Louis De Villard v. Minister of National Revenue, [1978] CTC 2044, 78 DTC 1047

Guy Tremblay [TRANSLATION]:—This case was heard at Montreal, Quebec on December 15, 1976.

1. Summary

As the appellant is a non-resident, the Board must decide whether the gross income derived from letting an apartment building in Canada should be taxed as income from property at the 15% rate, pursuant to paragraph 106(1)(d) of the Income Tax Act, RSC 1952, c 148, as amended, or rather, whether it should be taxed as income from a business in accordance with subsection 2(2) and section 31 of the afore-mentioned Act.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment is unjustified. This burden of proof derives not from one particular section of the Act but from a number of judicial decisions, one of which is the judgment delivered by the Supreme Court of Canada in P W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.1. During 1970 the appellant was a Swiss resident. Neither of the parties contends that he owns a second residence in Canada. On the contrary, it is admitted in the proceedings that Mr Louis De Villard is a non-resident within the meaning of the Act.

3.2. During the same year, 1970, he was the owner of a 4-storey apartment building comprising 35 apartments, which was known as “Chateau Nord” and located at 2165 Henri-Bourassa Street East, Montreal.

3.3. In 1970 this building yielded a gross income of $34,026.04 and zero net income. Expenses, including part of the depreciation, amounted in fact to $34,026.04.

3.4. The building, which the appellant purchased in 1969 for $264,604.88, had been built in 1967. It was resold in 1974 for $219,926.

3.5. The building had apartments with 11/2 rooms, 2 /z rooms, 3 /z rooms and 4 /z rooms, and the rent ranged from $75 to $145 a month.

8.4. Twenty-five to 30 leases were negotiated each year, including renewals, while 20 to 25 lessees left the premises and were replaced by new ones.

3.7. The vacancy rate in the building varied from 11% to 15%.

3.8. The number of furnished apartments in the building varied according to the demand: a furnished apartment would include drawing room, bedroom and kitchen furniture, carpets and drapes, a stove and a refrigerator. These last two items were provided in all apartments, even the unfurnished ones. Ten to 12 apartments were completely furnished in 1969, 15 in 1970 and as many as 23 thereafter, until 1974, the year the building was sold.

3.9. The building was managed by Valver Management Ltd.

3.9.1. The aforesaid company managed 10 to 15 buildings, containing from 12 to 300 apartments; the average number of apartments in each building was 100.

3.9.2. Pursuant to the contract concluded with the appellant and filed as Exhibit A-1, the duties performed by this company can be summarized as follows:

(a) negotiating leases and advertising to facilitate renting;

(b) collecting rent;

(c) upkeep of the building;

(d) bookkeeping;

(e) drawing up monthly reports for the appellant;

(f) current banking transactions;

(g) negotiating insurance contracts;

(h) making day-to-day purchases needed for efficient administration;

(i) providing tenants with general services and maintaining good relations with them.

3.10. Mr Jacques Rey, executive director of Valver Management Ltd, said that the company not only performed the aforementioned general duties but also provided tenants with the following specific services:

heating and electricity, hot water;

cleaning the drapes and carpets of tenants in furnished apartments;

a janitor, available at all times, to deal with tenants’ requests and ensure that common areas, the boiler room and the laundry room were Kept clean;

providing each tenant with a locker for storing various objects;

painting the walls and varnishing the floors when a new tenant moved in and sometimes when a lease was renewed, in order to keep a tenant.

3.11. Furthermore, as the executive director of the agent company also testified, his company had to have the following work carried out on the building after it was purchased by the appellant:

redo the floor in certain apartments;

fix washbasins in all bathrooms;

repair the heating system;

replace half a dozen windows;

repair a balcony;

divide the garage into various lockers and make them available to tenants for storing various objects.

3.12. From 1969 to 1974 the appellant also employed a firm of chartered accountants for an audit.

3.13. Mr Rey testified that the appellant’s son, Mr Pierre De Villard, who was the appellant’s agent for supervision of the management of the “Chateau Nord’’, took a regular interest in all problems. There were many telephone calls and letters between Montreal and Geneva, and vice versa. Most owners took little interest in their building once it was entrusted to a management company. However, the appellant and his son were in constant contact with the company.

