T-3692-72
The Queen (Plaintiff)
v.
Canadian-American Loan and Investment Corpo
ration Limited (Defendant)
Trial Division, Cattanach J.—Vancouver,
November 26, 1973; Ottawa, January 8, 1974.
Income tax—Operation of marina by defendant—Sale of
assets and building and lease-back—Continuation of same
business—Transfer of interest in lease to G company (in a
loss position)—Not an arm's length transaction—Whether
income from property or business—Income Tax Act, s. 23.
The defendant company leased to G company (then in a
loss position) land constituting one quarter of the premises
in which the defendant company operated a marina. A
building used by the defendant for the storage of small boats
was situated on the leased land. The lease contained an
assignment to G company of the defendant's revenue for
boat storage.
In its return for the taxation year 1967, the defendant
declared the sum of $4,500 received as rent under the lease
but not the sum of $9,528.60 being the difference between
$14,028.60 paid to the defendant for storage and assigned to
G company and the $4,500. The Minister assessed the
defendant for the total of these amounts. The Tax Appeal
Board (now the Tax Review Board) disallowed the
assessment.
Held, allowing the appeal, that the defendant company
was not dealing at arm's length with G company and that, if
it were not for the exception in the concluding words of
section 23 of the Income Tax Act, "unless the income is
from property and the taxpayer transferred or assigned the
property", the amounts transferred to G company would be
included in the defendant's income.
Even if there was a transfer of property, all G company
did was to pay rental to the defendant and receive transfer
of the amounts paid to the defendant by its customers for
storage. These amounts represented income from one part
of its marina operation, without any change in the operation
as conducted before the lease. In that part the defendant
was conducting the business of a warehouseman. The
income so generated was therefore income from a business
and not "income from property".
Wertman v. M.N.R. [1965] 1 Ex.C.R. 629, applied.
INCOME tax appeal.
COUNSEL:
N. A. Chalmers, Q.C., and C. H. Fryers for
plaintiff.
J. G. Smith for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Russell and DuMoulin, Vancouver, for
defendant.
CATTANACH J.—This is an appeal from a
decision of the Tax Appeal Board (now the Tax
Review Board) dated August 14, 1972 whereby
the defendant's appeal to that Board from its
assessment to income tax for its 1967 taxation
year by the Minister of National Revenue was
allowed.
The defendant is a joint stock company incor
porated pursuant to the laws of the Province of
Alberta and is registered under the laws of the
Province of British Columbia as an extra-pro
vincial company by virtue of which registration
it is authorized to carry on its business in that
Province.
The corporate name of the defendant is mis -
descriptive of the venture carried on by it in
British Columbia. The defendant operated a
marina known as the "Airport Marina" on the
Fraser River.
The defendant had owned a tract of land
facing that river on which was constructed a
two storeyed frame building of sufficient dimen
sions to store about 250 small sized boats as
well as a large fixed lifting device whereby a
boat could be hoisted from the water by means
of slings, transported in these slings along an
overhead track by motor power to an appropri
ate spot to be placed upon a powered dolly on
which the boat could be easily moved by one
man inside the building for storage. The boat
remained on the dolly on which it had been
placed originally throughout the period of stor
age to facilitate the movement of the boat
within the building. No boat was allocated a
particular space in the building but rather the
boats were moved about in the building for the
most convenient and maximum use of the stor
age facilities.
The defendant sold the land, buildings,
wharves and equipment that it had used in the
marina operation to a major oil company from
which it forthwith leased back the land, build
ings and other assets which had been sold by an
instrument dated February 6, 1966 for a term of
two years from March 1, 1966.
In addition the defendant had been the lessee
of a water lot fronting on the upland property
above mentioned from the North Fraser Har
bour Commissioners. The major oil company
which had purchased the upland property from
the defendant also became the lessee of the
water lot. The lease from the oil company to the
defendant dated February 7, 1966 also included
a lease back of the water lot.
The rental for the leased premises payable by
the defendant to the lessor was $125 monthly
and a sum equal to the rentals paid by the lessor
to the head lessor for the water lot.
After the lease-back of the premises by the
defendant it continued the operation of the
marina as it had done formerly. That operation
included the inside storage of smaller boats in
the building and the water mooring of up to
1,000 boats at facilities in the water lot. In
addition the defendant operated two floats from
one of which gasoline, oil and grease was sold
and from the other a general store was conduct
ed which I assume to be a business somewhat
akin to that of a ship-chandler. In the course of
the operation of the marina the defendant also
rented equipment such as trailers on which the
owner of a boat could transport his boat for
winter storage at his own home or used to
transport his boat to waters of his choice. The
defendant also did washing and servicing of
boats and some repair work.
