A-20-73
Arthur Rudnikoff (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Jackett C.J., Hyde and Cho-
quette D.JJ.—Montreal, December 4, 1974.
Income tax—Emphyteutic lease of land in Quebec—Cor-
porate lessee transferring interest to second corporation—
Interest in second corporation of taxpayer and associates—
Construction of building—Transfer of land and building to
taxpayer and associates—Claim by taxpayer for capital cost
allowance—Income Tax Act, s. 11(1)(a)—Income Tax Regu
lations, s. 1100(1)(a), Sch. B., classes 3, 13; s. 1100(1)(b),
Sch. H; s. 1102 (5)—art. 406 C.C.
A corporate lessee under an emphyteutic lease of land,
transferred its rights to T corporation in which the taxpayer
and his associates had interests. T corporation, having con
structed a building on the land, transferred to the taxpayer
and his associates its rights in the land and building. The
taxpayer and his associates claimed capital cost allowance
of 5% under section 11(1)(a) of the Income Tax Act and
section 1100(1)(a) of the Income Tax Regulations, as the
owners of "property not included in any other class that is a
building or other structure" in Schedule B, class 3(a). The
Minister disallowed the claim, as that of a taxpayer entitled
only to allowance on a "leasehold interest" within Schedule
B, class 13. The appeal of the taxpayer and his associates
was dismissed by the Tax Appeal (now Review) Board and
by the Trial Division (sub nom Feigelson v. The Queen, not
reported, T-4084-71, T-4085-71). The taxpayer appealed to
the Court of Appeal.
Held, dismissing the appeal, there was a distinction be
tween "ownership" as defined in article 406 of the Quebec
Civil Code, as "the right of enjoying and disposing of things
in the most absolute manner", and "ownership" as given to
an emphyteutic lease, just as there was between the rights of
an ordinary lessee and those of an emphyteutic lessee. In
the latter comparison, however, there was one common
factor, i.e., the existence of a lease. The common factor was
sufficient to bring the emphyteutic lease within the term
"leasehold interest" in Regulations 1100(1)(a), Schedule B,
Class 13. This general statement was unaffected by the
terms of the emphyteutic lease under consideration.
INCOME tax appeal.
COUNSEL:
P. Vineberg, Q.C., and A. Ross for
appellant.
A. Garon, Q.C., and W. Lefebvre for
respondent.
SOLICITORS:
Phillips & Vineberg, Montreal, and Rap-
paport, Whelan, Bessner, Gottlieb, Agard &
Feldman, Montreal, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered orally in English by
JACKETT C.J.: I agree with the disposition of
the appeal proposed by my brother Hyde.
I have no doubt in my mind as to the correct
ness of the reasons given by my brother Hyde
and of those given by the learned Trial Judge.
However, as a lawyer whose grounding is
primarily in the common law, I wish to abstain
as much as is possible from involving myself in
characterizing the incidents of the emphyteutic
lease. I therefore state my conclusions in a
slightly different way.
I have no doubt that, under Income Tax Regu
lation 1100(1)(a), the appellant would be en
titled to capital cost allowance at 5% per annum
on the basis that the building in question was
class 3 property if he did not fall in the implied
exception thereto to be found in Regulation
1100(1)(b) because the transaction under which
he held the building was a "lease" or "bail". In
my opinion, however, the transaction did fall
under Regulation 1100(1)(b) because the words
"lease" or "bail", in the Income Tax Act,
extend not only to leases in the common law
provinces (which create rights in rem) and to
ordinary leases in the Province of Quebec
(which create only rights in personam) but also
to emphyteutic leases under the Quebec Civil
Code (which create rights very similar to those
created by common law leases where a substan
tive transaction in a common law province is
such as would call for an emphyteutic lease in
the Province of Quebec).
However, in my view, while the general rule,
both in the common law provinces and in the
Province of Quebec is that a substantial building
becomes a part of the land and belongs to the
owner of the land, this situation may be
changed, by contract or otherwise, so that own
ership of the building is separate from owner
ship of the land and the building would not be a
part of the subject matter of the lease. Such a
result would, however, follow only as a result of
clear language and, in my view, in this case, the
terms of the emphyteutic lease are not such as
to produce such a result.
The following are the reasons for judgment
delivered orally in English by
HYDE D.J.: Appellant has appealed from a
judgment of the Trial Division dismissing his
appeal from a decision of the Tax Appeal Board
confirming the assessment of his taxes for the
years 1964 and 1965.
The dispute centres on the classification of a
certain building, in which appellant has a part
interest, for capital cost allowance which the
decisions appealed from held were properly
based on class 13 rather than class 3 of the
Income Tax Regulations. (Sections 1100 and
1102, and Schedules B and H.) 1
1 The relevant portions of sections 1100 and 1102, and of
Schedules B and H are the following:
1100. (1) Under paragraph (a) of subsection (1) of sec
tion 11 of the Act, there is hereby allowed to a taxpayer, in
computing his income from a business or property, as the
case may be, deductions for each taxation year equal to
(a) such amounts as he may claim in respect of property
of each of the following classes in Schedule B not exceed
ing in respect of property
(iii) of class 3,5%,
of the undepreciated capital cost to him as of the end of
the taxation year (before making any deduction under this
subsection for the taxation year) of property of the class;
(b) such amount, not exceeding the amount for the year
calculated in accordance with Schedule H, as he may
claim in respect of the capital cost to him of property of
class 13 in Schedule B;
(Continued on next page)
(Continued from previous page)
1102. (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.
(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
(c) alterations to buildings which substantially change the
nature or character of the leased property.
