Brulé,
T.C.C.J.:—These
are
appeals
for
the
taxpayer's
1984
and
1985
taxation
years
in
which
the
Minister
of
National
Revenue
("Minister")
assessed
the
appellant
for
income
tax
within
the
meaning
of
paragraph
212(1)(d)
of
the
Income
Tax
Act
("Act")
plus
interest
and
penalties.
Facts
At
the
outset
of
the
hearing
the
Court
was
given
a
copy
of
an:
AGREED
PARTIAL
STATEMENT
OF
FACTS
1.
Viceroy
Rubber
&
Plastics
Ltd.
("Viceroy")
was
incorporated
under
the
Ontario
Business
Corporations
Act
by
Articles
of
Incorporation
issued
October
22,
1982.
2.
Viceroy
was
created
for
the
main
purpose
of
purchasing
and
operating
the
assets
of
Viceroy
Manufacturing
Company
Ltd.
("Manufacturing"),
an
unrelated
corporation,
which
was
in
receivership.
The
controlling
shareholder
and
President
of
Viceroy,
Mr.
Ron
Bruhm,
caused
the
acquisition
of
the
insolvent
manufacturer
for
the
sole
purpose
of
revitalizing
its
operations
and
establishing
a
viable
manufacturing
concern.
Viceroy
is
now
a
financially
stable
manufacturer
with
significant
business
operations
which
employs
an
average
of
approximately
150
Canadians
annually.
3.
The
assets
acquired
along
with
the
insolvent
operations
of
Manufacturing
included
the
Schoeller
moulds,
used
principally
for
the
production
of
certain
plastic
soft
drink
containers.
4.
On
the
acquisition,
Viceroy
intended
to
use
the
Schoeller
moulds
to
produce
the
soft
drink
cases.
5.
Schoeller
International
GMBH
&
Co.
("GMBH")
originally
licensed
the
rights
to
the
use
of
the
moulds
to
Canadian
Battery
Containers
Ltd.
(”
Battery")
pursuant
to
an
agreement
dated
June
12,
1970.
Battery
subsequently
assigned
the
benefits
of
that
license
agreement
to
Viceroy
Plastic
Packages
Ltd.
(’
Plastic")
with
the
consent
of
GMBH.
Plastic
then
amalgamated
with
Manufacturing
and
continued
its
operations
in
the
merged
corporation.
6.
Pursuant
to
an
agreement
executed
in
May
1980,
GMBH
and
Manufacturing
agreed
to
renew
the
original
license
agreement.
The
renewal
was
effective
to
December
31,
1982.
7.
After
Viceroy's
acquisition
of
the
Schoeller
moulds,
GMBH,
through
its
solicitors
in
Canada,
McCarthy
and
McCarthy,
asserted
its
rights
to
the
patented
inventions.
In
that
letter,
GMBH
agreed
not
to
take
legal
action
against
Viceroy
provided
it
did
not
use
the
Schoeller
moulds
in
the
production
of
manufactured
products.
The
implicit
claim
in
the
letter
was
that
Viceroy
would
have
to
negotiate
licensing
arrangements
with
GMBH
in
order
to
have
free
and
unfettered
rights
to
use
the
moulds
in
a
manufacturing
process.
Viceroy
discontinued
its
use
of
the
Schoeller
moulds
in
its
operations
subsequent
to
the
receipt
of
the
McCarthy
letter.
8.
In
the
spring
of
1983,
Viceroy
commenced
negotiations
with
Mr.
Von
Obrelande
("Von
Obrelande”)
with
respect
to
the
use
of
the
Schoeller
moulds.
Von
Obrelande
had
led
Viceroy’s
management
to
believe
that
Intel-Prop
Holdings
Ltd.
(“Intel-Prop”)
was
in
a
position
to
negotiate
a
satisfactory
resolution
of
the
claims
which
GMBH
made
with
respect
to
its
entitlement
to
regulate
the
use
of
the
Schoeller
moulds.
Viceroy's
management
was
aware
that
Von
Obrelande
had
had,
in
the
past,
other
dealings
with
GMBH
and
was
potentially
in
a
position
to
resolve
the
licensing
issue.
9.
To
the
best
of
Viceroy's
knowledge,
Von
Obrelande
was
and
is
an
agent
or
officer
of
Intel-Prop,
Grand
Cayman
corporation.
Von
Obrelande
did
not,
at
any
time
during
the
negotiations,
to
Viceroy's
knowledge,
travel
to
Canada
in
relation
to
the
negotiations.
All
discussions
between
the
two
corporations
were
facilitated
through
meetings
outside
Canada,
by
telephone
and
through
correspondence.
10.
Von
Obrelande
and
Intel-Prop
deal
at
arm's
length
with
Viceroy.
Viceroy
was
Originally
introduced
to
Intel-Prop
by
the
Ontario
Ministry
of
Industry
in
the
late
19705.
The
Ministry
was
promoting
Intel-Prop
as
an
international
business
partner
for
Canadian
industrial
business
operations.
Further
introductions
to
Intel-Prop
were
made
by
the
Ministry
on
a
subsequent
trade
mission
to
Europe
in
which
Viceroy's
management
participated
on
the
Ministry's
invitation.
11.
Mr.
