Dorchester-Drummond Corporation LTD v. Minister of National Revenue, [1976] CTC 2109

Judge K A Flanigan (orally: September 18, 1975):—This is an appeal by Dorchester-Drummond Corporation Ltd against the reassessments of the Minister of National Revenue for the 1970 and 1971 taxation years.

The issue is, first of all, the deductibility of realty taxes against the piece of property owned by the appellant at the corner of Dorchester and Drummond Streets in the City of Montreal; and, secondly, whether or not the appellant company was carrying on a business which would entitle it to the benefits of the “carry-forward” provisions of the Act with respect to losses.

The facts are really not in dispute. Evidence has been called by both parties, and the facts are that, although no specific date was given, this company was incorporated in, I think, about 1958, for the purpose of acquiring the piece of property to which I have already referred. Some $70,000 was spent on architectural fees for preliminary investigation as to the proper revenue-producing building that might be built on this property plus a sum of $16,000, that I don’t know how to explain, which was spent over a period of years in addition to the original $70,000.

lt was admitted by the respondent that this was not an adventure in the nature of trade; and that the appellant intended at some future date to build a revenue-producing building on this property. At the particular time, this area (and when I say the particular time I refer to the time of purchase, when the appellant paid half a million dollars for the property) was considered to be a prime location, being almost in the heart of downtown Montreal. However, the area did not develop in the manner or to the extent that had been anticipated, and it became economically unfeasible to proceed along the originally intended lines at that time. There is no question in any of the evidence, nor is there any suggestion by either party, that there was ever any change in intention with regard to how this property should be utilized, and how it was finally disposed of is of no consequence to the years in question. What actually happened was that the appellant company turned the property into a parking lot and generated revenue ranging from $7,000 to $20,000 over a period of about four years. This was a very inconsistent return, but it helped to some degree to offset the cost of carrying this property until a revenue-producing building could be constructed.

In or about the year 1964, the City of Montreal prohibited by by-law the continued use of properties such as this as parking lots, and from 1965 on no revenue was shown from parking income. Evidence has been given that other parking lot owners tried, in conjunction with this appellant, to bring pressure to bear on City Hall to lift this prohibition but to no avail. Lawyers were hired to find ways and means to circumvent this, and perhaps some of the $16,000 I have referred to went by way of lawyers’ fees but in any event they were not successful. The company officers subsequently brought into this corporation what have been referred to as debt encumbrances, which I think can be more appropriately stated in layman’s language as “they went into the mortgage business”. They bought mortgages and loans, and generated, as Exhibit A-1 indicates, a substantial amount of income in the period between 1963 and 1972.

The witness on behalf of the respondent, Mr Veronneau, one of the respondent’s assessors, has said that, in his view, after 1964, when the property was no longer producing parking income, the realty taxes should be capitalized and added to the cost of the property to produce what might be today termed as “the adjusted cost base”. He says, for this reason, from 1965 on, the taxes were not treated as a revenue expenditure under paragraph 12(1)(a) of the Income Tax Act, RSC 1952, c 148, as amended, and that is the course that was followed. It is also his observation that the only reason that the corporation went into the money-lending, or borrowing, or debt, business was to have some income against which to write off these taxes.

With respect to the question of realty taxes in cases such as this, there has been cited an unreported decision of this Board by my colleague, Mr St-Onge, rendered in March of 1973, when a similar appeal for the year 1965 was brought by this same appellant. In that judgment, the appeal was allowed.

Although it would be perhaps imprudent, if not chaotic, to make a habit of not following decisions of my colleagues, as I understand the rule of stare decisis I am not bound by decisions other than those of courts which can sit in appeal on decisions of this Board. So I really make my finding for the 1970 and 1971 taxation years without any comment with respect to the Board’s decision on the 1965 taxation year.

On-the other hand, there are two other cases which have been cited and which are well known, the first being Esar v Her Majesty the Queen, [1974] CTC 34; 74 DTC 6062, and the other, the case of E R Squibb & Sons Ltd v MNR, [1973] CTC 120; 73 DTC 5139. In both those cases, taxes on vacant land were the subject of the appeal, and I express no opinion as to my personal thoughts on the decisions in each of those cases. But with respect to the allowance of realty taxes as deductible expenses, I am bound, in my view, by these decisions, neither of which was appealed further, and which, so far as I am concerned, are the law.

It has been urged upon me by learned counsel for the respondent that there is a distinction, and that distinction, as he puts it to me— and very forcefully—is: that in each of the Esar and Squibb cases it was an on-going established policy or practice of the appellants to hold vacant land, whereas in this case, according to respondent’s counsel, it was a one-time shot and so the cases can be distinguished. I cannot accept this argument. A higher jurisdiction has decided, in its wisdom, that these taxes on what are really capital assets are deductible as revenue expenses under paragraph 12(1)(a); and so, as I have said, I cannot, in my view, overrule a superior jurisdiction. Therefore, with respect to the realty taxes, the appeal must be allowed.

The second question is whether or not there was a business, and this issue is not quite as simple as it might seem. However, when I look at Exhibit R-1 and see the loans receivable held by Dorchester- Drummond, when ! see the interest income that the appellant received, and when I consider the fact that during the course of owning this land attempts were made to enter into an agreement with Provincial Transport to produce revenue, and meetings were held with other prospective persons, I think the evidence, taken as a whole, would support my conclusion that there was a business being carried on and that the appellant should be entitled to deduct any losses it may have suffered.

Therefore, for the purposes of the 1970 and 1971 taxation years, and the one will follow the other, the appeal will be allowed in full and the matter referred back to the respondent for reassessment accordingly.

Appeal allowed.