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Citation: 2003TCC386
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Date: 20031016
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Docket: 2000-5058(IT)G
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BETWEEN:
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HEWLETT PACKARD (CANADA) LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Hershfield, J.T.C.C.
[1] The Appellant, Hewlett Packard
(Canada) Ltd., ("HP") has appealed reassessments of its
1995, 1996 and 1997 taxation years in respect of which the
Minister of National Revenue (the "Minister")
disallowed a portion of the capital cost allowance
("CCA") claimed by the Appellant for each such
year.
[2] The Minister's basis for the
reassessments was that the undepreciated capital cost
("UCC") of the Appellant's Class 10 asset pool was
lower in each of the subject years than reported by the Appellant
because, in the Minister's view, certain vehicles included in
the pool at the end of each year had been disposed of before the
end of that year.
[3] Each of the fiscal years in
question ended on October 31. Each year in October the
Appellant has historically purchased a fleet of vehicles from
Ford Motor Company of Canada ("Ford") for use by the
Appellant's employees to replace the fleet acquired in
October of the preceding year. The purchase of a new fleet in
October (the replacement fleet) results in an addition to the UCC
of its Class 10 asset pool in the year of the purchase. Such
addition is not in issue.
[4] The Appellant maintains that the
fleet of vehicles being replaced (the old fleet) was not disposed
of until November of each year. There is no question that the old
fleet is repurchased by Ford each year. The repurchase of an old
fleet by Ford is included in the contract of sale of that fleet
to the Appellant.
[5] The issue is whether the old fleet
is, as maintained by the Appellant, disposed of in November of
each year or, as maintained by the Respondent, in October. If the
sale of the old fleet by the Appellant is in November the
reduction in the UCC of its Class 10 asset pool does not
occur until the fiscal year after the replacement fleet is added
to the pool. If the sale of the old fleet by the Appellant is in
October the reduction in the UCC of its Class 10 asset pool
occurs in the same fiscal year as the replacement fleet is added
to the pool. The Appellant has filed on the former basis. The
Respondent has reassessed on the latter basis and has reduced the
Appellant's CCA claims accordingly. The only issue then in
these appeals is when the fleet of vehicles being replaced each
year was disposed of. If the vehicles were disposed of in
November of each year, the appeals will be allowed and if the
dispositions occurred in October the appeals will be
disallowed.
[6] Before examining the issue raised
in these appeals, I note that the Appellant's fleet
replacement program permitted a doubling up of its CCA claims in
the first year it was employed. That is, two fleets were included
in the UCC of HP's Class 10 asset pool in that year and
none were taken out. Each year thereafter, including in the
subject years, one fleet was added to the pool and one was
removed. If the Minister's assessment is upheld, the doubling
up effect will end in HP's 1995 fiscal year since, in that
year, there will be a double reduction in the UCC of the
Appellant's Class 10 asset pool given that it had already
reduced the pool for that year by dispositions in November of
1994 and under the reassessment it would be required to reduce
the pool, again for that fiscal year, by dispositions in October
1995. That is, there would be one fleet added to and two fleets
removed from the UCC pool in the Appellant's 1995 fiscal
period. That would leave one fleet in the pool to be depreciated
each year since each year thereafter (e.g. in 1996 and 1997) one
fleet is added to the pool and one fleet is withdrawn from the
pool.
[7] The Respondent relies on
subsection 13(7) of the Income Tax Act ("the
Act") which deems depreciable property to be disposed
of when there is a change of use. The Respondent argues that the
old fleet was no longer in use in the Appellant's business in
October of each year given that the replacement fleet had arrived
in October, was in use in October and had fully replaced the old
fleet in October. The Respondent also argues in the alternative
that there is a "disposition of property", namely the
old fleet, in October of each year as that term was defined in
subsection 13(21) of the Act as it read in respect of the
subject years and that, applying ordinary legal principles
including those of various provincial Sale of Goods Acts,
the vehicles being replaced were at law disposed of in October of
each year.
[8] The Appellant denies that there
has been a change of use and asserts that under ordinary legal
principles and more particularly under governing provisions of
the relevant Sale of Goods Acts, the vehicles being replaced were
disposed of by the Appellant in November of each year. The
Appellant's position is that a "disposition" under
the Act is governed by such principles and provisions
which, on the facts of the case at bar, would give effect to the
intentions of the parties which was that the property in the old
fleet was to pass to Ford in November of each year.
[9] At the outset I would remark that
this is not a case that requires analysis or commentary on the
tax avoidance (savings) achieved under the regime sought by HP to
be in effect. It is open to all taxpayers to buy and sell
depreciable property and take CCA in accordance with the
provisions of the Act. That some deferral might be
achieved by careful timing of dispositions and acquisitions is a
simple result of the application of the provisions of the
Act. There is no dispute in this case as to the
application of this aspect of the Act. I am required only
to make a determination as to when a sale has occurred or if
there has been a change of use.
[10] The HP fleet consists of up to 750
vehicles used each year by HP employees across Canada. The
vehicles are used in the course of employment although personal
use is allowed with resultant taxable benefits recognized.
Eligible drivers had a specific vehicle assigned to them for
their exclusive use throughout the year. Each eligible driver
would pick up a replacement vehicle and drop off the old vehicle
after which Ford would take possession of the old vehicles. This,
almost without exception, was done in October of each year. Even
this briefest description of the program is sufficient to
illustrate the Respondent's main contention. How can an
employee have the use of two vehicles for use in the performance
of employment duties when only one is actually being put to that
use or even available for that use after the exchange? It is
argued that paragraph 13(7)(a) of the Act
deems a disposition to have occurred in October due to this
change of use. Paragraph 13(7)(a) reads as
follows:
13(7) Subject to subsection 70(13), for the purposes of
paragraphs 8(1)(j) and (p), this section,
section 20 and any regulations made for the purpose of paragraph
20(1)(a),
(a) where a
taxpayer, having acquired property for the purpose of gaining or
producing income, has begun at a later time to use it for some
other purpose, the taxpayer shall be deemed to have disposed of
it at that later time for proceeds of disposition equal to its
fair market value at that time and to have reacquired it
immediately thereafter at a cost equal to that fair market
value;
[11] If there is not a change in use, the
Respondent argues that the incidence of ownership in respect of
the old fleet passed to Ford in October of each year and that the
contractual provisions governing the fleet exchanges entitled
Ford to "proceeds of disposition" from a
"disposition of property" in respect of the old fleet
in October of each year. The argument is bolstered by the
invoicing regime which the Respondent suggests supports such
finding. The definition of "disposition of property" in
subsection 13(21) of the Act at all relevant times read as
follows:
"disposition of property" includes any transaction
or event entitling a taxpayer to proceeds of disposition of
property.;
and "proceeds of disposition" was at all relevant
times defined in that subsection as follows:
"proceeds of disposition" of property includes
(a)
the sale price of property that has been sold,
(b)
compensation for property unlawfully taken,
(c)
compensation for property destroyed ...
(d)
compensation for property taken under statutory authority ...
(e)
compensation for property injuriously affected ...
(f)
compensation for property damaged ...
(g)
an amount ... (relating to mortgage assumptions); and
(h)
any amount included because of section 79 ...
As I will note later in these Reasons, this list of inclusions
expands, for the purposes of section 13, the meaning of proceeds
of disposition beyond what otherwise would be included applying
settled commercial legal principles. What is to be regarded
as a disposition of property for the purposes of this section is
therefore correspondingly expanded.
[12] While the foregoing brief description
of the Appellant's fleet program is sufficient to highlight
the Respondent's arguments, it does not do justice to the
actual mechanics of the fleet exchange; nor does it respond to
the Appellant's position that intention alone governs when
property is transferred to a buyer as provided in the relevant
provisions of the Sale of Goods Acts governing the subject
transactions. It is necessary then to put some flesh on this
skeletal description of the Respondent's case.
[13] The Appellant called two witnesses. The
first witness was David Ogilvie who was employed by HP as fleet
manager since 1976. Throughout the subject years he was
responsible for all aspects of HP's fleet of vehicles
including negotiating the purchase and sale of the fleets and the
maintenance and operation of the vehicles comprising the fleets.
