Citation: 2010 TCC 475
Date: September 21, 2010
Docket: 2006-2175(IT)G
BETWEEN:
ON-LINE FINANCE & LEASING CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
Introduction:
[1]
These appeals concern a
determination of the proper treatment to be accorded lease payments received by
the Appellant in the 2000 and 2003 taxation years, pursuant to a leasing
program involving the Municipal Finance Authority of British Columbia (“MFA”) and
the Appellant.
[2]
Until 2004, the
Appellant reported the lease payments as its lease income, deducted an amount
for interest paid to the MFA on the borrowed funds and claimed capital cost
allowance in each year. In November 2004, the Appellant filed amended tax
returns for the 1997 to 2003 taxation years. In these amended returns, the
Appellant removed the lease payments from its income and no longer claimed
capital cost allowance in respect to the assets. Because the undepreciated
capital cost of the assets was now much higher, available terminal losses were
also much larger. Since the 1997 to 1999 taxation years were statute-barred,
the Minister of National Revenue (the “Minister”) reassessed the Appellant with
respect to its 2000 to 2003 taxation years. In addition, the Appellant
appealed its 2004 taxation year. Prior to the hearing, by Order of Boyle J.
dated October 30, 2009, the appeals for the 2001, 2002 and 2004 taxation years
were quashed. As a result, only the 2000 and 2003 taxation years are before me.
The Evidence:
[3]
I heard evidence from
three witnesses called by the Appellant:
Robert Leighton, the President and sole director of
the Appellant Corporation; James Craven, the executive director of the MFA
until December 31, 2001; and Victor Blamey, the Appellant’s accountant, who
prepared the amended income tax returns filed by the Appellant on November 16,
2004.
[4]
The MFA was created by
local government members in 1971 to provide municipalities across British Columbia with the opportunity to acquire financing for the
purchase of capital assets. The MFA was able to offer a number of favourable
borrowing options to municipalities including the leasing program which is
central to these appeals.
[5]
In 1991, Mr. Leighton
and Mr. Craven began discussions concerning the creation of a short-term
leasing program to be available to municipalities that wanted to purchase large
capital assets such as fire trucks, snowploughs or buildings.
[6]
The Appellant
corporation was created in 1995 as a leasing entity to facilitate the
implementation and operation of this leasing program. Initially, Robert Leighton
owned 100 per cent of the shares in the Appellant corporation. Since 2004, 98
per cent of the shares are owned directly or indirectly by Mr. Leighton.
[7]
The arrangement between
the Appellant and the MFA was an arms-length business relationship governed
primarily by four agreements:
(a)
a Services Agreement
dated April 1, 1995;
(b)
a Pricing Agreement
dated April 7, 1998;
(c)
a Leasing Agreement
dated April 5, 2000; and
(d)
an Assignment of Lease
Agreement dated October 30, 2002.
[8]
The MFA maintained a substantial
line of credit with the Bank of Montreal. When a municipality wanted to acquire
a specific asset, rather then purchasing it outright or leasing it directly
from the manufacturer, it had the option of leasing the required asset from the
Appellant corporation at a more favourable interest rate. The municipality
would apply to the MFA for an extension of the line of credit, in an amount
sufficient to purchase the asset. The MFA then determined whether the creditworthiness
of the municipality was acceptable. The necessary funds to purchase the asset
were then provided by the MFA to the Appellant. The Appellant used the funds to
purchase the asset that the municipality wished to acquire and, in turn, leased
the item to the municipality. The Appellant retained legal ownership to the
asset. The municipality made the lease payments directly to the MFA. The
Appellant assigned the lease payments, lease agreements and assets to the MFA.
[9]
Mr. Leighton provided
the following as a typical example of the mechanics of the leasing program:
(1)
The Appellant is
approached by the municipality to acquire a specific asset. The MFA approves or
rejects this request based on the municipality’s creditworthiness;
(2)
A lease agreement is
developed, drafted and prepared by the Appellant. The lessor on the lease is
the Appellant and the lessee is the municipality. Once signed by both parties,
the lease agreement is faxed to the MFA;
(3)
The municipality places
a purchase order with the manufacturer for the asset it wants to acquire. The
Appellant is billed and listed as the purchaser on the purchase order;
(4)
Once the MFA receives
the lease agreement, it advances funds to the Appellant so that the asset can
be purchased;
(5)
Once the asset is
delivered, the municipality either accepts or rejects the asset. If it is
rejected the funds are returned to the MFA but if it is accepted, the Appellant
remits the amount owing to the vendor of the asset; and
(6)
Where the asset is
accepted, the Appellant assigns the asset, lease agreement and lease revenue to
the MFA (the “Assignment”) but the Appellant retains title/ownership to the
asset. The Appellant receives broker fees for each lease it enters into with
the municipality.
[10]
The nature and purpose
of the Assignment to the MFA by the Appellant, as well as the nature of the
funds advanced by the MFA to the Appellant and the nature of the Appellant’s obligation
to repay these funds, are the aspects of the leasing program that are in
dispute in these appeals. Essentially, much of the dispute involves the proper
characterization of the MFA advances to the Appellant to purchase the asset. In
other words, who is the borrower of these funds, the Appellant or the municipality?
In addition, the characterization of the Assignment and the subsequent lease
payments are also in dispute. The Respondent’s position is that the advances
are on-going loans from the MFA to the Appellant, with each lease payment
reducing the principal balance of the loan. The Assignment, according to the
Respondent, is security for the on-going loan. The Appellant’s position is that
the advances are loans from the MFA to the Appellant which are interim only and
are immediately repaid through the Assignment. The Assignment is for the
benefit of the MFA and allows the MFA to pursue default remedies when
necessary.
