Juergen Baginski v. Minister of National Revenue, [1978] CTC 2679, [1978] DTC 1493

Delmer E Taylor:—This is an appeal against an income tax assessment for the year 1975 in which the Minister of National Revenue disallowed the claim of the appellant that he was operating a business, and instead assessed him on the basis that the income was from an investment in property. The respondent relied, inter alia, upon subsections 2(2) and 2(3), sections 3, 216, 111, and 248 of the Income Tax Act, SC 1970-71-72, chapter 63 and amendments thereto.

Facts

In 1972, the appellant who is a resident of the Federal Republic of Germany and is not a resident of Canada, acquired apartment buildings known as Queensberry Court Apartments (hereinafter known as “the property” or the ‘‘apartment building”), located in the City of Burlington, Ontario, and municipally known as 3020 Glencrest Road.

The appellant was unable personally to tend to the daily business of managing the apartment buildings from Germany. Accordingly, in 1972 he retained as his agent to carry on the business of managing the apartment buildings on a local firm, P Trauttmansdorff Property Management (hereinafter referred to as “Trauttmansdorff”). Trautts- mansdorff is a proprietorship with its business offices in the City of Hamilton, Ontario which undertakes as part of its business the management of apartment buildings.

Trauttsmansdorff undertook the following activities:

—the making of general repairs and maintenance and decoration of the buildings and ensured that the buildings were provided with adequate heating, plumbing, electrical, elevator and other services;

—to advertise for tenants to assure full occupation of the buildings and to enter into lease agreements with the tenants;

—the collection of rents and the provision of the necessary rebates and adjustments to the tenants;

—the provision of snow removal in the winter and landscaping and gardening services in the summer;

—the maintaining of compliance with municipal building requirements;

—the continuing employment and supervision of two full-time employees to provide the above-noted maintenance services;

—the employment of a full-time superintendent to provide janitorial and security services;

—the retention of off-duty police constables to provide additional security for the tenants of the apartment buildings.

The gross rentals from the buildings for the 1975 taxation year were $432,386. The appellant also received laundromat income in the amount of $5,820. After deducting expenses, the appellant made a profit for the 1975 taxation year of $12,014 from the operation of his apartment buildings. The appellant suffered certain losses in the years 1972 to 1974 and the respondent, while refusing to permit the deduction of such losses, reassessed the appellant in March, 1977 to permit the appellant to deduct from net income a capital cost allowance in the amount of $10,800. The appellant was thereupon deemed to have a revised taxable income in the amount of $1,214 for the 1975 taxation year.

Contentions

It was the position of the appellant that:

—it was necessary to supply laundry facilities in the buildings and to make available recreational facilities, including an indoor pool, lifeguard services, saunas, tennis court, reception and party rooms, all for the use of the tenants of the apartment buildings;

—he was carrying on a business, pursuant to paragraph 2(3)(b) of the Income Tax Act;

—the income assessed by the respondent was from business, not from property;

—section 216 of the Income Tax Act has no application whatever;

—the amount of $12,014, as a non-capital loss, was properly applied against his income for the year.

The respondent contended that:

—the income received by the appellant in his 1975 taxation year was rental income derived solely from the rental of the apartment building and was therefore income from property and not from carrying on business in Canada under subsection 2(3) of the Income Tax Act, the appellant was therefore not entitled to claim as a deduction from income for the purpose of computing his taxable income any non-capital losses under paragraph 111(1)(a) of Division “C” of the Income Tax Act for the immediate preceding taxation year by virtue of section 216 of the Act, paragraph (a) of which allowed the appellant, in connection solely with his income from real property, to file a return of income as a resident of Canada and paragraph (c) of which did not entitle him in filing such a return to make any deduction under Division “C” of the Income Tax Act for the purpose of computing his taxable income as defined in subsection 248(1) and 2(2) of the Income Tax Act, from that income;

—the appellant was entitled to a deduction for capital cost allowance on the Apartment Building in the amount of $10,800 in accordance with paragraph 20(1)(a) of subdivision (b) of Division B of Part I of the Income Tax Act in computing his income for the 1972 taxation year;

—the provision of laundry, janitorial and recreational facilities including an indoor pool, saunas, tennis courts, reception and party rooms, were part of the property for which the tenants paid rent and which the tenants were entitled to use under their rental agreements;

—the management activities, maintenance and repair services provided were ancillary and incidental to the acquisition of income from and the maintenance of the property in living accommodation of this kind; and were not such as to affect the rentals received by the appellant with a trading character as distinct from income from property.

