The Chairman:
1 This is an appeal by John M Turner against a reassessment of the Minister of National Revenue for the 1972 taxation year. The part in issue is whether or not the premises occupied by the appellant for the carrying on of his profession as an optometrist is a property that falls within the terms of subsections (11) and (14) of section 1100 of the Income Tax Regulations as issued by Order in Council pursuant to section 221 of the Income Tax Act, SC 1970–71–72, c 63 (as amended).
2 At the outset, I should point out that no evidence was called and the appellant was represented by an agent, Mr E F Estergaard, a chartered accountant.
3 At the opening of this appeal, consideration was given to the question of whether the appeal should have been disposed of by dismissing it for want of prosecution or for lack of any evidence that would meet the appellant's need to show that the reassessment was wrong either in fact or in law. However, learned counsel for the respondent agreed to accept the basic facts outlined in the lengthy notice of appeal, and in particular those in paragraph 9 of the statement of facts and paragraph 3 of the reasons for objection, even though the appellant himself was not present to give evidence at the hearing. Therefore, with the concurrence of counsel for the Minister, it was decided at that time that the case should be proceeded with and that I should render judgment on the basis of the admitted facts and the argument presented to me.
4 The facts briefly are that the appellant is an optometrist who has practised in Vernon, British Columbia for a number of years. He had been the owner for some time of a lot in a very prestigious area of downtown Vernon at a location which would be considered ideal for a building in which the appellant could carry on his profession. However, because of the high value of the land and the prestige of the location, the appellant felt that it would be much more practical to build a two-storey building rather than a simple one-level building to provide only an office for himself. He also felt that it would be advantageous if he could house some related business in the same building with his own practice. He had in mind particularly a business that would turn out prescription optical lenses and frames. The evidence is not clear as to whether he had already secured such a tenant before he commenced construction or not until afterwards but, in any event, by the time that the appellant was actually carrying on his optometry practice in the building there was also a tenant by the name of Branton Optical. This, it is conceded, was of great advantage to both the appellant and Branton in that each was able to refer customers or clients to the other. In the year in question, 1972, the appellant earned professional fees in the amount of $28,848.90 and his gross rentals from the building amounted to $10,160.
5 It should be pointed out that the appellant used about 25% of the space in the building and Branton occupied about the same amount, so that approximately half of the available space in the building was occupied by these related businesses. In the remaining rental portion of the building there was a bakery as well as two other small business tenants. In fact, the reason for the construction of a building with space in excess of the needs of the appellant's practice was clearly to make the most economical use of the lot and, in the event of resale, to have something that would justify the price that one would expect to ask for property at this location. Furthermore, while he himself was occupying the building, the rents receivable from these additional tenants would be necessary to offset a portion of the overhead of his optometry practice caused by building the accommodation that I have referred to at such a choice location.
6 These considerations resulted in a situation wherein the appellant, as I have said, occupied one-quarter of the available office space of the entire building, and the related prescription optical firm another one-quarter, while the unrelated businesses took up the balance of the space in the building.
7 The business results, as I have said, in 1972 showed that the anticipated increase in activity of the appellant's practice had indeed materialized. In his argument, the appellant's representative stressed that, under the circumstances, the entire building not only contributed to, but was an essential element in, the successful operation of his optometry practice, and therefore this property should not be classed as rental property of the type defined in subsection 1100(14) of the Regulations made under the Income Tax Act, and the maximum capital cost allowance on the building should have been allowed instead of the restrictive allowance prescribed by subsection 1100(11) of the Regulations.
8 I should further point out at this time that subsection 1100(11) is the regulation under which the calculations are made, and both parties agree that, if the basis of the Minister's assessment is correct, then the arithmetic is correct, and no question arises as to the accuracy of any of the calculations prepared by the assessors and included in the notice of reassessment.
9 I should also point out that subsection (14) of Regulation 1100 is new and, according to the respondent's argument, was necessary in order to round off the provisions of the Income Tax Act of 1972 whereby individual taxpayers are no longer permitted to write off their losses on rental property or to offset capital cost allowance on rental property against their other income.
10 The respondent's argument is put very briefly, and it is that the appellant falls squarely within the provisions of subsections (11) and (14) of Regulation 1100 since three-quarters of the building was rented to other persons from whom the appellant received rental income in the taxation year in question to the extent of approximately $10,000. He argued that the said building, being to the extent of approximately 75% rented to third parties, clearly qualified as rental property, and that the Minister, in assessing the appellant's taxable income, had correctly restricted the capital cost allowance on the rental property as prescribed by subsection (11) of Regulation 1100. The appellant, on the other hand, says this approach works a great inequity on the appellant, since, as an individual, he is not entitled to charge himself rent for the accommodation he uses and, if subsection (14) of Regulation 1100 is applied, he is deprived also of the benefits of capital cost allowance and is thereby being treated very harshly. The respondent points to the well worn adage that there is no equity in income tax law and argues that the legislature, in forming such a complex statute with an equally complex set of regulations, could not avoid situations whereby, in certain given circumstances, a taxpayer may seem to be unfairly treated.
11 The issue, in this case, therefore, clearly is one of interpretation of subsection (14) of Regulation 1100 and since, as I have said, this is a new regulation, it will perhaps serve some purpose if I reproduce it in full in this judgment:
1100. (14) 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) a 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,
12 The crux of this problem lies in the interpretation of the words of that clause beginning “if, in the taxation year ..., the property was used by the taxpayer ... principally for the purpose of gaining or producing gross revenue that is rent”. The appellant's argument, of course, is that the principal use of the building was an optometrist's office, and that the receipt of rental income was a secondary, ancillary or auxiliary part of the main or principal business carried on in the building, and in no way could it be said that the principal use of the building was for the purpose of gaining or producing gross revenue that is rent. In support of this argument, appellant's agent points out that the optometry practice produced approximately three times the income that was received by way of rent from the other tenants.
