Federal Court Decisions

     T-152-94

BETWEEN:

     HER MAJESTY THE QUEEN

     Plaintiff,

     - and -

     TCG INTERNATIONAL INC.,

     formerly TRANS CANADA GLASS LTD.

     Defendant

     REASONS FOR JUDGMENT

GIBSON J.:

         These reasons arise out of an appeal by way of trial de novo from a judgment of the Tax Court of Canada dated the 24th day of September, 1993 which allowed the Defendant's appeal from a confirmation of reassessment of income tax payable by the Defendant in respect of its 1985 taxation year and referred the matter back to the Minister of National Revenue for reconsideration and reassessment on the basis that an amount of $400,000., in the nature of a "lease inducement payment", be deleted from the Defendant's income for the 1985 taxation year. In its Statement of Claim initiating this appeal, the Plaintiff claimed the following relief: that the appeal be allowed; that the decision of the Tax Court of Canada dated September 24, 1993 be reversed and the reassessment of August 26, 1987 be confirmed; and costs of the appeal.

         The parties provided to the Court an Agreed Statement of Facts in part in the following terms:

1.      The Defendant, Trans Canada Glass Ltd. (the "Defendant"), was incorporated under the B.C. Company Act in 1969 as part of a consolidation of the business of the principals of the Defendant which business was commenced in 1946 and in 1990 was continued under the Canada Business Corporations Act and changed its name to TCG International Inc.

2.      The Defendant and its subsidiaries carry on a retail and wholesale auto glass business in Canada and the U.S.

3.      The Defendant maintains its head office in British Columbia.

4.      Until July 1985 from the date it commenced its business, the Defendant (or its predecessors) had its head office in New Westminster, British Columbia.

5.      In May 1985, the Defendant, as tenant, made an offer to lease ("Offer") ... to Metrotown Place Holdings Ltd. ("Metrotown"), as landlord, to lease the 20th floor of Metrotown located at 4330 Kingsway, Burnaby, British Colombia ("Premises"). Metrotown accepted the Offer on May 10, 1985. The Premises were used as the Defendant's new head office.

6.      As a term of the Offer, the Defendant received a $400,000 cash incentive as an inducement to enter into the lease ("Inducement"). The relevant paragraph of the Offer states:

2.      CASH INCENTIVE

The Landlord will pay to the Tenant the sum of Four Hundred Thousand Dollars ($400.000) upon the Tenant having executed the building lease. The funds shall be held in escrow with the Tenant's solicitors, with interest to the Tenant, until the occupancy of the premises, at which time the total funds held shall be released to the Tenant."

7.      The Defendant was entitled to do with the Inducement as it, in its sole discretion, determined.

8.      The lease over the Premises commenced July 1, 1985.

9.      The $400,000 inducement was paid by the Landlord and received by the solicitors for the Defendant on May 10, 1985.

10.      As a term of the Offer, the rent payable by the Defendant was $18.00 per square foot.

11.      As a further term of the Offer, the Defendant was paid a Rental Abatement of $1.50 per square foot per annum for the first term of the lease.

12.      For accounting purposes, the $400,000 Inducement was credited as follows:

(i)      Leasehold Improvements

- New Westminster                  $ 44,039**

- Burnaby (the Premises)              $217,314

(ii)      Moving Expense                      $ 6,259

(iii)      Rent Expense                          $132,388

_________

TOTAL                              $400,000

**      This was the unamortized portion of the leasehold improvements incurred in New Westminster.

13.      In reviewing the audited financial statements for the Defendant for the 1985 year, the auditors determined the accounting treatment of the Inducement was not in accordance with generally accepted accounting principles; however, no change to the financial statements was required because the amount in issue was not, in their opinion, material.

14.      The lease of the Premises and the leasehold improvements made by the Defendant to the Premises were capital assets of the Defendant.

15.      For tax purposes the Defendant treated the Inducement as a non-taxable receipt.

16.      On August 26, 1987, by Notice of Reassessment (the "Reassessment"), the Minister of National Revenue reassessed the Defendant for the taxation year ended December 31, 1985 by including the $400,000 Inducement in income.

