C.A.E. Inc. v. Canada, 2013 DTC 5084 [at at 5944], 2013 FCA 92

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) and had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

The taxpayer, which leased flight simulators which it had manufactured, subsequently sold those simulators. The Minister denied capital cost allowance claims of the taxpayer made prior to the sales on the grounds that the simulators were inventory.

Noël JA found that as ss. 45(1)(a) and 13(7)(a) applied to conversions of capital property (including depreciable property) from income-producing use into use as inventory (as well as to conversions into personal use), the claiming of capital cost allowance in the initial years was not inconsistent with a subsequent sale of the simulators on income account. (However, two of the simulators nonetheless were inventory in the years they were being leased by the taxpayer as two airlines had options to purchase them.)

The taxpayer, which leased flight simulators which it had manufactured, subsequently sold those simulators. The Minister denied capital cost allowance claims of the taxpayer made prior to the sales on the grounds that the simulators were inventory.

Noël JA found that as ss. 45(1)(a) and 13(7)(a) applied to conversions of capital property (including depreciable property) from income-producing use into use as inventory (as well as to conversions into personal use), the claiming of capital cost allowance in the initial years was not inconsistent with a subsequent sale of the simulators on income account. It was reasoned that the mere holding of inventory does not constitute a use of the property for an income-producing purpose in the context of considering a conversion of depreciable property to inventory (or vice versa) – whereas inventory should be considered to be income-producing property in the context of a conversion of personal-use property to inventory, or vice versa.

Two of the simulators nonetheless were inventory in the years they were being leased by the taxpayer as two airlines had options to purchase them.

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) and had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).