[11]
The lease program
ceased in 2003. The MFA, now under the leadership of Steve Berna, filed a
petition in bankruptcy against the Appellant. A proposal and an amended
proposal in the bankruptcy proceeding was made by the Appellant, accepted by
the creditors and approved by the British Columbia Supreme Court. Both the
Appellant and the MFA entered into written transfer agreements respecting the
Appellant’s disposition of the assets of the leasing program to the MFA and the
extinguishment of the debt under the line of credit. The Respondent attempted
to place reliance on these bankruptcy documents, as well as a number of other
agreements and affidavits related to the bankruptcy proceedings, to support its
position. Whether the Respondent will be permitted to place reliance upon these
extrinsic documents, to assist in interpreting the written leasing program
agreements, depends upon the application of the parol evidence rule.
Appellant’s Position:
[12]
The Appellant’s
position is that the funds it received from the MFA were interim unsecured
loans or advances which were immediately repaid and extinguished through the
absolute assignment of the lease payments (Appellant’s Written Submissions,
paragraph 3). As a result, the Appellant claims that the lease payments cannot
be characterized as its income and it is entitled to the terminal losses
claimed in the amended returns. In filing amended tax returns in 2004, the
Appellant no longer viewed the lease payments as income belonging to it and no
longer claimed a capital cost allowance. As a result, the undepreciated capital
cost of the assets was much higher than previously reported in the earlier
returns and gave rise to larger terminal losses than were claimed in the
Appellant’s original tax filings.
The Respondent’s Position:
[13]
The Respondent’s
position is that the funds received by the Appellant from the MFA were advanced
pursuant to an on-going line of credit extended to it by the MFA. Therefore,
any subsequent lease revenue was received by the Appellant despite the fact
that it may have been directly transferred to the MFA by the municipality to decrease
the principal balance on the line of credit. According to the Respondent, the Assignment
acted as security for the Appellant’s indebtedness to the MFA pursuant to the
line of credit which the MFA had extended to the Appellant. The Minister’s
reassessments were consistent with the plain words and meaning of the leasing
program agreements as well as with the Appellant’s original tax filings in
which the Appellant treated the lease payments as its income.
The Issues:
[14]
The issues are:
(1) Is the Respondent
entitled to rely on extrinsic evidence to assist in the interpretation of the
written leasing program agreements?
(2) What is the proper
characterization of the funds advanced by the MFA to the Appellant?
(3) What is the proper
characterization of the Assignment and subsequent lease payments received by
the MFA?
(4) Does the
Respondent’s alternative argument have any merit?
Analysis:
Preliminary Issue: Does the parol evidence rule apply
to the Respondent?
[15]
This issue is central
to these appeals and will dictate the outcome. If I conclude that the
Respondent should be permitted to rely on the extrinsic evidence it introduced,
then the Appellant is at peril of having its appeal dismissed. The extrinsic
evidence is comprised primarily of documentation from subsequent bankruptcy
proceedings that occurred between the Appellant and the MFA and include a
General Transfer Agreement, an Amended Proposal made by the Appellant and
affidavits, indemnities, releases and proposals. Many of these documents
contradict the position of the Appellant in these appeals.
[16]
At the beginning of the
hearing, the Appellant attempted to introduce into evidence correspondence
between the MFA and the Appellant relating to the negotiation stage of their
lease program dealings. The Respondent brought a Preliminary Motion objecting
to its introduction on the basis that it violated the parol evidence rule because
it related to evidence of the intention of the parties to the leasing program. The
Respondent argued that the four agreements in that program were clear and
unambiguous and therefore extrinsic evidence was not required to assist with
their interpretation. As it was the Appellant’s intention to introduce further
documentation in addition to the correspondence and because of the significant
impact a decision in this Motion could have on the scope of the hearing, I
adjourned the hearing and requested written submissions from both counsel. My
Order of March 2, 2010 concluded that the agreements constituted the entire
agreement between the parties and I directed that the Appellant would not be
permitted to introduce extrinsic evidence to assist with explaining the leasing
program agreements. I concluded that the relevant agreements were not ambiguous
so that extrinsic evidence would not be required to assist in interpreting
them.
[17]
At the recommencement
of the hearing, the Respondent sought to introduce extrinsic evidence to
support its position, arguing that my Order of March 2, 2010 applied only to
the Appellant, but not to the Respondent. The Appellant, although invited to do
so, did not object as such and submitted that it would address this issue in
its submissions.
[18]
The Respondent’s argument,
that it is entitled to rely on extrinsic evidence while the Appellant is not,
relies on the Federal Court of Appeal decision in Urichuk v. The Queen,
93 D.T.C. 5120, where the Court, at page 5121, held that:
… We also reject the appellant's
attempt to invoke the parol evidence rule to object to evidence of the
circumstances leading up to the making of the agreement; the Minister, not
being a party to that agreement, is entitled to rely on any available evidence
to support his characterization of the payments…
(Emphasis added)
[19]
This decision was
followed by Hogan J. in Husky Oil Limited v. The Queen, 2009 D.T.C.
1094. That case was subsequently reversed by the Federal Court of Appeal.
However, no specific comments were made with respect to the parol evidence
rule.
[20]
The Respondent submits
that, because it was not a party to the leasing program agreements, then as a
third party, it is entitled to rely upon any available evidence to support its
characterization of the leasing program agreements; that is, that the lease
payments were assigned as security and that payments made by the municipalities
reduced the Appellant’s indebtedness to the MFA over time. The Respondent
submits that the parties’ treatment in the bankruptcy documentation, which was
subsequent to the initial leasing agreements, is consistent with the
Respondent’s interpretation of the unambiguous leasing documentation.
