T-2280-74
Compagnie Immobilière BCN Limitée (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Addy J.—Montreal, February 6;
Ottawa, February 25, 1975.
Income tax—Deductions—Emphyteutic lease—Plaintiff
permitted deduction as capital cost allowance on building for
1964—Building demolished in 1965—Whether taxpayer loses
right to deduction as capital cost allowance if, after acquiring
property for purpose of gaining income, property ceases to
exist, and no property remains in same class Income Tax
Act, R.S.C. 1952, c. 148, ss. 11, 20(5),(6), 139(1)(ag) as am.
and Regulations, s. 1100, Sch. B—Quebec Civil Code, art.
1198.
In an earlier decision, this Court permitted plaintiff to claim
a deduction as capital cost allowance for a building and for its
rights as lessee under an emphyteutic lease for the 1964 year.
Since by virtue of article 1198 of the Quebec Civil Code, there
occurred confusion of the rights of lessor and lessee as a result
of purchase of both the building and lease by plaintiff in 1964,
and since the building was demolished in 1965, plaintiff com
menced this appeal to determine whether it may continue to
claim allowances in respect of the capital cost of the building
and of its rights as lessee.
Held, dismissing the appeal, in order to preserve the right to
deduct yearly amounts calculated on the capital cost of specific
property, destruction or alienation of the property, by sale or
otherwise, makes no difference, provided that there has always
existed, and still exists, since the initial purchase, property of
the same class. It does not matter whether the other property
was acquired concurrently with, before, or after, the destroyed
or alienated property. Property in the particular class must
actually exist before a deduction for previously acquired prop
erty may be claimed. The Tax Appeal Board has held that
when a lease no longer existed, the taxpayer could no longer
claim a deduction for the cost of acquiring the lease. Under
section 11, a deduction is permissible only when the property is
used to produce income; if it no longer exists, a deduction is not
justifiable.
The Queen v. Compagnie Immobilière BCN Ltée [1973]
C.T.C. 362; M.N.R. v. Bessemer Trust Company [1972]
F.C. 1398 and International Nickel Company of Canada
v. M.N.R. [1969] 1 Ex.C.R. 563, applied. Towers v.
M.N.R. (1954) 10 Tax A.B.C. 347; Borinsky v. M.N.R.
(1952) 6 Tax A.B.C. 367; Trans-Prairie Pipelines Ltd. v.
M.N.R. 70 DTC 6351; and Schafran v. M.N.R. 54 DTC
497, agreed with.
INCOME tax appeal.
COUNSEL:
M. Regnier and R. Couzin for plaintiff.
A. Garon, Q.C., and W. Lefebvre for
defendant.
SOLICITORS:
Stikeman, Elliot, Tamaki, Mercier and
Robb, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: The issue between the plaintifff and
the defendant turns on the interpretation of certain
provisions of the Income Tax Act' and the Income
Tax Regulations (hereinafter referred to as the
Act and the Regulations). The taxation years in
question are those ending on November 30, 1967
and November 30, 1968.
The facts are not in dispute and the parties have
produced a joint agreed statement of facts which
covers various transactions dating back as far as
1910, concerning an emphyteutic lease granted on
a parcel of land situated in Montreal and on a
building known as the Transportation Building
erected on the land. The agreed statement of facts,
filed at the hearing as Exhibit I, is attached to
these reasons.
In The Queen v. Compagnie Immobilière BCN
Ltée 2 , this Court ruled on the right of the plaintiff
at bar to claim a deduction as a capital cost
allowance for this same building for the year 1964,
and for its rights as lessee under the emphyteutic
lease. The plaintiff and the defendant are appear
ing again before this Court, not to vary or to
confirm the judgment previously rendered, but in a
sense to complete it. By reason of the confusion in
1964 of the rights of the lessor and the lessee and
because of the demolition of the building in
1965—which was noted by Court in the above-
mentioned decision involving the same two par-
ties—one might perhaps conclude that the plaintiff
had disposed of its rights as a lessee as well as its
1 R.S.C. 1952, c. 148 as amended.
2 [1973] C.T.C. 362.
rights to the building. Since by virtue of Article
1198 of the Civil Code, there undoubtedly
occurred confusion of the rights of the lessor and
the lessee as a result of purchase of both the
building and the lease by the plaintiff in 1964, and
since the building was demolished in 1965, the
present appeal is instituted in order to determine
whether the plaintiff may continue to claim allow
ances in respect of the capital cost of the building,
and also of its rights as lessee under the
emphyteutic lease, after the demolition of the
building and the confusion of the rights under the
lease.