The defendant was one of a group of compa
nies with substantially the same shareholders
and officers and served by common manage
ment and auditors.
Another company included in this group was
Georgia Marina Boat Works Ltd. (hereinafter
sometimes referred to as Georgia). This com
pany had operated a marina on Burrard Inlet in
the City of Vancouver, British Columbia or its
environs. Georgia ceased its operations in 1962
or thereabouts when its assets were sold and the
company then became dormant. However
Georgia was in a loss position to the extent of
approximately $12 ,000 .
Charles David Christie, a chartered account
ant and formerly a bank manager, was the office
manager of Western Business Management
Limited, a company affiliated with the group
and which did the accounting for the corporate
members of the group including the defendant
herein, Canadian-American Loan and Invest
ment Corporation Limited, and Georgia Marina
Boat Works Ltd.
Mr. Christie was aware of the tax loss posi
tion of Georgia and he also testified that he was
aware that after a prescribed period the loss
incurred by Georgia would not be available to
set off against income.
He thereupon set out to remedy that situation.
He devised an arrangement whereby the
defendant leased to Georgia by instrument
dated September 30, 1966 the land upon which
the frame building used for the storage of small
boats was situate! for a two year period. This
lease comprised about one quarter of the prem
ises upon which the defendant conducted its
marina operation.
The pertinent portion of this lease reads as
follows:
wrrNESsETH, the said Lessor doth demise unto the said
Lessee, his executors, administrators and assigns, ALL AND
SINGULAR that certain parcel or tract of land and premises
situate, lying and being in the Municipality of Richmond
more specifically designated as Lot A of Lot 14 Block A
Section 29 B.N. 5R.W 6 Map 51813F and in particular the
frame building thereon used for the purpose of housing
boats of all kinds, under rental agreements with the owners,
for various periods of time. The rentals accrueing [sic] from
these agreements also are hereby assigned to the Lessee
plus the revenue from the machinery used in conjunction
with above mentioned building to raise and lower the boats
into and out of the said building.
The rent payable to the defendant by Georgia
for the premises so leased was $500 monthly.
The revenue from contracts entered into by
the defendant with its clients whereby it agreed
to accept for storage motor launches and other
types of boats for those clients from September
30, 1966 until June 30, 1967, that is, nine
months of the defendant's 1967 taxation year
ending June 30, 1967, was $12,653.60.
The revenue for the same period from
charges made for the use of machinery to raise
and lower boats into and out of the building
used for storing boats was $1,375.
The revenue so received totals $14,028.60.
The defendant, in preparing its income tax
return for its taxation year ending June 30,
1967, did not include as income the amount of
$14,028.60 but it did include as income the
amount of $4,500 being the rent received by it
for nine months from Georgia pursuant to the
agreement between them dated September 30,
1966 mentioned above.
Mr. Christie frankly admitted that the sole
purpose of the arrangement he devised and
which is described above was to permit of reve
nue received by the defendant being transferred
to Georgia to be set off against the losses of
Georgia so that the revenue would not attract
tax either in the hands of the defendant or
Georgia.
There is no question that a taxpayer may so
organize its affairs as to minimize its tax liabili
ty so long as the method of so doing is permit
ted by pertinent provisions of the Income Tax
Act.
The question which arises in this appeal is
whether the defendant has been successful in so
doing.
The Minister of National Revenue contends
that the defendant has not.
In assessing the defendant as he did the Min
ister included in the defendant's income the sum
of $9,528.60 (being the difference between
$14,028.60 and $4,500) and he did so on the
assumption that:
(a) the sums of $12,653.60 and $1,375.00 were the
amounts payable to the Defendant by its customers pursu
ant to the terms of contracts which it had entered into at
the time it had accepted the possession of the boats from
them for storage or warehousing;
(b) none of the contracts of storage had been assigned by
the Defendant to Georgia Boat Works Ltd.;
(c) during the period from the 30th of September 1966
until the 30th of June 1967 the Defendant had held itself
out as the operator of, and in fact, had carried on its own
behalf, the business of accepting for storage and storing
boats and other chattels.
