Bell
T.CJ
.:
Issue:
The
issue
is
whether
the
Appellant
was,
throughout
its
1990
taxation
year,
“a
corporation
whose
principal
business
was
the
leasing,
rental,
development
or
sale,
or
any
combination
thereof
of
real
property
owned
by
it”,
within
the
meaning
of
subsection
1100(12)
of
the
Income
Tax
Regulations.
If
its
principal
business
is
not
as
above
described,
the
Appellant
will
be
prevented
from
using
capital
cost
allowance
to
produce
a
loss
from
rental
property
which
could
be
applied
to
reduce
other
taxable
income.
The
Minister
of
National
Revenue
(“Minister”)
reassessed
the
Appellant
for
its
1990
taxation
year
disallowing
the
deduction
of
capital
cost
allowance
in
the
sum
of
$482,722
on
the
assumption
that
the
Appellant
was
not
a
principal
business
corporation
as
above
described.
It
is
from
that
reassessment
that
this
appeal
has
been
commenced.
Facts:
The
Appellant,
incorporated
in
September,
1971,
manufactured
unfinished
parquet
flooring.
In
its
1990
taxation
year
it
reported
earnings
from
operations
before
tax
in
the
sum
of
$319,603.
Mr.
Manji
(“Manji”),
Appellant’s
comptroller,
testified
that
the
Appellant,
at
the
end
of
the
1990
calendar
year,
transferred
this
floor
manufacturing
business
to
a
related
corporation
which
manufactured
linear
flooring.
Manji
said
that
the
transfer
was
made
because
there
was
no
sense
in
the
Appellant
having
a
manufacturing
business
in
decline
with
no
potential
for
growth.
He
said
that
the
Appellant
had
120
employees,
all
of
whom
worked
in
the
manufacturing
business,
he
being
the
only
one
who
dealt
with
real
estate.
Manji
also
testified
that
the
Appellant
had
been
acquiring
real
estate
interests
since
1977,
mostly
in
Florida.
He
testified
that
the
Florida
properties
were
managed
by
Florida
resident
partners,
their
decisions
involving
regular
conference
calls
with
officials
in
Toronto.
A
schedule
of
those
properties
showed
three
buildings
totalling
164,320
square
feet
which
had
been
sold
at
a
substantial
profit
and
18
buildings
comprising
874,794
square
feet
owned,
as
to
a
50%
interest,
by
the
Appellant.
All
of
these
properties
were
industrial
warehouses.
The
Appellant
also,
through
a
nominee,
Suburb
Investments
Limited,
owned
a
34%
interest
in
a
324
unit
apartment
building
in
Mississauga,
acquired
in
1977.
Manji
testified
that
management
regarded
its
realty
as
the
most
important
part
of
its
operations
and
had
discussed
the
potential
of
closing
down
the
floor
manufacturing
business.
The
18
industrial
warehouses
were
described
as
Canam
Associates
Venture
No.
4
(“Canam”).
Manji,
referring
to
the
financial
statements,
said
that
Canam,
to
the
end
of
its
1989
fiscal
year,
had
claimed
total
depreciation
of
$5,394,365
for
accounting
purposes
and
that
applying
that
sum
to
Partners’
deficiency
of
$4,245,845
there
was
a
resulting
net
equity
of
$1,148,520.
He
stated
that
the
Appellant
had,
over
eight
years,
earned
approximately
$300,000
from
its
50%
interest
in
what
was
described
as
the
Tenure
property
(Tenure
Investments
being
a
nominee
corporation),
that
it
had
been
sold
and
that
the
Appellant
had
a
mortgage
receivable
of
approximately
$832,000
in
its
1990
taxation
year.
Mr.
Colin
Hunter
Loudon,
Chartered
Accountant,
(“Loudon”)
was
qualified
as
an
expert
witness
respecting
the
relative
fair
market
values
of
the
Appellant’s
real
estate
business
and
manufacturing
business
in
the
1990
taxation
year.
He
filed
a
report
which
estimated
the
fair
market
value
of
the
manufacturing
operation
on
a
going
concern
basis
using
the
capitalized
earnings
before
interest
and
taxes
(“EBIT”).
