October 07, 2011

Her Majesty the Queen (Appellant) v. Sussex Square Apartments Limited (Respondent)

2000 DTC 6548
Federal Court of Appeal
September 14, 2000

(Court File No. A-40-99.)

Business income or prepaid rent qualifying for deduction of a reserve — Corporate taxpayer leasing property (comprising suites in apartment buildings) from two related corporations under a Head Lease — Taxpayer later disposing of such suites to members of the public — Whether the proceeds of such dispositions constituting business income (as contended by the Minister) or prepaid rent qualifying for a deduction by way of paragraph 20(1)(m) reserve (as contended by the taxpayer) — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?9(1), 12(1)(a), 20(1)(m).

The corporate taxpayer leased property (comprising suites in apartment buildings) from two related corporations under a Head Lease. The taxpayer later disposed of such suites to members of the public, in some cases by way of assignment, and in some cases by way of assignment with a one-day reversion to the taxpayer (through the use of a modification agreement subsequently affirmed by an Order of the Supreme Court of British Columbia). In assessing the taxpayer for 1989 and 1990, the Minister treated the taxpayer’s proceeds of disposition of all of the said suites as business income, and not as prepaid rent qualifying for a deduction by way of a paragraph 20(1)(m) reserve. In allowing the taxpayer’s appeal in part (99 DTC 443), the Tax Court of Canada concluded, inter alia, that certain of the transactions involved subleases (including the ones which had been altered by the said Court Order to provide for the one-day reversion to the lessor). As a result, paragraph 20(1)(m) reserve deductions against prepaid rental income were permitted by the Court in the cases involving subleases. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed. The Tax Court Judge made no reviewable error. In particular, he had concluded that the modification agreements read in light of the Court Order made it clear that the intent was that the documents called “assignments” be treated ab initio as subleases. Finally, the taxpayer’s counsel had raised an argument which, for all practical purposes, was an attempt to have the Court revisit its decision in Dale v. The Queen (FCA). However, that decision should not be revisited, and counsel was wise not to insist on this particular argument at the hearing. The Minister was ordered to reassess accordingly.