The fundamental question in this case is as
follows: does a taxpayer lose all right to claim a
deduction as a capital cost allowance for property
if, after having acquired the property for the pur
pose of earning income, he disposes of it, or, in
more general terms, if the property ceases to exist,
and there is no property remaining in the same
class? In the case at bar, the question arises in
relation to two distinct properties included in dif
ferent classes of depreciation: the Transportation
Building included in class 3, and the lessee rights
under the emphyteutic lease of 1910 included in
class 13. Section 11(1) (a) of the Act reads as
follows:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a taxation
year:
(a) such part of the capital cost to the taxpayer of property,
or such amount in respect of the capital cost to the taxpayer
of property, if any, as is allowed by regulation;
This provision allows a taxpayer, in computing his
income, to deduct an amount of the capital cost of
property. It refers to the Regulations, and the
relevant provisions of regulation 1100 read as
follows:
1100. (1) Under paragraph (a) of subsection (1) of section
11 of the Act, there is hereby allowed to a taxpayer, in
computing his income from a business or property, as the case
may be, deductions for each taxation year equal to
Rates
(a) such amounts as he may claim in respect of property of
each of the following classes in Schedule B not exceeding in
respect of property
(iii) of class 3, 5%
(xii) of class 12, 100%
of the amount remaining, if any, after deducting the
amounts, determined under sections 1107 and 1110 in
respect of the class, from the undepreciated capital cost to
him as of the end of the taxation year (before making any
deductions under this subsection for the taxation year) of
property of the class;
Leasehold Interest
(b) such amount, not exceeding the amount for the year
calculated in accordance with Schedule H, as he may claim
in respect of the capital cost to him of property of class 13 in
Schedule B;
The Transportation Building, demolished in
1965, is in class 3 of Schedule B referred to in
regulation 1100, and the leasehold falls in class 13
of Schedule B as mentioned in regulation
1100(1)(b) above. As to the property in class 3 of
Schedule B, according to regulation 1100(1)(a),
counsel for the plaintiff maintains that deprecia
tion should be taken on the undepreciated capital
cost of property in the class, and not on the
property itself: therefore, the existence of the prop
erty is not necessary for the right to depreciation
to subsist. He refers for this purpose to the defini
tion of "undepreciated capital cost," as the latter is
defined in section 20(5)(e)(î) and (iii).
The relevant paragraphs of section 20(5) read as
follows:
(5) In this section and regulations made under paragraph
(a) of subsection (1) of section 11,
(e) "undepreciated capital cost to a taxpayer of depreciable
property" of a prescribed class as of any time means the
capital cost to the taxpayer of depreciable property of that
class acquired before that time minus the aggregate of
(i) the total depreciation allowed to the taxpayer for
property of that class before that time,
(iii) each amount by which the undepreciated capital cost
to the taxpayer of depreciable property of that class as of
the end of a previous year was reduced by virtue of
subsection (2).
He also refers to the definition of "depreciable
property" and to the definition of "total deprecia
tion," in paragraphs 20(5)(a) and (d):
(a) "depreciable property of a taxpayer" as of any time in a
taxation year means property in respect of which the taxpay
er has been allowed, or is entitled to, a deduction under
regulations made under paragraph (a) of subsection (1) of
section 11 in computing income for that or a previous
taxation year;
(d) "total depreciation allowed to a taxpayer" before any
time for property of a prescribed class means the aggregate
of all amounts allowed to the taxpayer in respect of property
of that class under regulations made under paragraph (a) of
subsection (1) of section 11 in computing income for taxation
years before that time;
The plaintiff maintains that its rights to contin
ue to claim a yearly deduction from its income
calculated on the initial purchase cost of the
Transportation Building rests on the above-men
tioned provisions, and that these clearly establish
its right to such deductions even though the prop
erty itself no longer exists. The complete demoli
tion of the Transportation Building in 1965 does
not prevent the plaintiff, according to its counsel,
from claiming a yearly depreciation, since there
remains a balance of the initial undepreciated cost
as defined by the Act and the above-mentioned
provisions of the Regulations.
