Date: 19990903
Docket: 98-570-IT-G
BETWEEN:
L & K FARMS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at
Prince Albert, Saskatchewan on August 11, 1999. Lloyd
Taylor, Secretary of the Appellant ("L & K"), David
Cook, President of Farm World Equipment Ltd.
("Farm World") of Kinistino, Saskatchewan and
William Litchfield, P.Eng., Logistics Manager of New Holland
Canada of Winnipeg, Manitoba testified for the Appellant. The
Respondent read in portions of its Examination for Discovery of
Lloyd Taylor as its only evidence in chief.
[2] The issues in dispute are outlined in paragraphs 8 to 10
inclusive of the Reply to the Notice of Appeal, which read:
8. By Notice of Reassessment dated May 12, 1997, for the
Appellant's 1993 taxation year, the Minister, in reassessing
the Appellant's return, inter alia:
i) Disallowed an Investment Tax Credit in the amount of
$17,570.00 on property or expenditures having a capital cost of
$175,700.00;
ii) In accordance with the attached Schedule "A",
revised the Appellant's 1993 Capital Cost Allowance Schedule
by:
a) disallowing the Appellant's addition in relation to the
Farm Machinery (subsequently allowed in the Appellant's 1994
taxation year); and
b) increasing the amount of recapture of depreciation by the
amount of $175,454.00.
iii) Assessed arrears interest pursuant to
subsection 161(1) of the Income Tax Act (the
"Act") in the amount of $22,555.82.
9. In so reassessing the Appellant, the Minister made the
following assumptions of fact:
a) The facts admitted above;
b) The Appellant is a corporation incorporated pursuant to the
laws of the Province of Saskatchewan and is engaged in a farming
operation near Melfort, Saskatchewan;
c) The Appellant's taxation year ends on
December 31st;
d) Lloyd James Taylor and Mary Jean Taylor are the sole
directors and shareholders of the Appellant;
e) On November 4, 1993, Lloyd Taylor entered into a
"Contract for the Sale of a New Farm Implement – Form
A" (the "Contract") with Farm World for the
purchase of the Farm Machinery;
f) The Farm Machinery was to be delivered, according to the
Contract, by December 31, 1993;
g) Farm World is a dealership handling new and used farm
equipment in the Province of Saskatchewan;
h) Farm World ordered the Farm Machinery on November 4, 1993
from the manufacturer, Ford New Holland Canada Ltd.;
i) The manufacture of the Farm Machinery was completed on
February 7, 1994;
j) The Farm Machinery was shipped from the manufacturer to
Farm World on February 14, 1994;
k) The Farm Machinery was delivered to the Appellant on April
15, 1994;
l) The retail date for warranty purposes was recorded by the
manufacturer as March 18, 1994;
m) As part of the consideration for the sale, the Appellant
traded in a John Deere 8960 tractor (the
"Trade-in");
n) The Trade-in was received by Farm World on November 30,
1993;
o) The balance owing under the Contract was $18,000.00 which
was paid by the Appellant by a cheque dated December 31,
1993;
p) In the 1993 taxation year, the Appellant did not acquire,
obtain title to nor have all of the incidents of ownership such
as possession, use and risk of the Farm Machinery;
q) The Farm Machinery was not in existence, produced, nor in a
deliverable state as at December 31st, 1993;
and
r) In reporting income for its 1993 taxation year the
Appellant:
i) claimed Investment Tax Credits in the amount of $17,570.00
to which it was not entitled; and
ii) under-reported the amount of recapture of depreciation by
$175,454.00.
B. ISSUES TO BE DECIDED
10. The issues are:
a) Whether the Appellant was entitled to claim an Investment
Tax Credit of $17,570.00 in its 1993 taxation year in respect of
the Farm Machinery;
b) Whether the Appellant under-reported the amount of
recapture of depreciation by $175,454.00 in its 1993 taxation
year; and
c) Whether the Appellant disposed of the Trade-in in its 1993
taxation year; and
d) Whether the Minister properly assessed interest pursuant to
subsection 161(1) of the Act, for the Appellant's 1993
taxation year.
[3] The Respondent filed a Request to Admit, to which the
Appellant admitted facts 1 to 11 and 14 inclusive. They read:
1. On November 4, 1993, Lloyd Taylor, on behalf of the
Appellant, entered into a "Contract for the Sale of a New
Farm Implement – Form A" (the "Contract"),
which is Document #3 in this Request to Admit, with Farm World
Equipment Ltd. ("Farm World") for the purchase of a
1994 Model 9880 Ford Tractor, serial number D100035, (the
"Farm Machinery").