[21]
The Appellant submits
that the Court Order of March 2, 2010 is binding on both parties to these
appeals for three reasons:
(1) the Federal Court of
Appeal decision in Urichuk does not stand for the general proposition
that the Minister is always entitled to rely on extrinsic evidence simply
because it was not a party to the contract and the Urichuk decision should
therefore be limited in its application;
(2) Justice Hugessen’s
comments in Urichuk have been superseded by subsequent case law; and
(3) it would be severely
prejudiced and placed at a substantial and unfair disadvantage in the hearing
if the Respondent were allowed to rely on extrinsic evidence.
[22]
On a plain reading of
the Urichuk decision, it would seem a logical conclusion that the
Respondent should be permitted to rely on the extrinsic evidence it tendered.
However, it is necessary to examine the background and context of this
decision. The primary issue was the characterization of payments made by the
taxpayer to his spouse and whether those payments were maintenance payments which
could therefore be deducted. At the Federal Court – Trial Division, Cullen J.
dismissed the appeal and allowed parol evidence to be introduced by the
Respondent in order to determine the proper characterization of the payments.
However, Cullen J. specifically noted that he allowed parol evidence based on
the Federal Court of Appeal decision in The Queen v. McKimmon, 90 D.T.C.
6088, which held, at page 6090, that in the context of spousal support
payments, “there can be very few hard and fast rules” and a “…Court is required
to look at all the circumstances surrounding the payment and to determine what,
in the light of those circumstances, is its proper characterization”.
[23]
In the context of this
background, I do not believe that the Federal Court of Appeal’s comments in Urichuk
can be expanded to stand for the general proposition that a party that is not a
party to a contract will always be entitled to rely on extrinsic
evidence. Instead, as suggested by the Appellant, the rule to be taken from Urichuk
is much more limited and applicable only to situations involving spousal
support payments.
[24]
The Appellant’s second
argument is that the Urichuk decision has been superseded by the
decisions in Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129
(“Eli Lilly”), Gilchrist v. Western Star Trucks Inc., 2000 BCCA
70, and The Queen v. General Motors of Canada Ltd., 2008 D.T.C.
6381 (“GM Canada”). The Federal Court of Appeal summarized the current
state of the parol evidence rule in the GM Canada decision at paragraph
36:
[36] A number of propositions emerge from the above authorities.
First, failing a finding of ambiguity in the document under consideration, it
is not open to the Court to consider extrinsic evidence. Second, where
extrinsic evidence may be considered, that evidence must pertain to the
“surrounding circumstances which were prevalent at the time”. Third, even where
there is ambiguity, evidence only of a party’s subjective intention is not
admissible.
[25]
Although these cases do
not specifically refer to the application of the parol evidence rule to third
parties to a contract, the propositions articulated in subsequent case law by
the Federal Court of Appeal seem inconsistent with the Urichuk decision
unless the Urichuk comments are limited as I have suggested.
[26]
With respect to
evidence surrounding subjective intention, the Federal Court of Appeal in GM
Canada clearly states that while a Court may examine the “surrounding
circumstances” it may not examine the “intention of the parties”. In Urichuk,
Cullen J., at the Trial Division level, examined the intention of both parties
at length and held, at page 5379, that:
… Mrs. Urichuk’s petition for divorce was the catalyst which moved
Mr. Urichuk to go to his wife and accept her terms of $200,000 to stop the
divorce action… While the agreement states that Mrs.
Urichuk was to discontinue the divorce action, in my opinion the plaintiff’s
real goal in paying the $200,000 was only to have the divorce delayed …
These comments are clearly examinations into the
subjective intention of the parties, which, according to the Federal Court of
Appeal in GM Canada, is never admissible.
[27]
Secondly, in allowing
parol evidence to be admitted in Urichuk, the Federal Court – Trial
Division noted, at page 5378, that “parol evidence is admissible to determine
the real nature of a transaction” and that the “well-established practice in
tax law is to look behind the form of an agreement to determine its substance”.
These comments are contrary to the Supreme Court of Canada’s decision in Shell
Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622, where, at paragraph 39, Justice McLachlin
(as she was then) held that while “courts must be sensitive to the economic
realities”, they cannot use economic realities to recharacterize bona fide
legal relationships. It follows from these comments that it cannot be the
established practice in tax law to look behind the form of an agreement. In
fact, as the Supreme Court of Canada made clear in its decision, bona fide
legal relationships established through an unambiguous contract must be
respected.
[28]
In respect to the
Appellant’s third point, that it would be prejudicial to the Appellant to allow
the Respondent to rely on extrinsic evidence, while the Appellant could not,
the scope of the parol evidence rule in Canada has been described as producing
harsh results [John McCamus, The Law of Contracts, (Irwin Law: Toronto,
2005) at 198]. In Corey Developments Inc. in Trust v. Eastbridge
Developments (Waterloo) Ltd., 34 O.R. (3d) 73 (“Corey Developments”),
Macdonald J. commented on the injustice that would arise with a strict
application of the parol evidence rule and stated, at page 80, that:
… the purpose of the parol evidence rule is to ensure that the
expectations of the contracting parties are upheld. …
Macdonald J. then quoted from the The Law of
Contract, 3rd ed. (Aurora, Ont: Canada Law Book, 1993) by S.M. Waddams, in
which, at page 82, S.M. Waddams expressed the following views on the
narrow application of the rule:
The parol evidence rule, as set out above, is not an unduly harsh,
nor an unreasonable rule. It asserts simply that
where the parties have agreed that a document is to constitute the exclusive
record of their agreement, their intention will prevail. Unfortunately,
however, many of the cases purporting to apply the rule do not formulate it,
and give the appearance of applying some other, more rigid, rule, such as a rule
that signed documents are absolutely binding. No such rule as this has even
been authoritatively formulated, and there are very many decisions that are
inconsistent with it. Such a rule would give rise to severe injustice, and
could not be easily defended.
