The Queen v. Hampton Golf Club Ltd., 86 DTC 6513, [1986] 2 CTC 403 (FCTD)

McNair, J.:—There are two points involved in this action by way of appeal and cross-appeal. First and foremost is the question whether golf greens and tees are depreciable assets within the meaning of the Income Tax Act and Regulations. The second issue is whether landscaping expenses are properly deductible. The appeals are from a decision of the Tax Review Board dated August 27, 1979 whereby the defendant's appeal from assessments of income tax for the 1974 and 1975 taxation years was allowed in part. The hearing of the appeals is still a trial de novo where the matter in issue is the validity of the Minister's assessment.

The taxpayer claimed capital cost allowance on its greens and tees on the basis that they were structures within the meaning of the Act and regulations and it claimed the cost of building the fairways as landscaping expenses. The Minister disallowed the capital cost allowance on the greens and tees by reason that they were not depreciable assets. He allowed 15 per cent of the total expense of building the fairways, greens and tees as landscaping expenses. The Tax Review Board allowed capital cost allowance on the greens and tees on the basis that they were property in the nature of “similar surface construction" within the meaning of Class 1 of Schedule B of the Regulations, but agreed with the allowance of 15 per cent for landscaping costs. The Crown appeals the decision on the depreciation aspect and the defendant cross-appeals by way of counterclaim in respect of landscaping costs and capital cost allowance, the contention regarding the latter being that the greens and tees are structures within the meaning of Class 3 of Schedule B.

The defendant is a company which owns and operates an 18-hole golf course in Hampton, New Brunswick, consisting of a clubhouse, outbuilding, fairways, greens and tees, and surrounding land. The company was incorporated in 1971 under the New Brunswick Companies Act. Shortly thereafter, it began the task of converting its land into a golf course. By 1974, nine of the 18 holes had been completed.

Greens and tees are essential and relatively permanent features of any golf course. They are built up to required heights, after initial excavation, by successive layers of earth material. The usual sequence is a bottom layer of gravel or other coarse fill, followed by a layer of subsoil sealer. Then comes a layer of nine inches or so of topsoil. Finally, a seed bed is placed over the topsoil to a depth of about one and one-half inches. The design and construction of greens and tees is complicated and time-consuming. Much attention nas to be paid to achieving good drainage. The construction of tees is similar to that of greens, although slightly less complicated. Tees and greens are the platforms used by golfers to make their shots at holes and thereafter to complete the holes. Virtually all of the building materials or components for the greens and tees was trucked in from outside.

It seems to me that the whole point of the case is whether the greens and tees are artificially created natural components, separate and distinguishable from the land itself, or whether they are merely the end result of the reshaping of land. Counsel for the defendant conceded at trial that the fairways were no longer an issue. Shortly put, the question is whether the greens and tees are structural entities or land.

The relevant statutory scheme is contained in paragraphs 18(1)(b), 20(1)(a) and 20(1 )(aa) of the Income Tax Act, Regulation 1100 and Schedule B thereunder, now Schedule II. For convenience of reference, I will utilize the Schedule II designation.

Paragraph 18(1)(b) of the Income Tax Act, S.C. 1970-71-72 c. 62, reads:

18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

Paragraphs 20(1)(a) and (aa) of the Act state:

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

(aa) an amount paid by the taxpayer in the year for the landscaping of grounds around a building or other structure of the taxpayer that is used by him primarily for the purpose of gaining or producing income therefrom or from a business;

The provisions of the regulations that are particularly relevant are subparagraphs 1100(1 )(a)(i) and (iii), which provide:

Capital Cost Allowances Division 1

DEDUCTIONS ALLOWED

1100.(1) For the purposes of paragraph 20(1 )(a) of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

Rates

(a) such amounts as he may claim in respect of property of each of the following classes in Schedule II not exceeding in respect of property