2. Farm World ordered the machinery on November 4, 1993 from
the manufacturer, Ford New Holland Ltd. ("Ford").
3. The manufacture of the Farm Machinery was completed by Ford
not sooner than February 7, 1994. The date of manufacture is
evidenced by the Ford computer printout which is Document #10 in
this Request to Admit.
4. The Farm Machinery was shipped from Ford to Farm World on
or about February 14, 1994. The Bill of Lading evidencing such
shipment is Document #6 in this Request to Admit.
5. The Farm Machinery was received by Farm World on February
15, 1994, as evidenced by the Farm World Receiving Report, which
is Document #7 in this Request to Admit.
6. The Farm Machinery was delivered to the Appellant by Farm
World on April 15, 1994, which is evidenced by Document #4 in
this Request to Admit.
7. The retail date of the Farm Machinery for warranty purposes
was recorded by Ford as March 18, 1994. This retail date is
evidenced by the Ford computer printout which is Document #11 in
this Request to Admit.
8. The purchase price of the Farm Machinery was
$175,700.00.
9. As part of the consideration for the sale, the Appellant
traded in to Farm World a John Deere 8960 tractor (the
"Trade-in") valued at $157,700.00.
10. The remaining $18,000.00 owing under the Contract to Farm
World was paid by the Appellant to Farm World by cheque dated
December 31, 1993.
11. The Trade-in was delivered to Farm World on
November 30, 1993, as evidenced by the Farm World Receiving
Report, which is Document #5 in this Request to Admit.
...
14. The invoice amount for the Farm Machinery was billed by
Ford to Ford Credit on February 16, 1994. The Invoice/Pay-off
Advice evidencing such billing is Document #8 in this Request to
Admit.
During the hearing the Appellant was allowed to withdraw the
admission given to #3 of the Request to Admit, and paragraph #2
of Document 10. Instead, the Court accepts the evidence of Mr.
Litchfield that L & K's Ford New Holland tractor which is
the subject matter of this appeal, being Serial #D-100035, was
serial numbered, completely manufactured, operating, ready to
ship and signed off for shipment at its premises in Winnipeg on
December 23, 1993. (Thus, assumption (q) is wrong). Then D-100035
was stored outside in New Holland's yard at Winnipeg until it
was shipped to Farm World on February 14, 1994.
[4] On the evidence D-100035 was received by Farm World on
February 15, 1994. Farm World shipped it to L & K on April 15,
1994 (Exhibit R-1, Tab 4).
[5] Assumptions 9(b), (c), (d), (e), (f), (g), (h), (j), (k),
(l), (m), (n) and (o) are true or were not refuted by the
evidence.
[6] Mr. Taylor testified that the serial number was not filled
in on Form A when the parties signed on November 4, 1993.
However, it is on the executed Form A copy in Exhibit A-1, Tab 1.
Mr. Cook testified that he kept a running sheet of production of
the model purchased by L & K. This sheet was seized by Revenue
Canada, along with many boxes of other documents. After a number
of court applications by Farm World, Revenue Canada was ordered
to return Farm World's documents. Mr. Cook has searched
diligently for his running record of New Holland's production
and has been unable to find it. It was based on
Mr. Cook's weekly or half-weekly telephone conversations
with New Holland. This testimony of Mr. Cook is believed because,
of approximately 53 units of this 1994 New Holland model in this
production run, 12 were for Farm World (Exhibit A-6). In further
substantiation of this, both Mr. Taylor and Mr. Cook believed
that L & K's tractor was in Farm World's yard on
December 29, 1993 when Mr. Taylor attended a show of the new
tractor model in Farm World's shop. It was too cold for
either of them to go out in the yard and check the units in the
yard.
[7] The cold was the reason given by all of the witnesses as
to why New Holland, Farm World and L & K did not want the
new tractor started or moved. Start-up or operation after
shut-down during intense cold can damage the engine and tractor
severely. In addition, both New Holland and Farm World shut down
over the Christmas holiday.
[8] The serial number of L & K's tractor is in the
copies of both the Appellant's and Respondent's exhibits
of the Form A contract (Exhibit A-1, Document 1) and (Exhibit
R-1, Tab 3). Both have Farm World's stock number written on
them, as confirmed by Exhibit R-1, Tabs 7 and 4. Form A was
seized by Revenue Canada from Farm World. It was also the copy
which Mr. Cook had when he was phoning New Holland in December,
1993 concerning the production run of D-100035.