(Emphasis added)
[29]
McLachlin J. (as she
was then) in Ahone v. Holloway, [1988] B.C.J. No. 1603 (B.C.C.A.),
noted that “the parol evidence rule is not absolute”. Macdonald J., in Corey
Developments, agreed with these comments and held that the parol evidence
rule is not an inflexible one and that courts should not allow the rule to be
used in such a manner that it would cause obvious injustice by providing a tool
for one party to dupe another. Although the present appeals do not involve such
a scenario, the underlying issues of unfairness and prejudice do exist. While
the Respondent objected to and did obtain an Order to prevent the Appellant
from introducing extrinsic evidence, the Respondent now seeks to introduce and
rely upon extrinsic evidence to assist in supporting its position. If I
permitted the Respondent to do so in these appeals, I would be creating an
inequitable environment which would be prejudicial to the Appellant’s
presentation of its appeal. The Respondent’s argument leads to the conclusion
that it should have the freedom to rely on whatever evidence it can locate
while the Appellant may be denied the very same opportunity. I do not believe
that the parol evidence rule, which exists to ensure the primacy of written
contracts, dictates such a conclusion. It would simply create unfair and
prejudicial circumstances that taxpayers could be subjected to in having their
appeals heard.
[30]
I believe that the
Federal Court of Appeal’s comments in Urichuk should be limited to
situations involving spousal support payments. I do not believe that Urichuk
can be expanded so that the Court is always required to admit extrinsic
evidence when tendered by the Respondent. I also note that I always considered
that the reasons in my Court Order, on the Respondent’s Preliminary Motion
respecting the introduction of extrinsic evidence, applied equally to both
parties in these appeals. The written submissions in the Motion never requested
or implied that my reasons should apply solely to the Appellant, leaving the Respondent
with free rein to introduce evidence as it saw fit. Although the Motion was
brought by the Respondent and aimed at the Appellant in respect to one item of
correspondence which the Appellant sought to introduce, my reasons applied
generally to the introduction of extrinsic evidence by both parties.
Consequently, none of the Respondent’s extrinsic evidence will be accorded any
weight because that evidence violates that parol evidence rule and my Court
Order dated March 2, 2010.
What is the proper characterization of the funds advanced
by the MFA to the Appellant?
[31]
The Respondent submits that
the MFA extended a line of credit to the Appellant, the borrower, to purchase
assets that could be leased to municipalities and that this indebtedness was secured
by an assignment of the lease assets and payments. The Respondent argues that
the leasing agreements clearly and unambiguously support its position. It cites
the following provisions, contained in the Leasing Program Agreement dated
April 5, 2000, to support this position:
WHEREAS the Authority:
Is prepared to offer a line of credit to On-Line guaranteed
by Canadian municipalities and eligible institutions…for the purpose of
purchasing assets to be leased to Canadian municipalities and eligible institutions;
(Leasing Program Agreement, Preamble)
1. The Authority hereby extends a line of credit
guaranteed by Canadian municipalities and eligible institutions for a term from
the above date until April 1, 2005. …
(Leasing Program Agreement, paragraph 1)
2. The Authority agrees:
[…]
(d) to provide funding for the purchase
of assets to be leased by On‑Line, …;
(e) to charge interest at the Canadian Prime
Rate minus One Hundred Basis Points (1.00%) on funds advanced to On-Line
…;
(Leasing Program Agreement, paragraphs 2(d)
and (e))
WHEREAS:
[…]
B. Pursuant to the Leasing Program Agreement, the
Authority provides a line of credit (the “Financing”) for the purpose of
purchasing assets to be leased …;
(Assignment of Lease Agreements, Preamble)
(Emphasis added)
[32]
The leasing program
agreements are between the Appellant and the MFA. Since they state that the MFA
agrees to provide funding to the Appellant, it follows that the borrower must
be the Appellant because the municipalities are not a party to the agreements
and, as submitted by the Respondent, the municipalities are not identified as
the recipients of the line of credit.
[33]
The Respondent argues
that the Appellant’s position that the MFA did not loan money to the Appellant
is inconsistent with the provisions in these agreements. The Appellant’s
position, that the advances are not a loan, is inconsistent with its position
that the advances by the MFA were immediately repaid through an absolute
assignment. According to the Respondent, the Appellant’s position, that it was
not the borrower of the funds and yet the debt was extinguished by the absolute
assignment of the lease payments, cannot both be correct.
[34]
The Appellant relies on
the following provision in the Assignment of Lease Agreements to support its
position that the MFA provided funding to the municipalities, which were the
borrowers, not the Appellant:
WHEREAS:
A. Pursuant to the provisions of section 11.1(1) of the Municipal
Finance Authority Act, On-Line and the Authority entered into a leasing
program agreement (the “Leasing Program Agreement”) dated as of the 5th
day of April, 2000;
B. Pursuant to the Leasing Program Agreement, the Authority
provides a line of credit (the “Financing”) for the purpose of purchasing
assets to be leased to local governments and eligible institutions prescribed
under section 11.1(5) of the Municipal Finance Authority Act;
(Assignment of Lease Agreements, Preamble)
[35]
Subsection 11.1(1) of
the Municipal Finance Authority Act, R.S.B.C. 1996, c. 325 (the
“MFAA”) allows the MFA to loan money only to local governments and specific
institutions, but not to private entities. The Appellant submits that it cannot
be the borrower of the funds as it is a private corporation and that, since the
Preamble clearly states that the agreement is pursuant to the MFAA, the
agreement would be illegal and unenforceable if the Appellant was the borrower.
There is no merit, however, to the Appellant’s argument that it could not be
the borrower because of the prohibitions contained in the MFAA. Any potential
circumvention of the provisions contained in the MFAA will have no bearing on
the interpretation of the agreements and the ultimate characterization of the
line of credit advanced by the MFAA.
