Regulation 1102 - Property Not Included

The taxpayer argued that his rental condominium units were not rental properties because they had been acquired by him with a view to their resale at a capital gain. Bowman C.J. noted that such an intention would be inconsistent with claiming capital cost allowance. He also noted (at para. 9) that although property held for sale might not be "described" in the taxpayer's inventory, "the short answer, I believe, is that paragraph 1102(1)(c) is probably unnecessary" given that property that was inventory, whether or not described in a list called an inventory, would not be eligible for a capital cost allowance as it would not have a capital cost.

The taxpayer - which was a member of group of companies that included a producer of exterior trim boards for construction ("W.L.") – earned management fees and rental fees from W.L. In 2003, the taxpayer lent $3.5 million to an arm's length supplier of specially prepared boards ("Interact") secured by patents held by Interact's principal ("Cable").

Following the bankruptcy of Interact and Cable earlier in 2005, the trustee in bankruptcy for Cable assigned the beneficial ownership of the patents to the taxpayer, so that it was deemed under s. 79.1 (6) to have acquired them at a cost of $3.5 million plus $0.4 million of relevant legal costs. The taxpayer claimed a terminal loss of $3.9 million when it sold its beneficial interest in the patents for $1 in 2007 to a related corporation.

In finding that the patents satisfied Reg. 1102(1)(c), Rip J noted that the taxpayer had made the $3.5 million loan in order to assist a financially strapped supplier (Interact) to supply it with the wood sizes it wanted, and that it acquired the beneficial ownership in 2005 with the objective (which was not realized) of exploiting the patents in a future joint venture so that the taxpayer could derive licensing revenues from them.

The taxpayer bought units in a limited partnership, which was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") purchased a smaller yacht (the S/Y Garbo) to be used for the provisioning of supplies to an envisaged fleet of yachts for the partnership in question and 35 others, which were never acquired. The purported business plan for the 36 partnerships represented a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).

In finding that no capital cost allowance could be claimed by the partnership in question in respect of the S/Y Garbo, Rossiter ACJ found (at para. 402) that the test in Reg. 1102(1)(c) was not satisfied as "the yacht was only used by OCGC as window-dressing to perpetuate the fraud and was never acquired by the ... LP for income gaining or earning purposes."

In finding that the taxpayer was entitled to deduct capital cost allowance in respect of houses situate close to the taxpayer's greenhouse operation and occupied by employee-shareholders of the corporation (all of whom had similar religious beliefs), Bowman, C.J. stated (at para. 23-24):

"Once I conclude that it is a business decision to house the employees in company-owned houses and to provide other facilities in the Commons it is not up to me or the Minister to question that decision, even if I were to disagree with it, which I do not ... . This case is an excellent example of the CRA seeking to substitute its business judgment for that of the taxpayer."

Bowman C.J. indicated that if the taxpayer's submission, that he acquired condominium rental units for the purpose of the resale thereof at a capital gain rather than as rental properties, were accepted, then the taxpayer would not be entitled to capital cost allowance by virtue of Regulation 1102(1)(c), given that subsection 9(3) excluded taxable capital gains from income from a property.

The taxpayers were found to have acquired rights in respect of computer software solely for tax-motivated reasons, with no ancillary income-earning purpose.

Before going on to find that a limited partnership had acquired software for the purpose of gaining or producing income, Bowman A.C.J. stated (at p. 678):

"Intention is subjective. Purpose, while it may involve a subjective element, must be largely determined on the basis of objective considerations. It is impossible if one looks at the material that was presented to the investors to conclude that the earning of income was not a purpose of the partnership."

The word "income" in Regulation 1102(1)(c) means an amount that would be subject to tax, not net income. That requirement was satisfied with respect to the acquisition of software game "engines" by a partnership notwithstanding that the partners may have invested to save tax. They reasonably expected to make a profit from the programs.

A residential property that the taxpayer received as partial consideration for the sale by it of substantially all its properties and that it rented out for a brief period before selling it, was found not to have been acquired for the purpose of gaining or producing income given the lack of real estate experience of its principal, the reason for receiving the property, and the low rents received on the property.

The taxpayers, were unsuccessful in their initial attempts to sell their Toronto condominium unit after purchasing a Toronto house and commenced advertising the condominium as a rental apartment while also continuing in their attempts to sell the condominium. The unit ultimately was sold in the following year.

In finding that the condominium unit during this period was not a depreciable property (with the result that the taxpayers were not able to deduct a terminal loss based on its decline in value during the period). Christie A.C.J. stated (p. 1782) that:

"Their over-riding purpose was to sell the apartment" and "the notion of renting was ... really related to the hope of somehow cutting their losses rather than for the purpose of producing income".

The taxpayer was found to have acquired a 12-year old building, containing two vacant small offices and a third office being used by a practising dentist, for the purpose of gaining or producing rental income therefrom notwithstanding that he entered into a contract to demolish the building eight months later.

The taxpayer purchased violins and violin bows, which had been fabricated between 1705 and 1844, for purchase prices aggregating $1.4 million. It also purchased (for $0.56 million) the "Sartory bow" in 2002, whose fabrication date was unknown other than that it had been anonymously estimated to be "about 1900." The taxpayer leased these items to a subsidiary, which provided them to performing musicians for promotional purposes. The taxpayer's capital cost allowance claims were denied on the basis that each instrument, although not "antique furniture," was "any other antique object, produced more than 100 years before [acquisition]."

The taxpayer unsuccessfully argued that Reg. 1102(1)(e)(iv) referred "to decorative objects and not objects that are used, as is the case with the musical instruments in question" (para. 25). Jorré J found (at para. 19) that "antique" merely referred to the "non-recent past" and that "the context of the provision does not suggest a limitation other than objects that are more than 100 years old" (para. 33); and noted (at para. 37) that, unlike the Budget papers, "antique object" rather than an "antique" was referred to.

The appeal was dismissed except with respect to the Sartory bow, which the Minister had not established to have been over 100 years old. Its tendency to appreciate over time was irrelevant (para. 24).