REASONS
FOR JUDGMENT
Graham J.
[1]
GMAC Leaseco Corporation/La Compangnie GMAC Location (“GMAC”) is in the automobile leasing business. In very
simple terms, the business can be described as follows. General Motors of
Canada Limited (“GM”)
sells vehicles to its network of GM dealerships. Those dealerships lease some
of those vehicles to their customers. The dealerships then immediately sell the
leased vehicle (subject to the lease) to GMAC. GMAC administers the lease
during its term. When the lease ends, the customer either buys the vehicle or
returns it to a GM dealership. If the customer returns the vehicle to a GM
dealership, GMAC quickly sells the vehicle.
[2]
This appeal involves three different issues:
(a)
Excess Kilometre Charges: In its taxation periods ending December 31,
2005, November 30, 2006, December 31, 2006 and December 31, 2007, GMAC charged
certain customers additional charges for driving more kilometres than their
leases permitted (“Excess Kilometre Charges”). When GMAC received an Excess
Kilometre Charge in respect of a vehicle it treated those charges as proceeds
of disposition which reduced the undepreciated capital cost (“UCC”) of its Class 10 assets
in the year in which the charge was received. The Minister of National Revenue
reassessed those taxation years to treat the Excess Kilometre Charges on income
account. The Minister included additional income of more than $90 million in
GMAC’s income in the periods in question in respect of this issue but allowed a
similar increase in GMAC’s UCC pool for its Class 10 assets and corresponding
increase in the CCA that it was entitled to claim in respect of that increased
UCC. GMAC has appealed that decision.
(b)
Residual Value Support Payments: In its taxation years ending
November 30, 2006, December 31, 2006 and December 31, 2007, GMAC received certain
payments from GM known as “residual
value support payments”.
GMAC treated those payments as reducing the undepreciated capital cost (UCC) of
its Class 10 assets in the year in which a lease in respect of which a payment
had been received ended. The Minister reassessed those taxation years to
include the residual value support payments in GMAC’s income in the year in
which they were received. The Minister included additional income of more than
$235 million in GMAC’s income in the periods in question in respect of this
issue but allowed a similar increase in GMAC’s UCC pool for its Class 10 assets
and corresponding increase in the CCA that it was entitled to claim in respect
of that increased UCC. GMAC has appealed that decision.
(c)
Ontario Capital Tax: The Minister has denied a deduction claimed
by GMAC in its taxation year ending December 31, 2007 for Ontario capital tax
that GMAC paid in respect of that taxation year but which was not assessed
until 2011. GMAC has appealed that decision.
Leasing Background
[3]
Before turning to the individual issues, it is
important to examine how GMAC conducted its business and, in particular, how
lease payments were determined.
[4]
When a customer went into a GM dealership, he or
she had the option of either purchasing or leasing a vehicle. If the customer
chose to lease the vehicle, there were three factors that were relevant to
determining a customer’s lease payments:
(a) Purchase price: GMAC imposed a ceiling
on what it was willing to pay a dealer for a leased vehicle. The dealer and
customer could negotiate any price below that ceiling. The lower the vehicle
purchase price, the lower the customer’s lease payments.
(b) Interest rate: Interest rates were set
by either GMAC or GM and communicated to the dealers. Customers could not
negotiate interest rates with the dealers. The higher the interest rate, the
higher the lease payments.
(c) Contract residual value: The “contract
residual value” is the price at which a customer is entitled to purchase
the vehicle at the end of the lease. Contract residual values were
set by GMAC and communicated to the dealers. Customers could not negotiate contract
residual values with the dealers. The higher the contract residual value, the
lower the lease payments. The contract residual value is affected by a number
of sub-factors. Two key sub-factors are directly correlated to the contract
residual value:
i.
Maximum kilometres: The contract residual value is directly correlated to the maximum
number of kilometres permitted under a lease. The greater the maximum number of
kilometres permitted under the lease, the lower the contract residual value and,
thus, the higher the lease payments.
ii.
Term: The
contract residual value is also directly correlated to the term of a lease. The
longer the term, the lower the contract residual value and, thus, the higher
the lease payments.