[36]
According to the
wording of the agreements, the Appellant was clearly the borrower of the funds
from the MFA. In the Preamble to the Leasing Program Agreement, it states that:
… the Authority: Is prepared to offer a line of credit to On-Line
guaranteed by Canadian municipalities…
(Emphasis added)
Although the Agreements do not specifically state that
the Appellant is the borrower of the funds, because the agreements are solely
between the Appellant and the MFA, one is left with the distinct impression
that it was the Appellant that was the borrower of the funds from the MFA.
[37]
In explaining the
operation of the Leasing Program Agreements, the Appellant stated:
The MFA would, on receipt of the signed lease agreement, advance the
proceeds of the line of credit extended by the MFA to the municipality to
On-Line as an interim unsecured advance.
(Transcript, volume 4, page 280, lines
22-25)
This assertion is inconsistent with the Agreements
between the MFA and the Appellant which clearly state that the Authority is
prepared to offer a line of credit to On-Line guaranteed by Canadian
municipalities.
[38]
The purchase/leaseback
scenario, as explained by Mr. Leighton in cross‑examination, appears to
be at odds with commercial realities. Pursuant to his scenario, a large portion
of the leasing programs’ assets that were originally owned by the
municipalities were purchased by the Appellant and then leased back to the
municipalities. If, as the Appellant contends, the loan is between the MFA and
the municipality, then the municipality under the purchase/leaseback scenario
would be borrowing money to purchase assets that the municipality already owned
in order to subsequently lease them from the Appellant.
[39]
Although there are the
inconsistencies with the Appellant’s position as highlighted by the Respondent,
there are also some inconsistencies with the view taken by the Respondent. For
example, if the Appellant truly is the borrower, then why would the MFA examine
the creditworthiness of the municipality? Clearly, the Agreements do not
address the role of the municipality, although they are an integral part of the
program. In Eli Lilly, at paragraph 56, the Supreme Court held:
56
When there is no ambiguity
in the wording of the document, the notion in Consolidated-Bathurst that
the interpretation which produces a “fair result” or a “sensible commercial
result” should be adopted is not determinative. Admittedly, it would be absurd
to adopt an interpretation which is clearly inconsistent with the commercial
interests of the parties, if the goal is to ascertain their true contractual
intent. However, to interpret a plainly worded document in accordance with
the true contractual intent of the parties is not difficult, if it is presumed
that the parties intended the legal consequences of their words. This is
consistent with the following dictum of this Court, in Joy Oil Co. v. The
King, [1951] S.C.R. 624, at p. 641:
. . . in
construing a written document, the question is not as to the meaning of the
words alone, nor the meaning of the writer alone, but the meaning of the words
as used by the writer.
(Emphasis added)
[40]
The Agreements are not
ambiguous, are plainly worded and, consequently, must govern the arrangement
between the parties. As a result, the funds advanced by the MFA to the
Appellant via the Bank of Montreal line of credit must be characterized as a
loan from the MFA to the Appellant. Therefore, the Appellant is the borrower of
the funds notwithstanding that this arrangement may have contravened the
provisions of the MFAA.
What is the proper characterization of the assignment
and subsequent lease payments received by the MFA?
[41]
The Appellant’s
position on the proper characterization of the Assignment is that it extinguished
the loan that was interim between the Appellant and the MFA. The MFA would then
use the Assignment as security to guarantee the lease payments and thus the
Appellant would no longer have any right to the lease revenue. The Respondent’s
interpretation is that the Assignment acted as security for the loan between
the Appellant and the MFA with each payment by the municipality to the MFA
constituting payment on, and the gradual reduction of, the loan between the
Appellant and the MFA.
[42]
The Appellant relied on
the following provisions from the Leasing Agreements to support its interpretation
that the Assignment was absolute and extinguished the Appellant’s interim debt
to the MFA:
WHEREAS:
[…]
D. Pursuant to the Leasing Program Agreement, On-Line has
agreed to assign all existing and future lease agreements as may be modified
from time to time, lease payments and the related assets thereto (the “Lease
Agreements”) to the Authority as security for the Financing.
(Assignment of Lease Agreements, Preamble, at
paragraph “D”)
1. Assignment. On-Line hereby
grants to the Authority a continuing and specific security interest in, and
hereby grants, assigns, transfers and sets over to, the Authority all of its
right, title and interest in and to the Lease Agreements entered into pursuant
to the Leasing Program Agreement and all benefits and advantages to be derived
from the Lease Agreements, including, without limitation, any payment derived
therefrom and the benefit of any and all representations, warranties,
conditions, terms and covenants on the part of all other parties to the Lease
Agreements therein or implied or expressed by law in relation thereto with full
power and authority to enforce performance of such terms or covenants, or to
demand, sue for and collect damages in connection with any misrepresentation,
breach of warranty or breach of covenant either in the name of and as agent for
On‑Line, or in the name of the Authority, to have and to hold for the
Authority until all monies under and all obligations of the respective lessees
under the Lease Agreements have been fully paid and fulfilled.
(Assignment of Lease Agreements, at
paragraph 1)
3. Credit. The Authority
acknowledges that, by virtue of the assignment and the physical lodging of the
original Lease Agreements with the Authority, the Authority has accepted the
credit extended to the Lessees by On-Line, and therefore has accepted
the responsibility for any credit losses, provided that On‑Line has
complied with all of the terms and conditions as required under the Leasing
Program Agreement.
(Assignment of Lease Agreements, at
paragraph 3)
(Emphasis added)
[43]
The Appellant submits
that these provisions clearly demonstrate that the Appellant assigned all of
the lease revenue absolutely. The Appellant submits that the lease revenue
cannot be attributed to it because it did not actually receive the lease
payments and, in addition, the Appellant’s financial statements did not show
any outstanding loans between the Appellant and the MFA.