17.      In October 1987, the Defendant filed a Notice of Objection to the Reassessment on the basis that the Inducement was a non-taxable capital receipt.

18.      On September 24, 1993 the Tax Court of Canada found for the Defendant and held that the Inducement was a non-taxable receipt.

19.      On January 26, 1994 the Plaintiff filed a Statement of Claim. The Plaintiff filed an Amended Statement of Claim on January 31, 1994 seeking to overturn the decision of the Tax Court of Canada.

         The "offer to lease" referred to in paragraph 5 of the Agreed Statement of Facts and attached thereto is not reproduced here.

         The testimony adduced before me and an expert report of a chartered accountant filed, confirmed and expanded on the facts recorded in the Agreed Statement of Facts but, I conclude, added nothing that requires highlighting in these reasons.

     In the Agreed Statements of Facts, the parties defined the "sole issue" in this matter in the following terms:

The sole issue to be decided is whether the $400,000 Inducement ought to be included in the taxable income of the Defendant for the taxation year 1985.

         The tax treatment of lease inducement payments up to the time of the facts giving rise to this appeal has been the subject of a significant amount of jurisprudence in this Court and in the Tax Court of Canada with the dispositions going both ways. See, for example, Woodward Stores v. the Queen¹ and Suzy Creamcheese (Canada) Ltd. v. The Queen,² where this Court found in favour of the taxpayer, and French Shoes Ltd. v. the Queen,³ where this Court found against the taxpayer. In this matter, the learned Tax Court Judge found in favour of the taxpayer. He wrote:

In my view, there is nothing before me which would call for a conclusion other than that which is supported by the weight of the authorities referred to, [including Woodward and Suzy Creamcheese] with the exception of the judgment of Teitelbaum J. in French Shoes.

By contrast to the decision of the Tax Court of Canada in this matter, Bowman J. of that Court, in Ikea Limited v. Her Majesty the Queen,⁴ a decision dated December 31, 1993, only slightly more than three months after the Tax Court of Canada decision in this matter, decided against the taxpayer, without reference to the decision in this matter. I was urged on behalf of the Defendant to draw an inference in favour of the Defendant arising from the failure of Bowman J. to distinguish the decision of his brother judge in this matter. I decline to do so.

         By reason of modifications to the jurisdiction of the Trial Division and the Appeal Division of this Court in Income Tax matters, the Ikea decision was appealed directly to the Federal Court of Appeal. As matters would have it, that appeal was heard by the Court of Appeal only two days after the hearing before me in this matter. The Federal Court of Appeal affirmed the decision of Judge Bowman from the bench with very brief reasons.⁵ In light of the proximity of timing, and with the agreement of counsel, I adjourned the hearing of this matter in order to allow counsel to provide me with written submissions as to the impact on this matter of the Federal Court of Appeal decision in Ikea. I have now received those written submissions and reviewed them, and I therefore now proceed to judgment with these reasons..

         Counsel for the Defendant argued before me and in his written submissions that the critical features in this matter which bring it in line with the decisions in Woodward Stores and Suzy Creamcheese cited earlier and distinguish it from the Ikea decision, also cited, are that the Defendant in this matter was not in the business of buying and selling leases, particularly for head office purposes as was the case here, the lease that was negotiated and related tenant leasehold improvements were capital assets, the Defendant had unrestricted use of the lease inducement payment, that is to say, it was not tied to tenant improvements or any other particular form of expenditure, and the inducement was not received as any part of an adventure in the nature of trade carried on by the Defendant. Counsel further argued that the Plaintiff should be estopped, or at least morally bound, by the terms of an Income Tax Bulletin that was current at the time and that could only be read as favouring the position of the Defendant and, finally, that the fact that the Income Tax Act was modified with effect from very shortly after the transaction giving rise to the inducement was entered into, to clearly bring inducement payments such as the one here at issue into income, should be interpreted as indicating that, at the relevant time, the inducement payment was not an income receipt.

