Date: 20011107
Docket: 1999-2684-IT-G
BETWEEN:
JOHN STEVENSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 1999-2685-IT-G
BETWEEN:
KELVIN STEVENSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
These appeals were heard together and are from assessments for
the 1993, 1994, 1995, 1996 and 1997 taxation years of the
appellants. Many of the issues have been settled.
[2]
Specifically, the parties agreed to the following.
(a)
Based on my oral reasons in Clifford James Savage and
Daryl Savage v. The Queen, 1999-1851(IT)G and
1999-1852(IT)G, rendered immediately prior to the hearing of
these appeals, the respondent concedes the appellants'
position with respect to the value of the equipment traded in on
the purchase of a new tractor and combine and therefore the
appellants' position on the cost of the new combine and
tractor.
(b)
It is agreed that the tractor was acquired prior to 1994 and
therefore qualifies for the investment tax credit, and was not
available for use until 1994 for purposes of capital cost
allowance. It is also agreed that the trade in of the tractor was
made in 1994 and that therefore the disposition took place in
1994.
(c)
It is further agreed that the combine that was acquired was not
available for use before 1994 and that the combine that was
traded in was disposed of in 1994.
[3]
To ensure that the formal judgments accurately respect the
concessions made by the parties I have asked counsel for the
appellants to draft the formal judgments and that they be
approved as to form by counsel for the respondent.
[4]
The sole remaining issue is whether a combine purchased by the
appellants was a "qualified small-business property" or
a "qualified property" within the meaning of
subsection 127(9) of the Income Tax Act. For the
appellants to be entitled to an investment tax credit in respect
of the combine it has to be "qualified property", as
defined, and to have been acquired after December 2, 1992
and before 1994. It is admitted that the combine was acquired
between those dates and that it otherwise meets the criteria of
"qualified small-business property" subject to one
exception. The respondent alleges that it did not meet the
condition in the definition of "qualified property" or
"qualified small-business property" in
subsection 127(9) of the Income Tax Act in that it
had
not been used, or acquired for use or lease, for any purpose
whatever before it was acquired by the taxpayer ...
[5]
Subsection 127(9) grants an investment tax credit in respect
of the cost of qualified small-business property. It is obviously
incentive legislation designed to encourage businesses, including
farming businesses, to invest in new machinery and equipment.
Evidently the incentive was effective. Both the appellants,
father and son, testified that it was one of the considerations
that motivated their buying the combine when they did. This fact,
although interesting, is not particularly germane to what has to
be decided here.
[6]
What is fatal to the appellants' claim according to the Crown
is that the combine — a 1993 Duetz-Allis R72 combine with a
cost of $210,000 was tested by an organization set up by the
Government of Saskatchewan to assist the agricultural industry,
the Prairie Agricultural Machinery Institute ("PAMI").
The manufacturer delivered the combine to Humboldt, Saskatchewan
where it was tested in working conditions in the fields of
farmers. It actually harvested grain.
[7]
During the period of testing title remained with the
manufacturer. PAMI did not purchase or acquire any interest in
the combine. When testing was completed it was delivered to the
dealer, Farm World Equipment Ltd., who sold it to the appellants
as a new vehicle with a new vehicle warranty.
[8] A
great deal of time at trial was devoted to disputing the
Crown's allegation that the combine was "used" by
PAMI for its own purposes for a total of 337 hours. I shall deal
briefly with this point although I do not regard the number of
hours of testing as particularly relevant to the question whether
testing a piece of equipment owned by a manufacturer prior to its
sale to a customer constitutes "use" for the purposes
of subsection 127(9).
[9]
Mr. Wassermann, an engineer employed by PAMI, testified that
the machine operated in the field at most about 115 hours.
PAMI usually attaches its own meter which tests only when the
machine is threshing. The engine meter on the combine measures
(a) when the machine is threshing, (b) when the machine is
moving, (c) when the machine is idling, (d) when the key is
turned on.
[10] The
documents upon which the Crown relies in arriving at a figure of
337 hours are not indicative of the field or operating
hours.
[11] I note in
passing that the testing of the combine done by PAMI is
painstaking, exhaustive and meticulous, to judge by its reports
filed in evidence.
[12]
Mr. David Cook, the president of Farm World Equipment Ltd.
confirmed Mr. Wassermann's conclusions — 1317
acres were harvested in 1992 and 50 in 1993. Normally this
combine would harvest 25 acres per hour. To harvest 1317 acres
would therefore in normal circumstances require about 53 hours.
It required 115 hours because of the frequent stops and
tests that were done.
[13] The life
expectancy of these combines is 3,500 field hours. 40 or 115
hours is an extremely small fraction of the combine's
expected life.
[14]
Mr. Cook testified that his dealership sold the appellants
the combine under a Form A contract, which means a new
combine with a new machine warranty. He testified that the clocks
on these combines are "hopelessly inaccurate". He
confirmed that the meter starts running once the key is turned
on. He described PAMI's testing as "awesome". This
is borne out by the detailed reports prepared. I can easily see
how 115 hours could be spent in testing the machine. The
evidence is clear that the figure of 337 hours is
inaccurate. I find that the combine had about 115 hours of
field or operating time when it was sold. However I would have
reached the same conclusion had the figure been
337 hours.
