Sarchuk,
T.C.C.J.:—Kamsel
Leasing
Inc.
(Kamsel)
is
incorporated
pursuant
to
the
laws
of
the
Province
of
Ontario
and
carries
on
the
business
of
leasing
chattels
and
equipment.
It
appeals
from
reassessments
to
tax
with
respect
to
its
1984,
1985
and
1986
taxation
years
by
virtue
of
which
the
Minister
of
National
Revenue
increased
its
income
by
$831,447
in
1984;
$921,442
in
1985;
and
$998,002
in
1986.
The
reassessments
arose
as
follows.
With
respect
to
its
business
Kamsel
considered
itself
as
the
holder
of
intangible
assets
represented
by
a
portfolio
of
leases,
and
not
as
owner
of
capital
property
represented
by
the
underlying
chattels
or
equipment
which
were
the
subject
matter
of
the
leases.
These
leases
were
treated
for
accounting
purposes
as
direct
financing
leases
pursuant
to
which
the
cost
of
a
lease
to
Kamsel,
representing
its
outlay
to
secure
and
enter
into
the
particular
lease,
was
amortized
over
the
term
of
the
particular
lease.
Kamsel
accounted
for
its
leasing
income
by
crediting
to
income
the
entire
amount
of
the
leasing
charge.
Leased
assets
were
carried
at
cost,
less
amortization,
which
was
based
on
writing
off
the
applicable
value
of
the
lease
in
equal
monthly
amounts,
over
the
life
of
the
lease.
In
the
preparation
and
filing
of
its
returns
of
income
for
the
taxation
years
in
issue
Kamsel
reported
its
income
on
this
basis
and
took
deductions
based
on
its
amortization
of
lease
costs.
The
respondent
disallowed
the
deductions
as
claimed
and
reclassified
the
chattels
as
depreciable
assets
within
Class
8
of
the
Schedule
as
set
out
in
the
Income
Tax
Regulations
(Regulations).
In
so
doing
the
Minister
of
National
Revenue
treated
the
property
as
depreciable
property
within
the
meaning
of
the
Income
Tax
Act
(the
Act),
the
cost
of
which
was
capital
and
not
deductible
by
virtue
of
paragraph
18(1)(b).
The
Minister
therefore
limited
the
deductions
available
to
the
extent
provided
by
paragraph
20(1)(a)
and
Part
1100
of
the
Regulations
and
allowed
the
deductions
to
that
extent
only.
The
issue
before
me
is
whether
the
lease
utilized
by
Kamsel
is
a
direct
financing
lease
as
asserted
by
the
appellant
or
a
true
or
operating
lease
as
asserted
by
the
respondent.
Five
witnesses
testified
on
behalf
of
the
appellant,
Ruth
Ann
Adams,
the
manager
of
Kamsel;
Jeffrey
L.
White,
a
sales
representative
with
K.E.L.
Communications;
Larry
D.
Dibbley,
a
chartered
accountant,
and
two
expert
witnesses,
Ralph
Fraser
Selby,
a
chartered
accountant
and
Martin
Leo
O’Brien,
a
solicitor.
What
is
relevant
in
their
testimony
follows.
Ms.
Adams
has
been
associated
with
Kamsel
since
1980
and
is
responsible
for
approving
credit
and
attending
to
collections.
She
described
its
business
as
the
leasing
of
equipment
with
emphasis
on
what
is
known
in
the
industry
as
"small
ticket"
items
such
as
office
equipment
and
furniture,
communications
and
computer
systems,
photocopiers,
word
processors
and
cellular
telephone
systems.
Kamsel
carried
no
inventory
or
stock
of
equipment
for
leasing,
did
not
maintain
any
storage
facilities
and
had
no
staff
to
provide
maintenance,
service
or
repairs.
Adams
considered
the
business
of
the
appellant
to
be
essentially
the
provision
of
a
financing
service
to
both
the
suppliers
and
purchasers
of
such
equipment.
It
did
not
advertise
but
relied
on
referrals
and
repeat
customers
for
the
bulk
of
its
business
and
had
developed
a
reputation
as
a
reliable
provider
of
such
services.
Both
Dibbley
and
Adams
stated
that
the
profits
of
Kamsel
were
substantially
derived
from
the
margin
between
its
cost
of
funds
and
the
yield
provided
by
the
payments
from
the
lessees
to
it
under
the
leases.
The
balance
of
profit
if
any
was
derived
from
the
payment
received
from
the
lessee
for
the
buy-out
of
the
equipment
on
the
expiration
of
the
lease.
As
a
general
rule
Kamsel
did
not
participate
directly
in
the
negotiations
with
suppliers.
