[OFFICIAL ENGLISH TRANSLATION]
2000-5063(IT)I
BETWEEN:
C.J. BOUCHARD RÉPARATION LTÉE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 18, 2001, at Québec, Quebec, by
the Honourable Judge P. R. Dussault
Appearances
Agent for the Appellant: Bruno Paradis
Counsel for the Respondent: Simon-Nicolas Crépin
JUDGMENT
The appeals from the assessments made under the Income Tax Act concerning the taxation years ending on October 31, 1993, October 31, 1994, and August 17, 1995, are dismissed.
The whole in accordance with the attached Reasons for Judgment.
Signed at Montréal, Quebec, this 27th day of November 2001.
|
"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 19th day of February 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011127
Docket: 2000-5063(IT)I
BETWEEN:
C.J. BOUCHARD RÉPARATION LTÉE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
P. R. Dussault, J.T.C.C.
[1] These are appeals from assessments for the appellant's taxation years ending on October 31, 1993, October 31, 1994, and August 17, 1995.
[2] The assessment for the taxation year ending on October 31, 1993, is no longer at issue.
[3] By the assessments for the taxation years ending on October 31, 1994, and August 17, 1995, the Minister of National Revenue ("the Minister") denied the appellant the right to carry over non-capital losses of $48,391 and $68,925 for each of those years, respectively. A total loss of $117,316 was reported by the appellant for its taxation year ending on October 30, 1996, apparently as a result of capital cost allowance claimed on a ship that it owned, the NM Cavalier Maxim. The ship was rented "bareboat" to Les Investissements Navimex Inc. during the years at issue.
[4] The Minister denied the appellant capital cost allowance for the taxation year ending on October 30, 1996, on the basis of subsection 1100(15) of the Income Tax Regulations ("Regulations") and on the basis that the appellant could not avail itself of subsection 1100(16) of the Regulations because the source of its income that year was not business but rather property. The appellant argued that the reverse was true.
[5] In making the reassessments, the Minister of National Revenue assumed, inter alia, the facts set out in subparagraphs (a) to (u) of paragraph 15 of the Reply to the Notice of Appeal. Those subparagraphs read as follows:
[TRANSLATION]
(a) C.J. Bouchard Réparation Ltée (hereinafter "the corporation") was incorporated under the Canada Business Corporations Act on March 19, 1991;
(b) during the 1993, 1994 and 1995 taxation years (the last of which ended on August 17, 1995), Guy Gagnon owned 85 percent of the appellant's voting shares and Cyril Bouchard owned 15 percent;
(c) on August 18, 1995, Voyages AML Inc. purchased 100 percent of the appellant's shares and the shares of Les Investissements Navimex Inc.;
(d) on October 31, 1996, the corporation amalgamated with Les Investissements Navimex Inc. to form a new corporation called Les Investissements Navimex Inc.;
(e) during the taxation years ending on October 31, 1993, and October 31, 1994, the only asset in the appellant's "Fixed Assets" account was a ship called the NM Cavalier Maxim, which was listed in the financial statements at a cost of $595,400;
(f) for the fiscal year ending on October 31, 1995, after Voyages AML Inc. acquired control of the appellant, the cost of the ship was listed as $1,407,766 in the appellant's financial statements for that taxation year;
(g) under a contract called "Addendum to Charterparty" signed on November 14, 1992, the appellant rented the ship "bareboat" to Les Investissements Navimex Inc. (hereinafter "Navimex"), the charterer of the said ship;
(h) Navimex also owns other ships and gives river cruises;
(i) that contract established the rent and various terms and conditions and determined its term, that is, from May 1, 1993, to April 30, 2002;
(j) the rent was thus set at $270,000 for 1993 and 1994, at $410,000 for the other years until 1999 and at $140,000 for 2000 and 2001;
(k) according to the contract, Navimex had an option to purchase the ship for ONE MILLION SIX HUNDRED AND FIFTY THOUSAND DOLLARS ($1,650,000.00) that could be exercised on October 30, 1996;
(l) according to the financial statements for the taxation years ending on October 31, 1995, and October 30, 1996, the only income reported by the appellant derived from the rental of the said ship, that is, $410,000 and $115,000, respectively;
(m) Guy Gagnon, the majority shareholder, was the appellant's only employee during the 1994 and 1995 taxation years (the last of which ended on August 17, 1995), and he worked as the sales and marketing manager for Navimex;
(n) Guy Gagnon has not worked for the appellant since November 1, 1995, when he became an employee of Groupe AML Inc.;