I accept that he would be the person most knowledgeable in
relation to HP's fleet program. The second witness called was
Thomas R. Nixon. Mr. Nixon is a national accounts
manager for Ford of Canada. He has held such position for the
last 10 years. He is responsible for selling vehicles to and
servicing 75 large corporate clients including HP. His job is to
sell or lease as many vehicles to his clients as possible.
HP's entire fleet in each of the subject years consisted of
Ford vehicles acquired and disposed of pursuant to agreements and
arrangements worked out between Mr. Nixon, on behalf of
Ford, and Mr. Ogilvie on behalf of HP. I accept that
Mr. Nixon would be the person most knowledgeable in relation
to Ford's participation in HP's fleet program.
[14] The evidence given at trial consisted
of testimony concerning written agreements of sale and details of
the exchange routines employed in giving effect to the
agreements. As one might guess, neither the agreements nor the
routines adhere to a regime that gives a clear answer to the
questions posed in these appeals.
[15] There are three written agreements
covering the subject years. One agreement, made in 1993, covers
both 1994 and 1995 model years. The old fleet sales in
October/November 1995 were covered by the 1993 agreement. Another
agreement made in June 1995 covered the next three model years,
namely the 1996, 1997 and 1998 model years. That agreement was
followed by a third agreement in April 1997 to ostensibly (on its
face) cover model years 1996 through 1999 inclusive creating an
overlap in terms of documentation governing the transactions that
are the subject of these appeals. The June '95 agreement on
its face covers the purchase of the 1996 and 1997 model year
vehicles in October 1995 and October 1996 respectively and the
sale of those vehicles in October/November 1996 and
October/November 1997 respectively. The April '97
agreement seems to affect the October/November 1997 disposition
of 1997 model year vehicles acquired in October 1996 under the
June '95 agreement and disposed of under that agreement as
well. This overlap is made more confusing as the April '97
agreement adjusted the purchase and repurchase prices for the
1997 model year vehicles in HP's favour even though the
purchase of 1997 model year vehicles had closed in October of
1996. That after the fact accommodations seem to have been made
does not seem to me to change the legal effect of completed
transactions or the terms on which they were completed. In any
event, such changes to the agreements do not ultimately seem
relevant except to support the position that the
"trade-in" language used in the April '97
agreement applied to the vehicle exchanges in both 1996 and 1997.
I mention the confusion primarily to illustrate the muddy water
in which HP has placed itself in respect of a third party
construction of its fleet exchange program. Still, I will
describe each agreement and related documentary evidence:
(a) In all agreements all
purchased vehicles are identified by model code. The number of
particular models to be acquired is specified as is the price
based on standard equipment as set out;
(b) Paragraph 2.3 of the 1993 agreement
provides as follows:
2.3 Recognizing the financial importance to Hewlett-Packard
(Canada) Ltd. of timely vehicle delivery, it is the intent of
Ford that all vehicles will be delivered via local dealers after
October 1st but prior to October 31st of each calendar year.
Ford will closely monitor Hewlett-Packard (Canada) Ltd.'s
order and will use its best effort to ensure early build in the
model year to achieve delivery during the month of October.
(c) Paragraph 2.2 of the June '95
agreement provides as follows:
2.2 It is the intent of Ford that all
vehicles will be delivered via local dealers after October 1st
but prior to October 31st of each calendar year. Should
production complications cause unacceptable delivery delays to
Hewlett-Packard, Ford agrees to supply 686 mutually agreed upon
new Ford vehicles ("Replacement Vehicles") to
Hewlett-Packard by October 31st of each applicable year. The
Replacement Vehicles would be "agreement" equipped . .
.
(d)
Paragraph 2.2 of the April '97 agreement is substantially the
same as paragraph 2.2 of the June '95 agreement although the
opening sentence reads as follows:
All vehicles will be delivered via local dealers between
October 1st and October 31st of each calendar year.
(e) The first two agreements
require payment for the replacement fleet by the 15th day of the
month following delivery. The April '97 agreement is silent
on the payment due date but invoices for the sale of 1998 model
year vehicles to HP in October of 1997 showed a payment due date
of November 15, 1997;
(f) All agreements credit old
fleet purchases at a fixed dollar amount per model. The April
'97 agreement refers to the credit as a trade-in value while
the earlier agreements refer to the credit as the repurchase
price. In all cases there is a schedule of fixed monthly
depreciation amounts for each model for each year. The first two
agreements have a repurchase price which calculates to be the
price HP paid less 13 times the fixed monthly depreciation
amounts. Similarly the April '97 agreement has trade-in
values which calculate to be the price HP paid less 13 times the
monthly depreciation amount.[1] Notwithstanding that these calculations
demonstrate that 13 months' depreciation were actually
used in pricing the repurchases, the first two agreements
expressly refer to depreciation being based on 12 months. Both
Mr. Ogilvie and Mr. Nixon testified that the reference
to 12 months was a typographical error. The calculations
themselves and the invoices introduced at trial both corroborate
that the depreciation used in pricing repurchases or valuing
trade-ins was in fact 13 months and I accept that that was the
intention of the parties;
(g) The April '97 agreement
expressly provides that billings for the replacement fleet are
reduced by the trade-in values of the old fleet. Single invoices
dated October 31 1997, showing both purchases and trade-ins, were
issued by Ford for each province in respect of the
October 1997 fleet exchange (i.e. 1998 model year vehicles
replacing the 1997 model year vehicles). Payment due date was
November 15th. Neither the 1993 agreement nor the June 1995
agreement expressly provide for net billing however the invoices
for each province for the October 1996 fleet exchange (i.e. 1997
model year vehicles replacing 1996 model year vehicles) dated
November 1st, 1996 credited "trade-ins" against
the amount due.[2]
The payment due date was November 15th.. In both the
1996 and 1997 fleet exchanges GST and provincial sales taxes were
effectively charged on the invoice price net of trade-ins. This
practice was not followed in respect of the October 1995 fleet
exchange (1996 model year vehicles replacing 1995 model year
vehicles). Indeed, separate invoices were prepared in respect of
this exchange covered by the 1993 agreement. That is, an invoice
dated October 31, 1995 was prepared in respect of purchases
for each province and separate invoices dated November 1, 1995
were prepared for the repurchase credits. The payment due date
and the credit date in respect of the October 1995 fleet exchange
is shown on both invoices as November 16, 1995;
(h) All agreements set out similar
"clean car" repurchase/trade-in conditions including an
excess mileage charge in respect of Ford's repurchase of the
old fleet. The charge set out in the 1993 agreement was five
cents per kilometre for vehicles returned with greater than
58,000 kilometres. The charge set out in the later
agreements was three cents for each kilometre over 50,000. There
were occasional vehicles exchanged amongst employees to ensure
excess mileage charges would not be assessed and, on the
evidence, no such charges were ever payable;
(i) All agreements permit
employee sales. That is, HP employees were entitled to acquire
old fleet vehicles being returned to Ford. The first two
agreements provide that Ford will repurchase all models
less those purchased by HP employees. The evidence at the
trial, however, was that Ford repurchased these employee acquired
vehicles from HP and then resold them to employees who had
elected to acquire an old fleet vehicle. Other language in the
agreements to the effect that old fleet vehicles would be made
available to HP employees at depreciated costs with a handling
charge payable to Ford tend to support that the intention of the
parties was that Ford would repurchase employee acquired
vehicles. As well, separate credit invoices for employee
purchased vehicles were issued by Ford to HP. Further, HP
received under each agreement an extra $500.00 from Ford for each
employee acquired vehicle to recognize Ford's savings in
having fewer vehicles to resell at auction. I accept then that
Ford acquired employee purchased vehicles from HP (as it did all
other old fleet vehicles) and resold them to HP employees and
that it was not simply HP's agent in respect of such
purchases and sales;
(j) HP was allowed to perform
minor warranty repairs at their own service locations in Montreal
and Toronto;
(k) The April '97 agreement
provides for the early repurchase of up to 12 vehicles per year.
The repurchase price would be depreciated on the actual time in
service using the same monthly depreciation amount as used for
October/November purchases. This supports Mr. Nixon's
testimony that the depreciation rate was determined on a monthly
basis and not on a term basis divided by the number of months
required to confirm a disposition at the expiry of 13 months.
[16] It is also important to point out what
is absent from all three agreements. None expressly specifies a
title or legal ownership transfer date of the old fleet to Ford.