[9] The question is when serial number D-100035, in law,
became part of Form A as between Farm World and L & K. L & K
ordered a special tractor powered by a Cummins Diesel engine,
which was L & K's choice. Their Form A contract specified
delivery by December 31, 1993. L & K signed the Form A knowing
that the space for the serial number was blank and that the
correct serial number would be determined by Farm World. Thus
L & K cannot, and does not, deny that the serial number
inserted by Farm World is accepted. L & K intended to be bound
to the serial number Farm World was to insert.
[10] Similarly Farm World is the only one which could have,
and thus did, insert the serial number into the Form A contract.
By doing so, it agreed to deliver that tractor to L & K by
December 31, 1993. It is an admission by Farm World that it has
set that very tractor, serial number D-100035, aside for delivery
to the Appellant by December 31, 1993. The testimony of both Mr.
Cook and Mr. Taylor, which is accepted, is that on December 29,
1993, when Mr. Taylor attended Farm World's dealership
showing of this new model of tractor in its shop, they both
believed that L & K's new tractor was sitting outside in
the cold in Farm World's yard among other new tractors and
equipment ready for sale or delivery. Mr. Taylor's belief had
to have been based upon a representation by one of Farm
World's staff. Neither one checked the serial number because
it was too cold to go outside.
[11] This fact coupled with Mr. Cook's testimony that he
was telephoning New Holland about twice a week respecting
its production run of this model establishes to the Court that
Farm World knew that D-100035 was completed and ready for Farm
World before December 29, 1993 and that Farm World inserted
serial number D-100035 into its copy of L & K's Form A
before December 29, 1993. Even if serial number D-100035 was not
inserted into L & K's copy of Form A on December 29, 1993,
the goods then passed to L & K. As was stated in
Benjamin's Sale of Goods, 3rd Ed. (1987)
Sweet and Maxwell at paragraph 462:
"Passing of property. The principle of estoppel
referred to above must be distinguished from a closely related
principle of estoppel by which the seller of unascertained goods
may be precluded from denying that the property in the goods sold
has passed to the buyer or to his sub-purchaser. It was thus
described by Cotton L.J. in Simm v. Anglo-American
Telegraph Co. "If an action is brought upon the ground
that the property in goods has passed to the vendor of the
plaintiff [sub-purchaser], and if that question depends upon
whether a particular parcel of goods has been set apart and
appropriated to the contract between the vendor of the plaintiff
and his defendant, an admission by the defendant, the owner of
the goods, that there has been a setting apart of the goods,
would be effectual as against him to pass the property in the
goods to the plaintiff's vendor; as against the plaintiff who
has paid for the goods, the defendant is estopped from denying
that the goods have been set apart, and the plaintiff is entitled
to rely upon the admission of the defendant which if true would
have given the plaintiff a good title to the goods."
There is collateral Canadian law relating to this principle
contained in Owen Sound Public Library Board v. Mial
Developments Ltd. (1979) 102 D.L.R. 685 (Ont. C.A.), and in
NEC Corp v. Steintron International Electronics Ltd.
[1985] BCJ No. 611.
[12] The insertion of serial number D-100035 coupled with Farm
World's advice to Mr. Taylor on December 29, 1993, that
L & K's tractor was in Farm World's yard on that date
estop Farm World from denying that D-100035 had been set
apart for L & K before December 31, 1993 and that L & K had
title to it. D-100035 is the tractor which was delivered to and
accepted by L & K.
[13] On the basis of the foregoing property in D-100035 passed
to L & K on December 29, 1993. Revenue Canada is bound by the
contractual relation of Farm World and L & K respecting
D-100035.
[14] Similarly, consideration passed on completion of the
contract of sale between L & K and Farm World . Thus, L & K
transferred the property of its trade-in to Farm World in
1993.
[15] For this reason, the appeal is allowed. Therefore:
(a) The Appellant was entitled to claim an Investment Tax
Credit of $17,570 in its 1993 taxation year in respect of the
farm machinery;
(b) The Appellant did not under-report the amount of recapture
of depreciation by $175,454 in its 1993 taxation year;
(c) The Appellant disposed of the trade-in in its 1993
taxation year; and
(d) This court has no jurisdiction with respect to the matter
of assessed interest pursuant to subsection 161(1) of the
Income Tax Act.
[15] The Appellant is awarded party and party costs.
Signed at Ottawa, Canada, this 3rd day of September
1999.
"D.W. Beaubier"
J.T.C.C.