Mount Robson Motor Inn Limited v. Her Majesty the Queen, [1980] CTC 31, 79 DTC 5479

The Associate Chief Justice:—The issue in this appeal is whether the plaintiff’s rights in buildings and improvements (paving) on certain leased land were properly classified by the Minister as a leasehold interest falling within class 13 of the capital cost allowance regulations or should have been classified as falling within classes 1 and 6 as claimed by the plaintiff in its income tax returns for 1974 and 1975.

The rights in question were acquired by the plaintiff from Mount Robson Motels Limited under an agreement made on or about May 16, 1973, which provided for the assignment to the plaintiff of the rights of Mount Robson Motels Limited as lessee of land in Jasper National Park held under a 42-year lease granted to it by the Crown in April 1959, together with the lessee’s rights in hotel buildings and other improvements which had been constructed thereon at the expense of the lessee. The consideration paid by the plaintiff was some $1,125,000 of which by the agreement $70,000 was apportioned to the lease of the land, $960,000 to the buildings, $14,000 to other improvements and the remainder to furnishings and other chattels.

The lease from the Crown required the payment of an annual rent of $500 throughout the 42-year term and included the following provisions:

1. The Lessee will during the said term pay the said rent and all taxes, rates, duties and assessments charged upon the land or upon the Lessee in respect thereof.

2. The Lessee will within six months of the commencement of the said term, submit to the Superintendent in triplicate plans and specifications of the building to be erected upon the land and a plan indicating its proposed location on the land.

3. Upon approval by the Superintendent of the said plans and specifications the lessee will erect the building described therein on or before the 1st day of April, 1960.

4. The Lessee will use the land for the purpose of a motel only, and will not use or permit the use of the land in any way that in the opinion of the Superintendent is immoral or constitutes a nuisance.

6. The Lessee may not sublet the premises or any part thereof or assign or transfer this lease without the consent of the Minister in writing.

10. The Lessee may on the termination of this lease sever and remove from the land all structures, fixtures and improvements which during the said term have been affixed or placed on the land at the expense of the Lessee.

13. This lease enures to the benefit of and is binding upon Her Majesty, Her Heirs and Successors and the Lessee, its successors and assigns.

On the evidence, I am of the opinion that whether or not the buildings were bolted to the concrete foundations on which they rested, they were fixtures. Whether the buildings were of a kind that, in the absence of clause (10), would be subject to severance and removal at the end of the term by the tenant in the exercise of the common law right to remove trade fixtures is not clear. However, as has been said in more than one case, the parties to a lease are entitled to make their own law with respect to their rights to fixtures and when they exercise that right the law so made governs*. [1] In the present instance, the original parties to the lease have done that by including paragraph (10) which confers on the lessee a right of severance and removal of the buildings and improvements.

In my view, nothing turns on the fact that the right given is to sever and remove “on termination of’’ the lease. The purpose of the clause is to protect the lessee’s interest in what has been erected on the land at his expense, and to make it clear that the Crown is not entitled to insist at the end of the term on the buildings and improvements being left on the land for its benefit. When the time comes, severance and removal itself may not be an attractive or profitable course, but the right to sever and remove at the end of the term gives the lessee bargaining power both with the Crown and any other prospective lessee which otherwise it would not have. Moreover, as an adjunct of the lessee’s right to possession of both the land and the buildings and other improvements during the continuance of the lease, it appears to me to demonstrate that, though during the term the buildings and the improvements as fixtures are part of the land, and though the lessee’s right to possession and enjoyment of the land with the buildings and improvements on it will terminate at the end of the 42-year period, the lessee’s right to possession and ownership of the buildings and improvements is to continue indefinitely. Further, in my opinion, the Crown has never had at any material time as against either the original lessee or the plaintiff or any sub-lessee or mortgagee any right to possession of the buildings or improvements. The Crown has never asserted any such right and it is apparent that the rent is not payable for anything but the land itself.

I turn now to the regulations in effect at the material time. Changes have been made since then but they do not affect the present appeal.

Under subsection 1100(1)(s/c), a taxpayer is entitled to claim a deduction of capital cost allowance according to the class defined in Schedule B in which the property falls. Parking areas fall within class 1, frame buildings, of the kind here in question, fall within class 6. But, with certain defined exceptions, which, however, do not apply here, “Property that is a leasehold interest” falls within class 13 of Schedule B. With respect to such property, subsection 1100(2) provides that the capital cost allowance which the taxpayer may claim may not exceed the amount calculated in accordance with Schedule H.

section 1102 includes the following provisions:

Land

(2) The classes of property described in Schedule B shall be deemed not to include the land upon which a property described therein was constructed or is situated.

Improvements or Alterations to Leased Properties

(4) For the purpose of paragraph (b) of subsection (1) of section 1100, capital cost includes an amount expended on an improvement or alteration to a leased property, other than an amount expended on

(a) the construction of a building or other structure,

(b) an addition to a building or other structure, or

(c) alterations to buildings which substantially change the nature or character of the leased property.