Bruhm
in
his
capacity
as
president
of
Viceroy
agreed
by
letter
dated
June
15,
1983
to
sell
all
of
Viceroy's
interest
in
the
Schoeller
moulds
to
Intel-Prop
for
$250,000.
12.
At
the
time
this
offer
was
made,
Viceroy
was
experiencing
labour
difficulties.
13.
In
order
to
resolve
licensing
issues
with
GMBH,
Intel-Prop
was,
to
the
best
of
Viceroy's
knowledge,
required
to
have
title
to
the
physical
assets
of
the
moulds.
In
this
way,
Intel-Prop
had
legal
standing
to
even
broach
the
matter
with
GMBH.
14.
A
"Capital
Lease
Purchase
Agreement”
dated
October
1,
1983
was
executed
by
Viceroy
and
Intel-Prop
which
provided
that
Intel-Prop
would
purchase
from
Viceroy
the
Schoeller
moulds
for
$250,000
(paragraph
3)
and
make
arrangements
with
Schoeller
to
permit
Viceroy
to
use
the
Schoeller
moulds
(paragraphs
1
&
2).
The
agreement
also
provided
that
Viceroy
warranted
that
it
would
be
able
to
purchase
assets
of
Dresden
Industries
Ltd.
(“Dresden”),
including
manufacturing
facilities
(buildings)
for
$500,000
and
equipment
for
$1,520,000
(paragraph
8).
The
Dresden
assets
included
Dresden
moulds
(paragraph
10).
15.
Viceroy
agreed
with
Intel-Prop
to
lease
all
of
the
moulds
at
an
annual
fee
of
$900,000,
for
a
term
of
three
years
from
October
1,
1983.
Upon
the
expiration
of
the
three-year
term,
Viceroy
had
the
right
to
repurchase
the
moulds
for
$1.
The
agreement
could
be
terminated
by
Viceroy
at
any
time
prior
to
the
expiration
of
the
three-year
term,
on
condition
that
Viceroy
paid
to
Intel-Prop
all
outstanding
arrears.
16.
In
1984
and
1985
the
appellant
paid
or
credited
amounts
totalling
$900,000
($625,000
in
1984
and
$275,000
in
1985)
to
Intel-Prop
in
respect
of
the
agreement.
Issue
The
sole
issue
in
these
appeals
is
whether
or
not
the
payments
made
by
the
appellant
in
the
1984
and
1985
taxation
years
in
accordance
with
the
agreement
were
in
substance
payments
of
rent
or
other
similar
payments
to
a
nonresident
and
therefore
subject
to
withholding
tax
or
whether
these
payments
were
in
fact
for
the
purchase
of
capital
property
in
which
case
no
withholding
tax
was
exigible.
Appellant's
position
Two
matters
came
up
in
evidence
that
were
not
in
accordance
with
the
appellants
understanding
and
these
were
explained
by
Mr.
Ron
Bruhm
the
CEO
of
the
appellant's
company.
First
of
all,
in
preparing
the
appellant's
income
tax
return
for
1984
the
appellant's
accountant
inadvertently
reported
the
$900,000
payment
to
Intel-
Prop
as
a
lease
payment
on
income
account.
It
is
the
appellant's
position
that
the
$900,000
payment
was
a
capital
expenditure
forming
part
of
the
cost
to
the
appellant
of
the
acquisition
of
the
Schceller
and
Dresden
moulds
and
this
was
subject
to
the
capital
cost
allowance
rules.
The
reporting
of
the
payment
on
income
account
was
an
error
and
an
explanation
was
given
to
the
Court.
Support
for
such
an
error
is
found
in
Thibault
v.
M.N.R.
(1963),
30
Tax
A.B.C.
406,
63
D.T.C.
76.
The
second
matter
was
found
in
the
formal
agreement
between
the
appellant
and
Intel-Prop
wherein
in
clause
13
reference
was
made
to
"rubber
moulds".
This
should
have
read
"plastic
moulds”
and
by
reference
to
other
documents
a
satisfactory
explanation
was
provided
for
the
error.
Counsel
for
the
appellant
submitted
that
no
amount
was
paid
or
credited
by
the
appellant
to
a
non-resident
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
rent,
royalty
or
similar
payment
for
purposes
of
paragraph
212(1)(d)
of
the
Act
as
relied
upon
by
the
Minister.
Furthermore,
the
appellant's
contention
was
that
the
above
payments
were
on
account
of
a
purchase
of
capital
property
(namely,
the
Schoeller
moulds
and
Dresden
moulds)
and
therefore,
paragraph
212(1)(d)
of
the
Act
does
not
apply.
The
following
cases
were
cited
in
support
of
the
appellant's
submissions:
The
Queen
v.
Moore,
[1986]
2
C.T.C.
22,
86
D.T.C.
6325
(F.C.T.D.);
aff'd
[1987]
1
C.T.C.
377,
87
D.T.C.
5215
(F.C.A.);
and
The
Queen
v.
Lagueux
&
Frères
Inc.,
[1974]
C.T.C.
687,
74
D.T.C.
6569
(F.C.T.D.).
Respondent's
position
The
Minister
submitted
that
the
appellant
made
rent
or
other
similar
payments
to
Intel-Prop,
a
non-resident
of
Canada
in
the
1984
and
1985
calendar
years
in
the
amounts
of
$625,000
and
$275,000
respectively.
