Morris Strug v. Minister of National Revenue, [1980] CTC 2463, 80 DTC 1426

John B Goetz:—This is an appeal with respect to reassessments of the appellant’s income tax liability for his 1973, 1974, 1975 and 1976 taxation years. The parties filed an agreement as to case whereby the appellant abandoned his appeal with respect to the assessment for a taxable gain and for travelling expenses. It was further agreed that the income which is the subject of the 1976 assessment be decreased by the sum of $4,319 representing the financing loss suffered by the appellant on the Fielding apartments, and it is so ordered. The parties further agreed that Schedules 1 to 8, setting out various financial information more particularly described therein and attached to the agreement as to case, be admitted without further proof, and it is so ordered.

The following statement of facts was agreed upon and it is with respect to this statement of facts that this appeal evolves:

STATEMENT OF FACTS

1. The appellant is in the business of owning, developing, operating, and leasing rental properties. In the course of operating the rental properties all rents received were deposited in deposit accounts or short term deposit receipts.

2. In the operation of the rental properties it is necessary to keep on deposit certain amounts for working capital and contingent expenses, in particular:

(a) To cover any contingent expenses which might arise such as repairs to buildings; and,

(b) To pay for taxes, heating expenses, and insurance, which expenses occur on an irregular basis.

3. Rental money not required for working capital and contingent expenses were kept on short term deposit. The monies kept on deposit earned interest.

4. Although it is not agreed that the interest earned on the monies on deposit for working capital and expenses as well as on rental deposits are inextricably connected with the operation of the rental properties, it is agreed that the interest on deposits for taxes, heating expenses, insurance, and working capital amounted to $4,300 in 1973, $4,600 in 1974, $6,400 in 1975, and $7,400 in 1976;

The interest earned on rental deposits amounted to $7,600 in 1973, $13,100 in 1974, $10,800 in 1975, and $12,000 in 1976. It is agreed that these amounts are estimates only made to obviate the need for the appellant to prove the actual amounts.

5. The issue is whether the appellant is permitted to deduct capital cost allowance on the rental properties from the interest earned on the deposits for working capital, contingent expenses, and/or deposits of rent.

Issue

The issue in this appeal resolves itself to an interpretation of Regulation 1100(11) of the Income Tax Regulations, which Regulation provides in part that deductions by an individual taxpayer of a capital cost allowance are limtied to .. the aggregate amounts each of which is (i) his income for the year from renting or leasing a rental property owned by him, . . The matter for me to determine simply is: What constitutes “income from the leasing of rental property”?

It was argued by the appellant, and quite convincingly, that reasonable interpretation of Regulation 1100(11) would permit capital cost allowance to be deducted not only from rental income but from all income connected with the operation of leasing of rental property. The appellant says this income would include interest earned on monies held for paying operating expenses as well as interest earned on rental deposit.

The respondent, on the other hand, says that Regulation 1100(11) is clear and unambiguous and that the figures referred to in paragraph 4 of the statement of facts are purely estimates. In any event, with respect to paragraph 4, the admission on the part of the Minister is not clear at all.

It would appear that Regulation 1100(11) draws a specific line and once rent is paid to the appellant, interest accruing on such rental deposits cannot be rental income. Regulation 1100(14) defines rental income as follows:

(14) For the purposes of this section and section 1101, “rental property” of a taxpayer or a partnership means

(a) a building owned by the taxpayer or partnership, whether jointly with another person or otherwise, or

(b) leasehold interest in real property, if the leasehold interest is property of class 3, 6 or 13 and is owned by the taxpayer or partnership,

if, in the taxation year in respect of which the expression is being applied, the property was used by the taxpayer or the partnership principally for the purpose of gaining or producing gross revenue that is rent, but, for greater certainty, does not include a property leased by the taxpayer or the partnership to a lessee, in the ordinary course of the taxpayer’s or partnership’s business of selling foods or rendering services, under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale, of the taxpayer’s or partnership’s goods or services.