Evidence

Mr Fritz Von Trauttmansdorff described for the Board the procedures and methods by which he fulfilled his management contract with' the appellant. It was noted that he also managed several other apartment buildings, but this was the only one in which the activities such as the pool, saunas, reception and party rooms, etc, were conducted in a building separate from the main building. No information was provided on how this fact would assist the appellant’s case. Several documents were filed with the Board through this witness, for the use of counsel both in examination and argument.

Argument

Counsel for the appellant maintained that the decisions rendered in The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156, and The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115, were such that they provided clear support for the appellant’s position—there was activity conducted far beyond that associated with the normal collection of rents, and the very size of the operation and the total income itself should be determinative of the fact that the appellant was carrying on a business, not simply realizing income from an investment. Further support could be found in Weintraub v The Queen, [1975] CTC 112; 75 DTC 5050, and in Radke Bros Construction Co Ltd v MNR, [1975] CTC 2187; 75 DTC 149. In addition there was a clear distinction to be made between this case and that of Spence Building Ltd v MNR, [1977] CTC 2104; 77 DTC 71, where the activity of Spence was virtually non existent. While the appeal in Harry Walsh and Archie R Micay v MNR, [1965] CTC 478; 65 DTC 5293, had been dismissed on the facts, it was important to note in that decision (applicable in this case) that the learned judge did not make any distinction on the ground that the operations were conducted through an agent rather than by the appellants themselves. Finally, the fact that this appellant was an individual taxpayer rather than a corporate taxpayer should have no bearing on a determination regarding the characteristics of the income involved, whether from business or property.

Counsel for the respondent in a lengthy and detailed argument put forward that the judgments in Rockmore (supra) and in Cadboro Bay (supra) should not be regarded as establishing that income from investments in general could qualify for treatment as business income (Rockmore); or that there were only two types of income to be determined under subsection 125(1) of the Act—business and property (Carboro Bay). The particular conditions evidenced in Rockmore (supra) must be established to provide a basis for such a claim, and that had not been done at this hearing; and even if the Board should find the income to be from business rather than property, it should be classified as from a “passive” (or non-active) rather than an “active” business. That the appellant was an individual rather than a corporation, in any event, should serve to disqualify him from the relief sought at this appeal. In addition to Rockmore (supra), Cadboro Bay (supra) and Spence Building (supra) counsel referred the Board to and quoted extensively from: Fry v Salisbury House Estate Limited, (1930) AC 432; Henry Wertman v MNR, [1964] CTC 252; 64 DTC 5158; Commissioners of Inland Revenue v The Korean Syndicate Ltd, 12 TC 181; Anderson Logging Company v The King, [1917-27] CTC 198; 52 DTC 1209; Commissioner of Income Tax v Hanover Agencies Ltd, (1967) 1 All ER 954; Tenir Ltée v MNR, [1968] Tax ABC 772; 68 DTC 589; Baramy Invetsments Ltd v MNR, [1977] CTC 2558; 77 DTC 400; De Villard v MNR, [1978] CTC 2044; 78 DTC 1047.

Findings

In my view, the size of the operation itself (some 192 apartments), the investment (about three million dollars) or the annual gross income (about half a million dollars) are not determinative of the question here posed. Also whether the appellant managed the building, or contracted out such management would not be critical. While the cases cited by counsel, which dealt with corporations, in support of either side of this appeal, might have merit in determining general guidelines, they are not ideally suited for examining this question, where an individual is the appellant. I recognize the import of the point made by counsel for the appellant, that it is difficult to conceive of an interpretation of the significant words “business” and “property” which could be applied differently to an individual as contrasted with a corporation. Nevertheless I am equally conscious of the view frequently expressed by the courts, that the very incorporation of a company by providing commercial powers in its charter, gives prima facie support that the operations conducted are “business”. The Wertman (supra) and Walsh (supra) decisions do not deal precisely with the same or analogous sections of the Act as in this appeal, nor do they touch on the issue of the characterization of non-resident income. Nevertheless they have certain application here because the same basic question was being examined—“business” or “property”; the income derived was from rentals; and the appellants themselves were individuals, not corporations. It is with considerable satisfaction therefore that the Board is able to turn to the decision of the Federal Court, Trial Division, (Walsh, J) in the appeal of Weintrub (supra) which dealt extensively with the merits of the above two noted cases at 117-118 and 5053-5054, respectively, as quoted hereunder:

