National Theatres Limited v. Minister of National Revenue, [1974] CTC 2208, 74 DTC 1174

Judge Flanigan (orally: March 20, 1974):—This is an appeal by National Theatres Limited against reassessments of the Minister of National Revenue for its 1969 and 1970 taxation years.

There are two issues before the Board in this appeal. The first is whether or not a sum of money in the amount of approximately $97,000 is prepayment of rent within the meaning of subparagraph 85B(1)(c)(iii) and therefore subject to special reserves as provided by that section. The second is whether or not an expenditure of some $31,000 to change the elevators in the building in question should be a deductible business expense in the year in which it was incurred, or whether it was an expense that should be characterized as a capital expenditure.

The facts are brief and not in dispute. The appellant company is a family-held corporation held by the Estate of J B Barron, Mr Robert H Barron and his two brothers. Apparently their father (the late J B Barron) in 1949 constructed an 11-storey office building, which had commercial space on the ground floor and some office space in the basement, and at the time of its construction was considered to be one of the most modern buildings in the city. The tenants that occupied the building after its completion in or around the year 1951 were triple-A tenants, being Mobil Oil, Sun Oil, and Shell Oil. As the oil industry expanded and as these companies grew and their importance in this area increased, Shell and Sun Oil built or moved to other locations, leaving the entire building, for all intents and purposes, to be occupied by Mobil. This Mobil did until it grew too large and was prepared to move, from about 1967 on, into one of the newer developments in the area. Mobil had a lease that ran until August 31, 1971, which was the second lease they had entered into, the first one being for five years, and the second for 15 years. Much discussion took place between representatives of Mobil and Mr Robert H Barron, who was Called to give evidence in this case, as to how the matter of the renting of the premises, after Mobil left, would be handled. There were several suggestions, I take it, but one of the most insistent was in fact that some joint operation would take place whereby Mobil and the appellant company would share the rents over and above the extent of Mobil’s liability to the end of the term of the lease. In addition, as a result of its growth, Mobil had repartitioned the building, so that without the expenditure of some $90,000 it was unusable in the form in which they vacated it. In addition, the appellant was, as Mr Barron put it, treated by Mobil in a rather cavalier fashion as to just how its Obligation would be handled. The question of the cooperative leasing produced many complex problems when it was looked into to any great depth, such as the type of tenant that Mobil might wish to put in, the rent at which they might wish to make the premises available, the cost of sharing janitorial services, and many other problems. In any event, the whole matter was disposed of by Exhibit A-1, which was a memorandum of agreement made on February 17, 1970. In that agreement the parties concluded the surrender of the Mobil lease, and from the terms of this agreement there is no question whatsoever but that the lease was surrendered and Mobil’s right to occupation for any purpose, or to any remuneration from any source within the building, ceased as of June 1970. The oil company had other rights, such as the right to store obsolete furniture in the premises until the end of March 1970, but it is clear on the evidence that it at no time had any occupation or use or right in the building after 1970.

Mr Barron has explained how the figure for the surrender of the lease was arrived at, and he indicated that the rent for the 22 remain- ing months was calculated on a present-day value, using a 10 /2% interest figure, plus the inclusion of the cost of repairs. The sum was apparently finally agreed upon at approximately $392,221 and, as Mr Barron said, this represented a buying-off or obtaining of a surrender of the lease for 30% of the rent that might have been received had the lease gone to termination. In other words, after he had calculated the current value, the figure of 70% was applied thereto to arrive at the settlement figure.

As has often been said, and is so often said that one tires of saying it or hearing it, that in order to avoid taxation one must bring oneself clearly and fully within any exempting or deducting provision of the Act. In my view, the appellant cannot fit within the provisions of subparagraph 85B(1)(c)(iii) because of the very wording of the section. The evidence, and appellant’s Exhibit A-1, clearly indicate that Mobil had no right to the possession or use of the Barron building at any period during 1971, and so no reserve could be available to the appellant pursuant to that section.

The appeal in that respect, then, must be dismissed.

The second aspect of the appeal is to me a little more difficult— although I find both results inequitable to the taxpayer, but that is not unusual when applying the provisions of the Act—and that is the question of whether or not the $31,000 expense incurred with respect to the elevators was a revenue expense which should be written off in the year it was incurred, or whether it was a capital expenditure. The evidence of Mr Barron is that, from the building’s opening until the surrender of the lease by Mobil, the two elevators in the building were operated by elevator girls. He says that the service supplied was much more satisfactory than what eventually resulted when the elevators were converted to automatic elevators, and that in essence is what happened as a result of the expenditure of this money as set out in appellant’s Exhibit A-2, the contract with Otis Elevator Company. It should be pointed out that Otis put in the original elevators, and over the years there had been a service contract with Otis for the maintenance of the elevators. When Mr Barron began his attempts to rent the premises, he was apparently met with one constant factor that mitigated against the rental of the premises, and that was the fact that the elevators were not automatic and that tenants thereby considered the building to be less desirable than more modern buildings that were in existence. The fact that automatic elevators are the accepted type in all modern buildings certainly supports his contention that he would have had difficulty in renting space with the older type elevators. In any event, the appellant did change the elevators to automatic. He said that absolutely nothing else was changed, that the elevators carried the same weight, they had the same basic shafts, and that all that had to be done was their conversion electronically and some resurfacing of the exterior of the cars of the elevators, which had become scarred by their use as freight elevators as well as passenger elevators. He also indicated that the appellant still had the service contract with Otis for the maintenance of the elevators. The elevators had proved useful from 1951 until 1969, and I am satisfied that they would have continued to be useful, had they been accepted by tenants, from 1969 on. However, in order to make the building attractive to tenants and to provide revenue and make the building an asset to the shareholders, it was said to be necessary to make this conversion. In my view, such a conversion as took place must be considered as an asset, an advantage of enduring benefit to the appellant, because there is no reason to believe that, with the continued existence of the maintenance contract, these elevators will not last at least as long as the previous ones lasted, and any expenditure to make such a conversion could not be considered as anything other than of a capital nature.

For these reasons, therefore, the appeal, on both headings, must be dismissed.

Appeal dismissed.