T-4365-77
Mount Robson Motor Inn Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Thurlow A.C.J.—Edmonton, Sep-
tember 13; Ottawa, December 7, 1979.
Income tax — Capital cost allowance — Rights in buildings
and improvements (paving) on leased land acquired under
lease which gave lessee (plaintiff) the right to remove and sever
such buildings and improvements — Whether the plaintiff's
rights in buildings and improvements (paving) were properly
classified as a leasehold interest falling within class 13 of the
capital cost allowance Regulations, or should have been clas
sified as falling within classes 1 and 6 — Appeal allowed —
Income Tax Regulations, ss. 1100(1),(2), 1102(2),(4),(5).
The plaintiff acquired rights in buildings and improvements
(paving) under an agreement which provided for the assign
ment to the plaintiff of the rights of Mount Robson Motels
Limited as lessee of land held under a lease granted to it by the
Crown, together with the lessee's rights in hotel buildings and
other improvements which had been constructed thereon at the
expense of the lessee. The lease from the Crown required the
payment of an annual rent, and provided that on the termina
tion of the lease, the lessee could sever and remove from the
land all buildings and improvements. The issue is whether the
plaintiffs rights in the buildings and improvements were prop
erly classified by the Minister as a leasehold interest falling
within class 13 of the capital cost allowance Regulations or
should have been classified as falling within classes 1 and 6 as
claimed by the plaintiff in its income tax returns for 1974 and
1975. The defendant argues that as the buildings and improve
ments were fixtures, they were part of the land and, as the
plaintiffs interest in the land was a leasehold interest, its rights
in the buildings and improvements, as well, were a leasehold
interest.
Held, the appeal is allowed with costs. The substance of what
appears to be embraced by the wording of class 13 is depre-
ciable property, that is to say property other than land, which is
held under a lease upon the termination of which the rights of
the lessee will come to an end and the depreciable property will
automatically revert to a lessor. In the present situation, the
buildings and improvements were erected at the expense of the
original lessee which had the right to their possession and
enjoyment throughout the term, and then to sever and remove
them as its own property. By virtue of the agreement and
assignment, the plaintiff at the material times had those rights.
The Crown has never had a right to the possession or enjoy
ment of the buildings and improvements and will have no right
under the lease to insist on these being left on the premises for
its benefit when the lease comes to an end.
Rudnikoff v. The Queen [1974] 2 F.C. 807, distinguished.
Cohen v. The Minister of National Revenue [1968] 1
Ex.C.R. 110, followed. Ayre and Sons Ltd. v. Minister of
National Revenue (1955) 14 Tax A.B.C. 1, referred to.
Dow Holdings Ltd. v. The Minister of National Revenue
76 DTC 1199, referred to.
INCOME tax appeal.
COUNSEL:
John V. Decore, Q.C. for plaintiff.
L. P. Chambers, Q.C. and L. S. Holland for
defendant.
SOLICITORS:
Decore & Company, Edmonton, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
THURLOW A.C.J.: The issue in this appeal is
whether the plaintiff's rights in buildings and
improvements (paving) on certain leased land were
properly classified by the Minister as a leasehold
interest falling within class 13 of the capital cost
allowance Regulations or should have been classi
fied as falling within classes 1 and 6 as claimed by
the plaintiff in its income tax returns for 1974 and
1975.
The rights in question were acquired by the
plaintiff from Mount Robson Motels Limited
under an agreement made on or about May 16,
1973, which provided for the assignment to the
plaintiff of the rights of Mount Robson Motels
Limited as lessee of land in Jasper National Park
held under a 42-year lease granted to it by the
Crown in April 1959, together with the lessee's
rights in hotel buildings and other improvements
which had been constructed thereon at the expense
of the lessee. The consideration paid by the plain
tiff was some $1,125,000 of which by the agree
ment $70,000 was apportioned to the lease of the
land, $960,000 to the buildings, $14,000 to other
improvements and the remainder to furnishings
and other chattels.
The lease from the Crown required the payment
of an annual rent of $500 throughout the 42-year
term and included the following provisions:
L 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.