[5]
If the customer and the dealer could agree on
the terms of a lease, the customer would then sign a standard lease contract
that had been prepared for the dealer by GMAC. The contract spelled out each of
the above factors and sub‑factors and showed how they impacted the
monthly lease price. The remaining terms of the contract were non-negotiable.
[6]
The calculation of the monthly lease price was
relatively straight forward. The following is a somewhat simplified version of
calculation:
(net purchase
price of the vehicle
- contract residual value) x (1 + interest rate)
#
of months in term
[7]
From this formula one can see that, in essence,
GMAC was receiving two amounts over the term of a lease. The first was the
difference between the purchase price and the contract residual value (the “Anticipated Loss of Value Amount”). The second was interest on the Anticipated Loss of
Value Amount (the “Interest Amount”). GMAC reported both of these amounts on income
account.
[8]
When a lease ended the customer had the choice
of either purchasing the vehicle for the contract residual value or returning
it to GMAC by dropping it off at a dealership. GMAC would immediately sell any
vehicles that were returned. When it enters into a lease, GMAC accepts what it
calls “residual value risk”. If GMAC ultimately sells a returned vehicle for
less than the contract residual value, it takes a loss. Conversely, if it sells
the vehicle for more that the contract residual value, it makes a profit. There
are a number of factors that can affect the market value of a vehicle following
a lease. The number of kilometres driven is a very significant factor but it is
not the only factor. Such things as consumer demand for the particular make,
model and colour of the vehicle, the condition of the vehicle and the current
supply of such vehicles in the relevant market also impact the market price.
Excess Kilometre Charges
[9]
When a customer entered into a lease, the customer agreed to the
maximum number of kilometres that the leased vehicle would be driven during the
term of the lease. Customers could choose between low
kilometre leases of 20,000 km per year and standard leases of 24,000 km per
year. Although the maximum number of kilometres was expressed as a
certain number of kilometres per year, since GMAC did not monitor the number of
kilometres driven on an annual basis, there was effectively a total maximum number
of kilometres for the term of the lease. If the customer exceeded that maximum
number of kilometres and did not purchase the vehicle at the end of the lease,
the customer agreed to pay an Excess Kilometre Charge to GMAC for each excess
kilometre driven. In the years in question, the Excess
Kilometre Charge was generally $0.12 / km on a low kilometre lease and $0.10 /
km on a standard lease.
[10]
The issue that I must determine is whether the
Excess Kilometre Charges were earned on capital account or income account.
[11]
As set out above, for tax purposes, GMAC treated
the Excess Kilometre Charges as proceeds of disposition of the returned vehicle
and, accordingly, reduced the UCC of its Class 10 asset pool. GMAC submits that
customers were required to pay Excess Kilometre Charges to compensate GMAC for the
decreased value of the returned vehicle as a result of its excess use. GMAC
says that the vehicles were capital in nature and that a payment to compensate
for a decrease to their value was accordingly on capital account. GMAC argues
that the Excess Kilometre Charge must be compensation for the anticipated
decrease in the market value of the vehicle because the customer only has to
pay the charge if he or she returns the vehicle to GMAC at the end of the
lease. If the customer keeps the vehicle, he or she simply pays GMAC the contract
residual value specified in the lease.
[12]
I disagree with GMAC’s conclusions. I agree that
the Excess Kilometre Charges compensate GMAC for an anticipated decrease in the
market value of a vehicle at the end of a lease. However, that does not mean
that the charges were on capital account. In fact, in all other aspects of its
business, GMAC treated anticipated decreases in market value as being on income
account.
[13]
As described above, GMAC essentially received
two amounts from customers over the term of a lease: the Anticipated Loss of
Value Amount and the Interest Amount. The Anticipated Loss of Value Amount was
calculated by taking the value of the vehicle at the beginning of the lease and
subtracting the anticipated value at the end of the lease. In other words, it was
compensation for what GMAC anticipated would be the decrease in the market
value of the vehicle at the end of the lease. GMAC treated the lease payments
received for the Anticipated Loss of Value Amount as being on income not as
compensation for the vehicle being worth less when it was returned.
[14]
When a customer leased a vehicle for a longer period
of time, the anticipated market value of the vehicle at the end of the lease
decreased so GMAC used a lower contract residual value. That lower contract
residual value resulted in a higher Anticipated Loss of Value Amount which meant
that GMAC received more money over the term of the lease. Again, GMAC treated
the resulting higher lease payments as being on income account, not
compensation for the vehicle being worth less when it was returned.
