statistical
material.
A
brief
review
of
the
data
available
to
the
Board
relative
to
these
factors
indicates
to
me
that
it
would
be
so
preponderantly
in
the
direction
of
showing
that
the
“principal
business”
in
this
building
was
trust
company
operations
rather
than
rentals,
as
to
render
superfluous
any
detailed
analysis.
Therefore,
on
the
basis
of
two
factors—first
the
prime
requisite
of
the
Company
that
its
operations
be
situated
in
the
building,
and
second,
the
parallels
which
may
be
inferred
from
an
examination
of
Bulletin
IT-371—1
would
reach
the
conclusion
that
the
property
was
used
by
the
taxpayer
principally
for
the
purpose
of
the
trust
company
operations,
not
for
the
purpose
of
gaining
or
producing
rent.
Before
finalizing
the
matter,
there
are
two
other
points
which
may
be
worth
noting.
First,
although
the
point
was
not
argued,
it
is
difficult
indeed
to
reach
the
conclusion
that
in
the
fiscal
year
1973,
the
building
(construction
of
which
had
only
commenced)
was
used
at
all
(let
alone
principally)
for
the
purpose
of
producing
rent—it
was
not
even
available
for
such
a
purpose;
and
since
occupancy
for
tenants
(including
Lincoln)
commenced
from
about
September
1,
1974,
leaving
only
two
months
until
the
end
of
the
1974
fiscal
year
(October
31),
a
similar
difficulty
could
be
experienced
in
arriving
at
the
conclusion
which
is
fundamental
to
the
Minister’s
assessment—the
meaning
assigned
to
“principally”.
Secondly,
it
seems
to
me
that
the
Minister’s
assessment
presupposes
that
during
the
years
in
question
the
appellant
embarked
on
and
sustained
a
rental
program
from
which
it
earned
investment
income—that
is
income
identifiably
different
from
the
income
of
its
regular
business.
The
Board
recently
reviewed
a
situation
(March
Shipping
Limited
v
MNR,
[1977]
CTC
2527;
77
DTC
371),
in
which
the
proposal
of
the
Minister,
under
circumstances
not
totally
dissimilar
from
the
instant
case,
was
quite
the
opposite.
In
that
matter
(March),
the
Board
decided
in
favour
of
the
taxpayer—that
the
income
in
question
was
investment
income
rather
than
business
income.
On
appeal
to
the
Federal
Court
by
the
Minister
of
National
Revenue,
this
decision
was
reversed
(on
consent
of
both
parties)
and
in
the
result
the
source
of
the
income
was
regarded
as
from
the
business
operations
themselves
rather
than
subsidiary
or
ancillary
to
such
operations
as
investment
income
might
have
been.
That
determination
through
the
Federal
Court
would
appear
to
me
to
be
supportive
of
the
conclusions
reached
above
in
this
matter.
Decision
The
appeal
is
allowed
and
the
matter
referred
back
to
the
respondent
for
reassessment
accordingly.
Appeal
allowed.
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