3.14. Mr Pierre De Villard explained that he came to Canada two or three times a year, not exclusively for the “Chateau Nord” building but also to see to his own building, “La Touraine”. He also came to ascertain at the same time if there were any opportunities for investing in other buildings and would take the opportunity to do some salmon fishing.

3.15. On July 31, 1973 the appellant filed his tax return for 1970, in which his income was shown as “nil”.

3.16. On June 28, 1974 the respondent issued notice of reassessment No 282,456, taxing the appellant at the rate of 15% on gross income which amounted to $34,026.04, and thus claiming tax of $5,103.91 plus $1,046.32 interest.

3.17. On September 11, 1974 Mr Louis De Villard filed an objection, and on December 9, 1975 the respondent sent a notification confirming the assessment.

3.18. In the said notification the respondent explained that the rate of 15% on gross income was imposed pursuant to paragraph 106(1 )(d) (Part III of the Act), since Mr Louis De Villard did not file a tax return within two years from the end of 1970, as stipulated by subsection 110(1) of the Act authorizing him to report income in accordance with Part I of the Act.

3.19. On February 10, 1976 the appellant submitted a notice of appeal to the Board, alleging that the income is income from a business and should be taxed in accordance with subsection 2(2) and section 31 of the Act.

4. Point at Issue

As can be seen from the two foregoing paragraphs, the point at issue is therefore whether the appellants’ income from rent for 1970 is income from a business, taxable under subsection 2(2) and section 31 of the Act, or income from property pursuant to paragraph 106(1 )(d), with the possibility of an exemption in accordance with subsection 110(1).

5. Act, Judicial Decisions, Comments

5.1. Sections of the Act

We shall cite subsection 2(2), section 31, paragraph 106(1)(d) and subsection 110(1) of the old Act.

2. (2) Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada at any time in the year, or

(b) carried on business in Canada at any time in the year,

an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

110. (1) Where an amount has been paid during a taxation year to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent on real property in Canada or a timber royalty, he may, within 2 years from the end of the taxation year, file a return of income under Part I in the form prescribed for a person resident in Canada for that taxation year and he shall, without affecting his liability for tax otherwise payable under Part I, thereupon be liable, in lieu of paying tax under this Part on that amount, to pay tax under Part I for that taxation year as though

(a) he were a person resident in Canada and were not exempt from tax under section 62,

(b) his interest in real property in Canada or timber limits in Canada were his only source of income, and

(c) he were not entitled to any deduction from income to determine taxable income.

5.2. Three Preliminary Points

Before examining the substantive problem, a ruling should first be made on three preliminary points. First we may say that, at first sight, section 31 does not seem relevant to the case at bar, since it describes the computation used to determine the taxable income of a nonresident, not his net income. However, as paragraph (a) explains, a person’s taxable income is based on his income. As used in the Act, “income” means “net income”. The evidence submitted shows that the appellant’s net income for 1970 was nil. The same is therefore true of the taxable income. This section is applicable so long as the income in question is from a business, as stated in subsection 2(2) in reference to Division D. Section 31 is one section of Division D.

Second, the evidence shows that the returns filed prior and subsequent to 1970 were filed within two years from the end of each of the years in question, and therefore in accordance with subsection 110(1) of the old Act. The Board does not necessarily conclude from this fact that income from the rent of the “La Touraine” building is necessarily income from property, and therefore that income for 1970 must be considered as such and is thus taxable under paragraph 106(1)(d).

Third, it should be noted that the time limit of two years prescribed in subsection 110(1) for filing a tax return pursuant to Part I is a provision which must be strictly applied. The Board does not have the authority to extend it. It has even refused to hear arguments seeking to justify or excuse the delay. The Board is aware that strict application of the Act may sometimes lead to the taxpayer being treated unfairly, but the Board can do nothing to rectify the situation.

5.3. The Substantive Problem

Having made these preliminary observations, we may examine the substantive problem: whether income from the “La Touraine” building is income from a business or from property.