[15]
When a customer entered into a standard lease
instead of a low kilometre lease, the anticipated market value of the vehicle
at the end of the lease decreased so GMAC used a lower contract residual value.
That lower contract residual value resulted in a higher Anticipated Loss of
Value Amount which meant that GMAC received more money over the term of the
lease. Here again, GMAC treated the higher lease payments as being on income
account, not compensation for the vehicle being worth less when it was
returned.
[16]
Excess Kilometre Charges were not the only
option available to customers who anticipated driving more kilometres than was
permitted under their lease. A customer who was considering entering into a low
kilometre lease had the option of entering into a standard lease. A customer
who was considering entering into a standard lease could choose to purchase
additional kilometres in advance. As would be expected, those additional
kilometres had an effect on the customer’s monthly lease payments. In the
periods in question, the additional kilometres were multiplied by $0.08 and the
product was subtracted from the contract residual value. The lower contract
residual value resulted in a higher monthly lease payment. It is important to
recognize that the monthly lease payments did not simply increase by an
amount equal to:
$0.08 x additional kilometres
number of months in the lease
Rather, the
monthly lease payments increased by a greater amount because of the effect that
the interest rate had on monthly payments. The $0.08 / km amount reduced the
contract residual value which, in turn, increased the Anticipated Loss of Value
Amount. Since the Interest Amount is calculated by multiplying the Anticipated
Loss of Value Amount by the interest rate, the higher Anticipated Loss of Value
Amount lead to a higher Interest Amount. Once again, GMAC treated this increase
in the monthly lease payments as being on income account, not as compensation
for the vehicle being worth less when it was returned.
[17]
In reassessing GMAC, the Minister assumed that
the Excess Kilometre Charges exceeded the impact that the extra kilometres had
on the value of the vehicle at the end of the lease. GMAC has failed to demolish
that assumption. The best way to understand why is to contrast a customer who
purchased additional kilometres and used all of them with one who did not
purchase additional kilometres but drove the same number of kilometres and thus
was faced with an Excess Kilometre Charge. Both customers returned a vehicle
which had the same market value. The former customer had already paid for his
additional kilometres using a rate of $0.08/km plus interest. The latter
customer had to pay an Excess Kilometre Charge calculated by multiplying the
excess kilometres driven by $0.10. Since the vehicles both had the same market
value at the end of the lease, the $0.02 difference between the $0.08/km rate
and the $0.10/km rate must have been designed to compensate GMAC not for damage
to the vehicle but rather for something else. The logical inference is that the
difference was compensating GMAC for its lost interest income. Because the
lease has already ended when the Excess Kilometre Charges are calculated, there
is no interest component factored into the charge. Thus, GMAC would have lost
out on interest income due to the customer’s failure to buy additional kilometres
up front. With the permission of counsel, I asked GMAC’s witness whether the
difference between the $0.08/km rate and the $0.10/km rate was designed to
compensate GMAC for lost profits. He said nothing that would convince me that
my inference is wrong. Based on the foregoing comparison, GMAC has not
convinced me that the $0.02/km component of the Excess Kilometre Charges is not
simply replacing lost interest income and has thus failed to demolish the
Minister’s assumption.
[18]
What then of the remaining $0.08/km component of
the $0.10/km Excess Kilometre Charge? Whether the customer paid the $0.08/km
up front by purchasing additional kilometres or at the end of the lease by
paying an Excess Kilometre Charge, the effect was the same. The customer was
paying for an anticipated decrease in the market value of the vehicle at the
end of the lease. If the customer paid for that amount up front by purchasing
additional kilometres, GMAC considered it to be on income account. How then could
it be on anything other than income account when the customer paid the same
amount at the end of the lease?
[19]
Based on all of the foregoing, I find that GMAC
incorrectly treated the Excess Kilometre Charges as being on capital account.
It should have treated them as being on income account.
Residual Value Support Payments
[20]
As set out above, contract residual values were
normally set by GMAC and could not be negotiated by the customer or the dealer.
