Hampton Golf Club LTD v. Minister of National Revenue, [1979] CTC 2833, 79 DTC 705

The Assistant Chairman:—The appellant, which was incorporated in 1971 pursuant to the laws of the province of New Brunswick as a public company, since 1972 has been carrying on the business of operating a golf course and related services. The parcel of land which the appellant acquired (which is now the golf course) was at the time of acquisition virtually a run-down farm. It was in brush country and had no drainage. Areas of it were very wet—so wet that at times rubber boots had to be worn. There were natural springs through the property. The area was hard to drain as it had a large number of springs. Trees had to be cut, stumps removed and the place generally made useable. The appellant took immediate steps to make it into a playable course. By the end of 1973, eight holes were finished and the ninth was completed in early 1974. Shortly thereafter, work was commenced on the back nine. At this time (1979) the appellant has an 18-hole course.

To build the golf course many things had to be done, but the most important work related to those parts of the course called “greens”, “tees” and “fairways”.

The designer of the course, Mr Manuge, as well as the general contractor for the construction, Mr Mott, gave evidence as to the building of the nine holes. Mr Manuge stated that he started upgrading golf courses around 1935 and has been involved in that work as well as designing them since that time. He has designed four or five courses. He drew the plans for the first nine holes and picked the area where the greens would be and proceeded to build them. The typical green was described and a drawing of a cross-section was filed as an exhibit. According to the witness, the greens were the most important parts or sections on the property of a golf course. In building a green the final result must be that there is a “platform”, the surface of which is to remain constant, that is, there will not be depressions or heaves, and the foundation for which provides excellent drainage as, after a rainstorm, the green is to be playable in a short period of time. To have the constant platform, it must be built so that it can withstand the traffic in the playing season and the elements in the winter. Having decided where a green is to be located and its shape and size, a bulldozer is used to clear the surface soil down to the solid ground. To build the green, a coarse fill for draining is put into this cavity. Depending on the natural drainage, this fill could be up to four feet deep. On occasions, concrete or field tile is placed in the cavity with the fill if the drainage is poor. At this particular course, gravel was used, all of which had to be trucked to the site. It was put into the excavation, sometimes to a depth of four feet and on other occasions to a lesser depth of two feet. On top of this gravel was placed by a layer of subsoil. This soil is quite fine and somewhat like clay. All of this soil, like the gravel, had to be trucked to the site. About seven or eight inches of this soil was used on each green. Its effect was to seal the topsoil and keep drainage uniform and to ensure the drainage would not plug up. The topsoil was a loam type soil.

On occasions the soil had to have sand mixed with it. This topsoil must remain constant and, in addition, it is to provide good root growth for the seed to be planted. While the depth of the topsoil varied, it had to be in excess of nine inches deep as the location of the cup on a green is changed many times in the course of a season. Since the cup is nine inches deep, the topsoil is usually over a foot in depth. On top of the topsoil is spread a seedbed to a depth of about one and one-half inches. The seedbed is a mixture of topsoil, peat moss, fertilizer and lime. After this, the seedbed is spread over the green, the green is rolled, then raked up to permit the sowing of grass seed and then the seed is sown and the green is rolled again. The grass, to withstand the traffic it is to bear, must have good roots and the soil where the roots are, is from nine to fourteen inches below the surface. When the grass grows, it is cut to a length of no greater than one- quarter of an inch, which is much shorter than the average lawn. On the sides of the green, usually sod is used as opposed to seed. The reasons for this is that, were only seed used, the green could wash out with a good rain. The approach to a green is gentle with sides built up: one must be able to get on and off the green with a triplex mower. The greens, as well as the fairways and tees, must be watered frequently. At the appellant’s course, water is piped (usually underground) to the sides of each green and a hose or sprinkler is used. All greens vary in size. The shape of the green is in part determined by how difficult the designer wishes to make the course. There is no set size for a green. They could vary in size from 7,000 to 10,000 square feet. The money available to build the course goes a long way in determining the size of the green. Greens have been moved, but that does not mean a green as a unit is moved from one place to another, but rather the “old” green is destroyed and a “new” replacing green is made elsewhere. On the “new” green one could use the old seed soil and topsoil.