On the other hand, certain cases in this court have made a distinction between income from a business and income from property. In the case of Henry Wertman v MNR, (1965) 1 Ex CR 629; [1964] CTC 252; 64 DTC 5158, which concerns section 21 of the Act dealing with transfers of property between spouses, Thurlow J stated at 644 (266, 5166-7):

“In the great majority of cases it is quite immaterial whether the profit is regarded as arising from a business or from property, but when the question does arise, it is in my opinion simply one that must be resolved on the facts of the particular case and I know of no single criterion on which it may be determined. That the rentals are primarily or entirely receipts from property may be a factor of great importance but it is not necessarily conclusive for the question in a case such as the- present one is not so much what the income is derived from but whether the income can be fairly described as income from a business within the meaning of that term as used in the Act.”

He suggests later in the same judgment that the extent of various services provided by the landlord may have a bearing on the matter of determining whether the rental is in substantial measure paying for such services as well as for the use of the property, but he does not consider that the fact that the management of the property occupied the appellants time indicates the operation of a business rather than the rendering of a service to himself and the other owners of the building. This judgment was referred to and followed by Cattanach, J in the case of Harry Walsh and Archie Robert Micay v MNR, (1966) Ex CR 518 at 524-5; [1965] CTC 478 at 484; 65 DTC 5293 at 5296, in which he states:

“In my view, prima facie the perception of rent as land owner is not the conduct of a business, but cases can arise where the extent of the various services provided by the landlord under the terms of a leasing contract and the time and labour devoted by him are such that the rental paid by the tenant can be regarded as in a substantial measure payment for such. services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum could readily be regarded not as mere rental of property, but as true receipts of a business of providing apartment suites and services to tenants. It is a question of fact as to what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.”

In that case, two solicitors together with two other persons purchased two large apartment buildings and a shopping centre which properties were, however, managed for them by a management company. This latter fact did not enter into the decision of the case, however, which relied rather on the nature of the services provided and concluded that the provision of heat, electric stoves and refrigerators, janitorial services, snow removal, and some carpeting and drapes were those which tenants have come to expect and landlords normally provide and were ‘‘relatively insignificant and insufficient to convert the appellants from land owners into the conductors of a business”. It should be noted. however, that that case dealt with capital cost allowances by virtue of subsection 1100(3) and paragraph 1104(1)(a) of the Income Tax Regulations and that the owners of the properties were individuals and not a corporation.

And at 118-119 and 5054 and 5055, respectively:

In the case of Her Majesty the Queen v Canadian-American Loan and Investment Corporation Limited, [1974] CTC 101; 74 DTC 6104, Cattanch, J had to consider whether the income in question was income from property or income from a business in connection with the application of section 23 of the Act. After again referring to the Wertman case (Supra) he stated at page 107 (6108-9):

‘‘In my view, prima facie the perception of rent as land owner is not the conduct of a business, but cases can arise where the extent of the various services provided by the landlord under the terms of a leasing contract and the time and labour devoted by him are such that the rental paid by the tenant can be regarded as in a substantial measure payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum could readily be regarded not as mere rental of property, but as true receipts of a business of providing apartment suites and services to tenants. It is a question of fact as to what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.”

and concluded that the services of the appellant, involving the lifting and storage of boats, was a service operation and hence a business, the taxpayer being a warehouseman so the income was not income from property.

The learned judge allowed the Weintrub appeal, relying substantially upon the corporate structure of the operations as evidence of the commercial characteristics, as indicated at 120 and 5055, respectively:

The business of the company as set out in its letters patent was

“To purchase, lease, take in exchange or otherwise acquire lands or interests therein together with any buildings or structures that may be on the said lands or any of them, and sell, lease, exchange, mortgage or otherwise dispose of the whole or any portion of the lands and all or any of the buildings or structures that are now or may. hereafter be erected thereon, and to take such security therefor as may be deemed necessary;”

The operation of the two office buildings in question involving dealing with a substantial number of tenants was clearly within the objects for which the company was incorporated and this constituted an “active” commercial undertaking.

In my view the individual appellant in this case does not commence from any such position of similar corporate advantage, and must establish even the rudimentary evidence of commercial operation.