(o) the appellant paid $60,500 in management fees to Groupe AML Inc. for the fiscal year ending on October 31, 1995;
(p) long-term debts are used to finance the appellant's only property¾the above-mentioned ship;
(q) the crew's wages, insurance, activities expenses and catering costs were paid by Navimex during the years at issue;
(r) the Minister considered that the appellant was carrying on a business during the fiscal year ending on October 31, 1995, since, in addition to renting the ship, it provided Navimex with a cruise marketing service by means of its only employee, Guy Gagnon;
(s) the cost of that service was included in the rent for the ship, that is, $410,000 for the fiscal year ending on October 31, 1995;
(t) the Minister's view is that the appellant's income for the taxation year ending on October 30, 1996, is from property and not business;
(u) the Minister therefore stood by his decision that the appellant could not create a net loss for federal income tax purposes by claiming capital cost allowance;
[6] The only witness was Bruno Paradis, an accountant who acted as the appellant's agent. Mr. Paradis said that he disagreed with the facts set out in subparagraph 15(q) of the Reply to the Notice of Appeal, since the conditions had always been the same before, during and after the years at issue. Obviously, he added that he disagreed with the conclusions set out in subparagraphs 15(t) and (u) of the Reply. He argued that the appellant always had a business and that this was acknowledged by the Minister for the taxation years prior to the one ending on October 30, 1996, since the Minister did in fact grant the capital cost allowance claimed by the appellant for those years.
[7] Subsections 1100(15) and (16) of the Regulations provide as follows:
(15) Notwithstanding subsection (1), in no case shall the aggregate of deductions, each of which is a deduction in respect of property of a prescribed class that is leasing property owned by a taxpayer, otherwise allowed to the taxpayer under subsection (1) in computing his income for a taxation year, exceed the amount, if any, by which
(a) the aggregate of amounts each of which is
(i) his income for the year from renting, leasing or earning royalties from, a leasing property or a property that would be a leasing property but for subsection (18), (19) or (20) where such property is owned by him, computed without regard to paragraph 20(1)(a) of the Act, or
(ii) the income of a partnership for the year from renting, leasing or earning royalties from, a leasing property or a property that would be a leasing property but for subsection (18), (19) or (20) where such property is owned by the partnership, to the extent of the taxpayer's share of such income,
exceeds
(b) the aggregate of amounts each of which is
(i) his loss for the year from renting, leasing or earning royalties from, a property referred to in subparagraph (a)(i), computed without regard to paragraph 20(1)(a) of the Act, or
(ii) the loss of a partnership for the year from renting, leasing or earning royalties from, a property referred to in subparagraph (a)(ii), to the extent of the taxpayer's share of such loss.
(16) Subsection (15) does not apply in respect of a taxation year of a taxpayer that was, throughout the year,
(a) a corporation whose principal business was
(i) renting or leasing of leasing property or property that would be leasing property but for subsection (18), (19) or (20), or
(ii) renting or leasing of property referred to in subparagraph (i) combined with selling and servicing of property of the same general type and description,
if the gross revenue of the corporation for the year from such principal business was not less than 90 per cent of the gross revenue of the corporation for the year from all sources; or
(b) a partnership each member of which was a corporation described in paragraph (a).
(Emphasis added.)
Appellant's position
[8] The appellant's agent submitted written representations. First, he argued that the source of the appellant's income was business and not property and even that the appellant actually had two businesses rather than one: the rental of the ship and the cruise marketing service provided through Guy Gagnon, the appellant's only employee until the end of October 1995.
[9] The appellant's agent referred to the third paragraph of article 1525 of the Civil Code of Québec, which provides as follows:
The carrying on by one or more persons of an organized economic activity, whether or not it is commercial in nature, consisting of producing, administering or alienating property, or providing a service, constitutes the carrying on of an enterprise.
