The Assistant Chairman:
1 This is the appeal of Smithers Plaza Ltd from an income tax assessment in respect of its 1972 taxation year.
2 By notice of assessment dated August 18, 1973 the Minister of National Revenue, on the ground that the appellant's entire revenue for that year consisted of rental income, disallowed the small business deduction provided for in subsection 125(1) of the Income Tax Act (1972) and claimed by the appellant in its 1972 tax return.
3 The issue in this appeal, for purposes of subsection 125(1) of the Act, is whether the appellant's operations constituted an active business giving rise to a profit, or whether the appellant's investment in property gave rise to strictly rental income.
4 The appellant is the owner of most, if not all, of the premises of a small shopping centre, which houses a retail hobby shop, two dental offices, a mail order house, a florist shop, a delicatessen, an optometrist's office, a retail clothing store, a supermarket, a chartered accountant's office, a medical clinic, and two government departments. The appellant also provides parking facilities for its tenants and their customers.
5 The appellant company was incorporated in 1965 and is controlled by three or four of its shareholders. Appellant's representative contends that the company is managed by a board of directors who employed a janitor to maintain the public areas. It would appear from the evidence that Mr Bealy, who acted as janitor on a full-time basis, received a salary of $600 a year for his services. He was subsequently replaced by a Mr Haywood, who, being also a fire chief, did not act as janitor on a full-time basis and was paid $300 a year for his janitorial services.
6 In many instances, of course, the difference between income from an investment and income from a business is not clear-cut. Activities connected with the investment of capital and the collection of revenue therefrom are often merged with those activities which could qualify as business operations. For example, one may invest money in an apartment building owned by a company incorporated for the purpose, and obtain a return on one's investment in the form of rentals, without any significant managerial effort on the part of the investor. In such a case, it would seem clear to me that the owner enjoys investment income and, in my opinion, his corporation is not in a business which would qualify for a deduction under subsection 125(1) of the Income Tax Act.
7 On the other hand, however, a car rental business could qualify under subsection 125(1), even though the company owning the cars does essentially the same thing as the company owning the apartment building. However, the difference, as I see it, is the degree of managerial involvement and operational activity incidental to a car rental enterprise which, in my view, would categorize the entire operation as a business venture and not one in which the investment aspect prevails.
8 Elsewhere “business” has been described as an income-generating organization in which the three essential elements of production, as I see it, of capital, labour and management are coordinated and manifestly operative and, as such, is distinguishable from an investment venture in which the emphasis is exclusively, or almost entirely, on the capital aspect and the return one may expect from capital alone. This description of “business”, though certainly not all-embracing, might, I believe, serve as a guideline in the interpretation and application of subsection 125(1) of the Act.
9 In this appeal the appellant company was responsible for the maintenance of the public areas but the lessees were responsible for the upkeep of their leased premises.
10 The appellant claims that 100% of the company's revenue was derived from the lease of the premises comprising the plaza and that, in 1972, 80% of its gross income went toward the payment of operating expenses.
11 In my view, the fact that a corporation has a board of directors, a manager, an accountant and a janitor does not by itself determine whether the company is engaged in an active business within the meaning of section 125 of the Act. Nor does the expenditure of 80% of the company's income for operational expenses necessarily prove that the company is operating an active business.
12 I do not believe that anyone would seriously quarrel with the definition of an investment as being “the investing of money or capital to secure profitable returns in the form of interest or income”. Nor, I believe, would anyone disagree with the proposition that a person may invest his money in a business in order to derive a profit from its active operation or he may choose to invest in property and passively derive revenue from rentals or from interest on his investment.
13 However, the Income Tax Act has made an important and consistent legal distinction between income from a business and income from investment or property, and it seems to me that this basic distinction is an essential consideration in determining whether or not the appellant falls within the meaning of subsection 125(1) of the Income Tax Act.
14 In my opinion investment in movable or immovable property on a long-term basis cannot in general be considered to be a profit-producing business enterprise. Whether the taxpayer invests in one or in a dozen rental properties, whether he leases the premises and collects the rent himself or has an agent do it for him, whether or not he provides janitorial services, does not in my view change the nature of his investment if the services rendered are aimed at and limited to the leasing and the maintenance of his property and the structural upkeep of the leased premises. The provision of usual maintenance services and looking after their attending cost is, in my view, an integral and necessary part of a taxpayer's investment in property, which gives rise, not to a business profit, but to rental income. I do not believe that the degree or the extent of the taxpayer's activity in connection with the normal operation and maintenance of a long-term rental property can automatically transform the taxpayer's investment in such property into an investment in a business. The nature of the two investments is, in my view, basically and fundamentally different and, for purposes of the Income Tax Act, should not be confused.
15 The appellant's representative, in support of his contention that the company was operating a business, compared the appellant's activities with the operations of a motel. Although it is always unwise to generalize, I think it is safe to say that most hotels and motels are considered business enterprises only because they provide in their public areas a variety of services that are very different from merely providing a roof over one's head, and go well beyond maintenance of the building and structural upkeep of the leased premises. The operation of an apartment building or rooming house, or, indeed, a hotel or a motel, where the services are restricted to the leasing and the necessary maintenance of the premises, would, in my opinion, not constitute a business, but would be merely the normal operation of a rental-producing property.
16 From the evidence adduced, the appellant was only concerned with its capital investment and with the leasing of its own property and it rendered only those services which are normally included and expected in the rental of premises.
17 The appellant did not operate or manage the shopping centre in any way, each tenant being left to his own initiative. Nor did it take part in the promotion of the Plaza, other than by displaying a sign indicating the name of the shopping centre which, in my view, is certainly not sufficient to be considered as administrating or operating a shopping centre.
18 On the basis of the facts, I can only conclude that the appellant was engaged in the leasing and the normal maintenance of rental property which, in my opinion, does not constitute a business. I further hold that the appellant's income for the 1972 taxation year was derived from property and consisted entirely of rental income to which the provisions of subsection 125(1) of the Income Tax Act cannot be said to apply.
19 The Minister did not err in disallowing the deduction claimed by the appellant in the 1972 taxation year and the appeal is therefore dismissed.
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