[44]
The Respondent’s
argument is that the provisions of the Agreements relied on by the Appellant
are plainly worded and support the position that the Assignment is security for
the funding. Further, in order for the Appellant’s position to be accepted, the
plain words of the Agreement would have to be qualified and that should not be
permitted.
[45]
The Respondent relied
on the following excerpts from the Agreements in support of its position:
AND WHEREAS On-Line:
[…]
Is prepared to assign all Accounts (“the Accounts”) to the
Authority as security for funding:
(Services Agreement, Preamble)
AND WHEREAS On-Line:
[…]
Is prepared to assign all lease agreements (the “Lease Agreements”),
lease payments and the related assets to the Authority as security for the
funding;
(Leasing Program Agreement, Preamble)
WHEREAS:
[…]
D. Pursuant to the Leasing Program Agreement, On-Line has
agreed to assign all existing and future lease agreements as may be modified
from time to time, lease payments and the related assets thereto (the “Lease
Agreements”) to the Authority as security for the Financing;
(Assignment of Lease Agreements, Recital D)
1. Assignment. On-Line hereby
grants to the Authority a continuing and specific security interest in, and
hereby grants, assigns, transfers and sets over to, the Authority of all of its
right, title and interest in and to the Lease Agreements… and all benefits and
advantages to be derived from the Lease Agreements, including, without
limitation, any payment derived therefrom… to have and to hold for the
Authority until all monies owing under and all obligations of the respective
leases under the Lease Agreements have been fully paid and fulfilled.
(Assignment of Lease Agreements, at
paragraph 1)
2. Attachment. The security
interest created hereby is intended to attach when this Assignment is executed
by On-Line and delivered to the Authority.
(Assignment of Lease Agreements, at
paragraph 2)
(Emphasis added)
[46]
The Respondent’s view
is that the Preamble portion of the Agreements is consistent with the operative
provisions of the Agreements. In contrast, the Appellant argues that the
operative provisions are clear and unambiguous and support its interpretation. In
addition, to the extent that the Preamble is inconsistent with the operative
provisions, it cannot alter the meaning of the operative terms.
[47]
Which of these two
interpretations will govern, depends primarily upon the wording in paragraphs 1
and 3 of the Assignment of Lease Agreements:
1. Assignment. On-Line hereby
grants to the Authority a continuing and specific security interest in … the
Lease Agreements … and all benefits and advantages to be derived … including, …
any payment … to have and to hold for the Authority until all monies owing
under and all obligations … under the Lease Agreements have been fully paid
and fulfilled.
(Emphasis added)
3. Credit. The Authority
acknowledges that, by virtue of the assignment … the Authority has accepted the
credit extended to the Lessees by On-Line, and therefore has accepted
the responsibility for any credit losses …
(Emphasis added)
[48]
There are a number of
conclusions that can be drawn from the aforesaid paragraphs 1 and 3:
(1) The Appellant grants
a security interest in the lease agreements to the MFA, including the lease
payments until all payments and terms contained in the original lease agreement
between the Appellant and the municipality are satisfied.
(2) Since the Appellant
is the borrower of the funds advanced to it by the MFA, paragraph 3 of the
Assignment of Lease Agreements implies that the Appellant then extends that
credit to the lessees.
(3) With the assignment,
the MFA now steps into the shoes of the Appellant, notwithstanding the fact
that it was the original creditor in respect to the funds advanced. At this
point, the Appellant has no further right to any of the lease revenue.
(4) The purpose of the
security is to ensure that the terms of the lease agreement between the
Appellant and the municipality are fulfilled. This is also supported by
paragraph 3, which states that the MFA accepts the responsibility for any
credit losses.
[49]
The Preamble to the
Agreements clearly states that the Appellant is assigning the lease agreements as
security for the financing provided to the Appellant by the MFA which
supports the Respondent’s position on these transactions. The Respondent, as
opposed to the Appellant, submits that the recitals in the Preamble are
consistent with the operative clauses of the Assignment of Lease Agreements.
However, contrary to the Respondent’s position, there does appear to be an
inconsistency between the Preamble and the operative terms of the Agreements.
[50]
The Appellant cited
several authorities to support the proposition that in the event of an
inconsistency between the recital and operative provisions of a contract, the
operative provisions prevail. In Monarch Timber Exporters Ltd. v. Bell, [1963] B.C.J. No. 154 (B.C.C.A.), aff’d [1964]
S.C.R. 375, the British Columbia Court of Appeal, at paragraph 18, held that:
18. In the construction of an instrument the recitals
are subordinate to the operative part, and consequently, where the operative
part is clear, this is treated as expressing the intention of the parties, and
it prevails over any suggestion of a contrary intention afforded by the
recitals: 11 Hals., 3rd ed., p. 418, para. 677. …
The Supreme Court of Canada adopted a similar approach
in Eli Lilly. The Court, at paragraph 63, stated:
63
It is true that, in the
recitals, the parties refer to a mutual intention to “share their rights”,
which itself might well be taken to suggest an intention to create a sublicence.
However, this provision must be read in light of the rest of the agreement,
which clearly discloses the intention not to create a sublicence.
[51]
Although the Preamble
provisions in many of the Agreements stipulate that the assignment made by the
Appellant is made as security for financing, only the Assignment of Lease
Agreements, and more specifically paragraphs 1 and 3, provide detailed terms
with respect to the assignment. Based on the remarks of the Supreme Court of
Canada, the inconsistency between the Preamble and the operative provisions
must be resolved in favour of the Appellant by following the operative
provisions of the Assignment of Lease Agreement. Since there were no
allegations of fraud or sham, the legal relationship created by the Agreements
must be given full effect.