This
was
done
by
the
prospective
lessees
who,
in
discussions
with
the
supplier,
determined
the
specific
equipment
they
required
and
its
cost.
When
the
terms
and
conditions
of
the
sale
were
arranged
to
the
satisfaction
of
both,
the
prospective
lessee
(or
on
some
occasions
the
supplier)
would
approach
Kamsel.
A
credit
review
of
the
prospective
lessee
was
conducted
and
if
satisfactory
Kamsel
advised
the
supplier
that
it
would
be
purchasing
the
particular
equipment
on
the
basis
of
the
arranged
terms.
Kamsel
then
calculated
the
appropriate
leasing
cost
and
the
aggregate
amount
so
determined
was
amortized
over
a
lease
term
settled
in
consultation
with
the
particular
lessee,
which,
in
the
usual
case
was
36
months.
Once
these
arrangements
were
completed
Kamsel
provided
the
supplier
with
the
prepared
lease
agreement.
It
was
executed
by
the
prospective
lessee
in
the
presence
of
the
suppliers'
sales
person
and
was
returned
to
Kamsel
for
execution.
Then
payment
for
the
equipment
was
remitted
by
Kamsel
to
the
supplier,
who
in
turn
delivered
the
equipment
to
the
lessee.
All
leases
were
net
leases
and
all
maintenance,
service,
repairs
and
insurance
were
the
responsibility
of
the
lessee.
Title
was
retained
by
Kamsel
which
registered
its
interest
in
the
equipment
pursuant
to
the
provisions
of
the
Personal
Property
Security
Act
of
Ontario.
Ms.
Adams
also
stated
that
at
the
time
the
lease
was
executed
each
lessee
understood
that
it
had
several
options
upon
its
expiry.
These
included
the
right
to
purchase
the
equipment
at
ten
per
cent
of
its
actual
cost;
to
renew
the
lease
at
an
annual
renewal
equal
to
the
quarterly
payment;
or
to
return
the
equipment.
She
conceded
that
with
a
few
exceptions
the
lease
agreement
itself
did
not
make
reference
to
the
buy-out
option
but
maintained
that
the
lessee
was
invariably
advised
of
its
right
to
do
so.
She
was
certain
of
this
fact
because
all
suppliers
who
dealt
with
Kamsel
were
provided
with
a
document
captioned
"Leasing
Factors"
(Exhibit
A-1)
containing
information
which
enabled
the
supplier
to
demonstrate
how
the
ultimate
lease
payment
would
be
calculated
and
which
also
specifically
set
out
the
options
available
to
the
lessee
at
expiry
of
the
lease.
Ms.
Adams
stated
that
all
suppliers
were
aware
of
the
options
and
to
the
best
of
her
knowledge
drew
them
to
the
attention
of
the
lessee.
Shortly
before
the
expiration
of
a
lease
Kamsel
sent
a
notice
advising
the
lessee
of
its
right
to
acquire
the
equipment
at
the
option
price.
Her
evidence
and
that
of
Dibbley
was
that
a
substantial
majority
of
Kamsel's
customers
exercised
the
option.
This
was
expected
since
the
residual
value
of
the
equipment
as
a
general
rule
exceeded
the
ten
per
cent
option
price.
Appellant's
position
It
is
asserted
that
Kamsel's
business
was
the
provision
of
financial
accommodation
to
suppliers
and
purchasers
of
certain
equipment.
This
was
done
on
the
basis
that
Kamsel
would
act
as
lessor
in
a
transaction
where
the
lessee
acquired
a
chattel
or
equipment
from
a
supplier
with
the
expectation
that
it
would
generate
profit
from
financing
these
transactions
rather
than
realizing
any
form
of
gross
profit
from
the
sale
of
the
chattel
itself.
The
lease
agreements
used
were
full
pay-out
leases
and
the
lessee
had
an
option
of
acquiring
the
chattel
at
the
conclusion
of
the
term
of
the
lease
for
ten
per
cent
of
the
original
price
paid
to
the
supplier
for
the
chattel,
which
amount
was
referred
to
in
the
trade
as
a
"bargain
purchase”.
Counsel
noted
that
at
the
time
a
lease
agreement
was
executed
the
lessee
was
advised,
generally
by
the
supplier,
but
on
occasion
by
Kamsel,
of
its
option
rights.
He
noted
that
the
residual
fair
market
value
of
the
chattel
at
the
conclusion
of
the
lease
had
been
established
to
be
in
excess
of
the
option
price,
and
that
in
most
instances
the
lessee
exercised
the
option.