He
also
estimated
the
fair
market
value
of
the
real
estate
operations
on
the
basis
of
an
adjusted
net
asset
value
approach
whereby
the
value
was
determined
based
on
the
estimated
market
value
of
the
properties
in
the
company’s
operations.
His
summary
of
value
follows:
|
Real
Estate
|
Manufac-
|
Ratio
|
|
Operations
|
turing
Op-
|
|
|
erations
|
|
Gross
Asset
|
24,319,000
|
3,258,000
|
7.4:1
|
Value
|
|
Debt
|
15,197,000
|
0
|
|
Net
Asset
Value
|
9,122,000
|
3,258,000
|
2.8:1
|
In
so
doing,
for
the
manufacturing
operation,
he
showed
management
fees
and
salaries
of
$705,792
in
1988
with
earnings
from
operations
before
tax
of
$396,802,
management
fees
and
salaries
of
$568,692
in
1989
with
earnings
from
operations
before
tax
of
$287,033
and
management
fees
and
salaries
of
$296,345
in
1990
with
earnings
of
$319,603.
He
stated
that
management
fees
and
salaries
were
discretionary
in
a
private
company
and
that
the
reduction
in
those
amounts
reflected
a
drop
in
profits
of
the
floor
manufacturing
business
in
a
real
economic
sense.
Loudon’s
evidence,
related
to
his
detailed
report
including
computations
and
explanations
therefor,
was
unchallenged
by
Respondent’s
counsel.
Analysis
and
Conclusion:
Appellant’s
counsel
referred
to
Interpretation
Bulletin
Number
IT-371
and
Interpretation
Bulletin
IT-290.
The
latter
bulletin
states
that
“principal”
is
not
defined
in
the
Act
but
considers
that
the
words
“chief’
and
“main”
are
synonymous
to
it.
It
goes
on
to
provide
that:
Although
none
of
the
following
criteria
may
be
sufficient
in
or
by
themselves,
they
should
be
considered
in
determining
which
of
the
corporation’s
businesses
is
its
principal
business...
(a)
the
profits
realized
by
each
one
of
a
corporation’s
businesses;
(b)
the
volume
and
the
value
of
the
gross
sales
or
transactions
of
each
business;
(c)
the
value
of
the
assets
of
each
business;
(d)
the
capital
employed
in
each
business;
and
(e)
the
time,
attention
and
efforts
expended
by
the
employees,
agents
or
officers
of
the
corporation
in
each
business.
Counsel
referred
to
Thomas
Co.
(Niagara)
v.
Minister
of
National
Revenue.
(1984),
84
D.T.C.
1641
(T.C.C.),
at
164
where
Christie,
C.J.T.C.
said,
at
1643
in
respect
of
subsection
1100(12):
..In
order
to
correctly
determine
that
question,
a
number
of
criteria
should
be
examined
in
relation
to
each
of
the
corporation’s
businesses
providing,
of
course,
that
evidence
relating
to
them
is
introduced
at
the
hearing.
These
criteria
have
been
suggested,
although
they
do
not
purport
to
be
an
exhaustive
enumeration:
profits,
volume
and
value
of
gross
sales
of
transactions,
assets,
capital
employed
and
the
time,
attention
and
effort
expended
by
the
employees,
agents
or
officers
of
the
corporation.
Appellant’s
counsel
continued
with
the
thesis
that
the
value
of
the
Appellant’s
real
estate
so
dwarfed
the
value
of
its
manufacturing
business
that
the
real
estate
business
was,
if
not
far
more
important,
at
least
slightly
more
important
in
the
1990
taxation
year
than
the
manufacturing
business
thus
qualifying
it
as
the
principal
business.
He
then
stated
that
the
evidence
demonstrated
that,
based
on
value,
the
real
estate
business
was
significantly
more
important
than
the
floor
manufacturing
business.
He
referred
to
the
comments
of
Bowman,
J.
in
Hover
v.
Minister
of
National
Revenue.
(1992),
93
D.T.C.
98
(T.C.C.),
at
10
in
quoting
Lord
Pearce
of
the
Privy
Council
in
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
Australia.
(1965),
[1966]
A.C.
