Pratte, J:—These are appeals from decisions of the Tax Appeal Board which held that in computing their income for the years 1964 and 1965 the plaintiffs were entitled to claim, in respect of a certain building, capital cost allowances under Class 13 rather than under Class 3 of the Income Tax Regulations.
An agreed statement of facts, signed by the solicitors for all parties, was filed at the hearing; it reads as follows:
1. On April 4, 1955, a Deed of Emphyteutic Lease was passed by Canadian National Railways with Century Building 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 Rosenstone, Arthur Rudnikoff, Nathaniel L. Rappaport 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 completed 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 Rosenstone, Arthur Rudnikoff, 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.
Both counsel also agreed at the hearing that, under the deed of sale of December 29, 1964 referred to in paragraph 5 of the abovequoted statement of facts, each plaintiff had acquired a fraction of the rights of Terminal Centre Corporation equal to his fraction of the capital stock of that company.
In order to properly understand the issue, it is necessary to have in mind certain provisions of the Income Tax Act and of the Income Tax Regulations.
Paragraph 11 (1)(a) of the Act allows a taxpayer to deduct from his income “such amount in respect of the capital cost to the taxpayer if any, as is allowed by regulation”. Part XI and Schedule B of the Regulations indicate the various types of property in respect of which a taxpayer is entitled to capital cost allowances and determine the amount of these allowances. Schedule B contains a list and a description of 27 classes of proper:y in respect of which a capital cost allowance may be claimed. For the purpose of this case it is sufficient to mention two of these classes, namely Class 3 and Class 13.
Class 3 of Schedule B includes:
Property not included in any other class that is
(a) a building or other structure . . .
As to Class 13, it includes:
Property that is a leasehold interest. . .
Paragraph 1100(1)(a) of the Regulations determines the amount of the capital cost allowance that may be claimed in respect of property included in Class 3 of Schedule B. Paragraph 1100(1)(b) indicates the capital cost allowance that a taxpayer may claim “in respect of the capital cost to him of property of class 13 in Schedule B”.
Two other provisions of the Regulations concerning the capital cost allowance that may be claimed in respect of leasehold interests must also be mentioned. Subsection 1102(4) specifies that the capital cost of a leasehold interest for the purposes of paragraph 1100(1)(b) 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.
Subsection 1102(5) refers to the lessee who has made to a leased properly improvements of such a nature that their cost cannot, under subsection 1102(4), be included in the capital cost of his leasehold interest; it reads as follows:
(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 substantially change the nature of the property,
This regulation simply means that the lessee who has made substantial improvements to the leased property is entitled, in respect of these improvements, to the same capital cost allowance as if he were an owner.
The submissions made by the solicitor for the defendant can be easily summarized. The plaintiffs never had more, said he, than a leasehold interest in the building that had been put up by Terminal Centre Corporation; as they cannot benefit from subsection 1102(5) of the Regulations (the building having been erected by their predecessor in title) they are entitled to claim in respect of their interest in that building the capital cost allowance mentioned in paragraph 1100(1 )(b) of the Regulations.
Counsel for the plaintiffs, on the other hand, submitted that the interest of his clients in the building in question fell within Class 3 of Schedule B and that, for this reason, they were entitled to the capital cost allowance determined by paragraph 1100(1)(a) in respect of that class of property. Counsel based this submission on various arguments that I shall now summarize and discuss.
Counsel first assumed that the plaintiffs, as contended by the defendant, had only a leasehold interest in the building erected by their predecessor in title. Even then, argued counsel, the plaintiffs were entitled to claim on this building the same capital cost allowance as, under subsection 1102(5) of the Regulations, their predecessor in title could claim. In support of this proposition, counsel pointed out that both subsection 1102(4) and subsection 1102(5) of the Regulations contemplate the case of a lessee who has himself improved the leased property. The situation of the taxpayer who acquires the rights of a lessee who has himself improved the property is therefore outside of the scope of both these sections of the Regulations. Counsel pointed out that if a lessee, after having made small improvements to the leased property, sells his leasehold interest to a third party, the latter, in respect of the amount paid by him for those small improvements, is entitled to claim the same capital cost allowance as his predecessor in title. This, counsel said, merely results from the application of the common sense principle according to which the successor in title must not be treated differently than his predecessor. This same principle, it was contended, should apply where a taxpayer acquires a leasehold interest in a building from a lessee who has himself erected the building on leased land; the successor in title, in such a case, should be entitled to the same capital cost allowance as his predecessor.
This argument, in my view, rests on a fallacy. If the lessee of a building makes small improvements and later sells his leasehold interest to a third party, it is clear that the purchaser will be entitled, in 2 certain sense, to the same capital cost allowance as his predecessor. But this is not because a successor in title is entitled to the same capital cost allowance as his predecessor. It is rather the result of the application of the rule stated in paragraph 1100(1)(b) of the Regulations according to which the taxpayer who has a leasehold interest may claim a capital cost allowance “in respect of the capital cost to him” of his leasehold interest. I am of the opinion that, as submitted by counsel for the defendant, a taxpayer who has a leasehold interest in a building cannot, if he does not fulfil the requirements of subsection 1102(5), claim a capital cost allowance other than that allowed by paragraph 1100(1)(b).