13 This is one of those cases that illustrates once again that, in complex Acts such as the Income Tax Act, one often has to apply to a given situation provisions of the Act or its accompanying Regulations which are not precisely defined in any of the statutory provisions thereof. The Act itself indicates in several sections that it is impossible to provide complete and comprehensive rules which can be expected to cover the endless variety of business arrangements that are likely to arise in social and commercial traffic. A classic example of this, of course, is the “adventure in the nature of a trade” which, by virtue of subsection 248(1) of the Income Tax Act, has been included in the statutory definition of the word “business”. It would be impossible to define precisely all the business ventures, the profitable results of which should be taxed. It is for that reason that the Legislature enacted this rather vague provision, which has served the income tax authorities so well throughout the years and has prevented enterprising speculators from realizing substantial business profits under the name of tax-free capital gains.
14 Another example of this phenomenon can be found in the application of section 125 of the Act. There it is a question of what kind of “active business” a Canadian corporation must operate in order to qualify for small business incentives. It is obviously left for the courts to answer this question, because the Act has not provided that answer. It would, in all fairness to the legislators, be totally impossible to design a provision which would suitably cover all the countless Canadian corporations operating small businesses which might apply for this deduction. In all these instances, the courts are expected to draw up guidelines, criteria and interpretations which aid, and have in fact greatly facilitated, a realization of the intention of the legislature as expressed in sometimes rather cryptic statutory provisions. However, in dealing with new sections of a practically new Act, one must be very careful, in my respectful view, not to draw up hard and precise guidelines too soon. I think one must almost proceed by trial and error in dealing with the multitudinous problems that arise out of a new statute. I have read recent articles which have been critical of the Board, and of myself in particular, for not laying down precise guidelines under section 125, but to do so at such an early stage in the development of the effect of this section would, in my view, unduly restrict the advantage that the framers of the Act obviously intended to grant to small businesses. It is very easy for one to say that henceforth and for all time the definition of “active business” will be as follows. But, at this early stage in the development of the law, I do not believe it is wise to be too specific, for the reasons I have stated.
15 This case is another example of this kind of situation, and it should be clearly understood from the outset that, even though the courts may develop certain criteria which may assist the administration of the Act, experience shows that the constantly developing and changing economic structure of society and the endless variety of its multitudinous business arrangements sometimes seem to make a mockery of the most carefully designed and tightly applied rules.
16 It is quite obvious what the legislature intended to achieve by enacting the provisions we are now dealing with. It wanted, as I see it, to prevent the possibility of substantial deductions on account of capital cost allowance in respect of large apartment or office buildings from the income from other sources of the owner or owners thereof by providing that such deductions can only be made from the gross rental income from such buildings.
17 However, the situations we are confronted with are not always clear-cut examples of rental operation on the one side and the opera tion of a commercial or professional business on the other. Everybody is familiar with large modern hotels that let space in their huge buildings to various retail outlets for the sale of cosmetics, flowers, travel services, ladies' apparel, etc. There are even hotels where one might find wholesale firms which find it profitable to lease office space in a hotel that has proved to be a thoroughfare for all kinds of businessmen. In spite of all this, one cannot say that such a hotel enterprise is in the business of renting properties within the meaning of subsection 1100(14) of the Income Tax Regulations.
18 The said leases or rental arrangements are obviously a common accessory to a hotel business in its entirety, and I do not think that the restricted capital cost allowance provisions of subsections (11) and (14) of Regulation 1100 would normally apply in such a case. It is difficult to draw a line, but it seems to me that in each case one should ask oneself whether the emphasis is on the operation of whatever constitutes the main business of the taxpayer and whether the rental operation is merely an accessory thereto or of an auxiliary nature. This is an area where, in my opinion, the jurisprudence will eventually draw up those flexible lines of distinction which the professional jurist, by virtue of his ability to analyze and evaluate existing factual relationships, can from then on apply in order to make sense of, and give reasonable practical application to, statutory rules of this kind.
19 I admit that the case before me is not as strong as I would have liked it to be in order to illustrate my interpretation of the above subsections of the Income Tax Regulations. Yet, having listened to the presentation of the agent for the appellant and to the representations made by counsel for the respondent, it seems to me that the scales in this case should tip in favour of the appellant and that, where minor details in the Statement of Facts may not have been entirely convincing, I should give him the benefit of the doubt. I am satisfied that the appellant, exercising sound business judgment, decided that, in order to profitably operate his optometry practice in this prestige location, it was necessary for him to commission the construction of a building sufficiently large to help him to recover a major part of the cost of his overhead, and that this was foremost in his mind at the time he made the decision to build the building in question not only to provide accommodation for himself but also, hopefully, to accommodate therein as a tenant someone in a related business. It was also obvious to him that, in addition to obtaining this desired result, it would be necessary for him to rent additional space to unrelated tenants. This may have been only an unavoidable sequel of the overall plan, but was inevitable in order to alleviate the otherwise too heavy cost of construction in this expensive location.
20 I am also prepared to accept the appellant's Statement of Facts to mean that it was never his intention to invest money in the said building as a form of investment in rental property, but that he considered the construction of the building and the rental of the extra space therein as a necessary and inevitable condition for the success ful operation of his professional business. I also take it from the statements of both parties that the financial success of the appellant's business in 1972 proved him to be correct.
21 Under these circumstances, I feel that the two-storey building in question was not one which fell squarely within the description of “rental property” as contained in Regulation 1100(14) and therefore the Minister, in my view, has erred in not allowing the full capital cost allowance on the building as a business expense chargeable to the appellant's professional income. I would, therefore, allow the appeal and vacate the assessment.
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