There is express language as to delivery dates for the
replacement fleet but the agreement is silent on the delivery
date and the legal transfer date in respect of the
repurchase/trade-in of the old fleet. Points of delivery of the
old fleet are not specified. There is no express language that
addresses the passage of risk notwithstanding, in respect of the
repurchase/trade-in of an old fleet, that the exchange routine
puts possession of the old fleet with Ford prior to the date the
Appellant asserts as the legal transfer date of the vehicles
comprising the old fleet. These gaps and questions require
looking beyond the written agreements.
[17] I will turn now to the evidence
concerning the procedures for delivering and returning vehicles.
Two different procedures were used: one for Toronto and Montreal
and another for the rest of Canada. There was also a different
procedure for employee acquired vehicles, however I have not
found such procedure material in my consideration of these
appeals so I will not comment further on it.
[18] In both Toronto and Montreal, HP had a
maintenance garage to service fleet vehicles picked up and
returned at these cities. These garages and adjacent areas
offered some parking space to accommodate replacement and old
vehicles but given the large number of vehicles being exchanged
in October of each year storage was a problem. Accordingly, the
return of old vehicles was not so much timed to co-ordinate with
the delivery of replacement vehicles when Ford was ready to ship
but was to a large extent governed by HP's ability to
accommodate the exchange given limited parking space. Old
vehicles dropped off at the Toronto and Montreal garages could
not be left there. The arrangement was that HP would call the
auctioneer that Ford used to resell the repurchased old fleet
vehicles, when there were sufficient old fleet vehicles to
warrant or require a pick-up. The auctioneer would deliver the
old fleet vehicles to its yard awaiting instructions from Ford.
With relatively minor exception, Ford was in possession of old
fleet vehicles returned to the Montreal and Toronto garages
before the end of October each year. I note at this point that
Mr. Ogilvie testified there were many exceptions each year
(perhaps as many as 25 to 30 vehicles a year in each of Montreal
and Toronto that were not picked up until after the end of
October each year). I do not give much weight to this testimony
except to acknowledge that there may well have been some
exceptions accommodated by Ford which was, by all other accounts,
to have the property available to it for its use by November 1st
each year.[3] To
the extent that there were late deliveries, that is deliveries
after October 31st to Ford in any year, they were clearly
indulgences that Ford allowed and would not be relevant in
respect of the issue as to when title in the old fleet vehicles
passed. Accordingly, I think that it is fair to say that the old
fleet vehicles were, by the end of October, virtually all stored
at the yards of the auctioneer. Further, there is no question in
my view that the auctioneer was holding the vehicles for Ford.
Ford retained the auctioneer on its behalf to sell the
repurchased vehicles. Ford retained the auctioneer to pick up the
repurchased vehicles at the HP garages. The auctioneer picked up
the vehicles in October and parked them at the auction lot until
Ford instructed the auctioneer to sell the vehicles which did not
occur until November each year. Ford was not HP's agent in
the retention of the auctioneer. It seems clear then that both
the place of delivery of the replacement fleet to HP and the
place of delivery of the old fleet vehicles to Ford was HP's
garage. This is not determinative of whether title has passed to
Ford in respect of the old fleet. Rather, it just begs the
question as to whether or not delivery (and possession) is being
made in advance of the date of title passing. What is established
is that possession of the old fleet vehicles, but not necessarily
ownership, passed to Ford in October in each year.
[19] Prior to the transfer of possession I
note that returned old fleet vehicles were received at HP
garages, cleaned out and inspected by HP maintenance staff in the
course of the exchange by the employee who picked up a
replacement vehicle. HP used stickers to identify vehicles in
use. Once a vehicle was returned, the stickers were removed. The
stickers were a part of HP's tracking procedure but it was
abandoned in favour of serial numbers. As to the inspection of
the returned vehicles I note, as referred to above, that the
agreements provided that the repurchases/trade-ins of the old
fleet vehicles by Ford were subject to the returned vehicles
meeting clean car criteria set out in those agreements. In the
case of vehicles returned at the Montreal and Toronto garages, HP
would inspect the old fleet vehicles and ensure they were in
suitable condition prior to arranging their pick up in October of
each year. When the auctioneer was called, the vehicles were
expected to meet the clean car criteria. The auctioneer would
then inspect the vehicles on Ford's behalf and in the
exceptional case where there was an issue, HP would make
arrangements for any work to be done to meet the clean car
criteria so that they would be approved for pick-up. No vehicles
were rejected as a result of the clean car criteria.[4] Given my finding that
virtually all of the old fleet vehicles were picked up by Ford by
the end of October each year, it follows that there were no
conditions to completing the purchase and sale of virtually all
of the old fleet vehicles by the end of October each year.
[20] The evidence as to who bares the risk
in respect of the old fleet once vehicles leave HP's garage
is somewhat muddy. While HP maintained liability insurance as
required by provincial legislation, it self-insured in respect of
damage to the fleet. No attention seems to have been paid, by HP
at least, as to who would be at risk once the old fleet left
HP's garage, even if it was still the owner of the old fleet
as it asserts. The issue of having liability coverage while owner
of up to 1,500 vehicles for even a short period was apparently
not considered, at least to the knowledge of Mr. Ogilvie or
HP's counsel. As to liability for damage to old fleet
vehicles while owned by HP but not in its possession, the issue
once again, was apparently not considered by HP. The bailment
assumed by Ford (which would exist if title did not pass on
delivery), the vehicles being off road and HP being self-insured
may all have resulted in no consideration being given to the
question of risk once the vehicle exchange commenced each year.
Similarly, Ford would seem to have little interest in where the
risk lay in these circumstances although unlike Mr. Ogilvie,
Mr. Nixon testified with some conviction that Ford was at
risk and would have insurance coverage as of November 1st of each
year. Such conviction, of course, flows from Mr. Nixon's
view that ownership did not pass until November 1st of each year.
Since risk follows ownership he would be right if his premise was
right. It would also follow that if the old vehicles were
destroyed before November 1st in a given year while with the
auctioneer, Ford would, according to Mr. Nixon's view,
hold HP accountable for lost trade-in/repurchase value to the
extent such loss could not be mitigated by action against the
auctioneer (say in the case of damage due to an act of God).
However, since these events are hypothetical and were not
contemplated, it seems to me that it was too easy, in the course
of the hearing, for Mr. Nixon to testify with conviction as
to who would be responsible to cover a loss in any given
situation. While I might thereby exercise some caution in giving
his testimony too much weight on this point, it does follow his
testimony in respect of his understanding of the intended
transfer date of the old fleet in each year and that does carry
weight.
[21] I will now turn to the procedure
employed at locations other than Montreal and Toronto. In these
cases HP employees would deliver the old fleet vehicles to a
designated Ford dealership. Again, I would say that this occurred
in virtually all cases in October when the employee was advised
that the dealership had the replacement vehicle ready for
pick-up. The old vehicle would be cleaned out. HP stickers used
to identify vehicles in use were removed. There would be an
exchange of keys. The vehicle inspection would be done by the
dealer at the dealership. HP addressed the clean car criteria
prior to such inspection being completed. Again, no vehicles were
rejected as a result of the clean car criteria. Upon having the
vehicles ready in October for delivery at the price fixed under
the agreements, there were no conditions to completing the
purchase and sale of the old fleet vehicles.
[22] There is no better evidence as to the
passage of risk when the old fleet vehicles were dropped off at
Ford dealerships than given in respect of the old fleet vehicles
picked up at the Montreal and Toronto garages. I see no
difference between a Ford dealership taking possession of the old
fleet vehicles and Ford's auctioneer taking possession of the
old fleet vehicles. In both cases Ford has taken possession of
the vehicles but that does not in itself resolve the question as
to whose vehicles they are.
[23] In answering the question as to whether
or not there has been a transfer of the old fleet vehicles to
Ford prior to November 1st in each year, the Appellant puts
emphasis on the vehicle registration procedure adopted for all
old fleet vehicles no matter where returned. Subject to
provincial law, all original vehicle registration papers were
kept by Mr. Ogilvie. Subject to provincial law, employees only
carried copies of the vehicle registration papers in their
respective vehicles. When a vehicle was returned for exchange
with a replacement vehicle, the copy of the registration papers
for the old vehicle was surrendered. Original registration papers
not already with Mr. Ogilvie were turned over to him so that Mr.
