[OFFICIAL ENGLISH
TRANSLATION]
Date:
20021018
Docket:
90-553(IT)O
BETWEEN:
TEREXCAVATION
ANTOINE GRANT INC.,
Appellant,
and
Her Majesty The Queen,
Respondent.
Reasons For Judgment
Lamarre Proulx, J.T.C.C.
[1] These are appeals for the 1983 to 1986 taxation years.
[2] At issue is an investment
tax credit for a tractor, claimed under subsection 127(5) and the relevant definitions set out
in subsection 127(9) of the Income Tax Act ("the Act"),
as these subsections applied to the 1986 taxation year.
[3] What must be determined is
whether the tractor was acquired on June 10, 1986, when a rental
contract with an option to purchase was signed. The appellant has argued that
the tractor was acquired within the meaning of the Act. The respondent
has argued that this property was acquired in January or
February 1987, when a leasing contract was signed, at which point this
property was not new.
[4] Kenney Grant, who was vice‑president
of operations for the appellant at the time the facts under review took place,
testified for the appellant. He adduced a book of documents with 11 tabs as
Exhibit A-1.
[5] The appellant is a business
that does work requiring the use of heavy equipment, including forestry work,
in particular. This work includes road, culvert and bridge construction and heavy equipment
transportation. The appellant's equipment apparently includes power shovels,
bulldozers, truck-trailers, and graders.
[6] Mr. Grant stated that the business's usual
operating method was to acquire the equipment it needed, not to rent it.
[7] During the taxation years
at issue, the appellant wanted to obtain contracts for forestry work from
"Les Bois de l'Est",
a corporation that had just begun its operations in the Matane area under a
government assistance program.
[8] The appellant obtained such a contract. It did not
have the tractor it needed to carry out part of the work, that is, constructing
a bush road. According to Mr. Grant, the appellant could have chosen to
acquire a used tractor at lower cost but preferred to acquire a new tractor.
The appellant knew that acquiring a new tractor would give rise to a tax
credit, and this knowledge was an important factor in its decision to acquire a
new tractor.
[9] Because the tractor was an
expensive piece of equipment costing $267,447, the appellant was unable, in the
short term, to arrange the financing needed to acquire it.
[10] On June 10, 1986,
the appellant signed a contract with Hewitt Équipement Ltée
("Hewitt") to rent a D7H crawler tractor (Exhibit A‑1,
Tab 7). The tractor was
to be delivered on June 11. The rental period was six months.
[11] Mr. Grant stated that
he came to Québec with the
Hewitt sales representative on June 9 or 10, 1986. He chose a tractor
that was in the yard on condition that Hewitt agree to make certain changes to
it. The tractor was not adapted for winter work in the bush. The sales
representative agreed to make some changes possibly costing between
$20,000 and $25,000. According to Mr. Grant, that agreement
indicated that the sales representative knew that the appellant's actual
intention was to acquire the tractor.
[12] An option to purchase was
signed at the same time as the rental contract (Exhibit A‑1, Tab 8). According to this
document, the option to purchase had to be exercised on or before
December 1, 1986, at the price of $267,447. One special condition of the
option to purchase was that the appellant would take out a Plus 3
warranty, and the amount of $2,500 covering this warranty would be payable
when the option to purchase was exercised. According to Mr. Grant,
negotiating this warranty also indicated that the appellant's long-term
intention was to acquire the tractor. In fact, on the day of the hearing, the
business still owned this tractor.
[13] According to one clause in the rental contract, each
minimum rental period of one month covered 176 hours of use, and each
additional hour of use would be invoiced at $51.14. Mr. Grant stated
that, when the rental contract was negotiated, the appellant was not very
concerned about this additional hourly rate, which in fact would have increased
the monthly rental cost to $9,000, an exorbitant amount for the business
if it had not intended to acquire the tractor. Mr. Grant stated that in fact the appellant did
not pay the rental amounts for the last two months. When the tractor was
acquired, the appellant had paid the interest for those two months. In any case, the option
to purchase provided that 100 per cent of rental and interest payments
would be deducted from the purchase price.
[14] The rental contract provided that the appellant
would pay the costs of insurance and those of maintenance and repair.