Broadly speaking, building a “tee” is similar to building a green except that there is not the same requirement for a ‘‘tee’’. It is a platform used at the commencement of playing as a hole. It must be a good level place with grass and it must have good drainage. It too is excavated, filled with gravel for drainage, covered with topsoil and then sodded. As to the location of the tee, it must be determined what is the intended yardage for the intended hole. Knowing this, the area is selected for the green and an area about that distance away is selected for the tees. There are on occasion two level tees—the front tee being lower than the back. Tees, which seldom exceed 10,000 square feet, can be moved more readily than can a green. Fairways cover the area from the front of the tee to the front and side of the green, with drainage being their main problem. At this golf course, areas had to be drained and tile was used to keep the fairways dry. There were real problems with drainage. In the words of the designer, there was an “unbelievable amount of water coming out all over the golf course.” In places the fairways were bulldozed to remove the clay down to solid ground and replaced by coarse fill with topsoil and loam. Generalizing the grass on the green is watered and cut daily while the fairway is usually cut more than once a week. The greens must be top-dressed three times a year. In the top dressing are fertilizer and lime.

Mr Mott gave evidence as to the doing of the work, engaging men and equipment, the procuring of gravel, topsoil, etc. He had been one of the incorporators of the appellant. He explained that he had been a builder and contractor, having built about fifteen homes. The site which consisted of about 140 acres had one main building—the clubhouse—together with three small buildings, to house the equipment. The clubhouse and adjacent parking lot occupied about two acres and the equipment buildings about one. There is of course some land which is not used—it is waste land.

Having in a summary fashion and very generally indicated the making of greens, tees and fairways, attention must be turned to the issue in this appeal. The appellant appealed to this Board from an assessment for the 1972, 1973, 1974, 1975 and 1976 taxation years, all of which are fiscal years ending October 31. All of those assessments were dated November 14, 1977. It so happens that tax was assessed the appellant by the assessments relating only to the 1974 and 1975 years. Consequently, as a result of the decision of the Federal Court of Appeal in Her Majesty the Queen v Garry Bowl Limited, [1974] 2 PC 146; [1974] CTC 457; 74 DTC 6401, which was an appeal from a nil assessment, as stated when the instant appeal was called, judgment will go quashing the purported appeal for each of the years 1972, 1973 and 1976.

The issue then becomes—Was the appellant correctly assessed for tax for the 1974 and 1975 taxation years? As well as considering what the profit of the appellant was in each of those years individually, it is necessary to ascertain the quantum of the loss for the years 1972, 1973 and 1976 so that those losses can be applied against the income of the years 1974 and 1975.

The appellant claimed that in the years noted below, the following amounts were expended for the construction or improvement of greens and tees: 1972—$10,818.11, 1973—$4,987.73, 1975—$9,578.20 and 1976— $13,102.16, as well as amounts for landscaping of grounds (clubhouse, outbuildings, fairways, tees and greens) in the years noted as follows: 1972—$6,737.43, 1973—$2,575.53, 1974—$1,950, 1975—$8,881.76 and 1976—$14,663.12. With respect to the first group of amounts, the appellant considered them to have been spent on capital account and that it was entitled to claim capital cost allowance with respect to those amounts pursuant to class 3 of Schedule B to the Income Tax Regulations. It claimed such capital cost allowance in the amount of $790 and $750.84 in the years 1973 and 1974 respectively. With respect to the second group of amounts above, the appellant claimed them as landscaping expenses pursuant to paragraph 20(1 )(aa).

Insofar as the respondent was concerned, he accepted that the appellant expended as “landscaping” expenses the following amounts in the following years: 1972—$17,555.54, 1973—$7,563.26, 1974—nil, 1975—$18,459.96 and 1976—$27,765.28. It is to be noted that the landscaping amounts as stated by the respondent are the total expenditure in each year by the appellant (except for 1974), part of which the appellant called capital and the other part of which it called landscaping expenses.

The respondent took the position firstly, that there was no expenditure by the appellant on landscaping in 1974, and secondly that the expenditures, as stated by the appellant in its two categories, were for landscaping only and only 15% of those expenditures come within paragraph 20(1)(aa). Consequently the respondent added back to the reported income of the appellant (or reduced the reported loss) by the capital cost allowance claimed in 1974 and 1975, and disallowed the landscaping expenses as claimed by the appellant in part, allowing only, of the total amounts claimed, the following amounts:

1972— $2,633.33

1973— 1,134.49

1975— 2,768.99

1976— 4,164.79.

These amounts allowed are (except for 1974) 15% of the total expenditure of the appellant in each year.