Pursuant
to
paragraph
212(1)(d)
and
section
215
of
the
Act,
the
appellant
was
required
to
deduct
or
withhold
and
remit
25
per
cent
of
$900,000
in
accordance
with
Part
XIII
of
the
Act,
to
the
Receiver
General
as
withholding
tax.
Given
that
the
appellant
failed
to
do
so,
the
Minister
assessed
withholding
tax
of
$156,250
(25
per
cent
of
$625,000)
and
$68,750
(25
per
cent
of
$275,000)
for
the
1984
and
1985
taxation
years
respectively.
In
addition,
penalties
of
$15,625
(1984)
and
$6,875
(1985)
were
also
levied
by
the
Minister
which
represent
10
per
cent
of
the
amounts
that
should
have
been
deducted
or
withheld
pursuant
to
subsection
227(8)
and
227(10)
of
the
Act.
The
Minister
made
reference
to
the
following
case
law
in
support
of
its
position
:
The
Queen
v.
Saint
John
Shipbuilding
&
Dry
Dock
Co.,
[1980]
C.T.C.
352,
80
D.T.C.
6272
(F.C.A.);
and
The
Queen
v.
Farmparts
Distributing
Ltd.,
[1980]
C.T.C.
205,
80
D.T.C.
6157
(F.C.A.).
Analysis
The
relevant
sections
of
the
Act
as
they
read
in
1984
and
1985
follow.
Subparagraph
212(1)(d)(i)
of
the
Act
read:
Every
non-resident
person
shall
pay
an
income
tax
of
25
per
cent
on
every
amount
that
a
person
resident
in
Canada
pays
or
credits,
or
is
deemed
by
Part
I
to
pay
or
credit,
to
him
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
(d)
rent,
royalty
or
similar
payment
(other
than
an
incremental
resource
royalty
or
an
incremental
production
royalty
within
the
meaning
of
subsection
79(1)
of
the
Petroleum
and
Gas
Revenue
Tax
Act)
including,
but
not
so
as
to
restrict
the
generality
of
the
foregoing,
any
payment
(i)
for
the
use
of
or
for
the
right
to
use
in
Canada
any
property,
invention,
trade
name,
patent,
trade
mark,
design
or
model,
plan,
secret
formula,
process
or
other
thing
whatever,
Section
215
stipulated
that:
When
a
person
pays
or
credits
or
is
deemed
to
have
paid
or
credited
an
amount
on
which
an
income
tax
is
payable
under
this
Part,
he
shall,
notwithstanding
any
agreement
or
any
law
to
the
contrary,
deduct
or
withhold
therefrom
the
amount
of
the
tax
and
forthwith
remit
that
amount
to
the
Receiver
General
on
behalf
of
the
non-resident
person
on
account
of
the
tax
and
shall
submit
therewith
a
statement
in
prescribed
form.
Failure
to
deduct
and
remit
withholding
tax
as
required,
will
render
the
taxpayer
liable
for
the
amount
not
withheld
and
will
further
render
the
taxpayer
liable
to
a
penalty
of
at
least
ten
per
cent
of
the
amounts
owing.
The
important
determination
to
be
made
here
is
whether
or
not
the
dealings
of
the
appellant
with
Inter-Prop
involved
a
lease
or
a
purchase.
Leasing,
as
a
means
of
financing
the
use
of
assets,
has
become
a
popular
trend
and
will
inevitably
carry
with
it
certain
unique
income
tax
implications.
The
Act
provides
no
definition
of
the
word
"lease".
The
Canadian
Institute
of
Chartered
Accountants
Handbook
("CICA")
defines
the
term
“lease”
at
page
1153
as:
the
conveyance,
by
a
lessor
to
a
lessee,
of
the
right
to
use
a
tangible
asset
usually
for
a
specified
period
of
time
in
return
for
rent.
The
Act
does
not
provide
for
a
determination
of
when
a
payment
is
on
account
of
a
purchase
transaction
or
on
account
of
a
lease
transaction.
Consequently,
this
determination
must
be
made
on
consideration
of
the
following:
1.
the
terms
of
the
agreement
between
the
parties
and
2.
the
factual
circumstances
surrounding
the
making
and
execution
of
that
agreement.
A
transaction
is
considered
a
sale
rather
than
a
lease
where
any
one
of
the
following
situations
applies:
1.
the
lessee
following
the
payment
of
specific
rental
costs,
automatically
acquires
title
to
the
property;
2.
the
lessee
is
required
to
purchase
the
property
from
the
lessor
during
or
upon
termination
of
the
lease
agreement
or
is
required
to
guarantee
that
the
lessor
will
receive
the
entire
option
price
from
the
lessee
or
a
third
party;
3.
the
lessee
has
the
right
during
or
upon
the
expiry
of
the
lease
to
acquire
the
property
at
a
price
which
at
the
commencement
of
the
lease
is
substantially
less
than
the
probable
fair
market
value
of
the
property
when
the
lessee
is
permitted
to
acquire
the
property;
or
4.
the
lessee
has
the
right
during
or
upon
the
expiry
of
the
lease
to
acquire
the
property
at
a
cost
and
pursuant
to
terms
and
conditions
which
at
the
commencement
of
the
lease
are
such
that
no
reasonable
person
would
fail
to
exercise
the
option
to
purchase.