[52]
The assignment by the
Appellant of the lease agreements, revenue and assets should be characterized
as extinguishing the outstanding loan between the Appellant and the MFA.
Consequently, all future lease revenue paid by the municipalities is properly
received by the MFA and should not be reflected in the Appellant’s income.
The Respondent’s Alternative Argument: Is the
Respondent permitted to introduce its alternative argument and, if so, does it
have any merit?
[53]
Based on my conclusion,
that the advances from MFA to the Appellant were interim loans that were
immediately repaid through an absolute assignment, the Respondent wishes to
rely on its proposed alternative argument: each absolute assignment constituted
a disposition and the resulting proceeds must be added to the Appellant’s
income, to the extent that it does not increase the amount of tax payable.
[54]
The terms “property”
and “disposition” are defined in subsection 248(1) of the Income Tax Act
(the “Act”):
“property” means property of any kind whatever whether real or
personal or corporeal or incorporeal …
“disposition” of any property, except as expressly otherwise
provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of
disposition of the property, […]
[55]
The Respondent submits
that the lease revenue and agreements constitute property and that the absolute
assignment constitutes a disposition. Consequently, there is a resulting gain
or loss, depending on the proceeds of disposition and the adjusted cost base.
The Respondent argues that the Appellant’s adjusted cost base is zero since it
is completely financed by the MFA. Therefore, all proceeds of disposition are
to be included in the Appellant’s income.
[56]
The Appellant relies on
the decision in First Vancouver Finance v. M.N.R., 2002 SCC 49, to argue that there was no
disposition of the lease payments. In addition, the Appellant disagrees with
the Respondent’s characterization of the adjusted cost base of each lease as
being zero and instead argues that it is “…the discounted value of the lease
payments at the date of inception of each lease and is equal to the remaining
principal balance outstanding under each lease at that time” (Appellant’s Reply
to Respondent’s Closing Arguments, at paragraph 19(b)).
[57]
The Appellant also
objects to the Respondent’s alternative argument on the basis that it violates
subsection 152(4), which states that no reassessment may be issued after the
normal assessment period. The Appellant also argues that this alternative
argument relies on a “different transaction” which is not permitted under
subsection 152(9). Lastly, the Appellant argues that, although the Respondent
has stated that the alternative argument will not increase the total tax
payable, this is an attempt to circumvent the issue as there will actually be
an increase in tax payable.
[58]
Since the enactment of
subsection 152(9), there are a number of cases that have defined exactly what
“an alternative argument in support of an assessment” may include. In Anchor
Pointe v. The Queen, 2003 FCA 294, the Court held that there was no
distinction between “a new basis of assessment” and “a new argument in support
of an assessment”. The main issue is whether the Minister is taking into
account other transactions or increasing the amount of tax payable. If so, then
the alternative argument cannot stand. In the present appeals, the Respondent
is not seeking to increase the tax payable by the Appellant nor is it trying to
introduce new transactions. Therefore, the Respondent is permitted to argue this
alternative argument.
[59]
The Appellant relied on
the decision in First Vancouver Finance to support its position that an
absolute assignment does not constitute a disposition. The Appellant relies
specifically on paragraphs 15 and 16:
15
On the preliminary issue of the ownership of the factored accounts, Wimmer
J. relied upon the definition of a factoring agreement from Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at paras.
30-31. In that case, Cory J. stated at para. 31 that, “A factoring of accounts
receivable is based upon an absolute assignment of them. It is in effect a
sale by a company of its accounts receivable at a discounted value to the
factoring company for immediate consideration.”
16
Wimmer
J. observed that, according to Alberta
(Treasury Branches),
an absolute and unconditional assignment of book debts is beyond the reach of
the Minister under garnishment provisions. He held further that the assignments
from Great West to First Vancouver were absolute and unconditional because,
upon completion of the assignments, Great West had no residual rights in the
property and could not redeem or recover the accounts and, in that
circumstance, Canada Safeway had no liability to Great West after there was a completed
transfer of accounts. Although the Minister argued that the assignments were
not absolute because under the factoring agreement First Vancouver had recourse
to Great West if a customer disputed or failed to pay an account, Wimmer J.
noted that the definition of factoring approved by Cory J. contemplated that a
factor may acquire an absolute interest in book debts with or without recourse
(p. 718).
(Emphasis added)
However, I do not agree with the conclusion that the
Appellant suggests.
[60]
In the context of
factoring agreements, it appears that the Supreme Court has accepted that an
absolute assignment is a disposition of property. Bowman J. reached a similar
result in Sussex Square Apartments Limited v. The Queen, 99 D.T.C. 443.
At paragraph 32 he states:
[32] The legal difference between an assignment and a sublease
results as well in a difference for income tax purposes. An assignment of the
entire term is a disposition of property and the consideration for that disposition
constitutes a receipt on income or capital account, depending on the
circumstances. …
[61]
If an absolute
assignment can be considered a disposition, then the question that must be
answered is whether the Respondent’s characterization is accurate. Because the
MFA financed everything, the Respondent argues that the Appellant’s adjusted
cost base is zero.
[62]
This argument has no
merit. If the Respondent calculates the proceeds of disposition as the value of
the loan (or the purchase price of the asset), then there has to be a cost
associated with it. Whether or not the MFA financed the leasing program is
irrelevant since it does not change the fact that there was still outstanding
debt between the Appellant and the MFA. The Respondent’s interpretation is contrary
to the Agreements which clearly state that the MFA extended a line of credit to
the Appellant. Even if the Respondent’s characterization of the disposition is
accurate, then essentially the MFA gave the Appellant something for nothing as
the Appellant would have received funds to purchase assets without having to
repay the MFA.