Ogilvie was able to turn over all the original
registration papers to Ford at the end of the day of October 31
of each year.[5]
Both Mr. Ogilvie and Mr. Nixon testified that this
routine was followed regularly each year. They did this on the
clear understanding between them that it was a necessary
procedure to ensure the income tax treatment HP required.
Mr. Nixon was happy to comply. He had to keep HP happy.
Mr. Ogilvie adhered to the practice as it was very important
to HP. The surrender of the registration papers at the end of the
day on October 31 each year was understood by Mr. Ogilvie
and Mr. Nixon not to be a transfer of legal ownership of the
old fleet on October 31 but was understood by them as a
means of ensuring that no vehicle registration changes would or
could be made until the following day, namely, in November. Mr.
Nixon testified that the process of Ford disposing of the old
fleet for its own account did not and could not start until
November. Mr. Nixon testified that Ford was not the owner of
the vehicles until November and he accepted the registration
papers at the end of the day on October 31st each year on that
basis. I accept that this was the intention of the parties. It is
uncontradicted and credible. Its credibility is re-enforced by
the need recognized by both witnesses for the transfer to occur
after October 31 for tax purposes. That motive does not
diminish the credibility of the testimony. Indeed it enhances it.
None of the factors that might cloud the question of when title
to the old fleet vehicle passes necessarily contradict the
testimony of the witnesses and conduct of the parties as to the
intended transfer date. Given the reason for it, the intended
transfer date is self-evident. Based on Mr. Nixon's testimony
as a whole, I see no room for Ford to argue, even if it served
its interests to do so, that it took title before November 1 of
each year. However when title transfers, even when it follows the
intended time for property to pass, may not be the end of the
matter for the purposes of section 13 of the Act.
[24] While my comments are leading quickly
to an analysis of the role of "intent" in determining
the disposition date for the purpose of these appeals, there is
one other aspect of the facts that I wish to expound on before
proceeding to the arguments and analysis. That is the import of
fixing the repurchase price and trade-in value of the old fleet
vehicles at cost less 13 months' depreciation. Mr. Nixon
testified that the depreciation factor used in calculating the
repurchase price/trade-in value of old fleet vehicles was
calculated at a fixed monthly depreciation rate for each month or
any part of a month that the vehicles were owned by HP. A new
vehicle delivered to HP in October, say of 1995, would suffer its
first month's depreciation in October of 1995 even if HP had
use of the vehicle for less than a full month. Twelve months'
use then ends in September of 1996. The 13th month is October
1996. If that vehicle (when it becomes part of the old fleet) is
used or available for use for any part of November 1996 then,
according to Mr. Nixon's testimony, I would understand
that 14 months of depreciation should have been taken in respect
of November 1996. Putting Mr. Nixon's position on the
head of a pin, I would say that the old fleet was then acquired
by Ford at midnight October 31st, 1996. I make note of this to
draw attention to the definition of "UCC" in subsection
13(21) of the Act. The UCC of a class of depreciable
property is the pool on which CCA is claimed each year and it is
reduced by a number of amounts referred to in a formula in the
definition of "UCC". One such amount, "F", is
"the total of all amounts each of which is an amount in
respect of a disposition before that time of property -
and is the lesser of (a) the proceeds of disposition of
the property - and (b) the capital cost to the taxpayer of
the property" (emphasis added). Since CCA is taken on the
UCC of the class at the end of the year,[6] the relevant UCC is the UCC otherwise
determined less proceeds of disposition before the end of the
year.[7] This
confirms that a midnight sale at year-end does not reduce the UCC
of a depreciable class of assets until the next fiscal year; i.e.
a midnight sale at year-end does not reduce the CCA available in
respect of a class of depreciable property in which the asset
disposed of was included. I will refer to this definition of
"UCC" again in these Reasons.
Respondent's Position Considered[8]
[25] The Respondent draws the following
conclusions from the evidence to support its position that there
has been a change in use:
· The
vehicles were used by the Appellant for business purposes;
· The use of
the vehicles was only through the employees of the Appellant;
· After the
exchange of the Old Vehicles for the New Vehicles, the employees
used the New Vehicles for business purposes;
· After the
exchange of the Old Vehicles for the New Vehicles, the employees
did not use the Old Vehicles for business purposes;
· After the
exchange of the Old Vehicles for the New Vehicles, the Old
Vehicles were no longer used by the Appellant in its
business.
I agree that the evidence clearly establishes and warrants the
first four of these conclusions.
[26] As to the passing of property, the
Respondent relies on the following aspects of the agreements to
support a finding that the property in the old fleet was to pass
to Ford prior to November 1st:
· The
purchase of the New Vehicles and trade-in/repurchase of the Old
Vehicles was governed by a single agreement.
I think there is some confusion on this point as commented on
in paragraph 15 of these Reasons although, in general terms,
I would agree that each agreement speaking to the purchase of a
replacement fleet of vehicles, speaks in the same agreement to
the trade-in/repurchase of that same fleet of vehicles in
October/November of the year following the purchase.
· The New
Vehicles were to be delivered by Ford to the Appellant between
October 1st and October 31st each year;
· The terms
of the agreements do not explicitly set out the date on which Old
Vehicles were to be delivered to Ford.
I have noted as well that the agreements do not set out the
date on which ownership passes.
· Ford was
obligated to accept the Old Vehicles for trade-in/repurchase if
they met the "clean car criteria" and the price was
predetermined; accordingly, the agreements provide for sale on
approval.
While I agree that the obligation existed once the clean car
criteria was met and that the price was determined at that time,
the effect of that finding remains open to analysis.
· In the
Vehicle Purchase Agreement for 1997-1999 it is explicit that the
Old Vehicles would be accepted as trade-ins on account of the New
Vehicle purchases.
This is the case in respect of the agreement that I have
referred to as the April '97 agreement. As noted in
paragraph 15 of these Reasons, the April '97 agreement
amended the June 1995 agreement. The amendment adjusted the
"trade-in" price of the 1997 model year vehicles
re-acquired by Ford in October of 1996. That is, to the extent
"trade-in" terminology matters, I would suggest that
both the 1996 and 1997 fleets were contractually acquired by Ford
as "trade-ins".
[27] As to the conduct of the parties, the
Respondent relies on the following evidence to support a finding
that the property in the old fleet was to pass to Ford prior to
November 1st in each year:
· The
exchange of the Old Vehicles for the New Vehicles happened in
October.
This implies that Ford has more than possession of the old
fleet vehicles at the time of the exchange which is to draw a
conclusion on the question at issue.
· The process
of the exchange of the Old Vehicles for the New Vehicles was
considered to be a "car flip";
· In Toronto
and Montreal, the Old Vehicles were accepted by the auctioneer
and removed from the Appellant's parking lot if they met the
"clean car criteria"; the Old Vehicles were not removed
if the "clean car criteria" was not satisfied.
The evidence I have accepted is that no vehicles were rejected
as a result of the clean car criteria.
· Outside
Toronto and Montreal, the Old Vehicles were accepted by Ford
dealerships if they met the "clean car criteria"; the
Old Vehicles were not accepted if the "clean car
criteria" was not satisfied.
The evidence I have accepted is that no vehicles were rejected
as a result of the clean car criteria.
· The
"clean car criteria" was satisfied with respect to the
majority of the Old Vehicles by the end of October.
The evidence I have accepted is that no vehicles failed to
meet the clean car criteria.
· Ford or its
agent, the auctioneer, had possession of the majority of the Old
Vehicles prior to October 31st.
I am satisfied on the evidence I have accepted that Ford was
in possession of virtually all the old fleet vehicles by October
31 each year.
· The
Appellant's employees had no contact with the Old Vehicles
after they were in the possession of Ford (with the exception of
one Old Vehicle for which special arrangements were made);
· Ford paid
to transport the Old Vehicles to the auctioneer;
· The
auctioneer was paid a commission by Ford;
· The vehicle
registrations for the Old Vehicles were given to Ford late in the
day on October 31st each year;
· The
invoices from Ford for the purchases of the New Vehicles in the
1996 and 1997 taxation years reflected total billings at the
prices of the New Vehicles outlined in the agreement less the
value of the trade-ins;
· The
invoices in the 1997 taxation year were dated October 31,
1997;
· Only one
cheque was issued to Ford by the Appellant for the net amount of
the New Vehicles less the trade-ins and employee sales.