(See
Interpretation
Bulletin
No.
IT-233R
dated
February
11,
1983
at
clause
3.)
When
it
is
determined
that
the
lease
is
one
of
sale,
the
lessee
must
treat
the
transaction
as
an
acquisition
of
an
asset
and
an
assumption
of
a
liability
as
at
the
commencement
of
the
lease.
It
is
important
to
note
that
where
certain
obligations
(i.e.,
taxes,
insurance
etc.)
incidental
to
ownership
of
property
become
the
responsibility
of
the
lessee,
this
fact
will
not
in
and
of
itself
determine
conclusively
whether
the
transaction
is
one
of
sale
but
will
only
corroborate
support
that
the
transaction
is
perhaps
a
sale.
The
question
of
whether
a
transaction
amounts
to
a
lease
or
sale
is
determined
in
light
of
a
variety
of
factors.
The
principal
test,
according
to
the
CICA,
for
such
a
determination
is
whether
the
transaction
conveys
all
the
"benefit
and
risks”
of
ownership
to
the
lessee.
(See
CICA
at
p.
1155
paragraph
3065.05.)
Benefits
may
be
represented
by
the
expectation
of
profitable
operation
over
the
property's
economic
life
and
of
gain
from
appreciation
in
value
or
realization
of
a
residual
value.
Risks
include
possibilities
of
losses
from
idle
capacity
or
technological
obsolescence
and
of
variations
in
return
due
to
changing
economic
conditions.
In
this
regard,
where
the
lessor
is
ultimately
at
risk,
the
transaction
is
generally
viewed
as
a
lease
whereas
if
the
lessee
is
at
risk,
the
transaction
is
viewed
as
a
Sale.
Yet
another
consideration
is
the
issue
of
title
to
the
property.
Incidents
of
title
include
possession,
use,
and
risk
of
loss
and
should
be
considered
in
determining
whether
a
transaction
bears
the
character
of
a
lease
or
sale.
Many
cases
have
been
decided
by
the
Courts
on
this
topic
of
sale
or
lease.
It
is
interesting
to
consider
not
only
cases
advanced
to
the
Court
in
these
appeals,
but
others
as
well.
In
United
Geophysical
Co.
of
Canada
v.
M.N.R.,
[1961]
C.T.C.
134,61
D.T.C.
1099
(Ex.
Ct.),
the
Court
concluded
that
this
case
involved"
rent"
and
withholding
tax
should
have
been
deducted
at
source.
Of
importance
to
the
present
appeal
and
making
a
decision
are
the
words
of
Thurlow,
J.,
found
at
page
146
(D.T.C.
1105):
Now
it
goes
without
saying
that
the
mere
use
of
the
words"rent"
and
"rental"
in
the
agreement
between
the
corporation
and
the
appellant
is
not
necessarily
conclusive
on
the
question
whether
the
payment
so
provided
for
is
in
fact
a
rent
.
.
.
but
their
use
in
the
agreement,
to
my
mind,
affords
some
indication
that
the
payment
which
was
to
be
determined,
having
regard
to
reasonableness
and
the
cost
of
each
item
to
be“
rented",
was
to
be
a
payment
in
the
nature
of
rent
for
the
equipment.
The
Federal
Court-Trial
Division
held,
as
per
Décary,
J.,
in
The
Queen
v.
Lagueux
&
Frères
Inc.,
supra,
at
page
6572:
In
my
opinion
fiscal
law
is
an
accessory
system,
which
applies
only
to
the
effects
produced
by
contracts.
Once
the
nature
of
the
contracts
is
determined
by
the
civil
law,
the
Income
Tax
Act
comes
into
effect,
but
only
then,
to
place
fiscal
consequences
on
those
contracts
.
.
.
.
Application
of
the
Income
Tax
Act
is
subject
to
a
civil
determination,
whether
such
a
determination
be
according
to
civil
or
common
law.
The
following
passage
of
the
Superior
Court
of
Quebec
decision,
in
Thibault
v.
Auger,
[1950]
Q.S.C.
343,
was
cited
by
Décary,
J.,
at
page
691
(D.T.C.
6572):
In
interpreting
a
contract
the
Court
must
seek
to
discover
the
intent
of
the
parties,
whatever
the
name
they
have
given
to
it.
They
may
in
fact
state
that
they
have
sold
or
rented
a
thing,
but
it
is
not
within
their
power
to
alter
the
meaning
of
the
contract
itself,
and
if
that
contract,
which
they
call
one
of
rental,
has
all
the
characteristics
of
a
sale,
it
will
be
governed,
not
by
the
principles
relating
to
rental,
but
by
those
relating
to
sale.
This
will
be
decided
by
reference
to
the
wording
of
the
contract
itself,
its
purpose
and
the
circumstances
surrounding
the
conclusion
of
such
a
contract.
The
Court,
in
Lagueux,
continued
at
pages
692-93
(D.T.C.
6573):
.
.
.
the
Court
concludes
that
the
payments
as
a
whole
were
made
in
order
to
purchase
the
equipment;
indeed,
the
total
amount
of
the
payments
made
during
the
period
of
alleged
rental
are
wholly
deductible
from
the
purchase
price
an
correspond
exactly
to
the
purchase
price
of
the
equipment
plus
interest
payable,
during
the
period
of
alleged
rental,
on
the
balance
of
the
purchase
price.
