Splend'or Industries Ltd. v. The Queen, 99 DTC 560 (TCC)

Date: 19990201

Docket: 97-2376-IT-G

BETWEEN:

SPLEND'OR INDUSTRIES LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Lamarre Proulx, J.T.C.C.

[1] This appeal concerns the interpretation of a clause in a lease entered into between two parties not dealing at arm's length, the issue being whether the replacement of a roof is a "landlord's repair".

[2] The Minister of National Revenue (the "Minister") made the assumptions of fact set out in paragraph 14 of the Reply to the Notice of Appeal (the "Reply") as follows:

a) At all material times, Mr. Joseph Caporicci was the only shareholder of the Appellant.

b) In 1994, the Appellant rented an immoveable property located at 8660, 8th Avenue in the City and District of Montreal.

c) The premises rented by the Appellant were the property of Mr. Joseph Caporicci.

d) In 1994, the Appellant incurred an amount of $47,000.00 to repair the roof of the premises it rented.

e) Under the terms of the Lease Agreement entered into by the Appellant and Mr. Joseph Caporicci on February 1st, 1984, the Appellant was not required to repair the roof of the premises. On this point, Article IX of the Lease Agreement reads in part as follows:

9.1 From the commencement date of the Lease, and throughout the term, Lessee shall at its sole cost and expense take good and reasonable care of the premises including the land, buildings, improvements, fixtures and equipment thereon or therein or hereafter erected or placed thereon or therein, as well as every part thereof, and shall manage, operate, maintain and keep same in good and substantial repair and condition, both interior and exterior, structural or otherwise, and shall promptly effect all required and necessary repairs and replacements thereto of a quality and class at least equal to the original. Lessee however shall not be responsible to effect any repairs or replacements to the premises which are "Landlord's repairs" ("Grosses Réparations").

f) In 1994, the rental fees paid by the Appellant under the Lease Agreement, significantly increased to provide the lessor, Mr. Caporicci, with additional funds to repair the premises.

[3] Mr. Joseph Caporicci and Mr. Rabinovitch, the Appellant's accountant, testified for the Appellant. Ms. Lilianne Mehanna, an agent for Revenue Quebec, testified for the Respondent.

[4] Subparagraph 14 a) of the Reply was not admitted as such but it was admitted that Mr. Joseph Caporicci was a controlling shareholder. Subparagraphs 14 b) to 14 e) were admitted. Subparagraph 14 f) was denied and the evidence adduced showed that this assumption of fact most probably was incorrect. As I find that it is of no importance I will not report the evidence on that point.

[5] The lease was produced as Exhibit A-1. It can also be found at Tab 10 of Exhibit R-1. To be complete clause 9.1 of the lease referred to above at paragraph 2 of these reasons should include the following sentence:

... Without limiting the generality of the foregoing, Lessee shall at all times take care of the premises and the improvements, fixtures, and equipment thereon or therein and, at the expiration or sooner termination of this Lease, shall surrender the premises in as good condition as reasonable use will permit. Lessee shall also give to Lessor prompt written notice of any accident to, or defect in the water pipes, steam pipes, heating or air-conditioning equipment, electric lighting, elevators, wires or other services of any portion of the premises.

[6] Mr. Caporicci considered the replacement of the roof as maintenance for wear and tear. Every 20 years or so a roof has to be replaced. The invoice was produced as Exhibit A-2. It also appears at Tab 11 of Exhibit R-1. According to the witness, the value of the building is one million dollars. Therefore, in the Appellant's view, the expense of $47,000 was not that great in comparison to the value of the building. He stated that when entering into the lease the parties intended it to be "triple net", that is, all repairs would be at tenant's responsability.

[7] Ms. Mehanna is of the opinion that the expense in question is not a maintenance expense as it represents 30 percent of the rental cost. She applied the lease agreement between the parties as it stands: article 9.1 says specifically that "les grosses réparations" are the lessor's responsibility.

[8] Counsel for the Appellant submitted that the expense was 1/20 of the value of the building and therefore not a big expense. It was an expense occasioned by the normal aging of the property. Referring to the clause in question he stated that this repair was a structural repair. He referred to sections 12.1 and 7.1 of the lease and tried to argue that the intent of the parties was to enter into an agreement whereby the responsibility for replacing a roof would fall on the lessee and not the lessor.

[9] He also submitted that the Minister should not contest the interpretation of the two parties to the contract. There is nothing in the Civil Code of Quebec that would have prevented the parties from entering into a lease that would have relieved the landlord from his obligations with respect to repairs. The parties were in agreement that the replacement of the roof was an expense to be assumed by the tenant and not the landlord, so why not accept this interpretation? Counsel did not, however, refer the Court to any authorities that would require the Minister to do so.

[10] Counsel for the Respondent referred to article 1864 of the Civil Code of Quebec which reads as follows:

Art. 1864. The lessor is bound, during the term of the lease, to make all necessary repairs to the leased property other than lesser maintenance repairs, which are assumed by the lessee unless they result from normal aging of the property or superior force.

[11] Relying on this article, counsel submitted that repairs resulting from the normal aging of the property are the lessor's responsibility and are not lesser maintenance repairs. They are "grosses réparations". She also referred to the work of Pierre-Gabriel Jobin, entitled Le Louage, 2nd ed., Cowansville, Les Éditions Yvon Blais Inc., 1996, and more particularly to paragraph 147, which is entitled "Grosses réparations". From this paragraph, she quoted the following excerpt: "Les réparations au toit et au système de chauffage sont considérées comme des grosses réparations." She argued that if repairs to the roof are considered "grosses réparations", all the more so should the replacement of the roof.

[12] I believe that it is abundantly clear that the replacement of a roof is a "grosse réparation" and nothing more need be said on the subject.

[13] Should the Minister follow the interpretation of a contract suggested by the two parties to that contract? The general principle is that the Act has to be administered in accordance with applicable law. In matters of possible tax avoidance, where transactions take place between parties not dealing at arm's length, scrutiny is to be expected. Where the law is clear regarding a given situation, the interpretation of the parties would not be relevant as it might be in more doubtful cases.

[14] There are numerous decisions on the subject: Stubart Investments Limited v The Queen, 84 DTC 6305, The Queen v. John J. Daly, 81 DTC 5197, Amelia Rose v. M.N.R., 73 DTC 5083, Cornerstone Properties Limited v. The Queen, 95 DTC 614. I wish to refer to the views expressed by Urie J. in Atinco Paper Products Ltd. v. the Queen, [1978] CTC 566 at 577 and 578, as follows:

I do not think that I should leave this appeal without expressing my views on the general question of transactions undertaken purportedly for the purpose of estate planning and tax avoidance. It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that this Court is not the watch-dog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is, correct in form, but, in fact, are in all respects legally correct, real transactions. If this Court, or any other court, were to fail to carry out its elementary duty to examine with care all aspects of the transactions in issue, it would not only be derelict in carrying out its judicial duties, but in its duty to the public at large. It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be a strict or liberal view taken of a transaction, or series of transactions which it is hoped by the taxpayer will result in minimization of tax. The only course for the Court to take is to apply the law as the Court sees it to the facts as found in the particular transaction. If the transaction can withstand that scrutiny, then it will, of course, be supported. If it cannot, it will fall. That is what happened here.

[15] The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 1st day of February 1999.

"Louise Lamarre Proulx"

J.T.C.C.