The word “business” is defined in paragraph 139(1)(e) of the Act as follows:

139. (1) In this Act,

(e) ’’business” includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;

This definition, which states that the word “business includes”, and not that the word “business means”, does not give us the ordinary meaning of the word “business”, although the word is used in the Act in its first meaning. The ordinary meaning of the word must be determined to help in solving the problem in the case at bar. The ordinary meaning is given in the dictionary. We should therefore consult the dictionary to see how it defines the word “business”, and the word “concern”, since the latter is included in the definition of the Act:

Entreprise: ‘‘mise à exécution d’un projet” (Petit Larousse Illustré 1973, p 380)

Entreprise: ‘‘Ce qu’on se propose d’entreprendre: mise à execution de ce dessein”

‘‘Organisation de production de biens ou de services à caractère commercial, voir affaire” (Le Robert 1971, vol 2, pp 554, 555)

Affaire: ‘‘L’activité économique et plus particulièrement commerciale”

And we might also cite the definition given by the author of the dictionary:.

‘‘Les Affaires? C’est bien simple, c’est l’argent des autres.” Dumas Fils, La question d’argent Il, 7 (Le Robert 1971, vol 1, p 61)

Business: ‘‘Commercial activity engaged in as means of livelihood—Activities of a person, partnership or corporation involved in commerce, manufacturing or performing a service;” (The Living Webster Encyclopedic Dictionary of the English Language, 1972, 1971, p 134)

Business: ‘‘2. econ. The purchase and sale of goods in an attempt to make a profit.

3. com. A person, partnership, or corporation engaged in commerce, manufacturing, or a service; profit-seeking enterprise or concern.” (The Random House Dictionary of the English Language, unabridged edition 1971, p 201)

The above definitions and those given in other scholarly dictionaries are very general. The courts of law have had to discuss the meaning of the words “business” and “concern” for a long time. In Martin v MNR, [1948] CTC 189; 3 DTC 1199, O’Connor, J of the Exchequer Court cited Erichsen v Last (1881), 4 TC 422. The Master of the Rolls said, at page 423:

I do not think there is any principle of law which lays down what carrying on of trade is. There are a multitude of incidents which together make the carrying on a trade, but I know of no one distinguishing incident which makes a practice a carrying on of trade, and another practice not a carrying on of trade. If I may use the expression, it is a compound fact made up of a variety of incidents.

And Brett, LJ said, at page 425:

Now, I think it would be first of all nearly impossible and secondly wholly unwise to attempt to give an exhaustive definition of when a trade can be said to be exercised in this country. The only thing that we have to decide is whether upon the facts of this. case it can be said that this Company is carrying on a profit earning trade in this country.

In one of the most recent judicial decisions, that of Walsh, J of the Federal Court, MRT Investments Ltd et al v The Queen, [1975] CTC 354; 75 DTC 5224, the problem is referred to Once again: a decision going back to 1907, which cites a decision of 1880, is cited [371, 5236]:

The word “business” was defined by Osler, JA in the case of The Rideau Club v The Corporation of the City of Ottawa, [1907] OLR 118, where he states at page 122:

‘Business’ is a word of large and indefinite import, but (as used in the section) its evident and reasonable meaning is (to adopt the language of the Master of the Rolls in Smith v Anderson. 15 Ch D 247, at p 258) something which is followed and which occupies time and attention and labour for profit.”

In No 240 v MNR, 12 Tax ABC 269 at 275; 55 DTC 147 at 150, Mr Fisher of the Tax Review Board cites the English case Re Pszon, [1946] OR 229, in which Laidlaw, J stated at page 234:

The word “business” is of wider import than “trade”: /n re a Debtor, [1927] 1 Ch 97 at 105. As used in various statutes it involves at least three elements: (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit. A person who devotes no time or attention or labour, by himself or by servants or employees, to the working or conduct of the affairs of an enterprise does not carry on the business of such enterprise. He might, for instance, be only financially interested. But to carry on business he must give attentions, or perform labour, for the maintenance or furtherance of the undertaking, and devote time to the accomplishment of its objects. He must also be in such relation to the public that he may be held liable to others. The liabilities must be such as to be referable to the carrying on of the enterprise. Obligations assumed in connection with and for the purpose only of betterment of property owned by a man do not necessarily constitute him a person who carries on business. Finally, it is an essential element of carrying on business that the purpose of the engagement is for a livelihood or profit. If an enterprise is not conducted as a means to accomplish that object it does not come within the ordinary meaning of the term “business”.

