Westcon Engineering and Contractors Ltd. v. The Queen, 77 DTC 5398, [1977] CTC 567 (FCTD)

Maguire, DJ:—On the hearing of this appeal, and with the consent of counsel for the Crown, Her Majesty the Queen was substituted as defendant in the place of the Minister of National Revenue.

This is an appeal from the judgment of A W Prociuk, a member of the Tax Review Board, confirming an assessment for income tax by the Minister of National Revenue on a profit of $7,491.80 obtained in the year 1970 from the sale of an aircraft.

The facts are not in dispute.

The plaintiff is a company incorporated in the Province of Saskatchewan and registered to carry on business in Saskatchewan, Alberta, British Columbia and Ontario. In the years immediately prior to 1965 and subsequently the plaintiff maintained offices in each of said provinces and manufacturing plants in Alberta, Saskatchewan and Ontario. The officers of the plaintiff determined that, in the interest of economy in time and money, it was advisable to lease an airplane for use by the president and others of the company.

On January 15, 1965 Western Construction Products (1964) Ltd of Calgary, Alberta leased a used 1958 Cessna 31 OB aircraft from Corporate Plan Leasing Limited for a period of five years at a total rental of $44,609.88, payable monthly in the sum of $743.49.

The plaintiff is associated with said Western Construction Products (1964) Ltd, guaranteed all payments to be made under the terms of said lease and on March 31, 1965 acquired the interests of Western Construction Products (1964) Ltd under the said lease.

Assignments of the lessor’s interest were granted, but no issue arises therefrom.

In 1969 the usefulness of the aircraft to the company ended and a decision was made to dispose of it, in the best interests of the company. An agent found a buyer for the aircraft, with the result that the company prepaid the balance payable under the lease and the additional stipulated sum to obtain title under option granted, and sold it to said buyer. A net profit of $7,491.80 was realized.

The defendant maintains that the only reason that the plaintiff purchased the aircraft under the terms of option contained in the lease was to realize the profit which it knew would accrue from selling the aircraft at its then fair market value and that such profit constitutes income to the plaintiff from a venture in the nature of trade.

The plaintiff had never been involved in trading of aircrafts. The lease in question was a commercial printed form used by the lessor save for an amendment to clause 9 thereof contained in a letter agreement of even date with the lease.

In determining whether the purchase and sale was a venture in the nature of trade, several factors require consideration.

The option to purchase granted by the lease was exercisable upon expiration of the prime portion of the lease, here involving prepayment of some 10 months’ rental plus 10% of the original cost of the aircraft, namely $3,569.

On cross-examination of A Tait Given, president of the plaintiff, he was asked as to the alternatives available to the plaintiff when it was found that the aircraft was no longer required in the conduct of the plaintiff’s business. These are:

(1) Default under the terms of the lease. This would not relieve the company of its liability for all moneys payable under the lease. The lessor could then retake possession of the aircraft and, in accordance with the amended provisions of clause 9, effect a sale thereof. Any deficiency after the sale would be payable by the plaintiff, or the net profit realized on the sale payable to the plaintiff.

(2) Assign the hirer’s interest in said aircraft for such sum as could be obtained.

(3) Effect a purchase and sale as here done.

Counsel for the Crown frankly admitted that any profit or moneys obtained in exercising either option (1) or (2) would not be taxable income.

The question is—does the adoption by the plaintiff of option (3) constitute the profit as taxable income, on the ground that the acquisition and sale was an undertaking or adventure or concern in the nature of trade?

The transaction of purchase and sale by the plaintiff cannot be considered as an isolated event. The rights and interest of the plaintiff in the aircraft, created by the lease, must have consideration in determining plaintiff’s position in the issue before the Court.

There is no specific evidence on this point, but it is apparent from the documents alone that, through payment of the rental for the lease period, plaintiff had paid the cost to lessor of the aircraft plus some additional return, and was then entitled to obtain this capital asset for continued use in its business operations at a low cost in relation to its probable then value. It would in such event become a Capital asset of the plaintiff.

As previously stated, the plaintiff was not engaged in the purchase and sale of such aircraft. At the time of leasing, the sole purpose was to acquire use of the aircraft plus the option given to later acquire title thereto. It cannot be said that in executing the lease, containing the option to purchase clause, plaintiff did so with an intention at that time of ultimately disposing of the aircraft for profit. The right constituted one to acquire a capital asset.

I do not find here other adjustments or arrangements between the parties to the sale such as in Hill-Clark-Francis Ltd v MNR, [+960] CTC 303; 60 DTC 1245, which I judge were factors influencing the Court in its decision.

Applying the test set down by Lord Justice Clerk in Californian Copper Syndicate v Harris (1904), 5 TC 159, and approved by the Supreme Court of Canada in Minerals Ltd v MNR, [1958] SCR 490 at 495; [1958] CTC 236 at 241; 58 DTC 1154 at 1156, I am of the opinion, under the circumstances here existing, that the purchase and sale of the aircraft amounted to no more than a liquidation or realization of a capital asset held or to which the plaintiff was entitled under the terms of the lease. It was not an adventure or concern in the nature of trade for the purpose of profit.

The appeal is allowed with costs.