Dubreuil Brothers Limited v. Minister of National Revenue, [1978] CTC 2853, [1978] DTC 1584

The Chairman:—This is an appeal of Dubreuil Brothers Limited from an income tax assessment dated July 22, 1977, in respect of the 1972, 1973 and 1974 taxation years.

Issue:

The issue in this appeal is best summarized by the respondent’s reply to the notice of appeal at paragraphs 2, 3 and 4.

2. In making its returns of income for its 1972, 1973 and 1974 taxation years the appellant claimed capital cost allowance under class 10 and class 6 of schedule B to Income Tax Regulation 1100 as follows:

	1972	1973 1973	1974 1974
Class 6	$ 42,165.47	$ 58,624.29	$ 60,235.39
Class 10	$381,977.82	$600,252.15	$594,286.50

3. In re-assessing the appellant for the taxation years under appeal, the respondent determined that certain of the capital assets which had been classified by the appellant to class 10 should have classified as class 6 and accordingly capital cost allowance was allowed the appellant as follows:

	1972	1973 1973	1974 1974
Class 6	$ 60,568.29	$101,297.69	$132,658.03
Class 10	$326,769.11	$483,423.43	$417,176.40

4. As a result of the said re-assessment, the net income of the appellant was increased for the years under appeal by the following amounts:

1972	$ 36,805.89
1973	$ 74,155.32
1974	$104,687.46

The basic question is whether some one hundred and five so-called “trailers” owned by the appellant come within the meaning and intent of property falling under class 10 of Schedule B to the Income Tax Regulations permitting a deductible allowance of 30% claimed by the appellant or whether the property comes under class 6 of Schedule B where the deductible allowance of 10% as claimed by the respondent in his reply to the notice of appeal.

However, at the outset of the hearing, counsel for the respondent presented a motion to amend his reply so as to include after paragraph 5 of the reply new paragraphs 6 and 7 which are to read:

6. In the alternative, the assets subject of the reclassification in issue on this appeal should be included in class 3 of schedule B to the Income Tax Regulations.

7. In the further alternative, if the said assets do not fall in either class 3 or class 6 then the assets must fall within class 8 of schedule B to the Income Tax Regulations.

Counsel for the appellant did not object to the proposed amendment to the respondent’s reply and the motion was granted. The subsequent paragraphs in the respondent’s reply are to be renumbered accordingly.

Summary of Facts:

The facts in this appeal are not really in dispute and it would appear that the only question to be determined is “when is a trailer not a trailer”. In his evidence Mr Terry Kelley, Vice-President of Finance of the appellant company with which he has been associated in one capacity or other for a period of ten years explained that the appellant company was in the logging and lumbering business and in 1960 owned a townsite situated some 175 miles north of Sault Ste Marie known as Dubreuilville which was incorporated in 1977. Dubreuilville is a modern townsite with a school, church, auditorium, single family dwellings, duplexes or semi-detached dwellings as well as 105 “so- called” trailers owned by the appellant and some 36 such trailers owned by individuals (Exhibit R-1, development plan).

The trailers were hauled into Dubreuilville by trucks and the appellant gave some 12 examples of trailers which were subsequently moved within the townsite or to other locations. The witness explained that the appellant company had three types of employees. 25% of the employees were permanent, 25% remained with the company 2 to 4 years and 50% were transient and remained with the company for 3 to 4 months. The witness who was a knowledgeable and credible witness alleged that the appellant’s policy in acquiring duplexes, single family houses and trailers was to entice employees to live in Dubreuilville on a more permanent basis. The trailers were allegedly a temporary measure to house employees but the company’s longer term. policy was to replace the trailers with single family houses or duplexes. Mr Kelley explained that 1973 was a boom year in the lumber industry and trailers had to be acquired to house employees, no time being available for the construction of more permanent housing. This, according to Mr Kelley, explains the large number of trailers as compared to the more permanent dwellings. The company is, even now, desirous of acquiring additional crown land on which some of the trailers are sited but the sale condition is that 75 to 80 permanent houses must be constructed within 5 years.

