Mother's Pizza Parlour (London) Ltd. v. The Queen, 88 DTC 6397, [1988] 2 CTC 197 (FCA)

Pratte, J.: —This is an appeal from a judgment of the Trial Division (Rouleau, J.) dismissing the appellant's appeal from an income tax reassessment in respect of its 1976 taxation year.

The trial judge held that in computing its income tax for 1976, the appellant was not entitled to claim, in respect of the proprietary interest it had acquired in a certain building after June 23, 1975, the tax credit contemplated by subsection 127(5) of the Income Tax Act (R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63, s.1). That conclusion was based on the judge's view that the building in question was not “qualified property" within the meaning of subsection 127(10) of the Act because, contrary to the appellant’s submission, that building had not been used primarily for one of the purposes mentioned in that subsection. [1]

The appellant was incorporated under the laws of Ontario for the main purpose of carrying on the business of restaurateurs and owners and operators of restaurants. It is a member of a group of companies which operate establishments under the name of "Mother's Pizza Parlour and Spaghetti House". These establishments offer a number of food items of which pizzas are the specialty; they generally provide dining room, take-out and delivery service to their customers.

After June 23, 1975, the appellant and some associates acquired a building in London, Ontario, that they leased to another member of the "Mother's" group, a company named "Mother's Pizza Parlour (Wellington Road) Limited" which used it as a "Mother's Pizza Parlour and Spaghetti House". It is in respect of its proprietary interest in that building that the appellant claimed an investment tax credit. It is common ground that the appellant was entitled to that tax credit if, contrary to what was held by Rouleau, J., that building was used by its lessee “primarily for the purpose of. . . processing of goods for sale" within the meaning of subparagraph 127(10)(c)(i) of the Act. Whether the building was so used is the sole issue to be determined on this appeal.

The building was operated as a restaurant. There was also a take-out and a home-delivery service. Food was prepared in an efficient and well-equipped kitchen and served in three separate dining rooms having a total seating capacity of 180. The building was not small. Its total net square footage (i.e., of usable space measured inside the walls) of 6,567 could be broken down as follows:

1. Food Preparation

Service Kitchen	513
Food Prep Area	720
Waitress Pick-up	144
Service Bar	157
Cooler	116
To tai	1,650
% square footage	25%
2. Public Area
Public Washrooms	217
Dining Rooms	2,694
Vestibule	84
Take-out	213
Cash Area	114
Lobby
Stairs	110
Total	3,432
% square footage	52%
3. Other
Receiving	102
Stockroom	520
Dishwashing	210
Office	240
Staff Areas
- Dining	149
- Washrooms	192
Mechanical	72
Total	1,485
% square footage	23%

In 1976 and in the following two years, the meals and drinks served in the dining rooms generated approximately 65 per cent of the gross income of that establishment; the rest came from the take-out and delivery service.

In 1977, 50 full-time employees and 55 part-time employees worked there. Out of those, only 9 full-time and 7 part-time employees worked at the preparation of food. Their wages represented roughly 30 per cent of the total wages paid.

The establishment was open to the public 7 days a week: from 11:00 a.m. to 1:00 a.m., Monday to Thursday, 11:00 a.m. to 2:00 a.m., Friday and Saturday, noon to 1:00 a.m. on Sundays and holidays. Employees, however, started to work early in the morning, specially in the kitchen which was thus "used" for longer hours than the dining rooms.

As the kitchen was also the scene of more intense activity than the rest of the building, it was built of sturdier material. Partly because of that, the kitchen area was certainly more expensive to build, per square foot, than the rest of the building. Moreover, the costs of the equipment required for the preparation of food was very high: it represented approximately 45 per cent of the costs of the equipment for the whole building.

The trial judge based his conclusion that the building in question had not been used primarily for processing goods for sale on the finding that the preparation of food for immediate consumption and sale is not “processing of goods" within the meaning of the Act. I need not, in order to dispose of this case, express any opinion on that finding. Indeed, even if the trial judge were wrong on that point (I do not want to suggest that he was) and if the preparation of food for immediate consumption and sale did constitute "processing of goods" within the meaning of subsection 127(10), it could not be said that the building was used primarily for the purpose of processing goods for sale since, in my view, it was mainly used for the consumption and sale of food.

When, as in the present case, different parts of a same building are permanently used for what is considered to be two different purposes, the most important factor in determining the purpose for which the building is primarily used is the amount of space in the building that is used for each one of those two purposes. In the case at bar, the part of the building that was used for the sale and consumption of food was, by far, larger than the part used for the preparation of food. For that reason, I cannot escape the conclusion that the building was not primarily used for the preparation of food.

It was argued, however, that the kitchen area in the building had been more expensive to build and to equip than the rest of the building. This may be true, but that difference in costs is not, in my view, sufficient to outweigh the factor that I have just considered. It was also said that the space in the kitchen was more efficiently used than in the rest of the building and that the kitchen area was the scene of more intense activity than the dining rooms. Those facts are, in my view, irrelevant. If a small part of the basement of a building that is used permanently as a church is used to operate a restaurant, the building could not be said to be used primarily as a restaurant for the reason that, nowadays, there are more people in restaurants than in churches.

I would dismiss the appeal with costs.

Appeal dismissed.