Dow Holdings LTD v. Minister of National Revenue, [1976] CTC 2258, 76 DTC 1199

Delmer E Taylor:—These are appeals from income tax assessments for the years 1969, 1970 and 1971. The matter at issue is whether the appellant’s interest in certain assets related to motel operations in Banff National Park, Province of Alberta should be, for purposes of Capital cost allowance, Class 13 leasehold improvements, or Class 6 buildings. The appellant company claims that such assets were purchased and are owned by it separate and distinct from the leasehold interest it holds from the Crown in the land upon which these assets are situated. The respondent asserts that the appellant purchased only a leasehold interest in the assets, and not the assets themselves, and the respondent relies, inter alia, upon paragraph 11(1)(a) of the Income Tax Act, RSC 1952, c 148 and amendments, and paragraphs 1100(1)(a) and (b) and subsection 1102(5), Schedule B, Class 6 and Class 13 of the Income Tax Regulations.

The appellant taxpayer is a body corporate, established under The Companies Act in the Province of Alberta. Pursuant to an agreement dated October 1, 1964, the appellant purchased from Henry Wiebe a motel known as “The Alpine Motel’’ located in Banff, Alberta. The total purchase price of $220,000 was allocated per the agreement between real estate ($185,000) and chattel property ($35,000). In the records of the appellant $25,036.95 of the cost was allocated to land. $160,950.30 to Class 6 buildings, $30,000 to Class 8 equipment and $5,000 to Class 12 linen, and capital cost allowance was claimed at the prevailing rates on such an allocation. (The small mathematical differences are assumed to be legal fees, registration, etc.) The purchase of the Alpine Motel was subject to a 17-year lease expiring in 1972 and contained a renewal clause for 42 years with Her Majesty the Queen. The Minister of National Revenue reclassified the land and the buildings totalling $185,987.25 to Class 13 leasehold interest assets.

Pursuant to an agreement dated November 17, 1971, the appeitant corporation purchased a second motel known as the “Banff Motel” also located in Banff, Alberta. The total purchase price of $300,000 was allocated per agreement between land ($70,000) and building and equipment ($230,000). In its records, the appellant allocated $70,000 of the cost to land, $200,000 to Class 6 buildings and $30,000 to Class 8 equipment, and capital cost allowance was claimed at applicable rates for each class. The purchase of the Banff Motel was subject to a 42-year lease with Her Majesty the Queen. The Minister of National Revenue reclassified the land and buildings totalling $270,000 to Class 13 leasehold interest assets.

During the hearing counsel for the appellant put into evidence the documents supporting the leases Originally held by the vendors, and also the agreements of purchase and sale between the vendors and the purchaser. There were certain sections of these agreements which counsel for the appellant contended were in support of the appellant’s case, and the major ones are herein reproduced.

From the “original lease’’ dated May 6, 1955 between Her Majesty the Queen and Elsie Honie Wiebe, the following clauses relate to the Alpine Motel:

14. The lessee covenants and agrees that the said premises and the buildings erected thereon will be used solely for the purpose of a motel or purposes connected therewith.

15. The lessee will, on or before the 31st day of December, 1956, remove or demolish the residence presently situated on Lots 10 and 11, Block 28, Banff Townsite.

16. The lessee will, on or before the 15th day of June, 1957, erect and complete upon the land hereby demised, to the satisfaction of the Superintendent of the said Park, a motel consisting of two triplexes, six duplexes, one staff quarters building and office and manager’s residence, at a total cost of not less than $65,000.00, according to plans and specifications previously approved by the said Superintendent.

17. The lessee will erect and complete one of the said triplexes and two of the said duplexes on or before the 15th day of June, 1955, three additional duplexes and staff quarters on or before the 15th day of June, 1956, and the remaining triplex, duplex and office and manager’s residence to be built on or before the 15th day of June, 1957.

There is also a standard clause in the lease which reads as follows:

IT IS FURTHER AGREED that Her Majesty will, at the end of this term of 17 years, 9 months and 27 days and, in perpetuity, at the end of each subsequent renewal term of forty-two years, grant a renewal lease of the demised premises to the lessee for a term of forty-two years if the following requirements are complied with, namely that

(a) the lessee, at least six months prior to the end of the present term of 17 years, 9 months and 27 days or prior to the end of -a subsequent term of forty-two years, as the case may be, notifies the Minister in writing that he desires a renewal lease of the demised premises;

(b) the lessee has fully paid all rents due under the lease to be renewed;

and

(c) the lessee has observed and performed all agreements and conditions of the lease to be renewed.