224
(Australia
P.C.)
at
page
264:
The
solution
to
the
problem
is
not
to
be
found
by
any
rigid
test
or
description.
It
has
to
be
derived
from
many
aspects
of
the
whole
set
of
circumstances
some
of
which
may
point
in
one
direction,
some
in
the
other.
One
consideration
may
point
so
clearly
that
it
dominates
other
and
vaguer
indications
in
the
contrary
direction.
It
is
a
commonsense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer.
Appellant’s
counsel
stated
that
the
evidence
showed
that
in
1990
the
sales
of
floor
products
was
declining,
that
profits
were
declining,
that
there
was
a
drop
in
demand
for
flooring
products
generally
due
to
fewer
housing
starts
and
a
lesser
demand
for
parquet
flooring
in
particular.
He
testified
that
the
business
was
discontinued
in
the
1990
calendar
year,
after
the
termination
of
the
1990
taxation
year.
He
reviewed
Mr.
Manji’s
evidence
about
the
sensible
combination
of
the
floor
manufacturing
business
with
that
of
an
affiliated
company.
Respondent’s
counsel
placed
great
emphasis
on
the
earnings
test.
He
quoted
Cameron,
J.
in
American
Metal
Co.
of
Canada
v.
Minister
of
National
Revenue,
(1952),
52
D.T.C.
1180
(Can.
Ex.
Ct.),
at
118
as
follows:
‘Chief
business’
is
not
defined
in
either
of
the
Acts
and
the
phrase,
so
far
as
I
am
aware,
has
not
been
the
subject
of
judicial
interpretation.
In
my
view
it
is
a
question
of
fact
to
be
determined
by
an
examination
and
comparison
of
all
the
facts
concerning
each
of
the
various
types
of
business
in
which
the
company
is
engaged.
...A
business
is
carried
on
for
the
purpose
of
making
a
profit
and
from
that
point
of
view
at
least
the
more
profitable
operations
of
one
branch
of
a
business
makes
that
branch
more
important
than
other
branches
which
are
less
profitable,
at
least
to
the
corporation.
The
learned
Justice
stated
with
regard
to
the
Appellant’s
exploration
business
that
it
was
at
all
times
conducting
exploring
operations
of
a
relatively
minor
nature.
This
was
said
in
the
context
of
the
Appellant
having
purchased
and
sold
minerals
valued
at
well
over
$40,000,000
and
having
made
substantial
profits
therefrom.
He
concluded
that
mining
and
exploring
for
minerals
was
not
the
company’s
chief
business.
Counsel
then
emphasized
that
one
must
look
at
the
profits
shown
on
financial
statements,
after
depreciation,
and
that
Courts
should
not
be
considering
a
company’s
cash
flow
from
a
different
business.
Counsel
also
referred
to
Combined
Appraisers
&
Consultants
Co.
v.
Minister
of
National
Revenue,
(1983),
83
D.T.C.
543
(T.C.C.)
where
Taylor,
J.
of
this
Court
determined
that
the
Appellant’s
principal
business
was
not
the
real
estate
rental
operation
which
produced
a
net
loss
but
was
the
appraisal
operation
which
produced
a
net
return
to
the
company,
both
in
income
and
cash.
He
relied
on
the
words
of
Taylor,
J.
found
at
page
548,
namely:
The
real
estate
rental
in
this
appeal
need
not
produce
income
in
order
to
remain
the
source
of
income
—
even
the
source
of
business
income.
However,
except
in
the
most
unusual
or
temporary
circumstances,
a
source
which
produces
a
negative
impact
on
the
total
income
should
not
represent
the
“principal
business”
of
the
taxpayer,
or
the
essential
ingredient
in
the
combination
in
the
“principal
business”
when
another
“business”
conducted
in
the
same
corporation
shows
a
positive
impact
on
the
total
income,
...
Where
the
range
of
businesses
being
conducted
...
include
those
related
to
real
property
listed
in
Regulation
1100(12)(a),
and
one
or
more
not
so
specified,
the
task
of
showing
that
the
specified
businesses
represent
the
“principal
business”
is
formidable
indeed
when
the
result
of
those
specified
businesses
is
a
“loss”
rather
than
“income”,
while
the
non-speci-
fied
businesses
show
a
profit.