This is the case (one cheque issued by Ford) even in respect
of the 1995 exchanges where separate invoices were prepared for
the purchase amount and the repurchase credit amount.
(Tab 16 of the Joint Book of Documents)
[28] Further, the Respondent asserts that HP
not needing the old fleet in October, having purchased and
received delivery of the new fleet to replace the old fleet,
suggests that the old fleet was to pass to Ford prior to November
1st of each year. That an asset is available to be passed to a
buyer by virtue of its redundancy to the vendor might be a factor
to consider in determining when title passes absent more
determinative factors, but it is only one of a number of factors.
However, there is actual delivery and entitlement to payment that
go further in this case to enhance the argument that the old
fleet was to pass to Ford prior to November each year. On the
other hand, if intentions govern and the intention to pass
property in the old fleet to Ford is after October each year,
such other factors will fall into line. That is, they will be
recast in a way so as to be consistent with that intention.
Possession, for example, will be recast as bailment. Ultimately
nothing is necessarily suggestive of one conclusion or another
until the underlying issue is resolved.
[29] The Respondent has referred me to a
number of cases on which it relies. While I find only one such
case helpful, I will provide a brief commentary on a number of
them.
[30] As to the change in use argument, the
Respondent cites Glaxo Welcome Inc. v. The Queen;[9] Dowbiggin v.
M.N.R.;[10]
Derlago v. The Queen;[11] Bolus-Revelas-Bolus Limited v. M.N.R.[12] and Hughes
v. M.N.R.[13]
The following are my observations in respect of these cases:
·
Glaxo was not a change in use case. It stands for the
proposition that acquisition for and owned for a purpose is not
the same as used for a purpose. "Use" for a purpose
requires employment of a particular property for that purpose.
The Respondent would argue that the old vehicles were, after the
exchange in October of each year, not employed for the purpose
for which they were acquired or owned. This case and argument
does not address a transitional situation where an asset acquired
and used for a business purpose is being sold in the normal
course of operating that very business. Further, this case and
such argument does not address the wording of the section in
question in these appeals. For there to be a disposition under
paragraph 13(7)(a), the Appellant must commence to use
property acquired to gain and produce income for some other
purpose. The transition requires identification of another
purpose which raises issues not dealt with in this case.
·
Dowbiggin underlines the fundamental requirement for
claiming CCA which is that a property be used for gaining or
producing income. The case confirms that where the business ends,
the property formerly used in that business can no longer be put
to that use. The case, however, does rely on
paragraph 20(6)(a) of the Act as it then read
(1962). That paragraph is virtually the same as
paragraph 13(7)(a) as it read in the subject years.
This suggests that in the context of the present Act, it
is not necessary in determining a change of use to find another
use to which property formerly used to gain or produce income has
been put - i.e. cessation of the business, or withdrawal of the
asset from the business, may be sufficient. However the appeal at
bar is not a case involving the cessation of a business and
drawing general principles from a case such as Dowbiggin
is not helpful in my view in respect of dealing with the facts of
the case at hand.
· In
Derlago the deemed disposition rules in section 45 of the
Act were applied. In that case the taxpayer commenced to
use a former rental property as his retirement residence. In that
case a use other than an income producing use was identified.
That is not the case in the appeals at bar.
· In
Bolus-Revelas-Bolus two amusement park rides were
acquired, dismantled and put in storage. It was found that there
was no business to which the rides related. This case offers no
assistance in respect of the issues in the case at bar.
· The
Hughes case deals with the meaning of "commence"
to use a property for a purpose other than to gain or produce
income and is helpful. The case involved a rental property
converted to condominium units to facilitate resale. The
construction given the verb "commence" is that it
required determination of when the taxpayer first deviated from
the original intent to use the property to gain or produce
income. On this question, D.E. Taylor, then of the Tax Review
Board, said:
. . . It is not incumbent upon the Minister, in a matter of
this nature, to establish the precise characteristics of
"some other purpose" which may be perceived in the
actions of a taxpayer who "has commenced to use" a
property in a manner which appears inconsistent with the
original "purpose of gaining or producing income"
therefrom. It is for the taxpayer to establish that the action
is consistent with the original intent, and failing
to do so leaves him at serious risk of the conclusion that there
was "some other purpose";
A finding that the actions of the Appellant in the case at
bar, in relation to the vehicle exchange regime employed by it,
are consistent with the original income earning purpose would be
sufficient reason then to conclude that the old fleet of vehicles
has not been put to some other purpose. I think such finding is
justified in the case at bar.
[31] As to the passing of title argument,
the Respondent cites Jerome v. Clement Motor Sales Ltd.[14], R. v.
Zwicker[15]
and Browning Harvey Limited v. The Queen.[16] The following are my
observations in respect of these cases:
· Clement
Motor Sales dealt with a contract for the sale of goods
involving an exchange of vehicles. The plaintiff acquired a
vehicle and as part of the consideration the defendant accepted a
trade-in of two vehicles. The consideration was paid, transfer
papers on the trade-ins were signed and the motor vehicle permits
of the trade-ins were surrendered although one of the trade-in
vehicles was kept in the possession of the plaintiff for use
until delivery of the acquired vehicle. The acquired vehicle
needed repairs and the defendant agreed to complete the repairs
before delivery (at no cost). The repairs were completed but for
one minor item when a fire at the defendant's premises
damaged the acquired vehicle.
The issue in this case was whether the property had passed to
the plaintiff. The provisions of the Sale of Goods Act of
Ontario were relied on. The provisions of that Act seem similar
to the provisions of present day legislation adopted by all
provinces (other than Quebec). First, there is the provision that
property passes when the parties intend it to pass and then, to
ascertain intention, regard is to be given to the terms of the
contract, the conduct of the parties and the circumstances of the
case and then, subject to a different intention being apparent,
there are guiding principles (rules or guidelines) set out to
ascertain intention. The majority of the Ontario Court of Appeal
resorted to the guidelines finding that there was no clear
evidence of intent as to when property in the acquired vehicle
passed (in spite of a provision in the written agreement of
purchase and sale as to when property passed). The majority
decision of the Court was that the vehicle purchased was not in a
deliverable state at the time of the fire even though only one
minor repair was yet to be completed and the Court relying on the
guidelines found that title had not passed. The majority rejected
the argument that the terms of the contract, the conduct of the
parties and the surrounding circumstances dictated a finding of
intention that the property had passed at the time the trade-in
was agreed to and acted upon. The burden of proof to find a
different intention than that established under the guidelines
was on the party alleging it. Only if the real intention (not
reflected by the application of the guideline) has been
manifested will the guidelines be subordinated and not
applicable.[17]
This is to say that a manifest or self-evident intent is in
itself determinative as to when property passes.
The majority found that even though the purchase price had
been paid and transfer documents completed, the intention to pass
title before the vehicle was in a deliverable state could not be
found. I note that there is a strong dissent in this case and
that, in my view, the case is most readily rationalized on the
basis that the majority was of the view that the undertaking to
repair the acquired vehicle was a condition precedent to the
purchase. It applied the guidelines to get to that result and
ignored terms of the agreement and circumstances and conduct that
would suggest the property passed when ownership papers were
transferred and consideration was paid. It ignored these indices
of intention on the basis that such factors are only overriding
when there is no compelling basis to ignore them. A compelling
basis to ignore them would be where a contrary intention can be
found (such as an intended condition precedent to passing title
as the majority in that case found or, as I have suggested, where
a self-evident intent can be found). The objective is to find the
real intention. Such real intention might be the asserted
intentions if the assertions are manifestly clear (self-evident)
and credible.
This case then is most helpful to the Appellant if I conclude
in the case at bar that there is a self-evident intention that
property in the old fleet of vehicles was intended to pass after
October 31st each year provided I conclude as well that
intentions govern when property passes for the purposes of
section 13 of the Act. Giving complete governance to
intentions alone in an income tax context seems to me to be a
premise that requires considerable scrutiny.