AND IT IS FURTHER AGREED that

(a) the renewal lease will contain agreements and conditions like unto those contained in the lease to be renewed with the exception of those pertaining to the amount of rent;

(b) the rent for the first part of the renewal term will be determined by the Minister or by the Exchequer Court of Canada where within thirty days after the Minister’s determination is communicated to the lessee, the lessee mails a registered letter to the Minister requesting that the Exchequer Court determine the said rent, and, in the latter case, the Exchequer Court will calculate the rent as ground rent of a parcel of land without taking into account the value of any buildings, tenements, houses or other works placed thereon by the lessee; and

(c) the rent under a renewal lease will be payable half-yearly in the same manner as set forth in the present lease and will commence immediately upon the termination of the term that is being renewed.* [1]

From the original lease dated August 25, 1964 between Her Majesty the Queen and Alex Kalinowski, the following clauses relate to the

Banff Motel:

2. The Lessee will, within six months after the commencement of the said term, submit to the Superintendent in triplicate plans and specifications Satisfactory to the Superintendent, of the buildings to be erected upon the land and a plan indicating its proposed location on the land.

3. Upon approval by the Superintendent of the said plans and specifications the Lessee will erect the building described therein on or before the 21st day of April, 1967.

4. The Lessee will not exercise or carry on or permit to be exercised or carried on upon the land a business, trade or calling other than a motel.

12. The Lessee may on the termination of this lease sever and remove from the land all structures, fixtures and improvements which have been affixed or placed on the land at the expense of the Lessee.

13. On the termination of this lease the Lessee will leave the land in a condition satisfactory to the Superintendent.

Some comfort may be obtained by the appellant in his claim by a reading of these clauses. However, some other clauses should also be taken into account. From the Wiebe lease, clause 12:

No implied covenant or liability of any kind on the part of Her Majesty is created by the use of the words “demise and lease” or by the use of any other word or words herein.

From the Kalinowski lease, clause 14:

No implied covenant or implied liability on the part of Her Majesty is created by the use of the words “demises and leases” herein.

Further, the renewal of the Wiebe lease dated January 2, 1974 for a period of 42 years effective from June 1, 1972 was between Her Majesty the Queen and Henry James Wiebe and Elsie Honie Wiebe (the original lessees), not between Her Maijsty the Queen and the appellant company. It is understoood that the assignment of this renewal lease to the appellant company still would remain. No explanation, however, was provided to the Board regarding the renewal having been made in the name of the original lessees rather than the appellant.

The basic contention of the appellant company is that the leases in question separate the “ground lease” sufficiently that the purchase agreements executed by the appellant should effectively establish ownership rights of the appellant in the buildings acquired, rather than only the leasehold interest in them asserted by the respondent. I find nothing in either the original leases nor the renewal which would provide for such separation of the buildings as distinct and transferable assets, from the leased land on which they were situated. The absence of any specific statement to that effect in my opinion should not be read to limit in any way the right of the Crown regarding its ultimate interest in these buildings. The buildings were placed on the leased land by the original lessees in full knowledge of the circumstances detailed in these leases. To accept the proposition put forward by the appellant now, it would be incumbent upon me to also accept that the original lessees held more than a leasehold interest in the buildings, in fact that they had a full and complete proprietory interest in the buildings, separate and distinct from the leasehold which would relate then only to the ground lease; or that the original lessees possessing only a leasehold interest in the buildings were somehow able to transfer to the purchaser (the appellant company) a greater entitlement than that interest.

A conclusion that the appellant company purchased and held a leasehold interest, part of which was represented by buildings constructed by the original lessees, seems most evident. The original lessees had certain deductions with respect to capital cost allowance on these buildings, since they had been erected by the said original lessees. There is no indication in the Income Tax Act or in the Income Tax Regulations that the benefit of these capital cost allowance deductions accrue undiluted, to a purchaser, of the said leasehold interest. This would lead to the determination that the appellant company was only entitled to capital cost allowance based on the section of the Income Tax Regulations dealing with such leasehold interests as Class 13 assets, in the case of Plan A Leasing Limited v Her Majesty the Queen, [1976] CTC 261; 76 DTC 6159, held in the Federal Court— Trial Division April 8, 1976, the Court held that the rule of common aw that a building, as a fixture, was part of the land on which it was situated could be altered by the contract between the two parties. The instant matter can be distinguished from that case by virtue of the fact that one of the contracting parties (to the original lease agreements) was Her Majesty the Queen. There is no evidence that this party (Her Majesty the Queen) has agreed to an alteration of the terms of the original contract, to the extent that the assignment of the leasehold interest from the original lessees to the appellant company conveyed to the appellant company a freehold interest in the buildings involved.

The appeals are therefore dismissed for all three years in question, 1969, 1970 and 1971, on the basis that the contractual arrangements between the parties in the sale and purchase of the leasehold interests of both the Alpine Motel and the Banff Motel could not alter, without specific acceptance by the lessor, Her Majesty the Queen, the contractual understanding to which Her Majesty the Queen remained a party, notwithstanding the validity between themselves of any arrangements made by the original lessees and a subsequent purchaser regarding the assignment of these leasehold interests.

Appeal dismissed.