[15] The offer to purchase made
by the appellant exercising its option to purchase was signed on December 18, 1986 (Exhibit A‑1,
Tab 9). The offer to purchase was accepted on
January 22, 1987. The respondent did not raise the point that the
offer to purchase was accepted in January 1987.
[16] The National Bank became a
party to the financing of this acquisition under a leasing contract dated
December 29, 1986
(Exhibit A-1, Tab 10). The supplier and the lessee were the same
entity, that is, the appellant. The supplier was the appellant itself since it
had become the owner of the tractor by means of its offer to purchase. The lessor was Le Crédit-Bail Banque
Nationale Inc.
[17] Under cross-examination,
Mr. Grant confirmed that the contract with Les Bois de l'Est was a one-year contract. The appellant
had a better grasp of its financial situation in December than in June. The
contract was completed in part, and the appellant was in a position to
ascertain whether the contract would be profitable.
Arguments
[18] Counsel for the appellant began by acknowledging that,
if the Court were to find that the appellant was entitled to the investment tax
credit, the rental expenditures allowed by the Minister of National Revenue
("the Minister") could not be deducted in computing the appellant's
income for the 1986 taxation year.
[19] Counsel for the appellant referred to the definition
of qualified construction equipment set out in subsection 127(9) of the Act:
"qualified construction
equipment" of a taxpayer means prescribed equipment acquired by him after
April 19, 1983 that has not been used, or acquired for use or lease, for any
purpose whatever before its acquisition by him and that is
...
[20] Counsel for the appellant
told the Court that the only point at issue between the parties was whether the
appellant acquired property when the rental contract was signed.
[21] Counsel for the appellant
pointed out that the rental contract was a means of readily obtaining bridge
financing for the acquisition of the tractor. He noted that the business's
policy was to acquire equipment, not to rent it, and that the investment tax
credit was an incentive to acquire a new, expensive piece of equipment.
[22] Counsel for the appellant
also noted that the business had significant changes made to the tractor,
changes that the sales representative had agreed to make. The appellant was
careful to take out a Plus 3 warranty, that is, a three-year warranty. As
they stood, the clauses in the rental contract would have been financially
unacceptable to the business given the number of hours of use of the tractor
and the additional rate to be paid.
[23] All these points, according
to counsel for the appellant, establish the actual intention of the parties to
the rental contract. This was a sales contract transformed into a rental
contract with an option to purchase, for the purpose of obtaining quick
financing.
[24] Counsel for the appellant
pointed out that a leasing contract is also a rental contract with an option to
purchase and that, since the decision by the Federal Court of Appeal in Canada
v. Construction Bérou Inc., [1999] F.C.J. No. 1761, it was accepted
in Quebec that property acquired under a leasing contract is property acquired
within the meaning of the federal legislation. Since the present case involves
a rental contract with an option to purchase, the reasoning of the Federal Court
of Appeal in Bérou should be applied.
[25] Counsel for the appellant
referred to paragraphs 7 and 14 of that decision, which read as follows:
7. In fact, in The Minister of
National Revenue and Wardean Drilling Limited [[1969] 2 Ex. C.R. 166],
it was held that there was an acquisition of property for purposes of the
capital cost allowance when there was a transfer either of title to the
property or of all the incidents of the said title, except for legal title
which remained in the vendor as security for payment of the purchase price in
accordance with accepted commercial practice.
...
14. In short, according to these two
cases, disposition or acquisition of property for purposes of the capital cost
allowance exists under the Act when the normal incidents of title such as
possession, use and risk are transferred. I agree with this legal
interpretation given for tax purposes to the word "acquired"
contained in the definition of "depreciable property". For practical
purposes this interpretation has the merit of recognizing, for tax legislation
that applies throughout Canada, a business practice that has no boundaries and
of avoiding the danger of becoming too embroiled in unnecessary, sectoral and
above all sterile and inequitable legalism at a time when the trend in the
civil law is to approximate more closely to the common law. In addition, it is
significant that Parliament, which annually amends the Act inter alia to alter
legislative provisions when they are so interpreted that they do not meet the objectives
sought, has not thought it appropriate to overturn this thirty-year-old
interpretation. Further, this interpretation is consistent with the legislative
intent stated in subsection 248(3) of the Act, which, as I have already
mentioned, is intended to treat beneficial ownership of property in the same
way as various forms of ownership recognized in the civil law of Quebec.