[63]
In the present appeals,
the proceeds of disposition are those amounts submitted by the Respondent.
However, the adjusted cost base of the assets is not zero. Instead, it should
be the exact amount as the proceeds of disposition, since each step of the
leasing program arrangement occurred immediately one after another, such that
there would be no income attributable to the Appellant.
Can the Appellant seek to have losses adjusted in
statute-barred years and years for which no loss determination request was
made?
[64]
In 2004, the Appellant
submitted amended tax returns for the 1997 to 2002 taxation years. The Minister
refused to accept the 1997 to 1999 amended returns as they were statute-barred.
The Appellant is now seeking to have the losses in those statute-barred years
adjusted so that non-capital losses from those years may be carried forward to
subsequent taxation years. The Appellant relied on the remarks of Bowie J. in Sherway
Centre Limited v. The Queen, 2001 D.T.C. 1021, at paragraph 11:
[11] That principle, as I understand it, is
simply this. If, the Minister in assessing a taxpayer, has misstated the
non-capital loss for a particular taxation year, which is statute-barred, and
so has also misstated the balance of non-capital losses available to be applied
to other years, then that error may be remedied in the reassessment or the
appeal of a later year, provided that either the later year is open for
reassessment, or there is a valid appeal with respect to it before the Court.
The Minister or the Court, as the case may be, should, in dealing with that
later year, re-compute the non-capital loss balance available to be carried
forward, and in doing so should correct the error in respect of the earlier
year.
(Emphasis added)
[65]
The Appellant argues
that, since the non-capital losses in these statute-barred taxation years, 1997
to 1999, have been misstated, the balance of available non‑capital losses
in subsequent taxation years is therefore misstated. Since the Appellant’s 2003
taxation year is validly before the Court, the Appellant’s non‑capital
losses for the 1997 to 1999 taxation years and the non-capital loss balance
available for carry-forward should be recalculated.
[66]
The Respondent relies
on the decision of Bowman J. (as he was then) in Aallcann Wood Suppliers
Inc. v. The Queen, 94 D.T.C. 1475, at page 1476, where he states:
… In the
absence of a binding loss determination under subsection 152(1.1), it is open
to a taxpayer to challenge the Minister's calculation of a loss for a
particular year in an appeal for another year where the amount of the
taxpayer's taxable income is affected by the size of the loss that is
available for carry-forward under section 111. …
(Emphasis added)
The Respondent’s position is that the Appellant “…is
not entitled to a determination of its non-capital losses from years that are
not under appeal.” (Respondent’s Closing Argument, paragraph 116). The
Respondent submits that the Appellant had a taxable income of nil in its 2000
taxation year and a taxable income of $314,876 in its 2003 taxation year. If
the Appellant is successful in these appeals, the Appellant’s taxable income
will be reduced to nil and because the tax payable would not be affected by
losses available for carry-forward from prior years, these losses should not be
recalculated as they will have no impact upon the Appellant.
[67]
Justice Bowman’s
decision in Aallcann implies that if an error with respect to losses
from a prior year is discovered but the taxpayer does not have taxable income
in the year under appeal, then the error cannot be corrected until the taxpayer
begins to turn a profit. Since I have allowed these appeals, the Appellant is
entitled to a determination of its non-capital losses from prior years that are
not under appeal, including those statute-barred years, if its taxable income,
in the years under appeal, is affected. The Appellant asked that either this
Court or the Minister correct the error in the 1997 to 1999 taxation years and
recalculate the Appellant’s non-capital loss balance available for
carry-forward. I believe the Minister is in the best position to make these
adjustments and recalculations if, in fact, there is taxable income upon which
those losses could impact. If it is determined that there is, in fact, no
taxable income in the years under appeal, then no adjustment would be required
in those years.
Conclusion:
[68]
In summary, I believe
the decision in the Urichuk case has more limited application than the
Respondent suggests and, consequently, cannot be extended to the present
appeals. In limiting the Urichuk comments on the parol evidence rule to
spousal and maintenance support issues and pursuant to the reasons contained in
my Order dated March 2, 2010, the Respondent was not permitted to rely on
extrinsic evidence to support its position.
[69]
Since I limited the
scope of the evidence in this manner, the leasing agreements, as they are
written between the parties, lead to the following conclusions:
(1) the MFA loaned funds
to the Appellant; and
(2) those funds were
immediately repaid to the MFA when the Appellant absolutely assigned its rights
in the lease agreements between itself and the municipalities together with the
lease revenue to the MFA.
[70]
In many ways, the
Appellant acted as a conduit between the MFA and the municipalities to
facilitate the leasing program by using its proprietary leasing software.
Therefore, the appeals are allowed with costs because the lease revenue is not
attributable to the Appellant’s income.
[71]
One final matter, that
requires a brief comment, is the submissions by the Appellant respecting relief
sought through this Court for so-called “taxpayer oppression”. These claims
were made “at the instance of Mr. R. Leighton” and I understand why Appellant
counsel wished to divorce himself in this manner from these submissions.
Firstly, I have no jurisdiction to provide such relief but secondly, and far
more importantly, it is highly inappropriate for Appellant counsel to reference
pre-hearing settlement discussions and particularly to quote in the final
written submissions from the Respondent’s pre-hearing brief. Since the final submissions
in these appeals were made in writing, I did not have the opportunity to stop
such a reference at the outset. Pre-hearing conferences encourage all parties
to be open and frank concerning settlement possibilities. Discussions that
occur at those conferences and all materials filed in support are never
intended to be part of the record of the Judge hearing the case. It is the
reason that all of those materials are sealed after the conclusion of any
settlement negotiations. Mr. Drove should know better and he should realize
that such conduct is highly unprofessional.
Signed at Ottawa, Canada, this 21st
day of September 2010.
“Diane Campbell”
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