The higher the contract residual value, the lower the monthly lease payment. From
time to time, in an effort to increase vehicle leases at GM dealerships on
certain models of vehicles by effectively lowering the monthly payments, GM
would agree with GMAC that if GMAC were willing to accept higher contract
residual values on leases, GM would pay GMAC an amount, known as a “residual value support payment” for each such lease.
[21]
On December 1, 2006, a new ownership structure
of GMAC led to some changes in residual value support payments. Up until
November 30, 2006, GM and GMAC were both wholly owned subsidiaries (indirectly
in GMAC’s case) of General Motors Corporation (“GMUS”). On December 1, 2006, GMUS’s ownership of GMAC
decreased to 49% when the remaining 51% of GMAC’s direct parent company was
sold to Cerberus Capital Management LP. The terms of the residual value support
payments were different in the period from January 1 to November 30, 2006
(the “Wholly Owned Period”) than in the period from December 1, 2006 to
December 31, 2007 (the “Arm’s Length Period”).
Wholly Owned Period
[22]
During the Wholly Owned Period, GM would pay a
residual value support payment to GMAC at the beginning of each supported lease.
The residual value support payment was calculated as being the present value of
the anticipated difference between the inflated contract residual value and the
contract residual value that GMAC would otherwise have used. GMAC was entitled
to keep the residual value support payment no matter what happened at the end
of the lease. If the customer chose to purchase the vehicle, despite the inflated
contract residual value, GMAC nonetheless kept the residual value support
payment. If the customer returned the vehicle to GMAC and GMAC sold the
vehicle, GMAC kept the entire residual value support payment regardless whether
the sale price that it achieved was higher than what it would have established
as the contract residual value had GM not provided the residual value support
payment.
[23]
GMAC takes the position that the residual value
support payments received during the Wholly Owned Period were received on
capital account. It argues that they were inducements to acquire the vehicles
and that those inducements took the form of reimbursements of part of the cost
of those vehicles. GMAC says that the inducements should have been brought into
its income under paragraph 12(1)(x). GMAC further argues that, because GMAC
made an election under subsection 13(7.4), it is permitted to deduct the
payments from the UCC of its Class 10 assets instead of including them in its
income under paragraph 12(1)(x). The Respondent takes the position that the
residual value support payments received during the Wholly Owned Period are
excluded from paragraph 12(1)(x) by virtue of subparagraph 12(1)(x)(v) because
they are otherwise taxable on income account under section 9. Thus, the primary
question to be answered is whether the residual value support payments were
taxable on income account or on capital account. If they were taxable on income
account, then the Respondent will succeed. If they were taxable on capital
account, then GMAC will succeed. GMAC concedes that, if the payments received during
the Wholly Owned Period were received on income account, then they were taxable
in the year they were received.
[24]
The Respondent relies on the Supreme Court of
Canada decision in Ikea Ltd. v. The Queen.
In Ikea, the Court dealt with the question of whether a sum of money
that a tenant received from a landlord upon entering into a lease with no
direction as to how the money was to be spent was received on income account or
capital account. The Court found that, because the rent that the taxpayer was
paying was paid on income account and the inducement effectively reduced that
rent, the inducement was therefore received on income account. The Respondent
argues that GMAC’s situation is comparable. The Respondent says that the
purpose of the residual value support payments was to replace lost income and
thus that the payments should be taxed on income account.
[25]
GMAC argues that its situation differs from that
in Ikea. GMAC relies on the Federal Court Trial Division decision Woodward
Stores Ltd. v. The Queen.
In Woodward, the Court dealt with the question of whether a sum of money
that a tenant received from a landlord upon entering into a lease for the
purpose of building fixtures, in an otherwise vacant premises, was received on
income account or capital account. The Court found that, because the sum was
received for the express purpose of allowing the taxpayer to acquire capital
assets, the sum was received on capital account. GMAC argues that its situation
is comparable. It says that the purpose of the residual value support payments
was to reduce the purchase price of the vehicle and thus that the payments
should be treated as being on capital account and then taxed under paragraph
12(1)(x) subject to its election under subsection 13(7.4).
[26]
I disagree with GMAC’s position. In my view, the
residual value support payments were made to replace GMAC’s lost income, not to
reduce its cost of acquiring the vehicles.