On the evidence, I am of the opinion that wheth
er or not the buildings were bolted to the concrete
foundations on which they rested, they were fix
tures. Whether the buildings were of a kind that,
in the absence of clause 10, would be subject to
severance and removal at the end of the term by
the tenant in the exercise of the common law right
to remove trade fixtures is not clear. However, as
has been said in more than one case, the parties to
a lease are entitled to make their own law with
respect to their rights to fixtures and when they
exercise that right the law so made governs'. In
the present instance, the original parties to the
lease have done that by including clause 10 which
confers on the lessee a right of severance and
removal of the buildings and improvements.
In my view, nothing turns on the fact that the
right given is to sever and remove "on termination
of' the lease. The purpose of the clause is to
protect the lessee's interest in what has been erect
ed on the land at his expense, and to make it clear
that the Crown is not entitled to insist at the end
of the term on the buildings and improvements
being left on the land for its benefit. When the
time comes, severance and removal itself may not
be an attractive or profitable course, but the right
to sever and remove at the end of the term gives
the lessee bargaining power both with the Crown
and any other prospective lessee which otherwise it
would not have. Moreover, as an adjunct of the
lessee's right to possession of both the land and the
buildings and other improvements during the con
tinuance of the lease, it appears to me to demon
strate that, though during the term the buildings
and the improvements as fixtures are part of the
land, and though the lessee's right to possession
and enjoyment of the land with the buildings and
improvements on it will terminate at the end of the
42-year period, the lessee's right to possession and
ownership of the buildings and improvements is to
continue indefinitely. Further, in my opinion, the
Crown has never had at any material time as
against either the original lessee or the plaintiff or
any sub-lessee or mortgagee any right to posses
sion of the buildings or improvements. The Crown
has never asserted any such right and it is appar
ent that the rent is not payable for anything but
the land itself.
I turn now to the Income Tax Regulations in
effect at the material time. Changes have been
made since then but they do not affect the present
appeal.
Under subsection 1100(1), a taxpayer is entitled
to claim a deduction of capital cost allowance
according to the class defined in Schedule B in
' See Williams' The Canadian Law of Landlord and Tenant,
fourth edition, sections 128.2 and 128.3 and cases there cited,
in particular Gray v. McLennan (1886) 3 Man. Law R. 337.
which the property falls. Parking areas fall within
class 1, frame buildings, of the kind here in ques
tion, fall within class 6. But, with certain defined
exceptions, which, however, do not apply here,
"Property that is a leasehold interest" falls within
class 13 of Schedule B. With respect to such
property, subsection 1100(2) provides that the
capital cost allowance which the taxpayer may
claim may not exceed the amount calculated in
accordance with Schedule H.
Section 1102 includes the following provisions:
1IO2....
Land
(2) The classes of property described in Schedule B shall be
deemed not to include the land upon which a property
described therein was constructed or is situated.
Improvements or Alterations
to Leased Properties
(4) For the purpose of paragraph (b) of subsection (1) of
section 1100, capital cost includes an amount expended on an
improvement or alteration to a leased property, other than an
amount expended on
(a) the construction of a building or other structure,
(b) an addition to a building or other structure, or
(e) alterations to buildings which substantially change the
nature or character of the leased property.
Buildings on Leased Property
(5) Where the taxpayer has a leasehold interest in a prop
erty, a reference in Schedule B to a property that is a building
or other structure shall be deemed to include a reference to that
part of the leasehold interest acquired by reason of the fact that
the taxpayer has
(a) erected a building or structure on leased land,
(b) made an addition to a leased building or structure, or
(e) made alterations to a leased property which substantially
change the nature or character of the property.
It will be observed that subsections (4) and (5)
established different treatment in respect of the
capital cost of buildings or other structures erected
on leased land, depending on whether the taxpayer
was the tenant who had erected the buildings or
structures or was an assignee of the tenant who
had erected them. But, in neither case was the land
on which the buildings or structures were erected,
included as property falling within any class
described in Schedule B.
The question to be resolved in these proceedings
is whether the plaintiff's rights in the buildings
and improvements here in question fall within the
definition of class 13 as being "Property that is a
leasehold interest". The Crown's position is that as
the buildings and improvements at the material
time were fixtures, they were part of the land and,
as the plaintiff's interest in the land was a lease
hold interest, its rights in the buildings and
improvements, as well, were a leasehold interest.