The interpretation placed upon Weintrub (supra) by counsel for the appellant was that it virtually annulled by its decision, the appeal dismissals in Wertman (supra) and Walsh (supra). None of these three cases however dealt with the issue of non-resident income, or examined a question arising under the provisions of the “new” Income Tax Act. These factors when added to the absence of any corporate structure in this appeal, leave me considerably less certain than counsel, that the learned Judge intended Weintrub (supra) to be the standard in all such matters distinguishing “business” from “property” income. The question before the Board, in my view, remains whether or not, on its own merits the activity of the appellant is of a nature that the income derived therefrom demonstrates clearly he was conducting a commercial enterprise and not simply receiving rent from real property. The physical evidence available is the “Statement of Operations” attached to the appellant’s income tax return, and it is reproduced hereunder:

QUEENSBERRY COURT APARTMENTS

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1975
Income	1975	1975	1974 1974
Rental income	$432,386		$392,983
Laundromat income		5,820		5,345
	$438,206		$398,328
Expenses
Accounting	$	580A	$	600
Advertising		243A		296
Bank charges		439A		669
Carpets and drapes		470M		803
Cash shortage		—		2,651
Garbage removal		2.438M		2,511
Heat		34.330M		28,070
Hydro		21 ,261 M		18,977
Insurance		1.791A		1,007
Landscaping		1.190M		886
Legal and audit		1.470A		1,411
Maintenance—building		6.100M		7,381
Maintenance—electrical		4.139M		6,925
Maintenance—elevator		3.494M		3,393
Maintenance—equipment		900M		996
Maintenance—pool		7.740M		7,419
Maintenance—plumbing		2.706M		2,031
Maintenance—snow removal		60M		34
Maintenance—pest control		293M		300
Management fees		13.266A		13,004

	1975	1974 1974
Miscellaneous	117A	499
Mortgage interest	213.167A	201,543
Municipal taxes	80.064A	74,180
Office expense	253A	318
Paint and decorating—suites	7.936M	8,918
Paint and decorating—other	27M	1,402
Pension	212A	202
Rental—equipment	4.938M	5,086
Supplies—cleaning	1.430M	2,267
Supplies—other	400M	1,090
Telephone	524A	560
Travel	60A	—
Unemployment insurance	254A	252
Wages	12.949M	11,871
Water	951M	950
	$426,192	$408,502
Net Income (Loss) for the Year	$ 12,014	$(10,174)

The appeal cannot be based on an examination of gross income—it was all from rental including that of the laundromat. The rentals are not such that they show relationships or allocations to any functions or activities, and barring any other perspective these fees must be perceived as payments to the appellant as the landlord, not as the operator of a business. The only other perspective possible to moderate this would be that the expenses were incurred for functions and activities identifiable with a commercial enterprise and not primarily or exclusively assuring the rental income from the use of the property. At the risk of some arbitrary decision, I have indexed on the above statement of expenses two groups: (A) referring to administrative and

(M) referring to maintenance.

Administrative expenses (as indexed above) are those generally incurréd outside the interest or concern of the tenants. In other words, Whether these things were done or not could be of no direct consequence to those paying rent. Clearly they have an indirect bearing on a well-managed building, but they are without exception, in my Opinion, expenses normally incurred in the operation of such a property—they are not reflective of any special business characteristic of the operation.

Maintenance expenses, when similarly reviewed, show much the same basis—the only difference being that these would generally be noticeable by the tenants. In a well-managed building these would be the visible criteria upon which tenants and particularly prospective tenants would make their decisions—whether to rent an apartment, whether to pay rental increases, and even whether or not to pay the rental due each month. The tenants’ relationship and reaction would be toward only one focal point—the rent they were being charged.

It may well be proposed that the proper and dedicated operation of any well-managed apartment building has characteristics and expenses akin to a commercial enterprise. The demonstration in evidence and argument that such similarities and comparisons can be drawn, does not of itself fulfill the conditions in the Weintrub judgment referred to earlier at 5296 and 484, respectively, quoting Cattanach, J, in Walsh (supra):

It is a question of fact at what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.

The facts must demonstrate that the operation has passed from one form of enterprise into the other. This comment must be read in conjunction with the opening sentence from the same quotation: “In my view, prima facie the perception of rent as landowner is not the conduct of a business . . .”. (Italics mine). Whatever might be the facts which would throw some light on where such a line of demarcation could be drawn, there is no evidence that in this case such a divide has been overcome. Ali the income in this appeal arose from rents, and all the expenses were associated directly or indirectly and exclusively with the collection and earning of those rents, and not with the provision of facilities or services beyond the parameters of perception, conviction or expectation of the tenants in return for such payments.

Decision

The appeal is dismissed.

Appeal dismissed.