[27]
If GMAC’s concern had been about the purchase
price of the vehicle, I would have expected to hear testimony explaining that
GMAC looked for a rate of return on each vehicle that it purchased of X% and
that, with the inflated contract residual value, it was not possible to achieve
that return without reducing the purchase price. I would then have expected
some sort of explanation of how receiving the residual value support payments
reduced the purchase price to such a level that GMAC was again able to achieve
a return of X% despite its anticipated loss on selling the vehicle. I did not
hear any such testimony.
[28]
Instead, aside from the bare assertion that the
residual value support payments were an inducement to acquire the vehicle, all
of the evidence was focused on the losses that GMAC would potentially suffer at
the end of each lease as a result of not being able to obtain a sale price
equal to the inflated contract residual value. I heard how the inflated
contract residual values increased GMAC’s residual value risk. With a higher
contract residual value it was less likely that a customer would actually buy
the vehicle at the end of the lease. This meant that it was more likely that
GMAC would be left having to sell the vehicle. Because the contract residual
value was inappropriately high, this meant that it was likely that GMAC would
sell the vehicle for less than the contract residual value. Furthermore, I
heard that since GM would offer residual value support payments on only certain
models and only at certain times, this meant that there would likely be a glut
of similar vehicles on the used vehicle market at the same time. This glut
tended to drive the market price down which meant that there was likely to be
an even larger gap between the contract residual value and the market value.
[29]
Even then, the evidence that I received relating
to potential losses arising at the time of sale suggested that the residual
value support payments were not really designed to replace lost income. During
the Wholly Owned Period GMAC was allowed to keep the residual value support
payments regardless whether the customer returned the vehicle or not. This is
inconsistent with the idea that GMAC was being compensated for losses on the
sale of the vehicle. Similarly, the fact that if a customer returned a vehicle GMAC
kept the residual value support payments regardless what price it sold the
vehicle for is inconsistent with the idea that GMAC was being compensated for a
loss on the sale of the vehicle. In both of the foregoing situations, if GMAC
were truly being compensated for its loss on the sale of the vehicle, it would
only have been compensated if an actual loss occurred.
[30]
Looking at how the residual value support
payments were actually calculated and what they actually did makes it clear
that they were designed to replace lost income. Had the contract residual value
been set where it should have been, the customer’s monthly lease payments would
have been higher. The residual value support payments had the simple effect of
replacing that lost income. As described above, GMAC reported all of a
customer’s monthly lease payments as income. Those lease payments were made up
of two components: the Anticipated Loss of Value Amount and the Interest
Amount. Inflating the contract residual value reduced both of these amounts.
The Anticipated Loss of Value Amount is the difference between the purchase
price of the vehicle from the dealer and the contract residual value. An
inflated contract residual value therefore resulted in a lower Anticipated Loss
of Value Amount and a lower monthly payment. The Interest Amount is the
interest on the Anticipated Loss of Value Amount. Thus a lower Anticipated Loss
of Value of Amount would necessarily lead to a lower Interest Amount. The
effect of the residual value support payments in the Wholly Owned Period was
that GMAC was paid the difference in the Anticipated Loss of Value Amount (i.e.
the difference between what that amount would have been if the contract
residual value had been correctly set and what it was with the inflated contract
residual value) up front instead of over the term of the lease. Because GMAC had
use of the money from the beginning, there would have been no need to
compensate it for any lost interest.
[31]
Based on all of the foregoing, I find that during
the Wholly Owned Period the residual value support payments were received on
income account and should have been included in income in the year in which
they were received.
Arm’s Length Period
[32]
There was a significant change to how the
residual value support payments worked during the Arm’s Length Period. This was
presumably because GMAC was now dealing at arm’s length with GM. GM would pay a
residual value support payment to GMAC at the beginning of a lease, but GMAC
had to return the payment to GM at the end of the lease if the customer
purchased the vehicle. The amount paid at the beginning of the lease was still
the present value of the anticipated difference between the inflated contract
residual value and the contract residual value that would otherwise be used.
However, there was a reduction in the amount paid up front to account for the
historical incidence of customers keeping their vehicles. In addition, if the
customer returned the vehicle to GMAC, when GMAC sold the vehicle there was a “true up payment”
either to or from GM depending on how the sale price compared to the contract
residual value that GMAC would otherwise have used. The idea was to ensure that
GMAC ultimately received a residual value support payment equal to the
difference between those amounts; no more and no less.