From
all
of
this
it
was
apparent
that
the
leases
in
issue
effectively
transferred
substantially
all
of
the
benefits
and
risks
of
ownership.
This,
counsel
submitted,
is
consistent
with
Kamsel's
position
that
they
were
direct
financing
leases.
Furthermore
counsel
argued
that
at
all
relevant
times
Kamsel
correctly
followed
generally
accepted
accounting
principles
in
accounting
for
them
as
direct
financing
leases.
He
referred
to
a
handbook
prepared
by
the
Canadian
Institute
of
Chartered
Accountants
and
to
the
testimony
of
Selby
as
to
the
appropriate
accounting
principles.
He
further
submitted
that
the
transactions
also
qualified
as
a
direct
financing
lease
in
that
they
met
the
criteria
as
set
out
by
Revenue
Canada
in
Interpretation
Bulletin
11-233R.
These
criteria
were
established
to
assist
in
determining
whether
a
transaction
was
to
be
treated
as
a
sale
and
financing
or
as
an
operating
lease
and
whether
payments
made
pursuant
to
those
agreements
were
in
substance
payments
of
rent
or
payments
on
account
of
the
purchase
price
of
property.
The
appellants
position
is
that
the
transactions
in
issue
satisfy
those
criteria
and
are
consistent
with
the
position
of
Revenue
Canada
as
to
what
constitutes,
in
the
appellants
terminology,
a
direct
financing
lease.
In
support
counsel
for
the
appellant
cited
the
following
decisions:
Front
&
Simcoe
Ltd.
v.
M.N.R.,
[1960]
C.T.C.
123,
60
D.T.C.
1081
(Ex.
Ct.);
Chibougamau
Lumber
Ltée
v.
M.N.R.,
[1973]
C.T.C.
2174,
73
D.T.C.
134
(T.R.B.);
The
Queen
v.
Lagueux
&
Freres
Inc.,
[1974]
C.T.C.
687,
74
D.T.C.
6569
(F.C.T.D.);
The
Queen
v.
Moore,
[1986]
2
C.T.C.
22,
86
D.T.C.
6325
(F.C.T.D.);
Feinstein
v.
M.N.R.,
[1978]
C.T.C.
2219,
78
D.T.C.
1171
(T.R.B.);
and
Tri-Star
Leasing
(London)
Inc.
v.
M.N.R.,
[1992]
2
C.T.C.
2099,
92
D.T.C.
1786.
Respondent's
position
Counsel
argues
that
the
facts
do
not
support
the
conclusion
sought
by
the
appellant.
He
contends
that
the
leases
in
issue
(with
the
exception
of
those
relating
to
cellular
phones)
make
no
mention
of
the
lessee's
option
and
that
the
evidence
as
to
any
collateral
oral
agreement
with
respect
to
the
option
was
nebulous
and
not
adequately
supported.
He
argued
that
ownership
remained
at
all
times
with
the
appellant
and
suggested
that
the
evidence
respecting
the
value
of
the
chattels
at
the
time
of
the
exercise
of
the
option
was
insufficient
to
enable
the
Court
to
reach
the
conclusion
urged
by
counsel
for
the
appellant.
The
respondent
relies
principally
on
this
Court's
decision
in
Tri-Star
Leasing
and
suggested
that
there
was
no
distinction
between
the
cases
on
the
facts.
Conclusions
There
is
no
special
provision
in
the
Income
Tax
Act
dealing
with
agreements
such
as
the
leases
in
question.
Accordingly
a
determination
as
to
their
true
nature
must
be
made
in
consideration
of
both
the
terms
of
the
agreement
and
the
factual
circumstances
relevant
to
both
the
making
and
execution
of
the
lease
agreement.
I
have
concluded
that
the
evidence
adduced
supports
the
position
taken
by
the
appellant.
I
am
satisfied
that
the
majority
of
the
lessees
were
aware
of
their
option
rights
at
the
time
of
the
execution
of
the
lease.
In
this
context
I
note
Kamsel's
practice
of
providing
its
suppliers
with
the
document
describing
the
options
and
the
testimony
of
Ms.
Adams
and
Jeffrey
White
that
in
the
normal
course
the
suppliers
informed
the
prospective
lessees
thereof.
There
is
also
independent
evidence
of
this
fact,
such
as
instances
where
the
lessee,
prior
to
the
commencement
of
the
lease,
requested
confirmation
in
writing
from
Kamsel
of
the
option
to
purchase
the
equipment
at
lease
termination
at
a
specified
amount,
being
ten
per
cent
of
its
cost
(Exhibit
A-2,
page
8).