The courts have, in fact, accepted the three points mentioned above, namely (1) time, attention and labour; (2) the purpose of profit; (3) the incurring of liabilities to other persons. It seems at first sight that these criteria make it easy to distinguish between income from a business and income from property. That is true if extremes, such as for example the income derived from manufacturing shoes and the income provided by interest on bank deposits, are being compared. However, the distinction is not so clear when the income in question is derived from an apartment building.

There is no problem involved in distinguishing between a building with four unfurnished apartments from which only rent is collected and a building with 200 apartments, restaurant, cleaning and janitor service.

The problem becomes more difficult when a dividing line has to be drawn between the time when the building stops producing income from property and begins producing income from a business. Then the question becomes simply one of degree. However, the difference seems determined by the nature and quantity of services provided to tenants.

Counsel for both parties have cited a number of judicial decisions and articles by legal commentators, a list of which follows:

1. Isaac Benjamin v MNR, 5 Tax ABC 85: 51 DTC 357:

2. Mary K O’Doherty v MNR, 11 Tax ABC 309; 54 DTC 463;

3. No 240 v MNR (supra):

4. George D Venini v MNR, 12 Tax ABC 147: 55 DTC 54:

5. Morris Ginsberg v MNR, 9 Tax ABC 321; 53 DTC 145:

6. Mrs Benjamin Manson v MNR, 7 Tax ABC 298; 52 DTC 433;

7. Bernard Marks v MNR, 30 Tax ABC 155; 62 DTC 536;

8. Tenir Limitée v MNR, [1968] Tax ABC 772; 68 DTC 589;

9. Saul Rubinstein v MNR, 28 Tax ABC 348; 62 DTC 100:

10. Clemens August Graf Von Westphalen v MNR, 35 Tax ABC 29; 64 DTC 194;

11. Salisbury House Estate, Ltd v Fry; City of London Real Property Company, Ltd v Jones, 15 TC 266;

12. The Rosyth Building & Estates Co, Ltd v Rogers, 8 TC 11;

13. Mrs Anna H Martin v MNR (supra);

14. Henry Wertman v MNR, [1965] 1 Ex CR 629; [1964] CTC 252; 64 DTC 5158;

15. Harry Walsh and Archie Robert Micay v MNR, [1966] Ex CR 518; [1965] CTC 478; 65 DTC 5293;

16. Re Pszon (supra)]

17. Jaenicke v Sohuits, [1924] 4 DLR 488;

18. Sproule et al v McConnell, 1 WWR 609;

19. Halsbury’s Laws of England, “Considerations affecting the question whether a partnership exists”, vol 28—Partnership;

20. Principles of the Law of Partnership (Essential Elements of Partnership), p 4;

21. Schulman v MNR, 40 Tax ABC 316; 66 DTC 206;

22. No 196 v MNR, [1954] CTC 312; 54 DTC 468;

23. MPT Investments Ltd et al v Her Majesty the Queen (supra):

24. Manning v MNP, [1956] CTC 167; 56 DTC 1099.

The Board has examined the aforementioned judgments, articles by commentators and other documentation. It will summarize only a few of these judgments, to show how contradictory they may seem prima facie.

In Martin v MNP (supra), the Exchequer Court stated that income derived from renting 150 apartments, houses and apartment buildings, which were worth $181,000 in 1936, was income from a business. Tenants were provided with heating, electricity and janitorial services. Most tenants owned the furniture with which the rented premises were furnished. O’Connor, J commented [p 193]:

But the question here is has the appellant reached the point where landownership has passed into commercial enterprise in land.

The years in question were 1940 to 1943.