(i) of class 1, 4 per cent,

(iii) of Class 3, 5 per cent,

of the amount remaining, if any, after deducting the amounts, determined under sections 1107 and 1110 in respect of the class, from the undepreciated

capital cost to him as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of the property of the class;

Class 1 and Class 3, as above referred to, are specifically defined in Schedule Il of the Regulations [formerly Schedule B], which provides in part as follows:

Schedule II Capital Cost Allowances

Class 1 (4 per cent)

Property not included in any other class that is

(g) a road, sidewalk, airplane runway, parking area, storage area or similar surface construction, acquired before May 26, 1976;

Class 3 (5 per cent)

Property not included in any other class that is

(a) a building or other structure, including component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators;

The Crown's basic position is that the building of tees and greens is nothing more than landscaping involving the reshaping of the land itself, which is not depreciable by virtue of the combined effect of subsection 1102(2) of the Regulations and Class 8 of Schedule II thereunder. Counsel for the Crown further contends that the ejusdem generis rule serves to limit the general to the particular class enumerated in paragraph (g) of Class I so as to exclude anything that is not in the nature of “similar service construction" upon which people walk or vehicles travel. Hence, the only permissible deduction is that provided for by paragraph 20(1)(aa), which the Minister allowed at a reasonable amount.

The defendant proceeds on the contrary premise that the greens and tees are constructed from natural elements designed for the sole purpose of putting together artificial structures of appreciable size and relative permanence with good drainage that will provide level playing surfaces or platforms for golfers. Counsel for the defendant contends that there are instances where earth materials formed part of what were held to be structures, and he cites several cases to support this submission: Moran & Son Limited v. Marsland, [1909] 1 K.B. 744; and Hobday v. Nicol, [1944] 1 All E.R. 302. In the Moran case, reservoirs on concrete flooring, with walls of brickwork backed by concrete and earth, covered by brick arches which themselves were covered with a layer of concrete and earth on top, were held to be “buildings or structures" within the meaning of a building statute. In Hobday v. Nicol galvanized iron tanks filled with earth and hardcore, which were erected behind a concrete wall along the bank of a river, were held to be “structures" in the ordinary acceptation of the word and were thus within the meaning of a drainage by-law sufficient to justify a conviction thereunder.

Counsel for the defendant acknowledges that the biggest hurdle the golf club has to clear is the fact that when all is said and done the completed structures of greens and tees look very much like the surrounding natural structure, that is, the land itself.

It has been laid down by the Supreme Court of Canada that the word “structure", as it is used in Class 3, is not to be interpreted ejusdem generis with the word “building" with which it is associated: see British Columbia Forest Products Ltd. v. M.N.R., [1972] S.C.R. 101; [1971] C.T.C. 270; 71 D.T.C. 5178; and Superior Pre-Kast Septic Tanks Ltd. v. The Queen, [1978] 2 S.C.R. 612; [1978] C.T.C. 431; 21 N.R. 73. The meaning of the word “structure" must be determined in relation to its use in the statutory provision in question. However, it is proper to consider what has been considered to be a structure in connection with other taxing statutes: see Superior Pre-Kast, supra, at 619 (C.T.C. 435).

The Superior Pre-Kast case involved a claim for exemption from sales tax where the narrow point in issue was whether a septic tank was a “structure" within the meaning of subsection 26(4) of the Excise Tax Act wherein the words used were “building or other structure". The exemption was allowed.

Martland, J., for the court, stated the ratio at 619-20 (C.T.C. 435):

With respect, in my opinion the fact that a septic tank is used as a part of the sanitary system of a residence, not on a sewer line, does not make it a part of the residence building. I would consider a water tower constructed to store water for use in the residence to be a structure in itself. It is not a part of the building, though constructed for the use of the residents of the building.

The septic tanks in question here are things which are built or constructed. They are designed to be placed underground and become a part of the land in which they are installed. They are manufactured in competition with persons who construct such tanks at the site. In my opinion they are structures within the meaning of s. 26(4) and the appellants are entitled to the exemption provided by that subsection.