But counsel for the plaintiffs added that, in his view, his clients met the requirements of subsection 1102(5) of the Regulations. He did not deny that the building here in question had been erected by Terminal Centre Corporation. However, according to him, as the plaintiffs, at the time of the construction, were the sole shareholders of Terminal Centre Corporation, this company should be considered as having built for the benefit of the plaintiffs, more or less as their agent. To dispose of this argument, one has only to mention that subsection 1102(5) applies only when a taxpayer has acquired a leasehold interest in a building “by reason of the fact that the taxpayer has” erected this building. In the present case, the interest of the plaintiffs in the building arose from the deed of sale of December 29, 1964; it did not arise from the fact that the building was put up by Terminal Centre Corporation.
Counsel for the plaintiffs also contended, and this was his main argument, that his clients had not merely a leasehold interest in the building here in question but that they, in fact, owned that building and were, for this reason, entitled to claim capital cost allowance under Class 3 of Schedule B of the Regulations.
As the plaintiffs’ rights are admittedly defined by the deed of emphyteutic lease made on April 4, 1955, counsel first submitted that, under the Civil Code of the Province of Quebec (Articles 567 to 582), an emphyteutic lessee is the owner of the buildings that he undertook to erect on the leased premises. With this submission I cannot agree. Under the Civil Code, an emphyteutic lessee has, on the immoveable leased to him, a partial real right which is not a right of ownership (Mignault, Droit Civil Canadien, vol 3, page 196; Montpetit & Taillefer, Traité de Droit Civil de la Province de Québec, vol 3, page 512). Nowhere in the Code is it to be found that the emphyteutic: lessee enjoys a more complete right on the buildings than on the land. The Code (Article 581) provides, however, that at the end of the lease “the lessee must give up, in good condition, the property received from the lessor as well as the buildings he obliged himself to construct”. If an ordinary building lease contains a clause to the same effect (namely a clause stating that the lessor, at the end of the lease, will have the right to keep the building put up by the lessee without having to pay him any compensation) then, according to the authorities (Dalloz, Encyclopédie de Droit Civil, v Louage No. 505; Planiol & Ripert, 2nd edition, vol X, No 607 bis, page 862), the building, as soon as it is erected, belongs to the lessor; with respect to this building the lessee merely has the same right of enjoyment as he has with respect to the land subject to the lease. I do not know of any reason why the situation would be different when the building lease is an emphyteutic lease.
This, however, is not the end of the matter since, under the law of Quebec, parties to a building lease may validly agree that the lessee will be the owner of the building to be erected by him. For instance, in Cohen and Zalkind v MNR, [1967] CTC 254; 67 DTC 5175, Noel, J, as he then was, found that the appellants, who had acquired the rights of an emphyteutic lessee, were the proprietors of the building put up by their predecessor in title because the lease, in that case, clearly stated so; indeed, the lease contained a clause providing that “at the expiration of the present lease, the Seminary (the lessor) shall have the right to purchase the building then erected on the land’’.
In the present case, the only clause of the lease from which one could infer that the lessee was to be the owner of the building is clause 22 which provided that:
22. At the expiration of the present lease, the lessor shall become the owner of all buildings with all improvements on the leased premises. . . .
This clause, according to counsel for the plaintiffs, clearly indicates that, before the expiration of the lease, the lessee was to own the building erected on the leased premises. To this, counsel for the defendant replied that importance should be given to the practical effect of this clause rather than to its wording. The only purpose of this clause, said he, was to make clear that, at the end of the lease, the lessor would have the right to keep all the improvements made by the lessee without having to pay any compensation. On this point again I think that I must find in favour of the defendant because the lease contains a clause (clause 17) which, in my view, makes clear that the lessee was not to have on the buildings to be erected by him a greater right than that enjoyed by an ordinary emphyteutic lessee. An emphyteutic lessee, under Article 570 of the Civil Code, “may alienate, transfer and hypothecate the immoveable so leased, without prejudice to the rights of the lessor”; this means that all rights that the emphyteutic will have conferred on third parties during the lease will come to an end upon its termination. On the other hand, the lessee who owns the building that he has erected on leased land may sell it or hypothecate it and, if he does so, the rights so granted by him will subsist notwithstanding the termination of the lease. Clause 17 of the lease here in question first states that the lease may be terminated should the lessee fail to fulfill his obligations. The clause further provides that if, in such an eventuality, there exists a mortgage or hypothec registered against the leased premises and the building, the lessor shall either assume the outstanding hypothec or mortgage or give notice of the lessee’s default to the mortgage creditor so as to enable him to make good the lessee’s default and, in so doing, to acquire the same rights in the leased premises and the building as those formerly enjoyed by the lessee. This clause was obviously inserted in the lease for the purpose of protecting the mortgage and hypothecary creditors against the forfeiture of their rights which would result from the early termination of the lease. In my view, this shows that the parties, did not contemplate that the lessee could grant an hypothec or a mortgage which would subsist after the termination of the lease; in. other words, this clause indicates that the lessee was not to have rights different from those of an ordinary emphyteutic lessee.
Counsel for the plaintiffs finally submitted that the rights of an emphyteutic lessee are such that they do not come within the definition of “leasehold interest” as this expression is used in Class 13 of Schedule B of the Regulations. I am of the opinion that the expression “leasehold interest”, as used in the Regulations, is general enough to include, in addition to the interest created by a lease in the commonlaw provinces, the interest created both by an ordinary and by an emphyteutic lease in the Province of Quebec.
For these reasons, these appeals are dismissed. The defendant will be entitled to her costs to be taxed; however, as all these appeals were heard on the same evidence and at the same time, the defendant will be entitled to only one set of fees for the preparation and the conduct of the hearing.