Compagnie Immobiliere BCN Ltée v. Minister of National Revenue, [1972] CTC 2311, 72 DTC 1259

Maurice Boisvert:—This appeal concerns the capital cost allowance claimed by a subsidiary of the Banque Canadienne Nationale (hereinafter called the “Bank”), which has its head office in Montreal. The taxation year in question is 1964 and the assessment is dated October 17, 1968.

The appeal was heard at Montreal, Province of Quebec on May 19, 1971 by the Tax Appeal Board under authority of the Income Tax Act then in force (RSC 1952, c 148).

There is only one question at issue in this appeal. Appellant claims that it bought some properties, made necessary by the expansion of its banking business, while respondent alleges that they were purchased so that the buildings might be torn down for a site. The facts are not complicated and were nearly all admitted by respondent.

In 1962 the Bank’s operations had reached such proportions that its quarters had to be enlarged if it was to maintain its status in relation to competing banks. With this in mind it incorporated the appellant company on December 27, 1962, all the issued and paid share capital of which is held by the Bank. The purpose of this company was to hold and administer the properties that would be purchased to help improve its main business office in the City of Montreal, located on Place d’Armes, at St James Street.

In June 1963 it took a five-year lease on offices in a building owned by Montreal Trust and located not far from the Bank’s head office. The Bank contemplated an expansion plan that would take in a quadrilateral running from Place d’Armes along St James Street on the north to St-François-Xavier Street on the west, and along Notre-Dame Street to St-François-Xavier Street on the south. Several plans were considered, architects were engaged to prepare sketches, and many discussions were held, on a continuing basis, by officers of the Bank. In view of the size of the project, which amounted to several millions of dollars, the Bank was approached by building promoters.

As the quadrilateral was built up, the Bank, if it wished to remain where it had been doing business since 1925, had to acquire some properties considered essential for its expansion.

One of the buildings, known as the Royal Globe Building, was now owned by the Royal Insurance Company Limited; the land of another property, known as the Transportation Building, was owned by the Prêtres de Saint-Sulpice of Montreal, and the buildings by Cohen and Zalkind. Convinced of the possibilities offered by the quadrilateral, the Bank, on January 3, 1963, bought the property located at civic number 900 Place d’Armes, from Royal Insurance along with the buildings on the said lot, for the price of $1,000,000 in cash. The contract of sale was concluded between the seller and General Trust of Canada, which acted, as the contract states, on behalf of the Bank. On March 27, 1963 General Trust of Canada transferred the said property to appellant for the same sum of $1,000,000. As a party to the deed of sale the Bank approved and ratified the said deed.

The Bank now saw it might be able to keep its head office where it had always been. With this in mind it bought, on March 16, 1964, through General Trust of Canada, the lot on which the building known as the Transportation Building was located. This lot contained 17,703 sq ft and was bounded on the south by Notre-Dame Street, on the west by St-Francois-Xavier Street, and on the north by St James Street; it was owned by the Prêtres de Saint-Sulpice of Montreal and $700,000 was paid for it. The sale also covered “all rights, titles and interests whatever” which the seller held in an emphyteutic lease granted to the Transportation Building Company Limited and which had been taken over by Nathan Cohen and Hyman Zalkind. On October 29, 1964 General Trust of Canada transferred the lot and the rights purchased from the Prêtres de Saint-Sulpice to the Bank, on the terms appearing in the deed of sale, and for the same amount.

On February 25, 1964 the Bank offered to buy, for $200,000, an 11,956 sq ft lot located at the corner of Hospital and St-François-Xavier Streets, in order to comply with by-laws of the City of Montreal by supplying a parking place for its staff and customers. The offer was accepted and the lot became the Bank’s property.

On July 3, 1964 Nathan Cohen and Hyman Zalkind sold to appellant, for the sum of $1,750,000, the property comprising (a) the rights under the emphyteutic lease which they held from the Prêtres de Saint- Sulpice; (b) a ten-storey building known as the Transportation Building, with all its contents, rents to be derived from tenants, etc. The rents at the time of purchase amounted to a gross annual income of $452,524.

As owner of the quadrilateral, the Bank, in 1965, put its plan into effect, and a huge building now stands on the site, yielding appellant income in the amount of $150,000 a year for rental of the land, as the building is being managed by a financial syndicate under an emphyteutic lease concluded on January 8, 1965 between appellant and the Société Immobilière Place d’Armes Limitée. When the lease expires the lot and the forty-storey building will belong to appellant.

It must be stated that the Bank had been a tenant of a part of the Transportation Building since 1955, which is an indication of the cramped nature of its own quarters. It must be stated further, that in 1962 the Bank had formed a building committee. It is therefore fallacious to claim that appellant invested the sum of $3,600,000 in purchasing properties solely for the pleasure of having “a site”, as respondent contends. It purchased rent-producing properties. Its income tax return for the year in question shows a net profit of $54,731.32. As it claimed depreciation — deduction of capital cost of $19,315.62 — it declared taxable income of $35,415.70. Since respondent claims that appellant was not entitled to deduct the capital cost from the amount it had paid for the properties purchased for expansion purposes, this appeal was lodged.

Only one witness was heard, the chairman of the board and president of the Bank. He established beyond question that purchase of ail the properties acquired in 1963 and 1964 was necessary for the banking operations of the Bank. Naturally such a project took time, three years, to become a reality. The intention was there and development of the project took place according to plan.

Respondent’s counsel stressed that in the deed of sale from Cohen et al to appellant it states that the building will be torn down as soon as appellant gets full and complete occupancy. The building clearly had to be torn down; it was old, and for a new building to be constructed in the quadrilateral it had to be demolished.

I feel that appellant, with which the burden of proof rested, has discharged it beyond any doubt and without rejoinder by respondent.

The jurisprudence on this subject has been twofold: first, that no allowance is to be granted if properties are purchased to clear the lots by demolishing the buildings; and, secondly, that if buildings on properties purchased for commercial. or industrial purposes are demolished and replaced by more suitable and convenient buildings, then the capital cost allowance must be granted and the taxpayer is entitled to the applicable deduction in the category set by the regulations. The problem raised in this appeal was dealt with in The Royal Trust Company v MNR (1956-1960), Ex CR 70; [1957] CTC 32. The appeal was heard by Thorson, P. In my opinion his remarks are completely applicable to this appeal. At page 83 [44] he states:

The essential limitation in the exception expressed in Section 12(1)(a) is that the outlay or expense should have been made by the taxpayer ‘‘for the purpose” of gaining or producing income “from the business”. It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income “from the business” in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes.

In this appeal, the purchase price of the properties was a necessary expenditure for the purpose of gaining income from the business of appellant, and for no other reason. This had been fully established by the evidence.

In such circumstances, the appeal must be allowed.

Appeal allowed.