I
therefore
conclude
that
these
were
conditional
sales,
on
a
suspensive
condition,
and
not
leases.
Similarly,
in
Purdy
v.
M.N.R.,
[1985]
1
C.T.C.
2295,
85
D.T.C.
254,
Christie,
J.,
set
out
at
pages
2295-96
(D.T.C.
256):
It
must
be
borne
in
mind
that
in
deciding
questions
pertaining
to
liability
for
income
tax
the
manner
in
which
parties
to
transactions
choose
to
label
them
does
not
necessarily
govern.
What
must
be
done
is
to
determine
what
on
the
evidence
is
the
substance
or
true
character
of
the
transaction
and
render
judgment
accordingly.
In
M.N.R.
v.
Saskatchewan
Co-operative
Wheat
Producers
Ltd.,
[1928-34]
C.T.C.
47,
1
D.T.C.
186,
Lamont,
J.
in
delivering
the
judgment
of
the
Supreme
Court
of
Canada
said
at
page
54
(D.T.C.
189):
In
revenue
cases
it
is
a
well
recognized
principle
that"
regard
must
be
had
to
the
substance
of
the
transactions
relied
on
to
bring
the
subject
within
the
charge
to
a
duty
and
the
form
may
be
disregarded”.
Pollock,
M.R.,
in
Inland
Revenue
Commissioners
v.
Eccentric
Club,
Ltd.,
[1924]
1
K.B.,
390,
at
page
414.
Viscount
Simon
in
delivering
the
judgment
of
the
House
of
Lords
in
Commissioners
of
Inland
Revenue
v.
Wesleyan
and
General
Assurance
Society
(1948),
30
T.C.
11,
said
at
page
25:
It
may
be
well
to
repeat
two
propositions
which
are
well
established
in
the
application
of
the
law
relating
to
income
tax.
First,
the
name
given
to
a
transaction
by
the
parties
concerned
does
not
necessarily
decide
the
nature
of
the
transaction.
To
call
a
payment
a
loan
if
it
is
really
an
annuity
does
not
assist
the
taxpayer,
any
more
than
to
call
an
item
a
capital
payment
would
prevent
it
from
being
regarded
as
an
income
payment
if
that
is
its
true
nature.
The
question
always
is
what
is
the
real
character
of
the
payment,
not
what
the
parties
call
it.
In
Front
&
Simcoe
Ltd.
v.
M.N.R.,
[1960]
C.T.C.
123,
60
D.T.C.
1081,
Cameron,
J.
said
at
page
132
(D.T.C.
1085):
In
Simon's
Income
Tax,
Second
Ed.,
Vol.
1,
page
50,
the
author,
after
referring
to
a
number
of
decisions,
states:
The
true
principle,
then
is
that
the
taxing
Acts
are
to
be
applied
in
accordance
with
the
legal
rights
of
the
parties
to
a
transaction.
It
is
those
rights
which
determine
what
is
the
“substance”
of
the
transaction
in
the
correct
usage
of
that
term.
Reading”
substance”
in
that
way,
it
is
still
true
to
say
that
the
substance
of
a
transaction
prevails
over
mere
nomenclature.
The
Tax
Court
allowed
the
appeal
and
stated
at
page
2296
(D.T.C.
257):
.
.
.
my
assessment
of
the
evidence
is
that
in
truth
and
substance
a
rental
agreement
never
existed
between
R
and
the
appellant
regarding
the
harvester
The
addendum
did
not
reflect
the
reality
of
the
legal
relationship
between
the
appellant
and
renders.
Further,
the
Tax
Court
in
Grand
Toys
Ltd.
v.
M.N.R.,
[1990]
1
C.T.C.
2165,
90
D.T.C.
1059
held,
per
Lamarre
Proulx,
J.,
at
pages
2167-68
(D.T.C.
1061):
In
my
view,
this
means
that
the
use
of
the
word
“
royalties”
in
an
agreement
between
two
parties
is
an
element
to
be
considered
in
the
determination
of
whether
a
payment
is
a
royalty
or
not
but
it
does
not
mean
that
a
payment
that
is
described
as
a
royalty
is
necessarily
a
royalty.
The
nature
of
a
contractual
obligation
is
determined
by
trying
to
ascertain
from
a
careful
review
of
the
agreement,
what
was
the
intent
of
the
parties,
what
was
the
nature
of
their
undertakings
or
in
other
terms
what
is
the
agreement
about.
In
this
instance,
the
appeal
was
allowed
on
the
grounds
that
the
payments
were
not
found
to
be
in
the
nature
of
"rents,
royalties
or
similar
payments
or
any
payment
for
the
use
of
any
property".
In
Tri-Star
Leasing
(London)
Inc.
v.
M.N.R.,
[1992]
2
C.T.C.
2099,
92
D.T.C.
1786,
once
again
the
Tax
Court
held,
per
Sarchuk,
J.,
at
page
2104
(D.T.C.
1790):
In
order
to
determine
the
nature
of
the
agreement
before
me
it
is
necessary
to
look
at
the
language
of
the
contract
itself,
its
purpose
and
the
circumstances
surrounding
the
conclusion
of
the
contract.