[26] Counsel for the appellant
also referred to Interpretation Bulletin IT-233R, specifically to
paragraphs 3 and 5, which read as follows:
Lease-Option Agreements
3. The Department's principal
interest in lease-option agreements is to see that significant sums paid for
the purchase of property are not being charged against income as rent, of which
no recapture can be made from a lessee who exercises his option and sells the
property at a price which reimburses him for all or part of the
"rent". Therefore it is necessary to determine whether or not the
object of the transaction at its inception is to transfer the equity in the
property to the lessee. Under conditions similar to those that follow a
transaction is considered to be a sale rather than a lease:
(a) the lessee automatically
acquires title to the property after payment of a specified amount in the form
of rentals,
(b) the lessee is required to buy
the property from the lessor during or at the termination of the lease or is
required to guarantee that the lessor will receive the full option price from
the lessee or a third party (except where such guarantee is given only in
respect of excessive wear and tear inflicted by the lessee),
(c) the lessee has the right during
or at the expiration of the lease to acquire the property at a price which at
the inception of the lease is substantially less than the probable fair market value
of the property at the time or times of permitted acquisition by the lessee. An
option to purchase of this nature might arise where it is exercisable within a
period which is materially less than the useful life of the property with the
rental payments in that period amounting to a substantial portion of the fair
market value of the property at the date of inception of the lease, or
(d) the lessee has the right during
or at the expiration of the lease to acquire the property at a price or under
terms or conditions which at the inception of the lease is/are such that no
reasonable person would fail to exercise the said option.
5. The Department is aware that
many lease contracts are in the nature of "financial leases" in which
the lessor is providing a financial service only. As a result certain costs or
obligations that are usually considered incidental to ownership, such as taxes,
insurance, maintenance and other obligations become the responsibility of the
lessee. In the Department's view the assumption of these obligations by the
lessee or any other conditions of the lease that may be indicative of a sale,
are not, in and by themselves, conclusive in determining whether the
transaction is in substance a sale. Such conditions only add corroborative support
where a transaction can be considered to be a sale under the circumstances
stated in paragraph 3 above.
[27] In conclusion, counsel for
the appellant argued that interpreting the contract as being solely a rental
contract would be a limited, strict and literal interpretation that would not
represent the economic reality of the transaction that took place and would be
inconsistent with the reasoning of the Federal Court of Appeal in Bérou
(supra).
[28] For his part, counsel for
the respondent argued that, since the terms "acquired" and
"acquisition" are not defined in the Act, in determining the
meaning of these terms we must therefore turn to the concepts of
"lease", "leasing" and "ownership", as defined in
Quebec civil law.
[29] Counsel for the respondent
referred to article 1603 of the Civil Code of Lower Canada, which,
in the chapter on the lease of things, specifically provides that the
provisions of a lease shall not apply to a leasing:
1603. This chapter does not apply to a leasing made by a
person who carries on the business of lending or granting credit and who, at
the request of the lessee, has acquired from a third person ownership of the
property forming the object of the contract provided that
1. the leasing is made for
commercial, industrial, professional or handicraft purposes;
2. the leasing relates to a
moveable;
3. the lessee has personally chosen
the property;
4. the lessor conveys expressly to
the lessee the warranty resulting from the sale entered into with the third
person; and that
5. the conveyance of warranty is
accepted without reserve by the third person.
[30] Counsel for the respondent
therefore pointed out that "lease" and "leasing" are two
separate concepts and that the tax treatment of a leasing is not necessarily
the same as the tax treatment of a lease.
[31] Counsel for the respondent
explained that a leasing involves a three-party relationship: a supplier of
property; a lessor that is a financial institution; and a lessee that asks the
financial institution to acquire the property from the supplier for its use,
which did not take place in this case.
[32] Counsel for the respondent
referred to clause 14 in the rental contract (Exhibit A‑1,
Tab 7), which stipulates that the lessor, Hewitt, shall remain the owner
of the equipment at all times and that nothing in the present rental contract
shall be interpreted as giving the lessee a right or title to the equipment
other than that of lessee.