It is clear that in order to preserve the right to
deduct yearly amounts calculated on the capital
cost of specific property, the destruction or aliena
tion of this property by sale or other means does
not matter, provided that there has always existed
and still exists, since the initial purchase, other
property of the same class. Nor does it matter
whether this other property was acquired concur
rently with, before or after the acquisition of the
destroyed or alienated property. In the case at bar,
it is clear that, after demolition of the Transporta
tion Building in 1965, the plaintiff no longer pos
sessed any property of the same class, and counsel
for the defendant maintains that when all the
property of a particular class disappears all right
to depreciation based on the cost of acquisition, of
previously acquired property in that class is ter-
minated, subject only to the provisions of regula
tion 1100(2), which reads as follows:
Allowance on Disposal of or Transfer from Class
(2) Where, in a taxation year, otherwise than on death, all
property of a prescribed class that had not previously been
disposed of or transferred to another class has been disposed of
or transferred to another class and the taxpayer has no property
of that class at the end of the taxation year, the taxpayer is
hereby allowed a deduction for the year equal to the amount
remaining, if any, after deducting the amounts, determined
under sections 1107 and 1110 in respect of the class, from the
undepreciated capital cost to him of property of that class at
the expiration of the taxation year.
On the other hand, counsel for the plaintiff
argues that this section does not require the tax
payer to take a deduction equal to the undepreciat-
ed capital cost within the year, but allows him to
do so if he wishes, and that he still retains his right
to take a yearly depreciation as he sees fit in
accordance with the provisions of section 11(1) (a)
and of regulation 1100(1) mentioned above.
It is well to note first of all that section 11(1)
contains the words "for a taxation year," and also
that in examining the above-quoted texts of sec
tions 11(1)(a) and 20(5)(e), and paragraphs (a)
and (b) of regulation 1100(1), we find the word
"property" in each case. The term "property" is
defined in section 139(1)(ag) as follows:
(ag) "property" means property of any kind whatsoever
whether real or personal or corporeal or incorporeal and,
without restricting the generality of the foregoing, includes a
right of any kind whatsoever, a share or a chose in action;
It seems clear, upon considering this definition
of "property" in the Act and upon applying it to
the sections and regulations mentioned above, that
property in the class under consideration must
actually exist before a deduction for previously
acquired property of that class may be claimed.
Jackett C.J. recently stated, at page 1400 of
M.N.R. v. Bessemer Trust Company':
The scheme of capital 'cost allowance, as it was originally
enacted in 1948 for residents of Canada and persons carrying
on business in Canada, was twofold. In the first place, annual
allowances in respect of capital cost were permitted by regula-
3 [1972] F.C. 1398.
tion under section I I(1)(a) each year during which the taxpay
er continued to own property acquired for use as, or in, a source
of income.
See also The International Nickel Company of
Canada v. M.N.R. 4 in which Gibson J. stated, at
page 567:
As a consequence, the appellant at no time could or can now or
in the future, make any deduction from its taxable income in
any taxation year for capital cost allowance under the Income
Tax Act in respect to the capital cost of these buildings or
things at Thompson Townsite not owned by it, but built and
paid for by it.
In three cases before the Tax Appeal Board, it
was held that when a lease no longer existed the
taxpayer could no longer claim a deduction for
depreciation on the cost of acquiring the lease. See
Towers v. M.N.R. 5 ; Borinsky v. M.N.R. 6 ; Scha-
fran v. M.N.R. 7 ; and in The International Nickel
Company of Canada v. M.N.R. mentioned above,
it was stated that the cost of constructing buildings
on land not belonging to the taxpayers could not
be the basis for a deduction for depreciation, since
the buildings had been erected on a piece of land
belonging to another person who ipso facto
became the owner of those buildings.
However, what is more important is the fact
that the general disposition of the Act in so far as
deductions are concerned, provides that, in order
to justify a deduction, the property in question
must be used to produce income and, if it no
longer exists, it clearly cannot produce income or
for that reason justify a deduction. The principle
that the property must be used to produce income
becomes clear when we examine the text of section
20(6)(a) and (b) of the Act, which reads as
follows:
(6) For the purpose of this section and regulations made
under paragraph (a) of subsection (1) of section 11, the follow
ing rules apply:
(a) where a taxpayer, having acquired property for the
purpose of gaining or producing income therefrom or for the
purpose of gaining or producing income from a business, has
commenced at a later time to use it for some other purpose,
° [1969] I Ex.C.R. 563.
5 (1954) 10 Tax A.B.C. 347.
6 (1952) 6 Tax A.B.C. 367.