The principal contention of counsel for the
Minister was that, at all material times, the
defendant held itself out as carrying on the
business of storing and warehousing boats and
did in fact carry on that business from which it
realized income in the amounts of $12,653.60
and $1,375 for storing and lifting boats during
the period from September 30, 1966 until June
30, 1967, that the total of those amounts, being
$14,028.60 was income earned by the defendant
from that business and as such is properly
included in the defendant's income.
Alternatively counsel for the Minister con
tended that the amounts were also properly
included in the defendant's income by virtue of
section 23 of the Income Tax Act since they
were amounts which were not income from
property but the amounts were payable to the
defendant under contracts between it and the
owners of boats for lifting and storing those
boats and which contracts had not been
assigned to Georgia.
On the other hand counsel for the defendant
contended that the arrangement initiated by Mr.
Christie on behalf of the defendant and Georgia
falls precisely within the exception contemplat
es: by section 23 of the Act which reads as
follows:
23. Where a taxpayer has, at any time before the end of a
taxation year (whether before or after the commencement of
this Act), transferred or assigned to a person with whom he
was not dealing at arm's length the right to an amount that
would, if the right thereto had not been so transferred or
assigned, be included in computing his income for the taxa
tion year because the amount would have been received or
receivable by him in or in respect of the year, the amount
shall be included in computing the taxpayer's income for the
taxation year unless the income is from property and the
taxpayer has also transferred or assigned the property.
In short his position is that the right to the
amount assigned by the defendant to Georgia
was income from property and the defendant
had also transferred or assigned the property
from which the income arose.
In paragraph 2 of the Amended Statement of
Claim it is alleged that at all material times the
defendant did not deal at arm's length with
Georgia. That allegation is admitted by the
defendant in paragraph 1 of the Statement of
Defence.
As I understand the principal contention
advanced on behalf of the Minister it is that
after entering into the arrangement with
Georgia, the defendant continued to carry on
the business exactly as it had done prior to the
arrangement with Georgia.
The principle is well established that, for the
purposes of Part I of the Income Tax Act,
profits from a business are income of the person
who carries on the business and are not, as
such, income of a third person into whose hands
they may come.
Accordingly it is implicit in the Minister's
submission that the amount of $14,028.60 was
income from a business and that business was
the business of the defendant.
The contention on behalf of the defendant, as
indicated before, is that what the defendant did
falls precisely within the exception in section 23
quoted above. The defendant transferred to
Georgia the right to receive the total amounts
payable for the lifting and storage of boats. Had
those amounts not been so transferred they
would have been included in the defendant's
income for the taxation year, regardless of
whether it was income from a business or
income from property. It is admitted that the
defendant was not dealing at arm's length with
Georgia. There is no question nor was there any
dispute between the parties that, if it were not
for the exception in the concluding words of
section 23 "unless the income is from property
and the taxpayer also transferred or assigned
the property", the right to the amounts so trans
ferred or assigned to Georgia would be properly
included in the defendant's income.
The property was transferred to Georgia by
the defendant by the lease dated September 30,
1966. In my view there was a "transfer" of
property by the defendant to Georgia. I do not
think it is material that in the head lease
between the purchaser of the property and the
defendant there was a clause prohibiting the
sub-lease of the property without the prior con
sent of the head lessee. That is a matter
between the defendant, as lessor, and the lessee.
Neither do I think it is material, in the circum
stances of this appeal, that Georgia did not go
into possession. Georgia had the legal right to
possession under its lease with the defendant.
The crux of the defendant's contention is that
the amount transferred by the defendant to
Georgia was income from property.
I, therefore, turn first to this contention.
The evidence is clear that Georgia did noth
ing. It had no employees. The operation was
carried on by the defendant exactly as it had
carried on prior to the lease of the land and
building to Georgia. The defendant held itself
out to its customers as conducting the opera
tion. Its employees did all the work involved in
the lifting of the boats, placing them on dollys
and moving them about in the building for the
most appropriate storage. The contracts for lift
ing and storage were entered into between the
defendant and the customers. The defendant
collected payment of all accounts from the cus
tomers. The contracts for storage and incidental
lifting were not transferred by the defendant to
Georgia.
All that Georgia did was to pay the monthly
rental of $500 to the defendant and to receive in
each month the amounts paid to the defendant
by the customers which in the nine months in
the defendant's taxation year totalled
$14,028.60.
These amounts were meticulously and care
fully recorded in the books of account of the
defendant and Georgia by Mr. Christie in his
capacity as accountant common to both
companies.