There have been three cases in this Court in
which somewhat similar problems have been
considered.
In Rudnikoff v. The Queen 2 , the Court of
Appeal affirmed the conclusion of the Trial Divi
sion in holding that the right of assignees of an
emphyteutic lease in a building erected on the
leased land by the lessee before making the assign
ment was a leasehold interest within the meaning
of the Regulations. In that case, there was no right
reserved to the lessee of his assignees to sever or
remove the building upon termination of the lease
and at that point, under the law of Quebec, the
building would belong to the lessor.
In reaching its conclusion, however, the Court
did not disapprove of an earlier decision of the
Trial Division in Cohen v. M.N.R. 3 in which,
because of particular provisions in an emphyteutic
lease which demonstrated that it was the intention
of the parties that the building to be erected by the
lessee was to belong to him, it was held that the
taxpayer's right in the building was not a leasehold
interest within the meaning of the Regulations. In
that case, the lease provided that upon its termina
tion if the lessor should not exercise a right given
to him to buy the building, the lessee might
remove it or insist on an extension of the lease'.
2 [1974] 2 F.C. 807.
3 [l968] 1 Ex.C.R. 110.
4 See also Ayre and Sons Limited v. M.N.R. (1955) 14 Tax
A.B.C. 1 where the facts were similar to those in the Cohen
case and the result was the same.
The third case is the judgment of the Trial
Division in Plan A Leasing Limited v. The Queen s
where, however, though the result was the same,
the facts were so widely different from those of the
present case as to render the case of no assistance.
Having regard to the reasoning of Noël J. (as he
then was) in the Cohen case and to the fact that
the land itself does not fall within any class of
Schedule B, I am of the opinion that the expres
sion "leasehold interest" in the Regulations is not
to be interpreted so as to include rights of the kind
held by the plaintiff in the buildings and improve
ments in question. What must be considered is the
taxpayer's right in them alone for they alone are
within the classes of Schedule B. Regardless of the
legal characterization that might be given to the
buildings and improvements in question in the
event of a conflict over the rights in which parties
other than the landlord and tenant were con
cerned, the substance of what appears to me to be
embraced by the wording of class 13 is depreciable
property, that is to say property other than land,
which is held under a lease for a term upon the
termination of which the rights of the lessee will
come to an end and the depreciable property will
automatically revert to a lessor. In my view, that is
not the present situation. The buildings and
improvements in question were erected at the
expense of the original lessee which had the right
to their possession and enjoyment throughout the
42-year term, and then to sever and remove them
as its own property. By virtue of the agreement
and assignment, the plaintiff at the material times
had those rights. The Crown has never had a right
to the possession or enjoyment of the buildings and
improvements and will have no right under the
lease to insist on these being left on the premises
for its benefit when the lease comes to an end.
This, in my view, does not describe a "leasehold
interest" within the meaning of the Regulations.
In the course of argument, reference was made
to the decision of the Tax Review Board in Dow
5 [1977] I F.C. 73.
Holdings Ltd. v. M.N.R. 6 in which a contrary
conclusion was reached. I see no valid basis for
distinguishing the facts of that case, in so far as
the Kalinowski lease was involved, from those in
the present situation. Kalinowski also had an
express right to sever and remove at the end of the
term structures which he had erected. As it does
not appear from the report that such a right was
expressed in the Wiebe lease, I need make no
comment on the result of the case so far as that
lease was involved but, with respect, I am unable
to agree with the conclusion of the learned
member that Kalinowski, the original lessee and
assignee to the taxpayer of the other lease, held
nothing more than a leasehold interest in the
buildings erected by him on the land.
The appeal, therefore, succeeds and it will be
allowed with costs and the reassessment for the
year 1975 will be referred back to the Minister for
reconsideration and reassessment on the basis that
in the taxation years 1974 and 1975, the plaintiff's
rights in the buildings and improvements in ques
tion did not fall within class 13 of Schedule B of
the Income Tax Regulations. In so far as the
statement of claim purports to appeal from a nil
assessment for the year 1974, the action will be
dismissed without costs.
6 76 DTC 1199.
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.