To
that
extent
it
is
appropriate
to
look
to
the
common
intent
of
the
parties
in
addition
to
looking
at
the
manner
in
which
the
contract
is
framed.
The
appeal
was
dismissed
on
the
basis
that
the
leases
in
question
did
not
amount
to
a
sale
or
a
disposition
of
assets.
The
Court
considered
the
deliberate
absence
in
the
agreement
of
an
option
to
purchase
to
the
lessee
as
a
determining
factor
in
its
decision.
In
determining
the
true
character
of
a
contract
as
one
of
lease
or
sale,
the
Courts
have
examined
closely
the
unique
provisions
within
the
documents
themselves.
Particular
attention
has
been
given
to
option
to
purchase
clauses
within
the
contracts.
In
Chibougamau
Lumber
Ltée
v.
M.N.R.,
[1973]
C.T.C.
2174,
73
D.T.C.
134,
the
Court
examined
an
equipment
lease
whereby
the
appellant
entered
into
contracts
to
lease
machinery
in
return
for
payment
of
a
monthly
rental
fee.
Interestingly,
these
contracts
provided
the
appellant
with
an
option
to
purchase
the
equipment
for
one
dollar
at
the
termination
of
the
lease
period.
The
Tax
Review
Board
held,
at
page
2178
(D.T.C.
137):
The
agreements
were
not,
in
my
view,
executed
in
the
manner,
or
penned
in
the
manner,
in
which
they
were
intended
to
operate
between
the
parties.
There
is
no
reason
whatsoever
for
a
sound
businessman
to
forsake
a
profit
of
such
magnitude
unless
it
is
an
attempt
to
hide
the
true
intention
of
the
parties
to
the
agreements
.
.
.
.
In
summary,
then,
in
my
view,
in
each
instance
these
contracts
represented
no
more
than
a
purchase
on
a
time-payment
plan
by
the
appellant,
and
were
not,
by
any
stretch
of
the
imagination,
leases
in
the
true
legal
sense
of
the
term.
Similarly,
in
C.R.
Stewart
Equipment
Ltd.
v.
M.N.R.,
[1977]
C.T.C.
2232,
77
D.T.C.
176,
lease
agreements
containing
an
option
to
purchase
clause
were
examined
by
the
Tax
Review
Board.
Taylor,
J.,
quoting
from
the
Interpretation
Bulletin
IT-17,
stated
at
page
180:
As
there
is
no
special
provision
in
the
Income
Tax
Act
dealing
with
such
agreements,
this
determination
must
be
made
on
the
basis
of
general
law
and
the
provisions
of
the
agreement
itself.
The
case
law
also
suggests
that
the
Court
must
consider
what
precisely
is
involved
in
a
transaction.
In
other
words,
what
are
the
rights
being
transferred
between
the
parties
to
an
agreement?
In
Vauban
Productions
v.
M.N.R.,
[1973]
C.T.C.
2230,
73
D.T.C.
184,
an
agreement
made
with
CBC
was
evaluated
on
the
basis
of
whether
it
was
a
lease
or
an
outright
sale
of
rights
to
films.
The
Tax
Review
Board
held
that
the
agreement
contained
all
the
elements
of
a
lease
and
the
fact
that
payment
was
made
in
one
lump
sum
could
not
alter
the
payments
as
on
account
of
a"
lease"
and
therefore
withholding
tax
was
exigible.
This
decision
was
subsequently
appealed
to
the
Federal
Court-Trial
Division,
[1975]
C.T.C.
511,
75
D.T.C.
5371,
which
held
per
Addy,
J.,
at
pages
514-15
(D.T.C.
5373):
The
sole
question
to
be
determined
therefore
is
whether
the
contract
between
the
plaintiff
and
the
CBC
was
for
the
leasing
of
films
or
whether
it
was
one
for
the
outright
sale
of
rights.
In
the
former
case,
there
would
be
no
exemption
from
the
withholding
tax
and
in
the
latter
case,
there
would
be.
When
attempting
to
determine
the
true
nature
or
essence
of
a
contract,
as
well
as
when
interpreting
a
particular
clause,
one
must
not
only
examine
the
words
used
by
the
parties
but,
with
due
regard
to
the
actual
subject
matter,
one
must
construe
those
words
in
the
light
of
the
entire
bargain
between
the
parties
as
evidenced
by
the
contract
as
a
whole.
In
doing
so,
although
every
effort
must
be
made
to
attribute
some
meaning
and
purpose
to
all
of
the
words
used,
it
is
at
times
necessary,
especially
in
the
case
of
contracts
written
on
printed
forms,
to
completely
disregard
certain
provisions
when
they
are
obviously
totally
redundant,
contradictory,
or
meaningless
having
regard
to
the
contract
as
a
whole.
As
evidenced
from
Exhibit
I
at
page
4
of
the
agreed
statement
of
facts,
the
plaintiff
distributor
acquired
certain
rights
which
would
include
the
right
to
either
sell
the
acquired
rights
to
others
or
to
show
the
films
itself
on
Canadian
television
in
the
French
language.
On
the
other
hand,
the
CBC
only
acquired
the
right
to
show
the
films
on
its
own
network
and
not
the
right
to
sell,
lease
or
assign
to
others
the
rights
acquired
by
it.