As to the trailers themselves, although of varying sizes, are usually 12 feet wide by 60 feet long. All are steel framed with metal sheeting and an undercarriage with axle and wheels such as exist in trailer trucks. In the front of each trailer and arising from the trailer chassis is a hauling attachment which can be hitched to a motor vehicle making the trailer capable of being moved on its own wheels. The company trailers were backed on to the intended site which are lots, the size of which are, on an average, 55 feet wide by 130 feet long also owned by the appellant. The trailer is then made to rest on 6" x 6" wooden cribbing (Exhibit R-1 (Photos)), or on concrete paddings. The wheels are sometimes taken off but the axle and the hub usually remains. Plumbing and electrical connections are then installed and a skirting is arranged around the trailer so as to hide its understructure. In most cases lean-tos of approximately 10’ x 16', most of which are used as bedrooms as well as small stoops, are added to the trailer. Mr Kelley testified that the lean-tos were not bolted or otherwise attached to the trailers. He explained that the lean-tos were built close enough to the trailer to allow for installation between the trailer wall and the lean-to and that connection was principally the joining of the roof of the lean-to with that of the trailer and thickly covered with tar.

Mr Belcourt, a senior real estate appraiser for the Department of National Revenue, to whom I shall refer later, who inspected the trailers and made his report produced as Exhibit R-1, believed that the lean-tos were bolted to the trailers but admitted in cross-examination that he had not, in fact, been able to ascertain whether that was so. Some of the tenants of the trailers built garages, fences and did some landscaping around their property. It should be noted here that the lean-tos and stoops were considered by the appellant in its tax returns as coming within class 6 in the Income Tax Regulations. Exhibit R-1 contains photographs of many of the subject trailers.

In his letter to the Chief of Appeals, Mr Belcourt, the senior real estate appraiser who was introduced as the respondent’s witness, explained that one of the purposes of his study (Exhibit R-1), was to determine the degree of permanency of the units. His report appears to be quite complete and he is, in my opinion, objective in out-look.

Counsel for the appellant, in fact, generally agreed with Mr Belcourt’s report but did not agree with some of the opinions stated by Mr Belcourt at page 5 and in his conclusion on page 15 of his report.

Mr Belcourt concluded that in his opinion the trailers were intended to remain at their respective sites and he made the distinction between the subject properties and mobile trailers such as are seen at construction sites and to which can be added recreational mobile trailers or travel trailers.

Submissions:

Counsel for the appellant’s submission is that the word “trailer” is specifically mentioned in paragraph (e) of the properties falling in class 10 of the capital cost classes in Schedule B and since a tax statute must be strictly interpreted the appellant’s trailers must necessarily fall within class 10. Counsel also suggests that the Regulation s use of the word “mobile home” in no way detracts from the fact that the subject properties are known as and referred to as trailers. Several old cases were cited in support of the proposition that a taxing statute must be clear and if some ambiguity exists in a taxing statute the section should be interpreted in favour of the taxpayer. Counsel further contends that in the circumstances the onus of proving that the subject properties do not fall within class 10 lies with the respondent.

I do not have any difficulty in accepting the appellant’s first proposition that a taxing statute must be clear before it can be properly applied but, in my opinion, the basic principles of our tax law and the decision of the courts are contrary to the appellant’s second proposition. In the circumstances of this appeal, particularly when dealing with the deductibility of certain amounts, it is the appellant who has the onus of establishing that the subject assets come squarely within the wording and intent of properties classified under class 10.

