The Assistant Chairman:
1 This is the appeal of Granite Apartments Ltd from an income tax assessment in respect of the 1972 taxation year.
2 By notice of reassessment dated March 6, 1974 the appellant was denied any deduction pursuant to subsection 125(1) of the Income Tax Act, SC 1970–71–72, c 63, as amended, on the grounds that the appellant did not derive its income from an active business in 1972, that its sole source of revenue in that year was from rental income, that the appellant does not meet the requirements of subsection 125(1) of the Act, and therefore does not qualify for the deduction provided therein.
3 Mr Ernest Evernden, a director of the appellant company, who also acted as its counsel at the hearing, contended that the appellant's income was from a business and that it could not be otherwise. In his opinion, no distinction should be made between a “business” and an “active business”. According to Mr Evernden, there can be no income from an inactive business. Since the appellant did report income in 1972, Mr Evernden concludes that this implies that the income must have been realized from an active business and that the deduction provided for small businesses in subsection 125(1), and claimed by the appellant in that year, should have been allowed.
4 The issue in this appeal turns on the interpretation to be placed on the words “an active business” in subsection 125(1) of the Act.
5 The facts in this appeal are as follows: The appellant company was incorporated in 1963, its objectives were the purchase of land, the construction of buildings, and the leasing and sale of the improved properties. The shareholders, including Mr Evernden, consisted of five friends, each of whom owned 20% of the shares. The company at that time (1963) bought land and built a 22-suite apartment building, leased the 22 apartments for a short time and then sold the building in 1965. At the time the apartment building was sold, the appellant had already bought land and constructed a 3-bay warehouse and office building in Prince George, BC, and had leased the premises. Later, a 4-bay warehouse and three offices were built in North Vancouver.
6 The leasing of the properties and the collecting of rents in the Prince George warehouse were looked after by the realty firm of McConley and Nichol, to whom the appellant paid a 5% fee for its services. The leasing and the collecting of rent in the North Vancouver warehouse were done by the shareholders who were resident in Vancouver. The appellant, as lessor, paid the water and municipal taxes and looked after the general maintenance of the building. The appellant also serviced the few public corridors and washrooms. The lessees looked after the maintenance and servicing of their own leased premises.
7 In 1973 the Prince George warehouse was sold. Uncontradicted evidence was adduced to the effect that income tax and not capital gains tax was paid on the profits of the sale of the warehouse. Subsequently the North Vancouver warehouse was sold, on the profits of which income tax was also paid.
8 The appellant company then bought a house on Pemberton Street, North Vancouver, where the property was to be zoned commercial, with the view to demolishing the house and building another warehouse there. Also in 1973, another warehouse and office building were built by the appellant in another area and both of these two last-mentioned properties are presently in the process of being sold, the appellant having in mind the purchase of a large tract of land for the construction of still another large warehouse and office complex. The hoped-for sale of the properties mentioned above is being effectuated so as to acquire the necessary capital for the new project. Mr Evernden testified that the operation and the expansion of the company were geared to the full extent of the appellant company's capital.
9 In considering the evidence as a whole, I have no difficulty in concluding that the appellant company was in fact engaged in the business of buying land, building warehouses and office complexes, leasing them and selling them.
10 In my opinion, the question as to whether the company was engaged in an active business does not depend only on the number of transactions it has carried out since 1963, but more on the pattern of its activities, taking into account the fact that it was operating to the full extent of the company's capital. Since subsection 125(1) deals particularly with small companies, it would be unrealistic, in my view, to require that the appellant's intensity and standard of operation be comparable to that of a large enterprise in the same field before it can be considered as being active.
11 Counsel for the respondent, in presenting his arguments, considered only that part of the appellant's activities which generated income from the rental of the premises. Although, in my view, the leasing of the premises is only part of the appellant's general business, the question as to whether the leasing of the warehouses by the appellant in 1972 can also be considered as part of an active business, as suggested by counsel for the respondent, does arise.
12 In my view, the actual leasing of the warehouses may or may not be an active business, depending on whether the object of the leasing is to receive rental income on a long-term basis of whether it is merely a preliminary step to the eventual sale of the rented property.
13 Had the appellant purchased land, built warehouses thereon and leased the premises on a long-term basis, providing only those essential services which are directly related and incidental to the maintenance of the building and the leased premises, it would, in my opinion, have invested in property, and the revenue it would have derived therefrom would necessarily have been merely rental income and not profit from an active business within the meaning of section 125 of the Act. As I see it, this form of investment would not constitute a business. My interpretation of “business” within the meaning of subsection 125(1) of the Act is “an income-generating organization in which the three essential elements of production, as I see it, of capital, labour and management, are coordinated and manifestly operative and, as such, distinguishable from an investment venture in which the emphasis is predominantly on the capital aspect and the return one may expect from capital alone”.
14 In this appeal, however, the renting of the warehouses was for relatively short periods of time and, in considering the appellant's activities, it is the construction, leasing and selling of rented property that must predominate. Such an investment, in my view, constitutes a business as defined above and the revenue derived therefrom was properly subject to income tax, which was in fact paid by the appellant on the profit from the sale of the warehouses.
15 In my opinion that implies that the respondent assumed that the appellant was at least engaged in transactions in the nature of trade.
16 I conclude therefore that the appellant was engaged in a business or in a venture in the nature of trade and that the degree of activity carried out by the appellant in the construction, leasing and sale of warehouses and offices constituted an active, though small, business within the meaning of subsection 125(1) of the Act.
17 The appeal is therefore allowed.
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