     Counsel for the Plaintiff argued that the Ikea decision is indistinguishable on the facts from this matter and that, in light of the decision of the Federal Court of Appeal in Ikea, this Court is bound to find in favour of the Plaintiff; that Woodward and Suzy Creamcheese are distinguishable in that, in those cases, the relevant lease inducement payments were, by terms of the lease agreements, directly tied and made payable in respect of leasehold improvements to be made by the tenants; that it is well settled law that the Plaintiff is not bound by the terms of income tax bulletins; and that, the amendments to the Income Tax Act dealing with lease inducement payments made with effect very shortly after the transaction here in question took place, should not be interpreted in the manner advocated on behalf of the Defendant.

         Despite the able argument on behalf of the Defendant, I find myself in agreement with the position of counsel for the Plaintiff on all issues.

         In Ikea, Bowman J.T.C.C. wrote:

Since the payment cannot be connected with any capital purpose the question therefore is whether this automatically makes it income to the appellant. It was neither a gift nor a windfall. It was not fortuitous. It arose out of the negotiation of an obligation whose incidents, the payment of rent and the carrying on of business in the premises in the West Edmonton Mall, were to the appellant of a purely revenue nature. It is true that the lease is a capital asset in the appellant's hands and the appellant is not in the business of negotiating leases. The negotiation of the lease and the payment of rent are, however, necessary incidents of the conduct of the appellant's business, and in determining the cost to the appellant of carrying on its business in the West Edmonton Mall it is impossible to imagine how such a payment could be ignored. ... It is true, as Reed, J. observed in Westfair Foods Limited, that not every receipt that is related to a business is necessarily income from that business. She was, however, dealing with a receipt that, albeit related to the business, was nonetheless one that arose from a disposition of a capital asset of that business. Here we are concerned with a receipt that, although it does not arise from the sale of the goods or services in which the company deals, is directly and inextricably bound up with the economics of the operation. It impinges immediately upon the costs that must be satisfied out of the appellant's trading operations.6

I am satisfied that exactly the same can be said on the facts before me. No distinction can be drawn from the fact that the premises here in question were head office premises, as opposed to wholesale and retail sales outlet premises. I am satisfied that head office activities and the premises at which those activities are carried on are equally as integral to the business operations of a limited company such as the Defendant as are wholesale and retail premises.

         In Ikea in the Federal Court of Appeal, cited earlier, Robertson J.A., in delivering reasons for judgment of the Court from the bench, found that Bowman J. T.C.C. had held:

...that a tenant inducement payment...received by the taxpayer was income rather than a tax-free capital receipt. He also concluded that the payment had to be included in the taxpayer's income in the year of receipt, that is to say it could not be deferred and amortized over the life of the lease.

Mr. Justice Robertson concluded that the Court had not been persuaded that there was any basis, either in fact or in law, for interfering with either of the conclusions of Judge Bowman. I find no basis in fact or in law that would enable me to distinguish this matter from Ikea.

         It is trite law that income tax bulletins are not law and are not binding on the Minister of National Revenue, and thus the Plaintiff herein. They cannot have the effect, as administrative instruments, of modifying the law as enacted by Parliament. Further, I find no basis to interpret amendments made to the Income Tax Act very shortly after the transaction here at issue took place and dealing with lease incentive payments as meaning that the law regarding lease incentive payments prior to the amendment worked in favour of the Defendant. Such an interpretation would be at cross-purposes with the interpretation of the relevant provisions of the Income Tax Act that is provided by the Ikea decision.

         For the foregoing reasons, this appeal will be allowed, the decision of the Tax Court of Canada herein dated September 24, 1993 will be reversed and the reassessment of the Defendant's liability for tax for its 1985 taxation year reflected in the reassessment of August 26, 1987 will be confirmed.

         The Plaintiff is entitled to costs.

                     _________________________________

                         Judge

Ottawa, Ontario

October 22, 1996

__________________

¹      (1991), 91 D.T.C. 5090 (F.C.T.D.)

²      (1992) , 92 D.T.C. 6291 (F.C.T.D.)

³      (1986), 86 D.T.C. 6359 (F.C.T.D.)

⁴      (1993), 94 D. T. C. 1112 (T.C.C.)

⁵      Court File: A-4-94, 19 September, 1996 (unreported) (F.C.A.)

⁶      Westfair Foods Limited v. Her Majesty the Queen (1990), 91 D.T.C. 5073 (F.C.T.D.)