Counsel for the appellant, and I believe rightly so, makes a distinction between a trailer or a mobile home and a more permanent dwelling and referred to special provisions applied to trailers and mobile homes and which are to be found, among others, in the Excise Tax Act, the Canada Customs Act, The Municipal Tax Act of Ontario, RSO 1977, The Conditional Sales Act of Ontario, RSO 1976, and The School Administration Act which appear to place trailers in a category somewhat different from permanent residences and from ordinary real property. On the. other hand, there is no record at page 16 of Mr Belcourt’s report, uncontradicted evidence that the Assessment Branch of the Ontario Ministry of Revenue has, for 3 years now, assessed all mobile homes equally with conventional homes and are included on the regular municipal assessment roles.

There can be no doubt that the concept of “trailers” that have evolved over the years and which include the type of structures with which we are presently concerned, appear to be somewhat between a vehicle and a permanently fixed dwelling. The various provincial and federal provisions which have been enacted for specific purposes because of the nature, the use and the double functions of certain categories of trailers can, in my view, be only marginally helpful as a criteria in determining, for purposes of capital cost allowances, whether the subject properties come within class 3, 6, 8 or 10 of Schedule B.

The respondent’s position appears to be that whatever other classes the subject properties may fall into they do not fall within class 10 of the Income Tax Regulations as claimed by the appellant.

Both parties to the appeal agree that the subject properties are structures or buildings which are not permanently fixed to the land; which are capable of being hauled and moved on their own wheels and which can also serve as dwellings. Counsel for the respondent considered that the subject properties can even be looked upon as chattels but which remain in the same place for a considerable period of time.

The Income Tax Act or its Regulations do not define the word “trailer” as used in class 10 of the Regulations. However, it should be noted that the legislator in paragraphs (a), (c), (d), (e) and (f) of class 10 including a trailer appears at least to have assembled together items having mobility as a principal characteristic as well as some carrying capability.

Although counsel for the respondent did provide the Board with several dictionary definitions of the word “trailer” I did not find them particularly helpful in determining whether the subject properties are trailers within the meaning and intention of class 10.

Because of the relatively recent development of trailers and the various uses to which they are put, I prefer to rely on more recent decisions of the courts in determining the instant issue rather than on older cases.

Although it deals more particularly with the Conditional Sales Act and not capital cost allowances, the case of Plaza Equities Ltd and Winnipeg Mortgage Holdings Ltd v Bank of Nova Scotia, [1978] 3 WWR 385, cited by the respondent and which was presided over by D C McDonald, J of the Trial Division of the Alberta Supreme Court, does make a logical, comprehensive and most useful study of the meaning of the word “trailer”.

In his conclusion on page 402, the learned judge makes a distinction between a trailer and a mobile home. Summarizing his con- clusions it would appear that for purposes of highway regulations a trailer is defined simply as a unit on wheels being drawn by a motor vehicle. Whereas for purposes of zoning restrictions the nature of a unit must be decided on the degree of its mobility and on whether mobility is a primary or ancillary characteristic of the unit. The learned judge states at page 403:

The view that the unit’s mobility is only an ancillary characteristic will flow from its being found to have been designed and intended for use as a permanent home in the same manner as any other modern dwelling . . .

Mr Kelley’S',evidence was that the appellant company’s policy in acquiring the trailers was to house its employees. Whether the trailers at Dubreuilville were hauled from a previous campsite or that over the years a few were moved within the campsite, it is clear that the intended use and indeed the actual use of the trailers was not that of a carrier but that of a dwelling on a more or less permanent basis. Although the subject properties did have potential mobility it was minimal and ancillary to its principal use as a dwelling.

The Supreme Court of Canada in the case of Eldon Farr and Helen Farr and Bryan Strangway and Sandra Strangway v The Corporation of the Township of Moore, (unreported), also cited by counsel for the respondent, in referring to trailers and mobile homes constructed and placed on land in a fashion very similar to that of the subject properties, though with reference to municipal zoning restrictives, also shed much light as to when a trailer is not a trailer. Mr Justice Spence, in his reasons for judgment states at page 5:

Before there can be any determination that the mobile home is a “trailer”, the mobile home must be found to be a “vehicle”. I am of the opinion that each particular apparatus purchased and installed by each of these appellants was not a “vehicle”. It was not a means of conveyance, although it was provided with wheels, and it was not used for the carriage of persons or goods. The purpose of the apparatus, and it is quite apparent from the evidence, was that it should be hauled quite empty to a site and there placed on the site and used, not for the conveyance of persons or goods, but for the installation of goods, to wit, furniture, and the residence of people.