Approximately 20 years later the same Court (Harry Walsh and Archie Robert Micay v MNP (supra)) was to hold that, with respect to 1960, income derived from renting buildings described below was not income from a business, but income from property.

The two appellants owned one-sixth of the shares in a company which owned three buildings valued at $2,712,650. Two buildings contained 257 furnished apartments, which were provided with hot water, heating, window cleaning every six months and janitorial services. The drapes and carpets were paid for by the owners. There were washing machines and automatic driers on each floor for the use of the tenants. There were also parking facilities, snow removal and other services. The third building was a shopping centre containing 18 shops, offices with air conditioning and other facilities. A company handled the management of the building. It was paid at the rate of

2V2% of the gross income.

We can well understand why the Court’s decision that the income in question was income from property might be greeted sceptically. However, we must first appreciate that life has changed in many ways—and therefore in the technical area—in the last 25 years. Services to tenants which seemed uncommon in 1940 had become quite common by 1965. The Court also considered that most of the services provided in this case should be considered ancillary to the property itself, rather than provided to the tenants, although the latter benefited from them. I would therefore cite my learned brother Cattanach, J in his final remarks (pp 484-5 [5296-7]):.

On the evidence I think that the rentals received by the appellants should be regarded as having accrued to them as owners of the properties rather than as traders and that the rentals accrued from use by the tenants of the property in that the rentals represent payments for their occupation thereof rather than from a combination of such use and the other services. from which the tenants. benefited. I regard the additional services which were provided to tenants as being relatively insignificant and insufficient to convert the appellants from landowners into the conductors of a business. The services such as the provision of heat, electric stoves and refrigerators, janitorial services to the common hallways, snow removal, carpeting in some rooms of the suites and drapes for windows are those which tenants have come to expect and are those which landlords normally provide in living accommodation of this kind. These are refinements offered to the tenants in connection with the occupation of suites and, in most instances, are also property for the use of which, along with the suites themselves, rent is paid. The heating of the building and snow removal are ancillary to the property itself and are exercised in the landlord’s capacity as owner of the property rather than as a service to tenants although the tenants incidentally enjoy the benefits thereof. While the nature of services provided has a bearing on the question, the services above described are not such as would characterize the rental received therefor as income from a business rather than income from property, as services such as the provisions of breakfast, maid, linen, laundry and such like services might do.

The additional charges imposed upon tenants for the use of either indoor or outdoor parking space is also income which accrues from the occupation of property.

As can be seen, distinctions become increasingly fine in their attempt to embrace a reality to which little attention had previously been given. Walsh and Micay v MNR marks a dividing line in the case law.

Considering the time, attention and work the appellant devoted to maintaining the building in a good state of repair, to patching it up where it was deteriorating, to signing leases, collecting rent and generally managing the building, the Board tends ipso facto to the view that the building constitutes a business. However, the question of how much work would have been done if the building had been better built may also be considered. There would have been almost no problems. The purchase of an old or badly built building, as opposed to a new, well built one, would therefore constitute the difference between income from a business and income from property.

However, it cannot be denied that in Saul Rubinstein v MNR, 28 Tax ABC 348; 62 DTC 100, annual repairs to a 25-year old building were taken into account in leading Mr Fordham of the Tax Appeal Board to conclude that the income in question was income from property. However, this case is prior to Walsh and Micay. The question was whether repairs to a building are ancillary to the building, and whether this work is usually done by an owner rather than by a businessman— the person who owns, an apartment rental business. It should also be remembered that the fact of collecting rent as an owner does not lead prima facie to the conclusion that a business is involved. It is the range of services provided to the tenants (not to the property) and the time devoted to management which lead to the conclusion that the income derived is income from a business.

The question is whether the services provided by the appellant are much more numerous than those provided in Walsh and Micay. Are they not largely services to the property? Were the services provided specifically to tenants in 1970 normal, regular services? With respect to the time involved, we should recall that in Walsh and Micay there were 257 apartments and also 18 shops. In the case at bar there are 38 apartments. The time devoted is not the same in each case.

The Board accordingly considers the appellant’s income for 1970 to be income from property.

6. Conclusion

The appeal is dismissed.

Appeal dismissed.