A case frequently relied on by the courts in interpreting the word “structure” is Cardiff Rating Authority v. Guest Keen Baldwin's Iron and Steel Co. Ltd., [1949] 1 K.B. 385 (C.A.). The point requiring determination was whether movable tilting furnaces in a steel works were in the nature of “buildings or structures” within the meaning of class 4 of the schedule to the Plant and Machinery (Valuation for Rating) Order, 1927, so as to be rateable thereunder. It was held that they were.

Denning, L.J., made this statement at 396:

In this case the learned recorder seems to have thought that these were not structures or in the nature of structures because they were moveable. In my opinion, that was a misdirection. A structure is something which is constructed, but not everything which is constructed is a structure. A ship, for instance, is constructed, but it is not a structure. A structure is something of substantial size which is built up from component parts and intended to remain permanently on a permanent foundation; but it is still a structure even though some of its parts may be moveable, as, for instance, about a pivot. Thus, a windmill or a turntable is a structure. A thing which is not permanently in one place is not a structure, but it may be “in the nature of a 'structure'” if it has a permanent site and has all the qualities of a structure, save that it is on occasion moved on or from its site.. . .

The earlier English case of Inland Revenue Commissioners v. Smyth, [1914] 3 K.B. 406 posed the borderline situation of whether a road was a “structure” within the meaning of subsection 25(2) of the Finance (1909-10) Act, 1910 (U.K.) and the court held that it was.

Scrutton, J., drew some interesting analogies and summed up his concept of a structure in this way at 421-22:

In my view it is a question of fact in each case; a gravel path though from repeated gravellings it is harder than the surrounding soil would not in my opinion be a structure, while the roads one is familiar with in Switzerland, the Tyrol, and Italy, in parts built up on mountain sides, in parts cut out of solid rock, would I think clearly be structures, as would the elaborate compositions of concrete, wood blocks, and tarmac used for heavy motor traffic at the present day. Between the two there is every variety of degree of solidity and permanence. . . .

I think a structure is something artificially erected, constructed, put together, of a certain degree of size and permanence, which is still maintained as an artificial erection, or which, though not so maintained, has not become indistinguishable in bounds from the natural earth surrounding. What degree of size and permanence will do is a question of fact in every case.

In Edinboro Company v. United States, 224 F. Supp. 301 (1963), a case strongly relied on by the plaintiff, the question was whether the taxpayer was entitled to claim depreciation for an 18-hole golf course in respect of a purchase price allocation to buildings and equipment and the cost of improvements and the court disallowed the depreciation claimed. The court held that the land itself was not subject to depreciation allowance for income tax purposes since it had an unlimited useful life. The same principle was applied by analogy to the cost of improvements for tees, greens, fairways, traps and other hazards.

Willson, D.J., said at 303:

This Court is in agreement with government counsel when he says that the tees, greens, fairways, traps and other hazards are not distinguishable from the land which is molded and reshaped to form them. Like the land they have an unlimited useful life.

The New Brunswick case of Acadian Pulp & Paper Ltd. v. Minister of Municipal Affairs (1973), 6 N.B.R. (2d) 755 (C.A.) is closely on point. The issue was whether a wharf and retaining wall were “structures” within the meaning of the province's Assessment Act, or whether they fell within the category of land.

Hughes, C.J.N.B., concluded at 759:

The appellant’s wharf, although built up from component parts consisting of large concrete boxes in and upon which stone, gravel and fill was placed is, in my

opinion, indistinguishable from the rest of the site upon which the refinery is constructed, except that the wharf has on its seaward side a vertical retaining wall made of heavy corrugated steel. The wharf constitutes an extension into the harbour of the land area of the refinery site made by the addition of fill stabilized by the concrete blocks and protected from erosion by the corrugated steel retaining wall. In my opinion the wharf, other than the retaining wall, is land and should be assessed on the principles by which land is assessed and not as a structure based on its cubic content.