Further at page 6 of his reasons for judgment the learned Judge stated:

Whether or not the wheels stayed on or had been removed, I am of the opinion that that structure, judged at that time, was not suitable for being attached to a motor vehicle for the purpose of being drawn.

At page 7 of the reasons for judgment the learned Judge also stated:

I turn then to the next requirement of the definition. The apparatus, and as I have pointed out it must be a vehicle, must be capable of being used for the living, sleeping or eating accommodation of persons. If we were to imagine that this apparatus was a ‘vehicle’ and that, at any rate, as it was being drawn along the highway, it was suitable for being attached to a motor vehicle for the purpose of being drawn thereby it was not then capable of being used for the living, sleeping or eating accommodation of persons. It was an empty hulk of a residence, albeit with wheels on it, but with no electrical connections, no telephone connections, no water or sewerage connections, and no method of heating. It was no more capable of being used for living accommodation than a carport or garage. Again, I fail to find that the apparatus in question, this mobile home in each case, was Within the definition of “trailer”.

The criteria used in defining a “trailer” and the relevant principles that flow from both the above mentioned decisions, in my opinion, do apply to the definition of trailer as used in class 10 of the Income Tax Regulations, and I am of the view that the Board cannot ignore the very valid and important distinction that IS drawn therein between a mobile home and a trailer.

I conclude, therefore, that the subject properties do not come within the definition of trailer in class 10.

I must now determine under which of the classes, 3, 6 or 8 of the Regulations in which the subject properties should properly fall. Having concluded that the subject properties are not to be considered as trailers for purposes of capital cost allowance, it is only proper to note that the very construction of the subject properties and the manner in which they are placed on the land without proper foundations though used as residences are not what one automatically thinks of as an ordinary dwelling.

In carefully reading the properties falling within class, 3 which the respondent claims could be the proper classification for the subject properties, I find it impossible to fit the mobile homes in the general context of class 3 items such as docks* wharves, windmills, etc, and I unhesitatingly conclude that the subject properties do not fall within Class 3.

The respondent, having added to his reply to the notice of appeal class 3 and class 8 under which the subject properties might properly fall, appears to agree that the word “frame” used in class 6 refers to wooden frames. The word “wood” in the French text is specifically mentioned. Since the subject properties are admittedly steel framed with metal sidings, I must conclude that they do not come within class 6.

Although the types of properties specifically mentioned in class 8 would not, in my view, be generally applicable to the subject properties, paragraph (d) of the properties under class 8 reads:

(d) a tangible capital asset that is not included in another class in this schedule except . . .

In my opinion, this very general description can include the subject properties. Although the capital cost allowance system may be an artificial creation of the Minister of National Revenue and to be distinguished from ordinary depreciation of a property as suggested by the respondent, capital cost allowances do have, in my opinion, an important bearing and a close relationship with the effective life span of the properties in the several specified classes. The appellant’s mobile homes would normally have a normal life span somewhat longer than that of a trailer which is used principally as a vehicle such as is contemplated in class 10 and allowing 30% deduction. It is reasonable to expect, however, that such mobile homes have a much shorter durability than would docks or wharves included in class 3 where only a 5% capital cost allowance is permitted.

I conclude, therefore, that the subject properties properly fall within class 8 of Schedule B to the Income Tax Regulations and that a capital cost allowance of 20% would be reasonable under the circumstances.

The appeal is therefore allowed and the matter is referred back to the Minister for reassessment on the basis that the properties subject to this appeal fall within class 8 of Schedule B to the Income Tax Regulations and that an allowance in respect of capital cost of 20% should be allowed.

Appeal allowed.