[33]
The primary question to be answered in respect
of the Arm’s Length Period is still whether the residual value support payments
were taxable on income account under section 9.
[34]
Despite the foregoing differences in the program
during the Arm’s Length Period, I still find that the residual value support
payments were received on income account. They were still intended to replace
the income that GMAC would have earned from having a lower contract residual
value. There is still no evidence that would indicate that the payments were
designed to reduce the purchase price. All that happened in the Arm’s Length
Period is that the payments were refined to ensure that they were not being
paid in situations where they were not required. In other words, they were
adjusted so that they were paid based not on the anticipated market value at
the end of the lease but rather the actual market value. Yet the payments were
still occurring at the beginning of the lease. If the payments were truly
designed to compensate GMAC for losses on the sale of the vehicles, then why
not simply pay them when the sale occurred? Why go through the effort of paying
them up front and then making true up payments at the end? The logical answer
that presents itself is that the payments were designed to replace lost income -
income that would have been earned prior to the end of the lease.
[35]
Under the system that was in place in the Arm’s
Length Period, if a customer purchased the vehicle at the end of a lease, then
GMAC would have received the inflated contract residual value which meant that
it would have received exactly the amount of income that it should have
received during the lease and had no need of a residual value support payment.
If a customer returned a vehicle at the end of the lease and GMAC sold the
vehicle for the same amount that it would otherwise have used as the contract
residual value, then it kept the entire residual value support payment as that
payment was exactly equal to the income that it would have received from the
customer had it set the contract residual value at the proper amount. If a customer returned a
vehicle at the end of the lease and GMAC sold the vehicle for less than the
inflated contract residual value but more than the contract residual value that
it would otherwise have used, then it kept that portion of the residual value
support payment that made up for the income that it would have received from
the customer had the contract residual value been set appropriately. That
amount compensated GMAC for the income that it would otherwise have received
from the customer.
[36]
GMAC conceded that, if I found that the residual
value support payments received during the Wholly Owned Period were received on
income account, then they were taxable when received. GMAC did not make that
same concession for residual value support payments received during the Arm’s
Length Period. GMAC submits that if I find, as I have, that the residual value
support payments received during the Arm’s Length Period were received on
income account, then they should be included in income at the end of the lease
after any true up occurred. The Respondent did not make any submissions on this
issue.
[37]
I accept GMAC’s position that the residual value
support payments were earned at the end of the lease. Although GMAC had use of
the money at the beginning of a lease, it did not have any entitlement to keep
it until the lease ended and GM and GMAC knew whether GMAC had had to sell the
vehicle and, if so, what price it had been sold for.
[38]
GMAC then argues that, because the residual
value support payments were not earned until the end of the leases, the
payments should not be taxable under section 9 because, despite the fact that
they were earned on income account, they are still taxable under paragraph
12(1)(x). GMAC reaches this conclusion based on the wording of subparagraph
12(1)(x)(v). That subparagraph reads:
12(1) There
shall be included in computing the income of a taxpayer for a taxation year as
income from a business or property such of the following amounts as are
applicable:
…
(x) any
particular amount (other than a prescribed amount) received by the taxpayer
in the year, in the course of earning income from a business or property, …
…
to the extent that the particular amount
(v) was not
otherwise included in computing the taxpayer's income, or deducted in
computing, for the purposes of this Act, any balance of undeducted outlays,
expenses or other amounts, for the year or a preceding taxation year,
[emphasis added]
[39]
GMAC submits that had the residual value support
payments been earned in the year that they were “received” (i.e. at the beginning of the lease), then subparagraph
12(1)(x)(v) would have excluded the payments from being taxed under paragraph
12(1)(x) and left them to be taxed under section 9. However, GMAC submits that
because the residual value support payments were “received” at the start of the lease but only earned at the end
of the lease, then subparagraph 12(1)(x)(v) does not apply to make paragraph
12(1)(x) inoperable. Instead, GMAC submits, paragraph 12(1)(x) applies and that
GMAC is free to make an election under subsection 13(7.4). The Respondent did
not make any submissions on this issue.