In this regard, the appellant argues that he was allowed capital cost allowance for income from coin operating washing machines and dryers located in his rental property, and I think this is proper in that the washers and dryers are part of the rental property. Regulation 1100(12) provides that:

.. a corporation whose principal business was the leasing, rental, development, sale or any combination thereof, of real property owned by it, _..’ and is not restricted by Regulation 1100(11) and hence the corporation can deduct capital cost allowance from all its income. The fact that Regulation 1100(12) excludes a corporation or an incorporated partnership from the effects of Regulation 1100(11) lends strength to the argument of the respondent that Regulation 1100(11) is clear and explicit and excludes the appellant as an individual from deducting capital cost allowance in the manner in which he did.

It is not for me to ascertain the rationale of Parliament in seemingly granting a benefit to a corporation as to an individual earning income from rental property but I am bound by the strict wording of the fiscal Statute. It is my view that Regulation 1100(11) confines the appellant to rents received from rental property. To go beyond the rental income per se to the accrual of interest on deposits of such rental, or for the use of such rental monies in any other purpose, would be repugnant to Regulation 1100(11).

In Her Majesty the Queen v Malloney’s Studio Limited, [1979] CTC 206; 79 DTC 5124, Estey , J at pp 212 and 5129 respectively, says:

Indeed, ‘‘fairness and realism” have never been the governing criteria for the interpretation of taxing statutes. Lord Cairns in Partington v Attorney-General (1869), LR 4 HL 100 at p 122 put it this way:

“I am not at all sure that, in a case of this kind—a fiscal case—form is not amply sufficient; because, as I understand the principle of all fiscal legislation, it is this: if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called equitable construction, certainly such a construction is not admissible in a taxing statute where you simply adhere to the words of the statute.”

In a taxing statute, the intention to tax must be expressed in unambiguous terms, and in case of reasonable doubt the Act must be interpreted in favour of the taxpayer. Unfortunately, I do not find that Regulation 1100(11) is ambiguous, though somewhat incongruous.

In Caloil Inc v Her Majesty the Queen, 72 DTC 6462, at 6463, Walsh, J quotes Thorson P in Executors of the Estate of David Fasken, [1948] CTC 265; 49 DTC 491 at 275 and 495 respectively:

It has been said on numerous occasions that a taxing Act such as the Income War Tax Act must be construed strictly. This does not mean that the rules for the construction of such an Act are different in principle from those applicable to other statutory enactments. All that is meant is that in constructing a taxing Act the Court ought not to assume any tax liability under it other than that which it has clearly imposed in express terms. Nowhere has this fundamental principle of construction of such an Act been better expressed than by Lord Cairns in Partington v Attorney-General, (supra) and by Lord Halsbury in Tennant v Smith (1892), AC 150 at 154:

“In a taxing Act it is impossible, I believe, to assume any intention, any governing purpose in the Act, to do more than take such tax as the statute imposes. In various cases the principle of construction of a taxing Act has been referred to in various forms, but I believe they may be all reduced to this, that inasmuch as you have no right to assume that there is any governing object which a taxing Act is intended to attain other than that which it has expressed by making such and such objects the intended subject for taxation, you must see whether a tax is expressly imposed.

Cases, therefore, under the Taxing Acts always resolve themselves into a question whether or not the words of the Act have reached the alleged subject of taxation.”

It is the letter of the law, and not its assumed or supposed spirit, that governs. The intention of the legislature to impose a tax must be gathered only from the words by which it has been expressed, and not otherwise.

I therefore find, that pursuant to Regulation 1100(11), income from the leasing of “rental property” is confined solely to the rent derived therefrom and does not extend to the use of rental income in any other way, either by way of deposit to earn interest or to be invested in any other manner.

For the above reasons, the appeal is dismissed in respect of the 1973, 1974 and 1975 taxation years and allowed and the matter referred back to the respondent in respect of the 1976 taxation year in order to reduce the income of the appellant by $4,319.

Appeal dismissed.