(5) Where the taxpayer has a leasehold interest in a
property, 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 alteration to a leased building, or structure,
or
(c) made alterations to a leased property which substan
tially change the nature of the property,
unless the property is included in class 23 in Schedule B.
SCHEDULE B
CLASS 3
5%
Property not included in any other class that is
(a) a building or other structure, including component
parts such as electric wiring, plumbing, sprinkler systems,
air-conditioning equipment, heating equipment, lighting
fixtures, elevators and escalators.
(b) a breakwater (other than a wooden breakwater),
(c) a dock,
(d) a trestle,
(e) a windmill,
(f) a wharf, or
(g) an addition or alteration made after March 31, 1967,
to a building that would be included in this class but for
the fact that it is included in Class 20.
CLASS 13
Property that is a leasehold interest except
(a) an interest in minerals, petroleum, natural gas, other
related hydrocarbons or timber and property relating
thereto or in respect of a right to explore for, drill for,
take or remove minerals, petroleum, natural gas, other
related hydrocarbons or timber,
(b) that part of the leasehold interest that is included in
another class by reason of subsection (5) of section 1102,
and
(c) a property that is included in class 23.
(Continued on next page)
There is no dispute on the facts which are set
out in an agreed statement reading as follows:
1. On April 4, 1955, a Deed of Emphyteutic Lease was
passed by Canadian National Railways with Century Build
ing Limited affecting a portion of its undeveloped land
fronting on University Street in the City of Montreal.
2. On July 2, 1955, Century Building Limited transferred to
Terminal Centre Corporation all the lessee's rights in the
Emphyteutic Lease of April 4, 1955.
3. Moses Rosentone, Arthur Rudnikoff, Nathaniel L. Rap-
paport and H. Eric Feigelson owned all of the issued capital
stock of Terminal Centre Corporation in the portion of 1/3,
1/3, 1/4 and 1/12 respectively.
4. Terminal Centre Corporation started in 1955 and com
pleted in 1957 the construction of an office building on the
property referred to in paragraph 1.
5. By Deed of Sale dated December 29, 1964, Terminal
Centre Corporation sold to Moses Rosentone, Arthur Rud-
nikoff, Nathaniel L. Rappaport and H. Eric Feigelson all the
rights it had on the land referred to in paragraph 1 and the
building constructed thereon.
6. The question to be determined in the present appeal is: Is
the Plaintiff entitled to claim capital cost allowance on the
building constructed on the land referred to in paragraph 1
under Class 3 or Class 13 of the Income Tax Regulations.
(Continued from previous page)
Schedule H
Leasehold Interests
1. For the purpose of paragraph (b) of subsection (1) of
section 1100, the amount that may be deducted in comput
ing the income of a taxpayer for a taxation year in respect of
the capital cost of property of class 13 in Schedule B is the
lesser of
(a) the aggregate of each amount determined in accord
ance with section 2 of this Schedule that is a prorated
portion of the part of the capital cost to him, incurred in a
particular taxation year, of a particular leasehold interest;
or
(b) the undepreciated capital cost to the taxpayer as of
the end of the taxation year (before making any deduction
under section 1100) of property of the class.
2. Subject to section 3 of this Schedule, the prorated
portion for the year of the part of the capital cost, incurred
in a particular taxation year, of a particular leasehold inter
est is the lesser of
(a) one-fifth of that part of the capital cost; or
(b) the amount determined by dividing that part of the
capital cost by the number of 12 month periods (not
exceeding 40 such periods) falling within the period com
mencing with the beginning of the particular taxation year
in which the capital cost was incurred and ending with the
day the lease is to terminate.
A reference to the aforementioned regula
tions, the interpretation of which, as given by
the judgment appealed from, presents no dif
ficulty to me, although I must confess that I am
unable to understand the rationale behind the
regulations, which is always disturbing.
Counsel for appellant vigorously attacked this
interpretation as being illogical and unjust but
has not been able to persuade me that we can
ignore the text of the law and its application to
the present case.
Despite the fact that the land upon which the
building stands is held under emphyteutic lease
to an auteur of the appellant who has no more
rights than such auteur and that emphyteusis
has some peculiar features that does not alter
the fact that the building in question is erected
"on leased land" within the context of section
1102(5). Appellant argues, however, that this
fact has only to be considered "where the tax
payer has a leasehold interest in a property",
and that his interest under an emphyteutic lease
is not "a leasehold interest" but that of an
owner.
There has been much written on the nature of
the rights conferred by an emphyteutic lease
both in the courts and by the authors and one
can pick out many instances of authoritative
statements to the effect that the lessee's rights
are equivalent to that of an owner.
There is, nevertheless, a distinction between
ownership as defined in Article 406 of the
Quebec Civil Code namely: "the right of enjoy
ing and disposing of things in the most absolute
manner ..." and "ownership" as given to an
emphyteutic lessee, just as there is a difference
between the rights of an ordinary lessee and an
emphyteutic lessee. In the latter comparison,
however, there is one common factor and that is
the existence of a lease. In my opinion this
common factor is sufficient to bring the
emphyteutic lease within the term "leasehold
interest" as used in the Regulations and I share
this view with the Trial Judge.
I am not persuaded that the terms of the
emphyteutic lease in this case in any way affect
this general statement.
Accordingly I am in full agreement with the
Court below and would dismiss this appeal with
costs.
The following is the English version of the
reasons for judgment delivered orally by
CHOQUETTE D.J.: Notwithstanding the tern-
porary right of ownership of the emphyteutic
lessor, I am of the view that he is subject to the
provisions of the Income Tax Regulations
regarding deductions as stated in sections 1100
and 1102.
For these reasons I would concur in the ruling
of my two colleagues and dismiss the judgment
with costs.
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.