Date: 19990506
Docket: 97-3124-IT-G; 97-1970-IT-G
BETWEEN:
DAN LEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AND:
BETWEEN:
LINDA LEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bonner, J.T.C.C.
[1] Dan Lee appeals from assessments under the Income Tax Act ("Act") for the 1992 and 1994 taxation years. Linda Lee appeals from an assessment under the Act for the 1992 taxation year. The appeals were heard together on common evidence.
[2] During 1992 the Appellants disposed of the shares of Cassidy Mobile Home Park Ltd ("Cassidy"). The issue in both cases is whether Cassidy's business was a specified investment business as defined in the Act.
[3] The Appellant Linda Lee included in reported income a taxable capital gain of $80,303 from the disposition of her shares. Dan Lee included a taxable capital gain of $723,963 from the disposition of his shares. Each Appellant sought a deduction under subsection 110.6(2.1) of the Act. The deduction in question is available only where there has been a disposition of a share of a corporation that, at the time of disposition, was a "qualified small business corporation share of the individual" who disposed of it.
[4] The term "qualified small business corporation share" is defined in subsection 110.6(1). Paragraph (c) of that provision requires that a qualified small business corporation share be:
... a share of a capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to
(i) assets used principally in an active business carried on ... by the corporation ...
[5] The term "active business" is defined in subsection 248(1) of the Act to be
... any business carried on by the taxpayer ... other than a specified investment business ... (Emphasis added)
[6] By virtue of subsection 248(1) the term "specified investment business" has the meaning assigned by subsection 125(7) of the Act. The definition in that provision is as follows:
"specified investment business" carried on by a corporation in a taxation year means a business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income from property (including interest, dividends, rents or royalties), unless
(a) the corporation employs in the business throughout the year more than five full-time employees, or
(b) in the course of carrying on an active business, any other corporation associated with it provides managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than five full-time employees if those services had not been provided;
(Emphasis added)
[7] The assessment in issue was made on the basis that Cassidy's business was a specified investment business. It was the Appellants' position that the level of their activity devoted to the operation of the Cassidy business was so great that the principal purpose of the business could not be said to be to derive income from property as required by the subsection 125(7) definition.
[8] Neither the exception in paragraph (a) nor that in paragraph (b) of the subsection 125(7) definition applies in the case of Cassidy. It did not employ more than five full-time employees. There was no suggestion that any other corporation associated with Cassidy provided services of the sort described in paragraph (b).
[9] Cassidy's business was the operation of a mobile home park on land which it owned. The park comprised 68 pads which Cassidy rented to tenants as sites for their mobile homes. There can be no doubt on the evidence of the Appellants and of the witnesses, Rosemary Nicholls and Arthur Gallant, that the tenants were attracted and retained by the high level of service and superior maintenance standards which were offered by the Cassidy Park. Nevertheless, so far as Cassidy's income earning activity is concerned, the clear purpose was to derive rental income from the tenants who occupied the pads under leases of the sort entered in evidence. What was paid by the tenants and received by Cassidy was described in the leases, and fairly so, as "rent". Cassidy had no other significant source of revenue.
[10] In Lerric Investments Corp. v. The Queen[1] my colleague Bowman, J. had the following to say regarding the subsection 125(7) definition of specified investment business:
[23] What, then, is the statute aiming at? The concept of specified investment business seems to have been a response to certain decisions of the courts which treated virtually any commercial activity of a corporation, however passive, even where it was carried under contract by independent contractors who were not employees, as an active business (see, for example, The Queen v. Cadboro Bay Holdings Ltd., 77 DTC 5115 (F.C.T.D.); The Queen v. Rockmore Investments Ltd., 76 DTC 6157; E.S.G. Holdings Limited v. The Queen, 76 DTC 6158; The Queen v. M.R.T. Investments Ltd., 76 DTC 6158).
[24] The result was the introduction of the concept of specified investment business the purpose of which to ensure that "active" meant truly active and that the word not be, in effect, judicially written out of the Act. Therefore the object of the new legislation was to ensure that the business of a corporation that invested in rental properties would not be considered "active" unless there was sufficient activity in the corporation's business to justify the employment of over five full-time employees.
Here the activities of the two Appellants in operating the park on behalf of Cassidy were extensive but they do not meet the statutory five full-time employee standard of subsection 125(7). The principal purpose of Cassidy's business, indeed almost the exclusive purpose thereof, was to derive income from property in the form of rent. Cassidy's business was therefore a specified investment business.
[11] The appeals will be dismissed with costs.
Signed at Ottawa, Canada, this 6th day of May 1999.
"Michael J. Bonner"
J.T.C.C.