Reference
can
also
be
made
to
the
Windsor
Welding
lease
(Exhibit
A-7,
page
4)
in
which
the
purchase
option
was
incorporated
into
the
lease
at
the
request
of
the
lessee.
While
such
occurrences
appear
to
be
the
exception
rather
than
the
rule,
they
are
confirmatory
of
the
testimony
of
Adams
and
White.
Adams
also
testified
that
occasionally
Kamsel
staff
prepared
lease
documents
for
execution
by
the
lessee.
She
was
involved
in
a
number
of
such
transactions
and
her
usual
practice
was
to
review
the
lease
with
the
lessee
and
to
specifically
advise
it
of
the
purchase
option.
The
evidence
also
satisfies
me
that
as
a
general
rule
the
residual
fair
market
value
of
the
chattel
at
the
expiration
of
the
lease
exceeded
the
ten
per
cent
option
price.
Adams's
testimony
in
this
regard
was
not
seriously
challenged
in
cross-examination.
Her
assertion
that
in
almost
every
case
the
lessees
exercised
their
option
to
acquire
the
chattel
is
supported
by
a
random
analysis
of
leases
for
years
ended
August
31,
1984,
1985
and
1986
prepared
by
Dibbley.
This
analysis
(Exhibit
A-9),
while
far
from
exhaustive,
was
reasonably
conducted
and
is
of
some
probative
value.
The
respondent's
reliance
on
this
Court's
decision
in
Tri-Star
Leasing
is
misplaced
since
in
that
case
there
was
no
evidence
of
any
enforceable
option
to
purchase
being
granted
to
the
lessee.
In
the
present
appeal
there
is
sufficient
evidence
upon
which
I
can
conclude
that
a
lessee
had
the
right
at
the
expiration
of
the
lease
to
acquire
the
property
at
a
price
which
at
the
inception
of
the
lease
could
be
said
to
be
substantially
less
than
the
probable
fair
market
value
of
the
property
at
the
time
of
permitted
acquisition.
It
is
equally
fair
to
state
that
the
option
permitted
a
lessee
to
acquire
the
property
at
a
price
which
at
the
inception
of
the
lease
was
such
that
no
reasonable
person
would
fail
to
exercise,
and
indeed
the
evidence
was
that
a
substantial
percentage
of
the
lessees
exercised
the
option.
These
two
findings
I
am
constrained
to
note
mirror
the
circumstances
under
which,
according
to
IT-233R,
Revenue
Canada
would
consider
a
transaction
to
be
a
sale
rather
than
a
lease.
I
have
reached
my
conclusions
with
little
reference
to
the
testimony
of
the
two
expert
witnesses.
Mr.
Selby
has
been
associated
with
the
Equipment
Lessors
Association
(the
Association)
since
its
founding.
He
is
the
chairman
of
the
accounting
committee
of
the
Association
and
as
such
has
been
involved
in
discussions
with
Revenue
Canada
with
specific
reference
to
its
position
regarding
the
tax
treatment
of
direct
financing
leases.
Mr.
O'Brien
has
been
an
advisor
to
the
Association
since
1973.
He
had
substantial
discussions
with
officials
of
the
Department
prior
to
the
release
of
Interpretation
Bulletin
IT-233
in
1975.
It
is
fair
to
say
that
both
are
proponents
of
the
Association's
position
with
respect
to
direct
financing
leases
and
hold
strong
views
regarding
Revenue
Canada's
intractability
on
the
issue.
The
role
of
expert
witnesses
is
to
provide
impartial
assistance
to
a
court,
particularly
when
complex
issues
of
a
scientific
or
technical
nature
are
involved.
Thus
that
portion
of
the
testimony
given
by
Selby
relating
to
generally
accepted
accounting
principles
was
appropriate
and
of
probative
value.
However
I
have
reservations
as
to
the
weight
to
be
given
to
the
balance
of
their
testimony.
Each
was
presented
with
a
hypothetical
fact
situation
(approximating
the
facts
being
asserted
by
the
appellant)
and
from
each
counsel
elicited
the
opinion
that
such
facts
described
a
direct
financial
lease.
These
responses
amounted
to
an
opinion
on
a
mixed
question
of
fact
and
law
which
requires
the
application
of
a
legal
standard.
It
has
been
said
that
such
opinions
are
superfluous
(The
Queen
v.
Fisher,
[1961]
S.C.R.
535,
[1961]
O.W.N.
94,
at
page
535
(O.W.N.
95),
Aylesworth,
J.A.),
and
in
this
case
they
were
just
that.
The
appeals
are
allowed,
with
costs.
Appeals
allowed.