[40]
While I accept GMAC’s interpretation of
subparagraph 12(1)(x)(v), I do not accept that the residual value support
payments were “received”
in the first year of the leases. In my view, the word “received” in paragraph 12(1)(x) must mean something more than
merely accepting possession of an amount and using it for a period of time. The
recipient must have a legal right to keep the amount. GMAC is trying to have it
two ways. It is arguing that the residual value support payments are not
taxable because it did not have a right to them when they came into its
possession but, in the same breath, arguing that it has “received” the payments
despite the fact that it has no right to keep them. GMAC cannot have it both
ways.
[41]
Based on all of the foregoing, I find that
during the Arm’s Length Period the residual value support payments were received
on income account and were not required to be included in income until the end
of the relevant lease. However, at the end of the lease, the residual value
support payments were taxable under section 9. The Minister will need to
reassess the periods in question in accordance with the foregoing.
Ontario Capital Tax
[42]
In 2011, GMAC filed an amended Ontario capital tax return for its
taxation year ending December 31, 2007. The amended return reduced the amount
of discretionary CCA claimed by GMAC which had the effect of increasing the
amount of Ontario capital tax that GMAC was required to pay under the Corporations
Tax Act.
GMAC filed an amended federal tax return for its taxation year ending December
31, 2007 in which it deducted the additional Ontario capital tax. The Minister
denied that deduction on the basis that the additional Ontario capital tax
liability had not arisen until GMAC’s taxation year ending December 31, 2011
when GMAC filed the amended Ontario capital tax return and thus that the
additional capital tax was not deductible until that year.
[43]
The Respondent takes the position that GMAC had
no liability for the additional capital tax until 2011 when it amended its
capital tax return. I disagree.
[44]
Counsel for GMAC directed me to subsection 78(1)
of the Corporations Tax Act which states that capital tax is “deemed to accrue proportionately as the days of each
taxation year for which [it] is imposed pass”. It
appears from this subsection that GMAC’s liability to pay the additional
capital tax must have accrued in 2007. Counsel for the Respondent did not
direct me to anything in the Corporations Tax Act that would indicate
that the liability for capital tax arising from a discretionary adjustment to a
capital tax return would accrue in any manner other than that dictated by
subsection 78(1).
[45]
The idea that liability for capital tax would accrue
in the relevant year regardless of when the tax was assessed is hardly
surprising. It is consistent with the long established principle under the Income
Tax Act that liability for tax arises not pursuant to the filing of a
return or the issuing of an assessment or reassessment, but rather pursuant to
the terms of the Income Tax Act itself.
[46]
The Respondent relies on the Federal Court of
Appeal decision in Canada v. Burns.
With respect, I cannot see the relevance of that case. Burns dealt with
the question of whether merely having an obligation to backfill a gravel pit
was sufficient for the taxpayer to claim a deduction in the year the obligation
arose, despite the fact that the taxpayer did not actually hire anyone to
backfill the pit until after the taxation year. The Federal Court of Appeal
stated that an “expense cannot be said to be
incurred by a taxpayer who is under no obligation to pay money to anyone. …an
obligation to do something which may in the future entail the necessity of
paying money is not an expense.” I do not think that GMAC
would dispute that point. However, Burns says nothing about how expenses
that are statutorily deemed to have accrued should be treated.
[47]
Based on the foregoing, it appears to me that
GMAC’s liability to pay the additional capital tax accrued in 2007 rather than
2011. Since GMAC reported its income on an accrual basis, it was appropriate
for GMAC to claim a deduction in its income taxation year ending December 31,
2007 for the additional capital tax that subsection 78(1) deemed GMAC to have
accrued.
Conclusion
[48]
Based on all of the foregoing, the Appeal is
allowed and referred back to the Minister for reconsideration and reassessment
on the basis that:
(a) the
residual value support payments received in GMAC’s taxation periods ending
December 31, 2006 and December 31, 2007 were taxable under section 9 but were
only taxable at the end of the relevant lease; and
(b) GMAC was
entitled to deduct its additional capital tax in its taxation year ending
December 31, 2007.
[49]
I am not inclined to award costs in light of the
parties’ mixed success in the Appeal but the parties may make submissions on
costs within 30 days if they wish.
Signed at Ottawa,
Canada this 11th day of June 2015.
“David
E. Graham”
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