Burri v. The Queen, 85 DTC 5287, [1985] 2 CTC 42 (FCTD)

Strayer, J:—It was agreed by counsel that the decision in this case should equally apply in the case of Ridgehurst Apartments Limited v Her Majesty the Queen, court file number T-7946-82. For the sake of convenience, I shall refer in these reasons to the facts in both cases.

Both companies, New Park Apartments Limited and Ridgehurst Apartments Limited were incorporated under the laws of Ontario. Both companies are now dissolved. In each case their objects included the acquisition and leasing of lands or buildings or portions thereof. During the period material to these appeals, 1976 to 1979, each company owned an apartment building in the Toronto area. Beneficial ownership of all shares in these companies was held by a Swiss shareholder or shareholders. Mr Eric Burri was president of each company during the period in question, but had no beneficial interest therein. At the apartment buildings owned respectively by these two companies, the apartments were rented unfurnished except that the owner in each case provided stoves and refrigerators. In each building a room was leased by the owners to a concessionnaire who ran coin-operated laundries therein, with the building owner in each case getting a fixed rental based on the number of apartments in the building. Parking was provided at each building. New Park Apartments also provided, without any specific charge therefor, television cable service. Its tenants were also entitled to use a swimming pool which was shared among it and other adjacent apartment buildings with the owners thereof sharing the costs of the pool and its operation.

Each of the buildings in question here was managed by a company called Swiss Canadian Management Company Limited. This management company was controlled by Eric Burri at all relevant times. Swiss Canadian provided at each building a supervisor who also served as janitor. It was responsible for cleaning public areas such as halls and stairways. It looked after finding tenants and the leasing of apartments and used a standard form of lease which Swiss Canadian also used in the management of apartment buildings other than the two in question here. (Swiss Canadian managed apartment and business buildings for many different owners.) It collected rents and paid all bills including taxes and mortgage payments. It did routine maintenance but for any major repairs or alterations it would engage outside contractors.

According to Mr Burri, he would go to Switzerland two or three times a year to discuss the operations of the buildings with the shareholder or shareholders of the owner companies. Those shareholders would be sent quarterly summaries of financial statements as well as the annual financial statement. It was not clear to me whether he reported in his capacity as president of the owner companies or as president of Swiss Canadian Management.

For each of the owner companies, income from its respective building was its only income which it reported during the years in question as "Canadian investment income". Each company sold its apartment building in 1979 at which time it recaptured depreciation.

With respect to New Park Apartments Limited, the Minister of National Revenue by notices of reassessment dated June 8, 1981, reassessed tax with respect to the plaintiff’s taxation years 1976, 1977, 1978 and 1979 as "active business income" instead of as "Canadian investment income" as reported by the taxpayer. New Park Apartments Limited objected to these reassessments, and by notices of reassessment dated May 4, 1982 the Minister reassessed its tax with respect to taxation years 1976 and 1977 as "Canadian investment income", and confirmed the reassessments of 1978 and 1979 income as “active business income". New Park Apartments Limited appeals against these reassessments for 1978 and 1979.

With respect to Ridgehurst Apartments Limited, by notices of assessment dated June 8, 1981 the Minister of National Revenue reassessed with respect to its taxation years 1977, 1978 and 1979 and reclassified its income as "active business income" rather than as “Canadian investment income" as reported by the company. The company objected to these reassessments. By a notice of reassessment dated July 28, 1982 the Minister reassessed tax with respect to the company’s taxation year 1977 and classified it as "Canadian investment income" as originally reported by the company. By notices of the same date, he confirmed his earlier reassessment of the 1978 and 1979 income as "active business income". The company appeals from these reassessments of its 1978 and 1979 income.

In the case of each company the reassessments also involved some changes in the amounts, irrespective of the classification of the income, but these were not in issue before me except to the extent that they flow from the classification of the income.

The main issue then which I must determine is whether the income of each of these companies during its taxation years 1978 and 1979 was "Canadian investment income" as it asserts, or “active business income" as the Minister asserts. Each plaintiff further contends in the alternative that even if this was not investment income, a portion of the depreciation recaptured by the company upon the sale of its building in 1979 should be treated as investment income. This would mean that any sums realized as the recapture of depreciation claimed prior to its taxation year 1978 should be treated as Canadian investment income.

Each of the plaintiffs asserts that its income in the disputed years fell within subsection 129(4) of the Income Tax Act. This subsection reads as follows:

129 (4) In subsection (3),

(a) “Canadian investment income” of a corporation for a taxation year means the amount, if any, by which the aggregate of

(i) the amount, if any, by which the aggregate of such of the corporation's taxable capital gains for the year from dispositions of property as may reasonably be considered to be income from sources in Canada exceeds the aggregate of such of the corporation's allowable capital losses for the year from dispositions of property as may reasonably be considered to be losses from sources in Canada,

(ii) all amounts each of which is the corporation's income for the year (other than exempt income or any dividend the amount of which was deductible under section 112 from its income for the year) from a source in Canada that is a property (other than a property used or held by the corporation in the year in the course of carrying on a business), determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation's income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that property,

(iii) all amounts each of which is the corporation’s income for the year (other than exempt income) from a source in Canada that is a business other than an active business, determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation's income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that business,

exceeds the aggregate of amounts each of which is a loss of the corporation for the year from a source in Canada that is a property or business other than an active business; and . . .

Each of the plaintiffs says that its income for 1978 and 1979 came within subparagraph 129(4)(a)(ii), being “income . . . from a source in Canada that is a property”; or failing that, that it came within subparagraph 129(4)(a)(iii) being “from a source in Canada that is a business other than an active business”.