· In
Zwicker, the Ontario Court of Appeal held that
"owner" for the purposes of subsection 2(1) of the
Compulsory Automobile Insurance Act was not limited to the
registered owner but included the common law owner. While this
case seems narrow, I would agree that the transfer of registered
ownership (as demonstrated as well in Clement Motor
Sales), is not determinative of when property passes. In
effect, common law recognizes that legal ownership in some
instances is a mere bare trusteeship giving the legal owner none
of the incidence of ownership except custody for the benefit of
and at the direction of the owner. I should note, however, that
the Respondent has not expressly argued that beneficial ownership
was transferred before November 1st each year but rather has
argued only that the transfer of legal ownership on
November 1st (if I accept that premise) is not a bar to my
finding that property has nonetheless passed prior to
November 1st each year. I agree with the argument but I
suggest that it implicitly requires that I make a finding that a
transfer of beneficial ownership has preceded in this case the
transfer of legal or registered ownership. Determination of that
issue may only take us back to intention as dictated by
commercial law principles - common law and statutory.
· In
Browning it is recognized that property in goods may
transfer prior to transfer of title. As in Zwicker, this
principle in theory at least assists the Respondent in its
attempt to diminish the significance of the old fleet vehicle
registrations being held back so as to ensure legal ownership
would not pass until November 1st of each year. As stated in
respect of Zwicker, the issue becomes one of determining
whether beneficial ownership has passed which, in turn, takes us
back to the determination of intention of the parties. The
Browning decision does not consider the impact of sale of
goods legislation on this question although Kempo, J. does at
page 168 seem to ultimately base her decision on her finding
of the intention of the parties. This recognizes that whether by
virtue of sale of goods legislation or by operation of common
law, intention as to when property passes is most relevant.
The more interesting aspect of this case, however, is that it
addresses the application of the definitions of "disposition
of property" and "proceeds of disposition" in
subsection 13(21). In Browning there were seven payment
instalments required over seven years. The Court found that there
were conditions to be met to enforce ongoing payment obligations.
As such, there was no entitlement to the full proceeds. The case
might have ended there but Kempo, J. went on to consider
when the property would pass irrespective of the issue of
entitlement to enforce the payment obligation. As stated, in
addressing this question, Kempo, J. did not apply sale of goods
legislation. Presumably, the question of the application of sale
of goods legislation was not put to the Court. In any event,
applying general principles dealing with the incidence of
ownership, the Court found that the property in question had not
passed. The normal incidence of title, namely possession, use and
risk had to be examined on the facts of the case. On the facts,
Kempo, J. relied on jurisprudence that confirmed that possession
would not speak to title passing where all attributes of
ownership were not transferred. The owner is the person that
retains, exclusive of the rights of the person in possession, any
right to use the property to advantage. Taking the appeals at bar
to this test would arguably support the Appellant's position.
Mr. Nixon's testimony confirms that HP had bought and paid
for the absolute ownership right until the end of October of each
year. Allowing Ford to take possession of the old fleet vehicles
served HP's interests and was taken advantage of by Ford by
storing the vehicles so put in its possession at a place where
they would be resold when the property passed to it. Ford could
not put the vehicles to any other use until November 1st.
Ford's absolute right to keep possession of the vehicles for
its use commenced November 1st each year. That is not to say that
its right to compel HP to complete the subject
repurchases/trade-ins did not exist prior to November 1st. At the
latest that right existed immediately after the October 31st
meeting between Ogilvie and Nixon which, at the latest, was when
HP had an absolute entitlement to payment regardless of when the
payment due date was agreed to be and Ford had an absolute right
to the vehicles regardless that the exercise of that right was
agreed to be one day later.
[32] Lastly, the Respondent cited two cases
on intention: Buffone v. The Queen[18] and Paquette v. Chubb et
al.[19] In
Buffone Kempo, J. remarked at page 1488 that:
Oral testimony was advanced by the Appellant and
by his wife, both of whom in my opinion were forthright and
credible. However, the direct evidence of a person who has an
interest in the outcome of an appeal regarding the intention
behind a transaction or series of transactions is not
determinative of the existence of the stated intention. Generally
speaking the intention is to be ascertained from the entire
course of conduct and relevant circumstances and the inferences
flowing therefrom: Racine et al. v. M.N.R., 65 DTC 5098
(Ex. Ct.).
[33] The Paquette case deals with the
question of what constitutes corroboration of a witness's
testimony.
[34] I do not find these cases on intention
helpful as they beg the question as to the need for independent
and disinterested corroborative evidence. Consider as an example
that "X's" stated intention was to buy a vehicle
before the end of the month to take advantage of a $2,000.00
manufacturer's rebate. The sales person has confirmed this
intention. Finding that the intended purchase date was before the
end of the month should require no more corroboration as to the
intent than confirming the existence of the rebate program and
having the credible testimony of the parties even though both may
not be "disinterested" persons. The buyer "X"
wanting the rebate is not disinterested and the seller, perhaps
wanting a commission, may not be disinterested. Still, an
intention so manifestly clear (self-evident) supported by
credible testimony cannot be cast aside by reason of being
uncorroborated by disinterested evidence. Similarly, conduct and
circumstances that might indicate a different apparent intention
than that asserted will not prevail over the asserted intention
where it is manifestly clear that the asserted intention is the
real intention. As I noted above, in my view, even an objectively
observed apparent intention manifested by certain aspects of the
conduct of the parties, is subordinate to a mutually recognized,
self-evident and credibly asserted intention. Put another way,
one only looks for disinterested corroboration of an asserted
intention, in the form of manifestations of it or otherwise,
where it is not self-evident and credible that the asserted
intention is the real intention.
Appellant's Position Considered
[35] The Appellant simply denies that there
has been a change of use of the old fleet vehicles and on the
question of the passing of property, it asserts that the
provisions of the various Sale of Goods Acts govern to the
exclusion of all else and that such Acts do not require
consideration of conduct or circumstances or terms of the
agreements where the intention of the parties is, in effect,
irrefutable. The Appellant also asserts that the conduct of the
parties and the surrounding circumstances do not in any event
dictate a different result than the result dictated by the
expressed intention of the parties as to when title passes.
[36] On the issue of change of use the
Appellant cited the following cases:
Edmund Peachey Ltd. v. The Queen, 79 DTC
5064 (F.C.A.);
Duthie Estate v. The Queen, 95 DTC 5376 (F.C.T.D.);
The Queen v. Dorchester Drummond Corp. Ltd.,
79 DTC 5163 (F.C.T.D.);
Meredith v. The Queen, 75 DTC 5412 (F.C.T.D.);
Roos et al. v. The Queen, 94 DTC 1094 (T.C.C.);
Duthie Estate v. M.N.R., 92 DTC 1043 (T.C.C.);
Colby v. M.N.R., 91 DTC 1237 (T.C.C.);
Cantor et al. v. M.N.R., 85 DTC 79 (T.C.C.);
Woods v. M.N.R., 78 DTC 1576 (T.R.B.).
[37] These cases deal primarily with real
estate holdings where use of lands as capital or inventory had
been put at issue. In these cases the intention of the taxpayer
as to the use of the lands was to be determined for the purposes
of deemed disposition rules under section 45 of the Act
that deem a disposition to occur where there has been a change of
use to or from a use for the purpose of gaining or producing
income. The cases cited deal with distinct alternative
classifications of an asset under consideration (as between
capital property and inventory) so that the characteristics of
each classification can be assessed and weighed at points in time
to determine if and when a change in use of it has occurred. In
the case at bar the Respondent does not take the position that
the old fleet has been converted to inventory prior to November
in each year. Nor is it the Respondent's position that the
old fleet has been converted to personal use property prior to
the end of November each year. The Respondent simply says that
the old fleet having been replaced is no longer used for the
purpose of gaining or producing income. I assume the Respondent
would add that the intention of the Appellant, once the
replacement fleet has been put in use, was not the resale of the
old fleet in the ordinary course of its ongoing business but was,
as expressly admitted by the Appellant, held for a tax advantage.
On the other hand, that the transfer date is selected for tax
purposes does not necessarily suggest that that transfer date
does not, coincidently, allow for the reasonable recycling of a
redundant depreciable asset in the ordinary course of an ongoing
business.
[38] Drawing from the Appellant's cases
on changes of use I make the following further observations.
