Gestions Calce Ltée v. Agence du revenu du Québec, 2019 QCCQ 7377

The ARQ assessed the taxpayer for recapture of depreciation and capital gain on the basis that a rental property that the taxpayer (“Gestions Calce”) had disposed of did not qualify as a “former business property” and thus did not qualify for deferral of such amounts under the Quebec equivalent (in Taxation Act, ss. 278 and 279) of the replacement property rules in ITA ss. 13(4) and 44. The property was rented by Gestions Calce to third parties and to a related person (“CR”) for use in CR’s business of reselling used Prévost buses. In so assessing, the ARQ relied on the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents. Whether the property was a “former business property” turned on whether (under the definition thereof) it qualified as a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.”

Cameron JCQ found that the above “principally” test was satisfied in light inter alia of the following factors:

• Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet” (para. 35, TaxInterpretations translation)
• “[B]eing the sole occupant for a large space versus numerous occupants of many small spaces, one can say, in qualitative terms, that the use of the immovable is principally for the sole occupant of greater importance, CR” (para. 36)
• There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50%
• “The price stipulated for the lease was somewhat arbitrary, in the sense that the parties to the lease were related persons, and the lessor received, in addition, a substantial amount as management fees” (para. 39).

One of the exceptions from the rule that a rental property cannot qualify as a “former business property” for purposes of the replacement property rules in ITA ss. 13(4) and 44 references the situation of a “property … leased by the taxpayer to a person related to the taxpayer and used by that related person principally for any other purpose.” The property in question had been rented by the taxpayer to third parties and to a related person (“CR”) for use in CR’s business of reselling used buses. The ARQ denied the Quebec replacement property rollover on the basis that the lease to CR covering only 39.6% of the floor area of the building and (if regard were to be had to qualitative factors) the rents received from CR represented less than 25% of the total rents.

Cameron JCQ nonetheless found that the “principally” test was satisfied:

• Taking into account the use of the external spaces (i.e., for parking the buses) “CR effectively used more than 50% of the collective usable external and internal square feet” (para. 35, TaxInterpretations translation)
• As the only major tenant, CR’s use of the property was qualitatively more significant (paras. 36-37)
• There was an additional unwritten lease at sufferance of the interior spaces augmenting the portion of the interior spaces leased to more than 50% (para. 38)
• CR’s rent was somewhat arbitrarily low given that the lessor (the taxpayer) received, in addition, a substantial amount as management fees” (para. 39).