A-2-80
The Queen (Appellant)
v.
Mount Robson Motor Inn Limited (Respondent)
Court of Appeal, Pratte and Heald JJ. and
Maguire D.J.—Edmonton, May 7; Ottawa, July 6,
1981.
Income tax — Capital cost allowance — Appeal from Trial
Division decision — Rights in buildings and improvements
(paving) on leased land acquired under lease which gave lessee
(respondent) the right to sever and remove such buildings and
improvements — Whether Trial Judge erred in holding that
the respondent's interest in the buildings and improvements
(paving) on leased land was not in the nature of a leasehold
interest within the meaning of class 13 of Schedule B of the
Income Tax Regulations — Income Tax Regulations,
Schedule B, classes 1, 6, 13.
The respondent acquired rights in the buildings and improve
ments (paving) pursuant to an agreement whereby Mount
Robson Motels Ltd. assigned to it all its rights as lessee of land
held under a lease granted to it by the Crown, together with its
rights in the motel buildings and other improvements Mount
Robson Motels Ltd. had constructed since the commencement
of the lease. The lease required the payment of an annual rent
and provided that on its termination, the lessee could sever and
remove from the land all buildings and improvements. The
issue is whether the Trial Judge was right in holding that the
respondent's interest in the buildings and improvements
(paving) on leased land was not in the nature of a leasehold
interest within the meaning of class 13 of Schedule B of the
Income Tax Regulations.
Held, the appeal is allowed. Ordinary buildings and an
asphalt pavement like the improvements here in question are
normally considered to be fixtures. When such improvements
are constructed by a tenant, they become the property of the
owner of the land. In order for the buildings and pavement to
have retained their identity as chattels and remained the prop
erty of the lessee, a clear indication of that intention should
have been found in the lease. Clause 10 of the lease which gives
to the lessee the right to remove the buildings and improve
ments at the end of the lease has in effect no bearing at all on
the issue since, as long as it remains attached to the land, an
improvement made by a tenant remains a fixture even if it may
be removed by the tenant either during or at the end of the
lease. Even if it were permissible to look outside of the lease to
determine the common intention of the parties who made it, the
circumstances would not show what that intention was but,
rather, what views some of the employees of the parties enter
tained as to the legal effect of the contract. The question
whether a person has, for the purposes of Schedule B of the
Income Tax Regulations, a proprietary or a leasehold interest
in a property must be answered in the light of the rules of
common law.
City of Vancouver v. Attorney-General of Canada [1944]
S.C.R. 23, referred to. Cohen v. The Minister of National
Revenue [1968] 1 Ex.C.R. 110, referred to. Rudnikoff v.
The Queen [1974] 2 F.C. 807, referred to.
INCOME tax appeal.
COUNSEL:
L. P. Chambers, Q.C. and J. Dean for
appellant.
J. V. Decore, Q.C. for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Decore & Company, Edmonton, for respond
ent.
The following are the reasons for judgment
rendered in English by
PRATTE J.: This is an appeal from a judgment
of the Trial Division [[1980] 2 F.C. 591] allowing
the respondent's appeal from an income tax reas
sessment for its 1975 taxation year. That judgment
held that the respondent was entitled, in comput
ing its income for that year, to deductions of
capital cost allowance in respect of its buildings
and a paved parking area as assets which do not
fall within class 13 of Schedule B of the Income
Tax Regulations but fall within classes 6 and 1
respectively of that Schedule.
The sole issue to be determined on this appeal is
whether the Trial Judge was right in holding that
the respondent's interest in certain buildings and
improvements (paving) on leased lands was not in
the nature of a leasehold interest within the mean
ing of class 13 of Schedule B of the Income Tax
Regulations.
By lease dated June 22, 1959, Her Majesty the
Queen in right of Canada leased to Mount Robson
Motels Ltd. a certain parcel of land situate in
Jasper National Park, Alberta, for a period of 42
years, commencing on April 1, 1959. The lease
required the payment of an annual rent of $500
and contained the following provisions:
1. The Lessee will during the said term pay the said rent and all
taxes, rates, duties and assessments charged upon the land or
upon the Lessee in respect thereof.
2. The Lessee will, within six months of the commencement of
the said term, submit to the Superintendent in triplicate plans
and specifications of the building to be erected upon the land
and a plan indicating its proposed location on the land.
3. Upon approval by the Superintendent of the said plans and
specifications the Lessee will erect the building described there
in on or before the first day of April, 1960.
4. The Lessee will use the land for the purpose of a motel only,
and will not use or permit the use of the land in any way that in
the opinion of the Superintendent is immoral or constitutes a
nuisance.
6. The Lessee may not sublet the premises or any part thereof
or assign or transfer this lease without the consent of the
Minister in writing.
10. The Lessee may on the termination of this lease sever and
remove from the land all structures, fixtures and improvements
which during the said term have been affixed or placed on the
land at the expense of the Lessee.