On the basis of that definition, he argued that the appellant carried on an enterprise or business in relation to the ship it owned and rented, since it administered or managed that property by negotiating, inter alia, the rental contract and by providing a rental service.
[10] The appellant's agent also noted that the concept of business found in subsection 248(1) of the Income Tax Act ("the Act") is general and very broad, since it includes an "undertaking of any kind whatever". In his opinion, the rental of a ship is an undertaking and therefore a business within the meaning of that provision.
[11] The appellant's agent referred to the distinction that exists between business income and property income, citing the Supreme Court of Canada's decision in Canadian Marconi Company v. Her Majesty The Queen, [1986] 2 S.C.R. 522, in which, he said, it was established that [translation] "a company is incorporated to carry on a business" and that [translation] "income generated in pursuit of objects established when the company was incorporated is presumed prima facie to be business income". He noted that this presumption has also been recognized by Revenue Canada (now the Canada Customs and Revenue Agency ("CCRA")), inter alia in paragraph 8 of Interpretation Bulletin IT-73R5:
If a corporation is incorporated to earn income by doing business, there is a general presumption that profits arising from its activities are derived from a business (or from separate businesses as discussed in the current version of IT-206, Separate Businesses). Thus, from the time that the activities contemplated commence (see the current version of IT-364, Commencement of Business Operations) until they permanently cease, most corporations carry on or will have carried on one or more businesses. However, in some circumstances, a corporation's entire profits can be characterized as income from property, as might be the case where the corporation is formed for the sole purpose of holding shares of a second corporation or holding a property to be rented with limited landlord responsibilities. . . .
[12] The appellant's agent argued that the appellant was incorporated to earn income from one or more businesses and that this is not disputed by the respondent, since the appellant was considered to be carrying on a business during the fiscal year ending on October 31, 1995, as stated in subparagraph 15(r) of the Reply to the Notice of Appeal. Thus, in his opinion, the rental income should be considered business income because the appellant was not incorporated [translation] "for the sole purpose of holding a property to be rented with limited landlord responsibilities, since it provided other services in the past".
[13] The appellant's agent also referred to paragraph 7 of Interpretation Bulletin IT-177R2, which states:
. . . Generally, however, subject to the comments in the current version of IT-420, Non-Residents - Income Earned in Canada, rental income of a corporation will be considered to constitute income from a business.
[14] In this regard, he noted the exclusion from rental income of property other than real property for the purposes of the definition of "specified investment business" in subsection 125(7) of the Act. In the same subsection, "income . . . from an active business" is defined as including any income "pertaining to or incident to that business, other than income . . . from a source in Canada that is a property (within the meaning assigned by subsection 129(4))". Since subsection 129(4) provides that the income of a corporation from a source that is a property "includes the income . . . from a specified investment business carried on by it in Canada", the appellant's agent concluded that income from the rental of movable property is not income from property but rather income from a business.
[15] Finally, the appellant's agent pointed out that paragraph 9 of Interpretation Bulletin IT-371 refers to Interpretation Bulletin IT-72R2, "Meaning of 'Active Business'", which "indicates the Department's view that a corporation which derives income from rentals is in the rental business and thus satisfies one of the criteria of Regulation 1100(12)".
Respondent's position
[16] Counsel for the respondent argued that the exception in subsection 1100(16) of the Regulations is applicable only insofar as a corporation's income is from a business and not from property. He also relied on the Supreme Court of Canada's decision in Marconi, supra, which recognizes that distinction even in the case of a corporation, although the decision confirms the existence of a rebuttable presumption that the income of a company incorporated to carry on a business is considered prima facie to be income from a business.
[17] According to counsel for the respondent, an analysis of the situation during the taxation year at issue shows that the appellant was not engaged in any activities, unlike in previous taxation years when Mr. Gagnon's contribution meant that the appellant could be considered to have a business. Thus, in his view, the appellant had no business during the taxation year at issue and its source of income was simply property.