Respondent’s
counsel
then
submitted
that
little
weight
should
be
given
to
the
ratio
of
capital
employed
in
each
business,
and
that
the
Canam
arm
of
the
realty
operation
was
managed,
day
by
day,
by
the
Florida
personnel.
He
emphasized
that
the
number
of
employees
weighed
in
favour
of
the
floor
manufacturing
business
being
the
principal
business.
He
sought
to
draw
a
distinction
between
“cash
flow”
and
earnings.
He
also
criticized
Loudon’s
valuation
report
but
in
so
doing,
attempted
to
draw
conclusions
on
his
own
analysis,
questions
in
that
regard
not
having
been
put
by
him
to
Loudon.
Indeed,
he
stated
that
in
sum
total,
Loudon’s
opinion
should
not
be
given
much
weight.
Finally,
he
submitted
that
no
importance
attached
to
the
fact
that
the
Department
of
National
Revenue
did
not
reassess
the
Appellant
for
the
years
1984
to
1989
inclusive
disallowing
the
claim
of
principal
business
in
the
real
estate
operations.
I
have
concluded
that
the
Appellant’s
principal
business
was
the
leasing,
rental,
development
or
sale,
or
any
combination
thereof,
of
real
property
owned
by
it
in
its
1990
taxation
year.
The
net
asset
value
of
the
real
estate
operations
was
almost
triple
that
of
the
manufacturing
operations.
Although
the
real
estate
operation
did
not
show
a
profit
for
accounting
purposes,
its
cash
flow
in
that
year
exceeded
the
net
profit
of
the
floor
manufacturing
operation.
The
fact
that
that
business
had
120
employees
whereas
a
relatively
small
number
of
people
conducted
the
real
estate
operation
is
not
only
not
determinative
but
rather
irrelevant
given
the
relative
nature
of
the
operations.
Although
the
evidence
of
Manji
with
respect
to
the
choice
of
business
to
be
continued
by
the
company
could
be
construed
as
self-serving,
the
discontinuance
of
the
floor
manufacturing
business
at
the
end
of
1990
lends
weight
to
that
statement.
The
question
to
be
determined
is
which
business
was
more
important
and,
having
regard
to
the
foregoing
factors,
I
have
no
difficulty
in
concluding
that
it
was
the
real
estate
operation.
I
heartily
agree
with
the
words
of
Urie,
J.A.,
in
Nowsco
Well
Service
Ltd.
v.
Canada,
(1990),
90
D.T.C.
6312
(Fed.
C.A.),
at
631,
where
after
referring
to
Lord
Pearce’s
words
quoted
above,
spoke
of
the
importance
of
“a
common-sense,
realistic
and
businesslike
appreciation
of”
all
factors.
The
real
estate
assets
had
been
accumulated
over
a
long
period
of
time,
they
were
valued
at
$24,319,000
and
carried
mortgage
debt
of
$15,197,000.
Their
value
was
a
multiple
of
the
value
of
the
manufacturing
operation
assets.
It
appears
that
the
accounting
deficit
had
little
if
any
effect
on
mortgage
lenders
who
were
looking
to
the
value
of
the
asset
used
in
the
real
estate
operation.
The
realty
operation
cash
flow
before
depreciation
was
substantial.
I
am
not
persuaded
that
the
Respon-
dent’s
view
that
only
the
1990
taxation
year
can
be
examined
for
the
purpose
of
this
determination
has
value.
The
assets
were
not
acquired
simply
in
1990
but
reflected
the
intense
activity
of
the
Appellant,
having
been
assembled
over
a
period
of
time.
The
actions
of
the
Appellant
in
late
1990
(after
the
Appellant’s
1990
taxation
year
end)
made
it
clear
that
real
estate
was
its
principal
business
because
it
became
its
only
business.
Although
not
determinative
of
the
issue,
I
give
some
weight
to
the
fact
that
the
Minister
chose
not
to
reassess
the
Appellant
for
the
1984
to
1989
years
inclusive
by
disallowing
the
claim
of
principal
business
status.
Accordingly,
the
appeal
is
allowed,
with
costs.
Appeal
allowed.