13. This lease enures to the benefit of and is binding upon Her
Majesty, Her Heirs and Successors and the Lessee, its succes
sors and assigns.
Pursuant to its obligations under the lease,
Mount Robson Motels Ltd. built two frame build
ings on poured concrete foundations. It also paved
a parking area.
By an agreement dated May 15, 1973, Mount
Robson Motels Ltd. assigned and transferred to
the respondent all its rights under the lease of June
22, 1959, together with its rights in the motel
buildings and other improvements it had con
structed since the commencement of the lease.
In computing its income for the year 1975, the
respondent claimed capital cost allowances with
respect to those buildings and improvements under
classes 1 and 6 of Schedule B of the Regulations as
if it had a proprietary interest in them. The Minis
ter reassessed the respondent on the basis that its
interest in those buildings and improvements was
merely a leasehold interest (class 13 of Schedule
B). On the appeal of the respondent, the Trial
Division, as I have already said, set aside the
reassessment and held that the respondent's inter
est in the buildings and improvements here in
question was not a leasehold interest within the
meaning of class 13 of Schedule B.
The appellant argues that the buildings and
asphalt pavement were fixtures since they had
become part of the land and that, consequently, as
the respondent's interest in the land was a lease
hold interest, its interest in the buildings and
pavement was also a leasehold interest.
The respondent's position, as I understand it, is
that the various clauses of the lease as well as the
surrounding circumstances show that it was the
common intention of both parties to the lease of
1959 that the improvements to be made by the
lessee would remain its property in spite of their
incorporation to the land and that effect must be
given to that intention.
The law on the subject seems to be reasonably
clear.' When chattels are physically attached to
land they may either retain their identity and
remain chattels or become part of the land, in
which case they are called fixtures. As fixtures are
really part of the land, once attached to the land,
they become the property of the owner of the land;
and this is true, as long as the articles remain
attached to the land, whether or not the person
who affixed them to the land has retained the
power to sever and remove them.
It may be difficult, in certain cases, to determine
whether or not a chattel has been so attached to
the land as to become a fixture. However, it is
clear, I think, that ordinary buildings and an
asphalt pavement like the improvements here in
question are normally considered to be fixtures.
When such improvements are constructed by a
tenant, they become the property of the owner of
the land. In order for the buildings and pavement
here in question to have retained their identity as
chattels and remained the property of the lessee, if
it were at all possible, a clear indication of that
intention should have been found in the lease. Now
the sole clause of the lease which, at first sight,
would appear to have a bearing on the subject is
clause 10 which gives to the lessee the right to
' See: Cheshire's Modern Law of Real Property, 12th Edi
tion, pp. 138 and following; Megarry and Wade, The Law of
Real Property, 4th Edition, pp. 711 and following; Anger and
Honsberger, Canadian Law of Real Property, 1959, pp. 454
and following; City of Vancouver v. Attorney-General of
Canada [1944] S.C.R. 23; Cohen v. M.N.R. [1968] 1 Ex.C.R.
110; Rudnikoff v. The Queen [1974] 2 F.C. 807.
remove the buildings and improvements at the end
of the lease. That clause, however, has in effect no
bearing at all on this question since, as long as it
remains attached to the land, an improvement
made by a tenant remains a fixture even if it may
be removed by the tenant either during or at the
end of the lease.
Respondent's counsel argued that other circum
stances (like the fact that the buildings were
insured by the respondent and not by the Crown)
showed that the parties to the lease had intended
that the improvements remain the property of the
lessee. That argument does not convince me. Even
if it were permissible to look outside of the lease to
determine the common intention of the parties who
made it, the circumstances referred to by counsel
would not show what that intention was but,
rather, what views some of the employees of the
parties entertained as to the legal effect of that
contract.
I am therefore of opinion that, at common law,
the buildings and improvements here in question
were fixtures and were, therefore, as long as they
were not severed from the land, the property of
Her Majesty. As long as that situation persisted
the respondent's interest in those fixtures was
merely that of a lessee.
If the learned Trial Judge decided the case as he
did, it is not, I think, because he differed from the
opinion that I have just expressed. Indeed he
expressly found that the buildings and improve
ments in question were fixtures. His decision, as I
read it, rests on his opinion that the expression
"leasehold interest" in Schedule B of the Income
Tax Regulations has a special meaning that does
not include a right of the kind held by the plaintiff
in the buildings and improvements in question.
With that opinion, I respectfully disagree. The
expression "leasehold interest" in Schedule B of
the Regulations does not have, in my view, such a
special and restrictive meaning. In my view, the
question whether a person has, for the purposes of
Schedule B, a proprietary or a leasehold interest in
a property must be answered in the light of the
rules of the common law. If, under those rules, the
interest of that person is that of a lessee, that is the
answer to the question.
For those reasons, I would allow the appeal with
costs, set aside that part of the judgment of the
Trial Division relating to the respondent's 1975
taxation year and dismiss the respondent's action
with costs.
HEALD J.: I agree.
MAGUIRE D.J.: I concur.
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.