Conclusions

I have concluded that the income which was reassessed for 1978 and 1979 both with respect to the plaintiff in this action and with respect to Ridgehurst Apartments Limited was “Canadian investment income” by reason that it was income “from a source in Canada that is a property” as provided in subparagraph 129(4)(a)(ii).

Whether income should be regarded as coming from an investment or from a business is a question of fact which must be determined in each case: see, eg, Wertman v MNR, [1964] CTC 252 at 266; 64 DTC 5158 at 5166- 67 (Ex Ct); The Queen v Rockmore Investments Ltd, [1976] CTC 291 at 293; 76 DTC 6156 at 6157 (FCA); Buonincontri v The Queen, [1985] 1 CTC 360; 85 DTC 5277. In respect of both New Park Apartments Limited and Ridgehurst Apartments Limited I am satisfied that their income during these years from their respective apartment buildings came to them essentially as owners of property and not as operators of a business. I am for these purposes, (and without making a finding on the point which was not argued) regarding that which was done by Swiss Canadian on their behalf as having been done by the taxpayers. The services which they provided to occupants were of a very limited nature and typical of what any owner of a modern apartment building would expect to have to provide. As such they must be seen as incidental to the making of revenue from property through the earning of rent. The provision of stoves and refrigerators is not only very common but is to some extent a means of protection of the building from undue wear and tear. It is to be noted that the owner in each case did not provide laundry facilities as such, but only rented space to concessionnaires who provided the facilities. The fact that at New Park Apartments television cable service and a pool were also made available to the tenants as part of the consideration for their rent does not alter in any way the character of the income of New Park Apartments Limited: such facilities are very common in a certain class of modern apartment building and should be viewed as no more of a “service” than the provision of secure locks on the doors or electrical outlets in the walls. Past decisions involving rental income have attached considerable importance to the nature and extent of services provided by the landlord in determining whether he is in the business of providing services for which he is paid or is essentially in receipt of investment income: see, eg, Wertman v MNR, supra, at 267 (DTC 5167); Walsh and Micay v MNR, [1965] CTC 478 at 481, 65 DTC 5293 at 5296-97 (Ex Ct); Be- ginski v MNR (1978), 78 DTC 1493 (TRB).

Counsel for the defendant contended, however, that many of the earlier decisions were distinguishable because they involved individual taxpayers, whereas the taxpayer in both this case and that of Ridgehurst Apartments is a corporation. Some reliance was placed on the statement of Duff, J in Anderson Logging Company v The King, [1924] SCR 45 at 56:

The sole raison d’être of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.

This statement has been quoted with approval in various cases, including the decision of MRT Investments Ltd, et al v The Queen, [1975] CTC 354 at 370; 75 DTC 5225 at 5235 (FCTD) where my colleague Walsh J stated that the cases had established conclusively . . if a corporation carries on the business for which it is formed it creates a presumption that the profit from these activities is a profit derived from the business. . . .” But it must be noted that these statements do not purport to hold that a corporation can never have income other than income from a business. They speak only of a presumption or a prima facie indication that a corporation's income is business income. The Federal Court of Appeal in The Queen v Marsh & McLennan Limited, [1983] CTC 231 at 239; 83 DTC 5180 at 5187, after referring to statements such as that in the Anderson Logging Company case said that: “While this factor is one to be taken into account in a private company in a given case, it cannot of itself be decisive except in the absence of other relevant considerations”. With respect I am unable to understand why there should be a strong presumption at all that a corporation designed for profit is earning its income from business as opposed to earning it from the ownership of property, just because the operation of a business may be within its stated objects. To attach great significance for tax purposes to the wording of a company's memorandum of association is only to invite self-serving statements in such documents in the future, inserted with an eye to tax liability. In any event, in the present case I find ample grounds for rebutting the presumption, if such exists. With respect to both of the companies in question here, they are private companies which have in their respective memoranda of association objects which would normally involve business activities. But they have other objects which suggest the making of revenues from property. For example, in each of the memoranda of association there is an object which covers the acquisition of lands and interest in lands, and the object “to 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 . . .”. That object is broad enough to cover activity as a landowner by which revenue is realized from the ownership of land and buildings through rentals. At best, then, I cannot derive any guidance from the fact that the taxpayer in both cases is a corporation since any presumption which might have arisen from that fact alone is neutralized by the breadth of the objects for which each corporation was established. But the facts as to the way in which each taxpayer has gone about earning a revenue from its respective building satisfy me that, notwithstanding any presumption, it was earning income during the taxation years 1978 and 1979 from property and not from business.

The result then is that with respect to the plaintiff Eric Burri as director of New Park Apartments Limited the reassessments of the company's income for the taxation years 1978 and 1979 are to be referred back to the Minister for reassessment on the basis that income in the amounts of $39,104 and $383,047 respectively should be classified as “Canadian investment income", and that the taxpayer is entitled to the dividend refund appropriate to such reassessments with respect to each of these years together with interest. The plaintiff Eric Burri as director of New Park Apartments Limited is entitled to his costs. Similarly, in the case involving Ridgehurst Apartments Limited the reassessments in respect of the company's income for the taxation years 1978 and 1979 are to be referred back to the Minister for reassessment on the basis that income in the amounts of $11,525 and $274,997 for the years 1978 and 1979 respectively be classified as “Canadian investment income" and that the taxpayer is entitled to the dividend refunds appropriate to such reassessments together with interest thereon. Eric Burri in his Capacity as director of Ridgehurst Apartments Limited is also entitled to his costs. In the circumstances, it appears to me to be unnecessary to consider the alternative relief requested with respect to recaptured depreciation.

I would request that counsel for the plaintiff in both cases prepare formal judgments based on these reasons and seek concurrence of counsel for the defendant. If counsel can agree on the wording of the judgments they can be submitted pursuant to Rule 324; if not, they can be the subject of an application under Rule 319.

Appeals allowed.