Analysis
[18] The rebuttable presumption that corporate income derives from business, which was recognized by the Supreme Court of Canada in Marconi, supra, was relied on again, inter alia, in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336. In her reasons at page 358, L'Heureux-Dubé J., while acknowledging that the presumption could be rebutted by evidence to the contrary, found that no such evidence had been adduced. Moreover, although he dissented, Iacobucci J. referred to the basic distinction between business income and property income for tax purposes. He also referred to a number of legal works that address this question. At page 396, Iacobucci J. stated the following:
As Professor Vern Krishna notes in The Fundamentals of Canadian Income Tax (5th ed. 1995), income such as rents may be either property income or business income. He distinguishes between the two on the basis that "business" connotes some kind of activity, at p. 260:
. . . "business" refers to economic, industrial, commercial, or financial activity and involves more than mere passive ownership of property. [Emphasis in original.]
In a similar vein, Harris, supra, says at p. 143:
Passive income from the mere holding of property is classified as income from property rather than income from business.
And Peter W. Hogg and Joanne E. Magee say in Principles of Canadian Income Tax Law (1995), at p. 195:
A gain acquired without systematic effort is not income from a business. It may be income from property, such as rent, interest or dividends.
Unless the taxpayer actually uses the asset "as part of a process that combines labour and capital" (Krishna, supra, at p. 276), any income earned therefrom does not qualify as income from a business, but rather falls into the category of income from property.
[19] It should be noted that subsection 15(1) of the Canada Business Corporations Act provides as follows:
A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.
[20] Thus, a corporation, like a natural person, may simply be the owner of property that is rented to another person. This is true for both movable and immovable property. Where a long-term lease involves no activity by the owner, who merely receives the rent, it is my view that it can rightly be concluded that the source of income is the property itself and not a business carried on in relation thereto. It is the activity required to generate business income, although it may be minimal in some cases, that distinguishes this source from the source that is simply property. The distinction based on the level of activity and recognized by both writers and the courts is moreover reflected in the last part of paragraph 8 of Interpretation Bulletin IT-73R5 reproduced in paragraph 11 of these Reasons for Judgment.
[21] In the case at bar, the Minister assumed that the appellant did not engage in any activities during the year at issue. The appellant did not adduce evidence of any activity associated with the rental of the ship. On the contrary, the appellant's agent merely argued in his written representations that the appellant had signed a lease and that it provided a rental service. The signing of a long-term lease in 1992 is not an activity that could make it possible to conclude that the appellant had a business in 1995. Moreover, the appellant did not provide a "rental service" that year specifically because it had rented the ship bareboat several years earlier. The only possible conclusion is that the presumption that the appellant earned business income rather than property income has been rebutted.
[22] It is interesting to note that article 2007 of the Civil Code of Québec defines a bareboat charter as follows:
A bareboat charter is a contract of affreightment by which a lessor places an unmanned and unequipped or partly manned and partly equipped ship at the disposal of a charterer for a determinate time, and transfers to him the navigation, management, employment and agency of the ship.
This definition is supplemented by article 2010 of the Code, which provides as follows:
The charterer may use the ship's stores and equipment.
He insures the ship and bears all operating costs. He hires and maintains the crew.
[23] According to the commentary by the Minister of Justice, this article [translation] "confirms the rule that the charterer is responsible for the navigation, management, employment and agency of the ship".[1]
[24] As the appellant's agent himself acknowledged, the bareboat rental of a ship, which is movable property, is comparable to a net-net-net lease of an immovable. In this case, an eight-year bareboat lease or charter with respect to the NM Cavalier Maxim was entered into in 1992. The rent for each year was set in advance. Although some activities may have been viewed by Revenue Canada as indicating that the appellant had or carried on a business in previous years because of Mr. Gagnon's cruise marketing activities, the evidence adduced shows that it did not engage in any activities during the taxation year ending on October 31, 1995, since Mr. Gagnon was no longer working for it. In the circumstances, the only conclusion that can be reached is that the appellant earned property income (in the form of rent) and not business income that year. That being the case, the exception in subsection 1100(16) of the Regulations is not applicable here. It is the rule in subsection 1100(15) that must be applied.
[25] As a result of the foregoing, the appeals are dismissed.
Signed at Montréal, Quebec, this 27th day of November 2001.
|
"P. R. Dussault" |
J.T.C.C.
Translation certified true
on this 19th day of February 2003.
Sophie Debbané, Revisor
[1] Le Code civil du Québec, Commentaires du ministre de la Justice, vol. II (Les Publications du Québec), page 1264.