54 DTC 497.
he shall be deemed to have disposed of it at that later time at
its fair market value at that time;
(b) where a taxpayer, having acquired property for some
other purpose, has commenced at a later time to use it for the
purpose of gaining or producing income therefrom, or for the
purpose of gaining or producing income from a business, he
shall be deemed to have acquired it at that later time at its
fair market value at that time;
Therefore, in order to enable a deduction to be
made pursuant to section 11 of the Act, the prop
erty must be used to produce income, or at least, if
it does not produce income, it must be held for the
purpose of producing some. (This principle has
also been recognized in Trans-Prairie Pipelines
Ltd. v. M.N.R. 8 —see page 6354 of the decision
and the other cases quoted at the bottom of the
page.)
I must therefore conclude that, by demolishing
the Transportation Building in 1965, the plaintiff
lost all right to future deductions based on the
original purchase price of that building under sec
tion 11 of the Act, since no other property of that
class existed, and for the same reason I must also
conclude that, in view of the confusion of the
rights of lessor and lessee when the emphyteutic
lease and the building were both purchased, the
plaintiff also lost all right to a deduction arising
from the said lease.
The appeal will therefore be dismissed with
costs.
AGREED STATEMENT OF FACTS
Exhibit I attached to the reasons for judgment of Addy J. on
February 25, 1975.
1. The Plaintiff was incorporated on December 27, 1962 under
the Companies Act, now the Canada Corporations Act.
2. The Plaintiff is a subsidiary of the Bank Canadian National,
and apart from directors' qualifying shares, all the issued
shares of the Plaintiff are held by the Bank Canadian National.
3. The taxation years in question are the Plaintiff company's
taxation years ending on November 30, 1967 and on November
30, 1968.
4. By contract dated June 2, 1910, the "Ecclésiastiques du
séminaire de Saint-Sulpice de Montréal" granted an
emphyteutic lease to the Transportation Building Company
Limited.
8 70 DTC 6351.
5. The Transportation Building Company Limited erected a
building known as the Transportation Building on the land
covered by the emphyteutic lease.
6. By contract dated July 4, 1952, Messrs. Cohen and Zalkind
acquired from the Transportation Building Company Limited:
(i) the rights of the lessee under the emphyteutic lease of
June 2, 1910; and
(ii) ownership of the Transportation Building.
7. By contract dated March 16, 1964, General Trust of
Canada acquired from the "Prêtres de Saint-Sulpice de Mont-
réal" (formerly the "Ecclésiastiques du séminaire de Saint-Sul-
pice de Montréal"):
(i) ownership of the land covered by the emphyteutic lease
of June 2, 1910;
(ii) the rights of the lessor under the said emphyteutic lease;
and
(iii) all rights of the lessor in the Transportation building;
for the sum of $700,000.00.
8. By contract dated July 3, 1964, the Plaintiff acquired from
Messrs. Cohen and Zalkind:
(i) the rights of the lessee under the emphyteutic lease of
June 2, 1910; and
(ii) ownership of the Transportation Building.
9. By contract dated October 29, 1964, General Trust of
Canada sold to the Bank Canadian National:
(i) ownership of the land covered by the emphyteutic lease
of June 2, 1910;
(ii) the rights of the lessor in the said emphyteutic lease; and
(iii) all rights of the lessor of the Transportation Building;
for the sum of $700,000.00.
10. By contract dated January 8, 1965, the Plaintiff acquired
from the Bank Canadian National:
(i) ownership of the land covered by the emphyteutic lease
of June 2, 1910;
(ii) the rights of the lessor in the said emphyteutic lease; and
(iii) all rights of the lessor of the Transportation Building;
for the sum of $700,000.00.
11. On that same date, the Plaintiff leased the land in question
by means of an emphyteutic lease to the "Société Place d'Ar-
mes Ltée," which demolished the Transportation Building
during the course of 1965.
12. On April 24, 1973, judgment was delivered in The Queen v.
Compagnie Immobilière BCN Ltée [ [1973] C.T.C. 362], con
cerning the 1964 taxation year, as follows:
... the assets acquired by defendant were acquired to be
used, and not for demolition or for extinction by confusion.
The building must be classified in Class 3 and the lessee
rights in Class 13.
The appeal is ... dismissed without costs ....
13. At the end of the Plaintiff's 1964 taxation year the only
property belonging in class 3 of Schedule B of the Income Tax
Regulations was the Transportation Building, and the only
property belonging in class 13 was the lessee rights described in
paragraph 8.
14. During the Plaintiffs 1965, 1966, 1967 and 1968 taxation
years, there were no additions of property in classes 3 or 13.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.