It
is
therefore
quite
clear
that
the
CBC
did
not
receive
all
of
the
rights
which
the
distributor
Vauban
had
received.
In
other
words,
the
rights
of
the
latter
were
distributor
and
user's
rights
while
those
of
the
former
were
solely
user's
rights.
And
at
pages
515-16
(D.T.C.
5374):
It
seems
quite
evident,
therefore,
that
not
only
did
the
CBC
not
receive
everything
that
Vauban
had
originally
acquired
but,
Vauban
definitely
retained
a
residuary
possessory
right
to
the
films
which
it
had
received
from
the
original
distributor
or
owner.
Where
.
.
.
there
has
not
been
an
absolute
transfer
of
the
rights
of
the
distributor
of
films
to
another
party
as
a
user,
then
.
.
.
the
transaction
is
to
be
considered
a
leasing
of
film
rights.
In
other
words,
there
must
be
a
total
transfer
of
all
the
rights
of
the
indicated
lessor
to
the
lessee
in
an
agreement
for
there
to
be
a
transaction
of
sale.
Finally,
in
the
case
of
The
Queen
v.
Moore,
supra,
Rouleau,
J.,
held,
at
page
32
(D.T.C.
6332):
I
am
of
the
view
that
I
am
confronted
here
with
what
is
generally
referred
to
as
a
"capital
lease”
in
accounting
circles.
In
International
Survey
of
Accounting
Principles
and
Reporting
Practices
(edited
by
R.D.
Fitzgerald,
A.D.
Stickler
and
T.R.
Watts
for
Price
Waterhouse
International,
distributed
by
Butterworths,
Scarborough,
Ontario,
1979)
the
authors
state
at
page
17:
[O]ften
the
lessee
may
acquire
ownership
of
the
property
at
the
end
of
the
lease
on
very
favourable
or
nominal
terms.
In
other
words,
the
lease
has
sometimes
become
a
form
of
deferred
purchase
and
many
enterprises
find
it
advantageous
to
lease
many
or
all
of
their
assets.
Such
leases
often
also
provide
taxation
benefits
to
the
lessor
and
to
the
lessee.
In
these
cases,
although
the
contract
is
legally
a
lease,
it
is
in
substance
equivalent
to
a
purchase
with
the
purchase
price
being
paid
in
instalments.
Although
legal
title
to
the
ownership
of
the
property
may
not
pass
until
the
end
of
the
lease,
in
reality
the
benefits
and
risks
of
ownership
pass
from
the
lessor
to
the
lessee
at
the
inception
of
the
lease
term.
It
is
well
established
in
many
countries
that
accounting
should
attempt
to
reflect
the
substance
of
a
transaction
rather
than
merely
record
the
legal
form.
Where
this
concept
is
accepted,
it
is
logical
to
suggest
that
a
lease
which
in
effect
transfers
the
benefits
and
risks
of
ownership
should
be
accounted
for
as
a
purchase
by
the
lessee
and
as
a
sale
by
the
lessor.
Notwithstanding
the
absence
of
transfer
of
title,
the
property
would
be
recorded
in
the
balance
sheet
of
the
lessee
as
an
asset
and
a
corresponding
liability
would
be
recorded
for
future
rental
payments.
.
.
.
For
example,
the
Canadian
pronouncement
is
stated
as
a
general
principle,
with
guidance
but
no
precise
rules
for
its
application
.
.
.
.
Citing
from
the
CICA
Handbook,
at
subsection
3065.09,
Rouleau
J.,
states,
also
at
page
32
(D.T.C.
6332):
A
lease
that
transfers
substantially
all
of
the
benefits
and
risks
of
ownership
related
to
the
leased
property
from
the
lessor
to
the
lessee
should
be
accounted
for
as
a
capital
lease
by
the
lessee
and
as
a
sales
type
or
direct
financing
lease
by
the
lessor
A
lease
where
the
benefits
and
risks
of
ownership
related
to
the
leased
property
are
substantially
retained
by
the
lessor
should
be
accounted
for
as
an
operating
lease
by
the
lessee
and
lessor.
He
continues
at
pages
32-33
(D.T.C.
6333):
The
following
definitions
have
been
adopted
for
purposes
of
this
section:
(a)
Capital
lease
is
a
lease
that,
from
the
point
of
view
of
the
lessee,
transfers
substantially
all
the
benefits
and
risks
incident
to
ownership
of
property
to
the
lessee.
(e)
Bargain
purchase
option
is
a
provision
allowing
the
lessee,
at
its
option,
to
purchase
the
leased
property
for
a
price
which
is
sufficiently
lower
than
the
expected
fair
value
of
the
property,
at
the
date
the
option
becomes
exercisable,
that
exercise
of
the
option
appears,
at
the
inception
of
the
lease,
to
be
reasonably
assured.
The
Court
concluded
that
the
defendant's
lease
was
a
"capital
lease”
by
considering
three
factors:
1.
reasonable
assurance
that
the
investors
(lessee)
would
exercise
their
option
to
purchase;
2.
lessee
acquired
substantially
all
of
the
benefits
and
risks
incidental
to
ownership
of
property;
and
3.
true
intention
of
the
parties
acquiring
this
leasehold
interest.