There must be clear, unequivocal positive acts to change a use.[20]
Engaging in a vehicle exchange program while managing the tax
impact of such program does not in my view constitute a clear,
unequivocal, positive act demonstrating that there has been a
change in use or that a use has commenced for a non-income
producing purpose. Taking property out of use should not be a
sufficient reason by itself to find that it is no longer part of
the income earning process until a positive act putting the
property to a different use has commenced.
[39] In Cantor a rental property was
converted to condominiums. There were substantial renovation and
repair costs. The Minister assessed the property on the basis
that there had been a change in use from a capital rental
property to inventory when the decision was made to take these
steps in order to dispose of the property. The Court held that
steps taken to help ensure a more profitable resale of a capital
asset does not constitute a change in use. The case was
distinguishable from an earlier case where a subdivision
undertaken with an obligation to add services had been found to
be a change in use. The distinction, if you will, is that the
latter constitutes a clear, unequivocal, positive act of a change
in use whereas the former is consistent with reasonable steps
taken in the liquidation of an asset. In the former case the
basic use is not changed. There has been no commencement of a
different use.
[40] Other cases that the Appellant has
cited include Will-Kare Paving & Contracting Limited v.
Her Majesty the Queen,[21] Canada (Deputy Minister of National Revenue)
v. Mattel Canada Inc.,[22] Borstad Welding Supplies (1972) Limited v.
Her Majesty the Queen,[23] Gold Line Transport Ltd. v. M.N.R.,[24] M.N.R.
v. Wardean Drilling Limited,[25] Victory Hotels Ltd. v.
M.N.R.,[26]
and Argus Holdings Limited v. Her Majesty the Queen.[27] The following
are my observations in respect of these cases:
· In
Borstad Welding Supplies counsel for the Minister agreed
with the taxpayer that the determination of when title passed was
governed by the Sale of Goods Act of Alberta. But the case
goes on to suggest that that is not the end of the matter. That
is, that the property did not pass in that case pursuant to the
terms of the Sale of Goods Act was not the end of the
matter. It still had to be determined whether a disposition had
occurred because of the "second branch" (of law)
developed in the jurisprudence which was whether the purchaser
had acquired all of the incidence of legal title and that none
remained with the vendor. This case then is an invitation to look
beyond the relevant sale of goods legislation. On the other hand,
the case concludes with the observation that most important was
the fact that the parties did not intend that the property in
question be sold on the day asserted by the Crown. As such, I do
not find that case helpful in resolving the case at bar.
· In Gold
Line Transport the question of when property passes for the
purposes of CCA was found to be governed by the provisions of the
Sale of Goods Act of New Brunswick pertaining to when
property in goods is transferred by a buyer under a contract of
sale. While the case does not seem to rely on any one aspect of
the applicable Sale of Goods Act it does seem to conclude
that there was nothing in the evidence that contradicted the
testimony of both parties as to the intended time for the passing
of the property. That possession stayed with the vendor was not
determinative as there was a finding that the goods were in a
deliverable state at the time the contract of sale was entered
into. Testimony as to when risk was intended to pass was accepted
by the Court. Ultimately the case confirms that it is open for a
court to rely on credibly asserted intentions on the question of
when property passes.
· In
Wardean Drilling the Court accepted that the Alberta
Sale of Goods Act applied to determine when property
passed for the purposes of the Act.
· In
Victory Hotels the definition in the Act of
"disposition of property" is considered. In that case
the Court regarded the definition as being somewhat restrictive
in the case of a property disposed of by means of a sale. I
cannot agree with this conclusion. In my view the definition is
expansive and is a direction by Parliament away from the confines
of sale of goods provisions. Such provisions are not precluded in
the Act from applying but they are not, for the purposes
of section 13 of the Act, the only provisions
governing whether or not there has been a disposition of
property. The definitions list other circumstances that will also
be regarded as dispositions for the purposes of section 13.
·
Will-Kare is a fairly recent Supreme Court of Canada
decision. It dealt with the meaning of the word "sale"
as used in the Act. It reasoned that Parliament had chosen
to use language that imports relatively fine private law
distinctions and that absent express direction that an
interpretation be applied other than that ascribed by settled
commercial law, it would not be appropriate to do so.[28] The Act does
not operate in a vacuum, oblivious to a legal characterization of
the broader commercial relationships it affects. It is not a
commercial code in addition to a taxation statute.
All this can be taken from the Will-Kare decision but
the context of that case is somewhat different and evidences two
lines of authority on the question. The context is whether a
plant acquired by Will-Kare was acquired primarily for the
purpose of manufacturing or processing goods for sale or whether
the purpose was for manufacturing or processing goods for use in
Will-Kare's business. The view adopted by the courts
including the majority of the Supreme Court of Canada was that
the correct line of cases to apply were the ones that applied
general common law and statutory principles of what constituted a
sale. Three dissenting judges of the Supreme Court, however, took
the view that in interpreting the Act one should not
wander off to consider fine private law distinctions but should
accept the plain meaning of words so as to permit, in that case,
the manufacture of asphalt used in the construction of roads for
customers, to be regarded as goods sold as opposed to goods used
by the manufacturer in the course of its own business.
I would point out, in addition to the strong dissent in the
Will-Kare case that would allow for looking beyond
commercial law principles in determining what constitutes a
"disposition" such as those prescribed in various Sale
of Goods enactments, there is in the case at bar express
direction in the Act as to what constitutes a disposition
for the purposes of the subject provision of the Act. Such
directive supports a construction of "disposition" that
is not limited by such commercial law principles. That directive
in the Act, as it read in the subject years, in the form
of a definition of "disposition of property" should, as
stated above, be read as expansive, not limiting. That is, it
strikes me that Parliament has chosen to use language that
incorporates both settled commercial law and, expansively, other
prescribed rules that might not, under settled commercial law,
result in a finding that a disposition has occurred. The
Act means to draw more transactions into the net of
dispositions covered by the subject provision of the Act
than would be caught by settled commercial law principles.
· Having
noted the strong dissent in Will-Kare, I note that in
Mattel the Supreme Court of Canada unanimously applied the
Will-Kare decision and found that rather than creating a
complex series of tests not strictly based on the settled legal
meaning of words, it was preferable to rely on the common law and
Sale of Goods enactments to describe whether royalties and
licence fees were paid as a condition of the sale of goods for
export to Canada in accordance with provisions of the Customs
Act. This does not speak to the exception referred to in
Will-Kare to the effect that settled commercial law
principles cannot govern the construction and application of
words in the Act in the face of an express directive in
the Act to do otherwise. This leaves the question of
whether or not in the case at bar the definition of
"disposition of property" in subsection 13(21) applies
in the case at bar so as to cause the UCC of HP's class 10
asset pool to be reduced each October by the proceeds of sale of
old fleet vehicles.
· Argus
Holdings was referred to by the Appellant to support an
argument that the reassessments have resulted in a gross
distortion of the picture of the Appellant's income. Simply
put, I do not believe this case has any application in the case
at bar. Extensions of the principle in Canderel Limited v. The
Queen[29]
cannot be taken to regard termination of a double inclusion in
the UCC of a class of depreciable assets as a distortion of
income. Aside from the question of whether or not CCA claimed in
any given case is a distortion of income in favour of taxpayers,
it is remarkable to think that a person who has intentionally
managed UCC pools to inflate the UCC of a class would complain
about income distortion when a case is brought against it to the
effect that its own mismanagement of its deferral scheme has
resulted in the termination of the benefit.
Concluding Analysis
[41] The Respondent's main argument is
that there has been a change in use of the old fleet once the new
fleet has been put in use. As suggested in these Reasons, it is
unreasonable in my view to think that an asset being replaced is
not still being used in the course of business where it is being
held for the purposes of disposal. An asset used in a business
that is regularly replaced cannot be said to have its use changed
simply because it has ceased being used in the course of its
replacement. A part of the business operation is to sell off such
"circulating" depreciable assets. Provided that they
are not put to any use other than being held for or in the course
of resale, it cannot, in my view, be said that they are held for
a purpose other than producing income notwithstanding that they
are redundant after the replacement is complete. Taking such
assets out of use is consistent with, indeed virtually essential
to, the required liquidation of the asset. Liquidation of a
circulating depreciable asset is consistent with the original
income earning purpose for which it was used. There has been no
commencement of another use when a redundant asset is held for
sale.