The mere fact that there was no handing of
money back and forth and the embodiment of
the transactions consisted of book entries is still
the equivalent of the payment and receipt of
money. (See Lord Wright in Trinidad Lake
Asphalt Operating Co., Ltd. v. Commissioners
of Income Tax for Trinidad and Tobago'.)
At this point I cannot refrain from comment
ing that the foregoing evidence lends substantial
support to the contention of the Minister that
the amounts received were income from the
operation of a business by the defendant and
which continued to be operated by the defend
ant without any external change from the opera
tion as conducted by the defendant before the
lease to Georgia. I find it difficult to perceive
how one part of the marina operation, namely
the lifting and storage of the boats in the build
ing, can be segregated from the operation as a
whole.
In Wertman v. M.N.R. 2 Thurlow J. had occa
sion to consider the question of whether
receipts from the letting of real property are to
be considered to be receipts from a business or
receipts from property. He carefully reviewed
and analyzed the leading United Kingdom and
Canadian cases on the subject. He was particu
larly conscious of the fact that in Great Britain,
income from real property is computed for taxa
tion purposes on a special basis prescribed
under Schedule A and that because of this,
cases in which the revenue authorities have
sought to bring the rentals of real property into
the computation of profits under Schedule D as
profits of a trade are not strictly parallel and
thus not applicable in considering a case arising
under the provisions of the Canadian Income
' [1945] A.C. 1 at pages 10 et seq.
2 [1965] 1 Ex.C.R. 629.
Tax Act. He did conclude, however, that they
offer light on the subject of what is income
from property as distinguished from income
from trading.
He concluded that when the question arises it
is one that must be resolved on the facts of the
particular case. I am in complete agreement
with this conclusion and the reasoning by which
it was arrived at.
In my view, prima facie the perception of rent
as land owner is not the conduct of a business,
but cases can arise where the extent of the
various services provided by the landlord under
the terms of a leasing contract and the time and
labour devoted by him are such that the rental
paid by the tenant can be regarded as in a
substantial measure payment for such services
as well as for the use of the property and the
interrelation of the use of the premises with the
use of such services may be so extensive that
the whole sum could readily be regarded not as
mere rental of property, but as true receipts of a
business of providing apartment suites and ser
vices to tenants. It is a question of fact as to
what point mere ownership of real property and
the letting thereof has passed into commercial
enterprise and administration.
Reverting to the facts in the present case it is
significant, in my view, that the charges to cus
tomers were for the lifting and storage of their
boats. The lifting of the boats was a service and
was an integral part of the storage operation.
The boats could not be stored indoors without
being lifted and extensive facilities were con
structed for that purpose. In addition dollys
were provided. The dollys and small power
engine operated by one man permitted the boats
to be moved about indoors to ensure maximum
storage space. In my view it is of still greater
significance that the customer was not allocated
to specific space nor could he demand a specific
space. The customer's boat was stored in a
space most convenient to the defendant and
could be moved by the defendant from space to
space at the defendant's discretion.
In my view the defendant was a warehouse-
man. A warehouseman has been defined as a
person who receives goods to be stored for
which storage he receives compensation. He is
also a bailee for hire.
As a warehouseman the defendant is bound to
use ordinary diligence in the care and preserva
tion of the property entrusted to him. He is not
an insurer. Where goods are damaged while in
his custody the onus is upon him to prove that
this did not occur from his negligence.
At common law a warehouseman has a lien
on the goods for his service of storing.
It follows that a warehouseman is engaged in
a recognized business of warehousing. As part
of that business as warehouseman, and as part
of the standard of care that a warehouseman is
bound to exercise, it is logically incumbent upon
him to take reasonable care to see that the place
where the goods are kept is fit and proper for
the purpose. In the case of the defendant that is
the provision of a suitable building. The provi
sion of a building fit and proper for the indoor
storage of the boats owned by customers of the
defendant is essential but incidental to the con
duct of the business of a warehouseman by the
defendant and is not in itself the business of
warehousing. What the defendant provides to its
customers is the service of storage of their
boats.
In my view the income so generated is income
from a business and notincome from property.
Because of the conclusion I have reached it is
not necessary for me to reach a conclusion on
the issue raised by the Minister that the income
here in question continued to be income earned
by the defendant even after the lease of the
premises -to Georgia and I do not• purport to do
so.
For the reasons above expressed the appeal is
allowed and Her Majesty is entitled to taxable
costs.
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