[33] Counsel for the respondent
argued that the appellant's situation differed from the situation described in Canada
v. Wardean Drilling Ltd., [1969] 2 Ex. C.R. 166, at
paragraph 26:
26. As I have indicated above, it is
my opinion that a purchaser has acquired assets of a class in Schedule B when
title has passed, assuming that the assets exist at that time, or when the
purchaser has all the incidents of title, such as possession, use and risk,
although legal title may remain in the vendor as security for the purchase
price as is the commercial practice under conditional sales agreements. In my
view the foregoing is the proper test to determine the acquisition of property
described in Schedule B to the Income Tax Regulations.
[34] Counsel for the respondent argued that the appellant was not in
the same legal situation as an entity having all the incidents of title. In
the instant case, the appellant was only a lessee and was not entitled to the
investment tax credit because, in renting the tractor, it did not acquire it.
Conclusion
[35] The Court believes, first, that it is a mistake to see the issue
of the interpretation to be given to the term "acquired" as a debate
between civil law and common law on the concept of ownership. In the Court's
view, Wardean interpreted the meaning of the term "acquired"
on the basis of the tax legislation. That interpretation may or may not
correspond to the common law concept of ownership; that is not the point. The
point is that this interpretation was made on the basis of the tax legislation
and was accepted by the Minister, as is shown in the Interpretation Bulletin (supra).
[36] That interpretation must also be followed in cases subject to Quebec civil law, as was decided by the Federal Court of
Appeal in Bérou (supra).
[37] As counsel for the appellant noted, a leasing contract is a rental
contract with an option to purchase. As counsel for the respondent noted, a
leasing contract is also not the same thing as a lease.
[38] In both of these legal situations, the lessor retains ownership
of the property. The Court therefore sees nothing surprising in clause 14
of the rental contract (Exhibit A-1, Tab 7) on which counsel for the
respondent has relied.
[39] The case law has accepted that a leasing contract is a means of
acquiring property, a means that takes the form of a lease. In the present
case, the evidence as summarized by counsel for the appellant, has established
that this was also the situation of the appellant. The rental contract was a
financial lease for the purpose of acquiring property.
[40] Like the Federal Court of Appeal in Bérou at
paragraph 26, the Court considers that the transaction to which the
appellant was a party qualifies as an acquisition, under both test (c) and
test (d) set out in the Interpretation Bulletin.
[41] In these circumstances, the Court fails to see how it could make a
decision other than the one made by the Federal Court of Appeal in Bérou
(supra).
[42] As an aside, the Court notes one aspect of the case that was not
raised and that, in the Court's view, would have been worth discussing. According
to paragraph 7 of the appellant's Notice of Appeal, Hewitt never claimed
the investment tax credit for the tractor sold to the appellant. The Court
pointed this out to counsel for the respondent, who stated that, according to
paragraph 5 of the Reply to the Notice of Appeal, the respondent was not
aware of that fact. The Court would have liked to have more evidence on this
aspect of the case, which, in the Court's view, is indicative of the seller's
or lessor's intention to divest itself of ownership of the property. In
contract matters, the shared intention of the parties is vital.
[43] The seller or lessor, on the one hand, and the lessee, on the
other hand, cannot both own the property at the same time and claim the
investment tax credit and the capital cost allowance. That was the situation
in Location Gaétan Lévesque Inc. v. M.N.R., [1991] T.C.J. No.
406 (Q.L.), a case this Court heard in 1991. A representative of the
lessor explained to this Court that the cost of financing the leasing contract
was lower than that of a conditional sale or commercial pledge because, under a
leasing contract, the financial institution claimed the capital cost
allowances. The appellant in fact argued that it too was entitled to claim the
capital cost allowance. This Court held in that case that the appellant had
not acquired ownership; however, that decision was rendered before the Federal
Court of Appeal's decision in Bérou (supra). As the Court has
noted, no evidence on this aspect of the case was adduced, nor did counsel for
the respondent raise this point. The Court therefore does not take this aspect
of the case into consideration in making its decision and concludes its aside.
[44] In conclusion, the appeal is allowed with costs.
Signed at Ottawa, Canada, this 18th day of October 2002.
J.T.C.C.
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