[42] The situation here is different perhaps
to the extent there is an intentional stall in the disposition
process. The intention of having a November 1st transfer date is
to defer reduction in the UCC of the class, not to pursue the
disposition as soon as possible. The disposition might have been
effected by the end of October. The buyer, the price, the
procedures and mechanics for a sale in October were all there. In
this scenario can it be said that the property, namely the old
fleet, was no longer being held for the purposes of gaining or
producing income?
[43] I am not overly troubled by this line
of inquiry. After the old fleet is returned they need to be
readied for sale. That is, put in a suitable condition to be sold
at the fixed repurchase price. There was an inspection process to
confirm that all the vehicles in the old fleet met the clean car
criteria and were in a suitable condition to be sold at the
agreed repurchase price. Given that that was part of the
necessary sale process together with the logistics of recycling
so many vehicles, I am satisfied that allowing a few weeks for an
exchange of between 650 and 750 vehicles is not unreasonable.
While November 1st was targeted for tax purposes, on the
facts of the case there was no unreasonable delay in the transfer
of the old fleet. That is, the "stall", if any, was not
material in terms of supporting a finding that the old fleet had
been put to another use.
[44] Further, as I said at the outset, there
is nothing wrong with a taxpayer timing acquisitions and
dispositions to best suit tax planning needs. If on December 15th
I receive an offer to sell a property and I am agreeable to do so
but accept the offer on condition that the transfer takes place
on January 1st, am I subject to a change of use deemed
disposition in December? Does a tax planning motive constitute an
unequivocal positive act from which a conclusion can be drawn
that a change of use has occurred? I think not. In my example, I
may have a disposition for the purposes of section 13 in
December if I have an absolute entitlement to payment in December
but I have not commenced another use of the property simply by
virtue of a tax motivated delay.
[45] One last observation on the question of
change in use in this case that might distinguish it from other
cases (if such distinction is warranted) is the scope of the
operation in this case. The fleet management, a large part of
which is geared to keeping new vehicles on the road each year for
its employees on the most economic terms, requires a full time
fleet manager and adoption and implementation of a variety of
procedures that are in this case a distinct part of the operation
of HP's business. The original income earning purpose of
acquiring the vehicles is contractually coupled with the sale.
The complete package is managed in the course of HP's
business. These factors support my finding that HP had not
commenced use of the property in question for some purpose not
consistent with the original use to which it was put. On the
facts of the case at bar, I am satisfied that the recycling of
the old fleet vehicles was part of the business operations of the
Appellant. HP did not at any point commence to use its old fleet
for any other purpose than the purpose for which it was
originally acquired and used.
[46] That takes me to the next question
which is when was the effective transfer date of old fleet
vehicles at law? I am satisfied that the provisions of the
various Sale of Goods enactments that determine when property
passes can apply to determine when property is disposed of for
the purposes of section 13 of the Act.[30] Clear authority for
this lies in the Supreme Court of Canada's decisions in
Will-Kare and Mattel. If that were the end of the
matter the Appellant's appeal would (subject to further
consideration of the laws of Quebec) be allowed as I accept that
intentions govern under provincial law and that the intention of
the parties in the case at bar was that the property in the old
fleet of vehicles was not to pass until November 1st each
year. While there are a number of factors which could suggest
that property in the old fleets passed each year in October, the
intention of the parties to transfer ownership as of November 1st
is, as I have discussed earlier in these Reasons, self-evident
and credibly attested to. However, having determined when a sale
occurs for provincial law purposes is not the end of the matter.
Such determination is not sufficient for the purposes of
determining whether there has been a disposition of property for
the purposes of section 13 of the Act. For the
purposes of that section there has been a disposition of old
fleet vehicles in October of each of the subject years since for
the purposes of that section there is also a disposition under
the Act if and when there is an entitlement to the sale
price of property sold. Pursuant to subsection 13(21) "a
disposition of property" includes any transaction
entitling a taxpayer to "proceeds of disposition" which
includes an entitlement to the sale price of property
sold. The facts of the case at bar leave no doubt in my view that
HP was unconditionally entitled to enforce payment by the end of
October each year of the purchase price of the old fleet vehicles
being exchanged. Inspections were complete; vehicles were in a
deliverable state; the price was fixed; and, possession had been
transferred. Even the diligently followed arrangement to meet on
October 31st each year to ensure registration and passage of
legal title on November 1st, had the affect of absolutely
and unconditionally crystalizing Ford's obligations to pay HP
for the old fleet before the end of the day. In fact payment was
practically speaking already made. The 1996 and 1997 exchanges
were "trade-ins" effectively completed in October of
each such year and invoiced that way at least in respect of the
1997 fleet exchange. Regardless, even recognizing the November
15th payment due date would not change the conclusion that the
entitlement to be paid existed prior to the agreed payment due
date. Even the definition of "UCC" in subsection 13(21)
speaks to the reduction of the pool when there is a disposition
(i.e. when there is an entitlement to proceeds), not when amounts
are received or when they become due and payable. The question is
only whether the entitlement to be paid is absolute regardless of
the payment due date. In all years, the absolute, unconditionally
enforceable entitlement to be paid for the old fleet vehicles
existed by (before) the end of October each year. After the
meeting between Mr. Ogilvie and Mr. Nixon on October
31st each year, I see no room to argue that HP's entitlement
to sale proceeds was not absolute. Accordingly there has been a
disposition of old fleet vehicles in October of each year for the
purposes of section 13 and the subject appeals are dismissed on
that basis.
[47] While I have no reservations as to this
conclusion, there are some further observations that need to be
made. First, I note that that part of the definition of
"UCC" that reduces the pool by the proceeds of
disposition of property sold does not use the exact phrase
"disposition of property". Rather, the exact reference
in calculating the "F" amount in the calculation used
in defining "UCC" is "a disposition before that
time of property". Ordinarily one would not, in a tax
statute, say that the phrase "disposition before that time
of property" is a defined phrase where the Act
expressly defines the phrase "disposition of property".
However, in this case it seems to me we are looking for what the
Supreme Court in Will-Kare referred to as an expressed
direction to apply an interpretation beyond that ascribed by
settled commercial law. I can draw no other conclusion in this
case than Parliament, in defining "disposition of
property" intended an express directive not to leave the
timing of dispositions for CCA purposes solely to the expressed
intentions (or even manifestly clear, self-evident and credibly
attested to intentions) of the parties to an agreement of sale.
The effect of the Act, in my view, is that a disposition
occurs at the earlier of when determined pursuant to settled
commercial law principles and when there is an absolute
enforceable entitlement to be paid, however that might be
determined having regard to conduct and circumstances surrounding
the transaction.
[48] The second observation that I would
make is that arguably the definition of "proceeds of
disposition" in referring to an entitlement to the sale
price of property "sold" requires a finding that there
be, applying settled commercial principles, a sale in the first
place. Such construction would be to the effect that this part of
the definition of "disposition of property" and
"proceeds of disposition" say nothing more than what
would be the case if these definitions did not embrace, as a
disposition, an entitlement to the sale price of property. I do
not believe that such inclusion in such definitions is there for
greater certainty. In my view this provision is a clear attempt
to define a particular state of affairs as constituting a
disposition for the purposes of section 13. To find
otherwise would be to find that the definition of proceeds of
disposition should be read as saying that a disposition includes
a disposition. Further, I note in the case at bar that there is
no question that property has been "sold". That is the
point. We know on October 31st of each year that the old
fleet has been "sold" even though the asserted
intention was that the property was not to pass until
November 1st. The definition of "proceeds of
disposition" does not refer to the sold date but rather only
to the time entitlement to payment crystalizes absolutely
notwithstanding when the property is to pass under other
definitions of when a sale occurs.
[49] I appreciate that it may seem curious
that the affect of my decision is that there can be an absolute
entitlement to proceeds of sale before a "sale" or a
passing of property has occurred. While it may seem curious, it
does not in my view evidence any error in reasoning. That the law
will recognize the transfer date to be the date the parties
intend, does not suggest that the parties cannot have, before
that time, a binding enforceable contract to proceed which
creates for the vendor an entitlement to proceeds of disposition
at that earlier time. In such case, the earlier time is the time
that there is a disposition for the purposes of section 13
of the Act.
[50] Accordingly, the appeals are dismissed,
with costs.
Signed at Ottawa, Canada, this 16th day of October 2003.
Hershfield, J.
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