[Emphasis added.]

In Plastibeton Inc. v. M.N.R. et al., [1985] 1 C.T.C. 319; 85 D.T.C. 5240 (F.C.T.D.) Mr. Justice Dubé held that median polymer strips installed as traffic barriers in the centre of Metropolitan Boulevard in Montreal were structures and exempt from sales tax under subsection 26(4) of the Excise Tax Act but that the precast polymer panels erected as side barriers along the Boulevard were not. The learned judge did an extensive review of the authorities and resorted to the standard dictionary definitions of the word “structure”. The case went on appeal and the Federal Court of Appeal held that the median polymer strip could not qualify for sales tax exemption as an “other structure” within the meaning of subsection 26(4) of the Act on the ground that it was not a separate structure: M.N.R. et al. v. Plastibeton Inc., [1986] 2 C.T.C. 211; 86 D.T.C. 6400.

MacGuigan, J., alluded to the opinion of Martland, J., regarding the septic tank in Superior Pre-Kast Septic Tanks, supra, and stated at 214 (D.T.C. 6402):

It seems to me that in the analysis Martland, J. endorses three criteria for determining the existence of a structure: (1) it must be built or constructed; (2) it must rest on or in the ground (3) it must not be “a part” of another structure.

The learned judge went on to conclude at 215 (D.T.C. 6402):

The learned trial judge here adequately took account of the positive characteristic but not of the negative one. The median strip has no purpose other than that of forming part of the highway. It is a common, even a usual feature, of such highways. It is not separate and apart from the highway like a tower or a cabin, but is entirely co-extensive with it, having no distinctive shape or existence. It is a part or incident of the highway, and cannot therefore qualify as an “other structure” from it for the purposes of paragraph 24(4)(a).

Marceau, J., agreed with the result but had some reservations about his colleague’s endorsement of criteria of general application for determining the existence of a “structure” beyond the particular facts involved in the Superior Pre-Kast decision. He preferred to approach the problem of structural differentation from the standpoint of function rather than construction. I am bound, of course, by the majority opinion.

The words “building or other structure” in paragraph (a) of Class 3 of the Regulations, having regard both to the enumerated inclusions therein and the specific exclusion of land in the other regulatory provisions creates, in my view, more of the impression or image in the mind’s eye of something in the nature of an artificially constructed entity or structure that is separate and distinct from the land itself. Narrowing the range of imagery to a golf course, one can readily envision as structures such artificial works as a pavilion, fence, outdoor lighting stanchion, rain shelter and the like. By the same token, it is difficult to visualize greens and tees as other than part of the fairways and surrounding landscape. In my opinion, the defendant’s greens and tees are not so obviously artificial as to be readily distinguishable from the natural earth surroundings of the rest of the golf course. In short, they are not separate and distinct from the land itself. In the result, I find that the greens and tees are not structures within the meaning of Class 3 of the regulations.

Turning to Class 1 of the Regulations, I am unable to conclude that the greens and tees come within the terminology of surface construction similar to a road, sidewalk, airplane runway, etc., as used therein. It is my opinion therefore that the greens and tees are not similar surface constructions within the meaning of Class I.

The final point in the defendant’s appeal concerns the 15 per cent deduction for landscaping costs allowed by the Minister pursuant to paragraph 20(1)(aa) of the Income Tax Act. As stated, it was conceded at trial that the fairways are not structures within the meaning of Class 3 of the Regulations. I have found that the greens and tees are not structures within the meaning thereof. Under the circumstances, I consider that the amount allowed by the Minister for landscaping costs is reasonable and proper in the circumstances.

For the foregoing reasons, the plaintiff’s appeal is allowed, with costs. The defendant’s cross-appeal by way of counterclaim is disallowed with costs. Judgment will go accordingly.

Appeal allowed.