[15] I do not
think that where a manufacturer tests a piece of equipment, or
causes it to be tested on its behalf by an independent
organization such as PAMI, it can be said that it is, during the
testing period, being "used for any purpose whatever".
How does a manufacturer test a piece of equipment other than by
having it perform the very task for which it is designed, that of
harvesting crops? Testing new equipment by or at the behest of
the manufacturer is an essential part of the manufacturing
process.
[16] I have
concluded that the combine was not used for any purpose prior to
its acquisition within the meaning of subsection 127(9). Any
other conclusion would be a purely mechanical one (The Queen
v. Swantje, 94 DTC 6633, aff'd.
96 DTC 6310) and would be inconsistent with at least
two principles of interpretation. The first is that if two
interpretations are possible, one of which leads to an absurdity
and one of which does not, the interpretation that does not
should be preferred (Victoria City v. Bishop of Vancouver
Island, [1921] 2 A.C. 384 at p. 388).
[17] The
second is that a statute should be construed in a manner that
best conforms to the scheme of the legislation (Highway
Sawmills Ltd. v. M.N.R., 66 DTC 5116). This
principle has been stated in a number of ways. In
Communauté Urbaine du Québec v. Corp.
Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3 at
p. 17, Gonthier J. spoke of the teleological approach,
which involves an identification of the telos or purpose of the
legislation. Quite obviously the purpose of the legislation is to
encourage investment in new machinery and equipment. The Federal
Court of Appeal in Lor-Wes Contracting Ltd. v. The Queen,
85 DTC 5310, interpreted section 127 in accordance
with the incentive that it was intended to provide and I think it
is appropriate that I do so also in this case.
[18] Counsel
for the appellants referred to Interpretation Bulletin IT-331R,
paragraph 18.
Used Property
18.
As indicated in 9, 10, 12 and 13 above, qualified property,
qualified transportation equipment, qualified construction
equipment, and certified property must be property which was not
used for any purpose whatever before it was acquired by the
taxpayer. The property must not only be new when acquired by the
taxpayer but it must not have been acquired for use or lease or
for any purpose whatever by any previous owner. As a result of
these requirements, if a property that has been used or was
acquired for a use (even though unused) is transferred to a new
owner, eligibility for the investment tax credit is not
transferable. In such a situation the former owner remains
eligible for this credit provided the other requirements are
satisfied. A piece of equipment that is used regularly for
demonstration purposes (a "demonstrator") would not
qualify; however, new equipment that is demonstrated to or
"test" driven by, a prospective purchaser of that
particular piece of equipment would not normally be considered to
have been "used for a purpose".
[19]
Administrative practice is not binding on the court. I agree
however with the approach in the bulletin but it does not go far
enough.
[20] Counsel
referred as well to a decision of Beaubier J. in Whyte v.
R., [1999] 4 C.T.C. 2678, 99 DTC 994. In
that case he held that testing of a combine by a prospective
purchaser did not constitute use within the meaning of
subsection 127(9). I agree. Neither does testing by the
manufacturer before delivery to the dealership prior to sale to
the purchaser.
[21]
Beaubier J. in Miller v. The Queen,
2000 DTC 2535, reached the opposite conclusion in the
case of a combine that had previously been leased to another
farmer, for use in his farming operations but not for the purpose
of testing.
[22] I am in
respectful agreement with the conclusion of Beaubier J. in
both cases. His decision in Whyte is however closer to the
fact situation here.
[23] The
appeals are allowed with costs and the assessments are referred
back to the Minister of National Revenue for reconsideration and
reassessment:
(a)
to allow the appellants the investment tax credit on the basis
that the 1993 Duetz-Allis R72 combine is "qualified
small-business property" within the meaning of
subsection 127(9) and therefore qualifies for the
small-business investment tax credit;
(b)
to give effect to the agreement between the parties on the other
issues referred to at the beginning of these reasons.
[24] Counsel
for the appellants is directed to prepare draft judgments and
submit them to counsel for the respondent for approval before
submitting them to the court for issuance and entry.
Signed at Ottawa, Canada, this 7th day of November 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NOS.:
1999-2684(IT)G, 1999-2685(IT)G
STYLE OF
CAUSE:
Between John Stevenson and
Her Majesty The Queen AND
Between Kelvin Stevenson and
Her Majesty The Queen
PLACE OF
HEARING:
Prince Albert, Saskatchewan
DATE OF
HEARING:
August 31, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF REASONS FOR
JUDGMENT:
November 7, 2001
APPEARANCES:
Counsel for the
Appellants:
Grant Carson, Esq.
Counsel for the
Respondent:
Karen Janke
COUNSEL OF RECORD:
For the
Appellants:
Name:
Grant Carson, Esq.
Firm:
Carson & Co.
Melfort, Saskatchewan
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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