The appellant contends that the second group of expenditures, as it set them forth (landscaping), is within the ambit of paragraph 21(1)(aa) in that the clubhouse, outbuildings, fairways, greens and tees are “buildings” or “structures” and the expense was for landscaping around such buildings or structures. As to its claim for capital cost allowance, the appellant contends that it is entitled to capital cost allowance on the first group of amounts either:

(a) as the greens and tees are structures within class 3 of Schedule B to the Income Tax Regulations, or

(b) if they are not within class 3 of the said schedule, they are within class 1 of the same schedule, being surface construction similar to a road, etc.

With respect first of all to the disallowed expenditure in 1974 of $1,950, while the records of the appellant, which were filed as an exhibit, would at least cast doubt as to whether or not the appellant had incurred the expense claimed (the Minister’s reply states “there was no verification submitted for expenses in this year”), after listening to the evidence of Mr R A Warren (he had been treasurer of the appellant since incorporation, although not an accountant) I am satisfied that the appellant did expend that money and that the expenditure would fall in the category of landscaping, as claimed by the appellant. Consequently, having made this finding, I shall proceed to determine:

(a) whether or not the appellant is to be allowed any further amount as landscaping expenses, and

(b) the amount, if any, on which the appellant may claim capital cost allowance, and, if it may, pursuant to which class of Schedule B it may be claimed.

There was no dispute that the expenditure for “greens” and “tees” was a capital expenditure, but the respondent’s position was that, if the appellant were to be allowed anything, it would have to be allowed pursuant to paragraph 20(1)(aa) which reads as follows:

20.(1) Notwithstanding paragraphs 18(1)a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(aa) an amount paid by the taxpayer in the year for the landscaping of grounds around a building or other structure of the taxpayer that is used by him primarily for the purpose of gaining or producing income therefrom or from a business.

The Crown just allowed an amount which was 15% of the total expenditure claimed pursuant to this paragraph as being, according to the reply, “costs of landscaping around the club house.’’ Nothing was allowed with respect to “greens” and “‘tees”’.

The appellant contends that its greens and tees are within class 3(a) of Schedule B which reads as follows:

Property not included in any other class that is

(a) a building or other structure, including component parts such as electric wiring, plumbing, sprinkler systems, airconditioning equipment, heating equipment, lighting fixtures, elevators and escalators.

Failing that, it contends that they are within class 1 of the same schedule, which reads as follows:

Property not included in any other class that is

(g) a road, sidewalk, aeroplane runway, parking area, storage area or similar Surface construction.

While conceivably the “tees” and “greens” could be within the word “structure” in class 3, it would appear to me that if they are a “structure” then they are much more aptly described in class 1 by the words “similar surface construction”. When one considers the words in that class, one cannot say that they could not include a dirt road, a gravel sidewalk or a dirt parking area. All of them it is assumed are constructed, that is, built or manmade, and it is the cost of so building the road, sidewalk, etc on which the person may claim 4% capital cost allowance. Having listened to the evidence in this appeal and the somewhat detailed description of the construction of a green and tee, I am satisfied that they are a surface construction and consequently the appellant is entitled to capital cost allowance on the cost of building them as class 1 property.

As to the landscaping expenses, it would appear to me, from the evidence, that the majority of those expenses were expenses incurred in clearing trees and draining the proposed fairway to build a golf course. I do not view that type of an expense as landscaping or building a structure. The result is that, with respect to those expenses, I agree with the approach taken by the respondent.

The result is, judgment will go quashing the purported appeals from the assessments of nil tax for the 1972, 1973 and 1976 taxation years, and the appeals for the 1974 and 1975 taxation years will be allowed and the assessments remitted to the respondent for variation. The variation is on the basis that the losses for the years 1972,1973 and 1976 are to be recomputed by allowing as an expense 15% of the landscaping costs, as shown in paragraph 5 of the appellant’s notice of appeal, and allowing such capital cost allowance as the appellant may claim as class 1 property on the amounts for those years, as shown in paragraph 3 of the said notice of appeal. Also to recompute the income of the appellant for the 1974 and 1975 taxation years by allowing 15% of the landscaping costs, as set forth for those years in said paragraph 5 of the said notice of appeal, and allowing such capital cost allowance as the appellant is entitled to claim as class 1 property on the amounts for those years, as shown in paragraph 3 of the Said notice of appeal.

Appeal allowed in part.