Buildings on Leased Property

(5) Where the taxpayer has a leasehold interest in a property, a reference in Schedule B to a property that is a building or other structure shall be deemed to include a reference to that part of the leasehold interest acquired by reason of the fact that the taxpayer has

(a) erected a building or structure on leased land,

(b) made an addition to a leased building or structure, or

(c) made alterations to a leased property which substantially change the nature or character of the property.

It will be observed that subsections 4 and 5 established different treatment in respect of the capital cost of buildings or other structures erected on leased land, depending on whether the taxpayer was the tenant who had erected the buildings or structures or was an assignee of the tenant who had erected them. But, in neither case was the land on which the buildings or structures were erected, included as property falling within any class described in Schedule B.

The question to be resolved in these proceedings is whether the plaintiff’s rights in the buildings and improvements here in question fall within the definition of class 13 as being “Property that is a leasehold interest”. The Crown’s position is that as the buildings and improvements at the material time were fixtures, they were part of the land and, as the plaintiff’s interest in the land was a leasehold interest, its rights in the buildings and improvements, as well, was a leasehold interest.

There have been three cases in this Court in which somewhat similar problems have been considered.

In Rudnikoff v The Queen, [1974] 2 FC 807; [1975] CTC 1; 75 CTC 5008, the Court of Appeal affirmed the conclusion of the trial division in holding that the right of assignees of an emphyteutic lease in a building erected on the leased land by the lessee before making the assignment was a leasehold interest within the meaning of the regulations. In that case, there was no right reserved to the lessee or his assignees to sever or remove the building upon termination of the lease and at that point, under the law of Quebec, the building would belong to the lessor.

In reaching its conclusion, however, the Court did not disapprove of an earlier decision of the trial division in N Cohen v MNR, [1968] 1 Ex CR 110; [1967] CTC 254; 67 DTC 5175, in which, because of particular provisions in an emphyteutic lease which demonstrated that it was the intention of the parties that the building to be erected by the lessee was to belong to him, it was held that the taxpayer’s right in the building was not a leasehold interest within the meaning of the regulations. In that case, the lease provided that upon its termination if the lessor should not exercise a right given to him to buy the building, the lessee might remove it or insist on an extension of the lease*. [2]

The third case is the judgment of the trial division in Plan A Leasing Limited v The Queen, [1977] 1 FC 73; [1976] CTC 261; 76 DTC 6159, where, however, though the result was the same, the facts were so widely different from those of the present case as to render the case of no assistance.

Having regard to the reasoning of Noel, J (as he then was) in the Cohen case and to the fact that the land itself does not fall within any class of Schedule B, I am of the opinion that the expression “leasehold interest” in the regulations is not to be interpreted so as to include rights of the kind held by the plaintiff in the buildings and improvements in question. What must be considered is the taxpayer’s right in them alone for they alone are within the classes of Schedule B. Regardless of the legal characterization that might be given to the buildings and improvements in question in the event of a conflict over the rights in which parties other than the landlord and tenant were concerned, the substance of what appears to me to be embraced by the wording of class 13 is depreciable property, that is to say property other than land, which is held under a lease for a term upon the termination of which the rights of the lessee will come to an end and the depreciable property will automatically revert to a lessor. In my view, that is not the present situation. The buildings and improvements in question were erected at the expense of the original lessee which had the right to their possession and enjoyment throughout the 42-year term, and then to sever and remove them as its own property. By virtue of the agreement and assignment, the plaintiff at the material times had those rights. The Crown has never had a right to the possession or enjoyment of the buildings and improvements and will have no right under the lease to insist on these being left on the premises for its benefit when the lease comes to an end. This, in my view, does not describe a “leasehold interest” within the meaning of the regulations.

In the course of argument, reference was made to the decision of the Tax Review Board in Dow Holdings Ltd v MNR, [1976] CTC 2258; 76 DTC 1199, in which a contrary conclusion was reached. I see no valid basis for distinguishing the facts of that case, insofar as the Kalinowski lease was involved, from those in the present situation. Kalinowski also had an express right to sever and remove at the end of the term structures which he had erected. As it does not appear from the report that such a right was expressed in the Wiebe lease, I need make no comment on the result of the case so far as that lease was involved but, with respect, I am unable to agree with the conclusion of the learned member that Kalinowski, the Original lessee and assignee to the taxpayer of the other lease, held nothing more than a leasehold interest in the buildings erected by him on the land.

The appeal, therefore, succeeds and it will be allowed with costs and the re-assessment for the year 1975 will be referred back to the Minister for reconsideration and re-assessment on the basis that in the taxation years 1974 and 1975, the plaintiff’s rights in the buildings and improvements in question did not fall within class 13 of Schedule B of the Income Tax Regulations. Insofar as the statement of claim purports to appeal from a nil assessment for the year 1974, the action will be dismissed without costs.