Regulation 1100 - Deductions Allowed

Although agreements did not obligate a partnership to acquire any specific property from a particular vendor but only property of a type or class meeting certain qualities as to building standards, and therefore did not come within s. 1100(2.1)(a), they did meet the requirements of s. 1100(2.1)(d):

"'Obligated to acquire' implies that the taxpayer must be bound by contract; whereas 'arrangements for the acquisition' implies that the taxpayer need not be bound by contract." (p. 1407)

The taxpayer was found to be a principal business corporation notwithstanding that its business of manufacturing unfinished parquet flooring had 120 employees whereas there was only one individual who dealt with real estate (industrial warehouses that were managed by Florida-resident partners). Bell TCJ. stated (at p. 290) that "the question to be determined is which business was more important", and found that the real estate operation satisfied this test given that its net asset value was almost triple that of the manufacturing operations, and its cash flow exceed the net profit from the manufacturing operation.

The taxpayer owned and operated a rental chalet in Charlevoix Quebec which was furnished including with kitchen utensils, bedding, WiFi and sound system. A maid service was available but not usually utilized. In finding that the chalet was a rental property, so that Reg. 1100(11) denied the deduction of capital cost allowance, Masse J noted that over half of the rentals came from a single user who rented the Chalet from mid-June to the end of August each year and who did not wish to utilize any supplementary services such as cleaning , changing bedding, laundry and snacks. Before so concluding, he stated (para. 36 – TaxInterpretations translation):

[T]here is income from property rather than income from a business when the appellant cannot demonstrate that the range of services provided by her are such that the payments can in substantial part ["bonne partie"] be attributed to such services. In other word, income is considered to be from an active business only when the owner provides or makes available to the renters services so as to cause the activities at the property to go beyond the simple rental of immovable property.

The taxpayer was unsuccessful in a submission that seven condominiums owned by him, which generated gross revenue of approximately $85,000 in a year, were not rental properties because he had acquired the properties in order to resell them at a capital gain. Bowman C.J. stated (at para. 12) that "the fact remains that the use to which the units were put in the year was the production of rental income. They fall within the definition of rental properties."

A medical practioner who owned a building in co-ownership with others and used about 45% of the building along with the co-owners in a medical practice was found to be operating his medical practice apart from the operation of the building. Accordingly, a terminal loss realized on the disposition of the building represented a loss from a rental property.

Various hotels and motels of the taxpayer were rental properties given that the revenues were derived principally from the rental of rooms and not from services. Accordingly, such revenues could be included for purposes of determining whether the taxpayer was subject to the limitation in Regulation 1100(11).

A partnership purchased trading software from a vendor corporation, with the vendor and the partnership agreeing that the vendor would form a joint venture for exportation of the trading software and that the vendor would buy no less than a stipulated number of trading reports generated from the software in each year. In finding that the purchased software was not leasing property to the partnership, Bowman A.C.J. stated (at p. 682) that:

"The profits of a joint venture in which the partnership expected to share were profits from trading future contracts. By no stretch of the imagination can this be called rent, royalty or leasing revenue."

A British corporation ("WBDL") entered into a distribution agreement with a California corporation ("WBI") pursuant to which WBI was granted the right to license and to exhibit and distribute the picture, largely in Canada and the U.S., but with WBDL retaining control of the master negative. WBDL was found not to be "leasing" the film to WBI because it did not provide "exclusive possession at a rent for a term" (see p. 243).

In the ordinary course of trade of a finance subsidiary ("GMAC"), it provided a financial package to car dealers, which entailed (1) GMAC purchasing a vehicle from its manufacturing affiliate on the same terms as if the dealer had ordered the vehicle, (2) GMAC providing the dealer with an option to purchase the vehicle, and (3) GMAC in the interim charging a "handling fee" to the dealer in order to recover its interest expense and a profit. It was found that "although cars was not what [GMAC] was trading in, in the ordinary course of selling its financial package, it would, inevitably, be involved in the sale of cars [as a consequence of the dealers' exercise of their options]. So, in the ordinary course of its trade as a financial dealer, it sold the cars, even though it was not out of such sales that it made its profits".

Dickson J.A. found that the hiring of a cash register was a chattel lease notwithstanding a clause that provided that the lease was irrevocable for the full term and that the aggregate rentals would not abate by reason of the hirer's right to retake possession on default. The right of the hirer to collect the full balance of rentals for the remaining term following a default (minus any proceeds received from a sale or re-leasing within the 60-day period following default) instead represented a penalty clause that was void.

Dickson J.A. also accepted a definition of a lease of chattels as "a contract by which the hirer obtains a right to use the chattel hired, in return for the payment of the price of the hiring to the owner'".

In finding that an agreement pursuant to which the plaintiff transferred 14 cows to his brother-in-law who was required to return the same number of cows (but not necessarily the same cows), was a sale rather than a bailment, MacKay J.A. stated (at p. 717):

"When the original chattel delivered is to be returned in the same or an altered form the title does not pass but the transaction constitutes a bailment with the title in the bailor, but if the transaction as made by the contract between the parties does not require the party receiving the chattel to return it in its original or an altered form but permits the possessor to return another chattel of equal value or to pay the money value thereof, the relation of vendor and purchaser is created and the title to the property passes to him and is in him.

The essential difference between bailment and sale is the locus of the title."

The taxpayer (Mr. Oke), who leased a recreational vehicle to a company that was in the business of renting recreational vehicles to movie studios for several-week terms, was found not to be himself using the recreational vehicle in a business notwithstanding that he provided some assistance to the proprietor of the company in its business.

In the Court of Appeal, Pelletier JA stated (2011 DTC 5010 [at 5553], 2010 FCA 350, at paras. 29-30):

The higher the level of activity, the more likely it is that one is engaged in a business; the lower the level of activity the more likely it is that the income derives from the use of property.

...[T]he Tax Court compared Mr. Oke’s level of activity relative to other RV owners in Coast-to-Coast’s pool and found that Mr. Oke’s level of activity relative to his own RV did not differ significantly from that of other (admittedly passive) owners. In my view, this was the correct test.

The taxpayer leased a boat (his only leasing asset) to a company of which he was the sole shareholder and director for use by the company in running whale-sighting cruises. 

As the exception in Reg. 1100(17.3)(b) was not available, the CCA deductions of the taxpayer were limited to the leasing revenues (net of minor management fees) generated from the company.  After noting (at para. 63) that the company was responsible for the crew, operating and insuring the boat and for all damages, D’Auray J indicated (at para. 64) that the services provided by the taxpayer did not satisfy the test in Oke that they “surpass those which are usually provided under a lease” (TaxInterpretations translation).  In particular, the activities of the taxpayer in distributing pamphlets, constructing a ticketing booth, landscaping around the booth and selecting a caterer, were effected in his capacity of shareholder of the company rather than of lessor (para. 64).