The
Federal
Court
of
Appeal
discussed
the
extent
to
which
subparagraph
212(1)(d)(i)
of
the
Act
applied
to
certain
payments
in
the
following
two
cases:
Mr.
Justice
Heald,
in
The
Queen
v.
Farmparts
Distributing
Ltd.,
supra,
held
that
payments
must
be
measured
against
the
strict
words
of
the
paragraph
definitions
and
exclusions
[in
a
contract].
In
addition,
the
Court
explained
that
payments
for
an
exclusive
territorial
right
to
buy
certain
machines
from
a
nonresident
and
resell
them
in
Canada
was
not
a
payment
for
the
right
to
use
the
machine
and
accordingly
was
not
subject
to
subparagraph
212(1)(d)(i)
of
the
Act.
However,
payments
for
the
use
of
trade
names
and
logos
and
payment
for
the
right
to
market
a
''merchandising
concept"
were
held
to
be
subject
to
subparagraph
212(1)(d)(i)
withholding.
The
appeal
was
dismissed.
In
The
Queen
v.
Saint
John
Shipbuilding
&
Dry
Dock
Co.,
supra,
Thurlow,
J.,
was"
not
satisfied
that
the
provision
(namely
subparagraph
212(1)(d)(i)
of
the
Act)
is
not
broad
enough
to
include
the
payments
in
question”,
but
did
not
finally
rule
on
the
issue
because
he
found
the
payments
were
treaty-protected
and
therefore
not
subject
to
Canadian
tax.
The
Court
discussed
what
should
be
included
within
the
terms
of
"rentals
and
royalties”
and
essentially
concluded
that
in
order
to
characterize
payments
as
"rent
or
royalties”,
one
must
look
to
the
following
factors:
1.
time
limitation
with
respect
to
use
or
right
to
use;
2.
payments
proportionate
to
or
in
any
way
related
to
use
or
extent
of
use
or
to
revenues
or
profits
therefrom
or
to
a
period
of
use;
and
3.
right
to
use
information
and
objects
of
the
lessor
as
well
as
what
is
produced
by
using
them
which
is
at
the
discretion
of
the
lessor.
As
mentioned
above,
Interpretation
Bulletin
IT-233R
gives
an
indication
of
the
factors
necessary
to
consider
in
making
a
determination
as
to
whether
a
transaction
or
a
series
of
transactions
may
be
considered
as
a
lease
or
a
sale
arrangement.
Sarchuk,
J.,
in
a
recent
decision
in
January
1993,
that
of
Kamsel
Leasing
Inc.
v.
M.N.R.,
said
(see
[1993]
2
C.T.C.
2279):
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.
It
is
evident
from
the
case
law
that
in
determining
the
true
character
of
an
agreement
between
parties,
the
substance
(as
opposed
to
the
form)
of
the
agreement
is
of
paramount
importance.
In
assessing
the
common
intent
of
the
parties
to
a
transaction,
one
must
analyze
the
agreement
itself,
the
language
used
therein,
the
purpose
and
the
circumstances
surrounding
the
transaction
in
their
entirety.
All
of
these
factors
must
be
scrutinized
in
order
to
reach
a
determination
on
the
issue
of
whether
a
transaction
is
on
account
of
a
sale
or
on
account
of
a
lease.
No
one
factor
is
determinative
in
and
of
itself
but
will
corroborate
or
lend
weight
to
one
position
or
the
other.
Provision
for
options
to
purchase
must
be
closely
evaluated.
In
addition,
consideration
must
be
given
to
whether
or
not
“benefits
and
risks"
of
ownership
have
been
transferred
from
one
party
to
another.
In
the
case
at
bar
an
analysis
would
indicate
a
sale
transaction
rather
than
a
lease
arrangement.
In
accordance
with
the
Agreement
herein,
the
appellant,
lessee,
will
have
the
option
to
exercise
a
right
to
repurchase
from
the
lessor,
Intel-Prop,
the
Capital
property
(namely
the
moulds)
at
the
expiration
of
the
lease
agreement
on
nominal
value
of
one
dollar.
Consequently,
the
arrangement
appears
in
essence
to
amount
to
a
deferred
purchase
such
that
the
appellant
essentially
pays
for
the
capital
property
by
way
of
instalment
payments
over
a
three-year
period
(term
of
the
lease).
Although
title
to
ownership
of
the
moulds
is
transferred
to
Intel-Prop
pursuant
to
the
agreement,
for
reasons
stated
in
evidence
this
factor
in
and
of
itself
will
not
determine
the
proper
characterization
of
the
transaction
in
question.
Furthermore,
it
appears
as
though
Intel-Prop
has
sole
and
exclusive
responsibility
to
maintain
the
moulds.
However,
the
agreement
stipulates
that
the
appellant
is
to
provide
the
necessary
maintenance
costs
and
Intel-Prop
will
subsequently
provide
for
a
reimbursement
by
way
of
credit
towards
the
appellant's
future
lease
payments.
In
conclusion,
while
it
appears
as
though
the
agreement
legally
exhibits
the
form
of
a
lease
in
substance
it
bears
the
characteristics
of
a
sale.
These
appeals
are
allowed,
with
costs,
and
the
matter
is
returned
to
the
Minister
for
reconsideration
and
reassessment.
Appeals
allowed.
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