Kowdrysh v. The Queen, docket 98-569-IT-G

Date: 19990903

Docket: 98-569-IT-G

BETWEEN:

WALTER KOWDRYSH,

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 9, 1999. The Appellant testified and called Gerard Bourgault, P.Eng., President of Bourgault Industries Ltd., and David Cook, manager and half-owner of Farm World Equipment Ltd. ("Farm World") of Kinistino, Saskatchewan. The Respondent did not call any witnesses.

[2] The Appellant has appealed reassessments for his 1991, 1992 and 1993 taxation years. The issue is whether the Appellant acquired a Bourgault Air Seeder from Farm World in 1993 so as to become "qualified property" or "qualified small business property" within subsection 127(9) of the Income Tax Act and to entitle the Appellant to capital cost allowance in 1993.

[3] The assumptions in paragraph 8 and paragraph 9 of the Reply to the Notice of Appeal read:

8. In so reassessing the Appellant, the Minister made the following assumptions of fact:

a) The facts admitted above;

b) During the taxation years in question the Appellant was engaged in a farming operation at Yellow Creek, Saskatchewan;

c) On November 30, 1993, Farm World ordered the Farm Machinery from Bourgault Industries Ltd., an equipment manufacturer;

d) In confirming the order, Bourgault Industries indicated a tentative shipping date of February 15, 1994 to Farm World;

e) The manufacture of the Farm Machinery was not completed until January, 1994;

f) The Farm Machinery was subsequently shipped to Farm World on February 15, 1994;

g) Farm World completed a pre-delivery check for Bourgault Industries on the Farm Machinery on February 15, 1994;

h) Farm World delivered the Farm Machinery to the Appellant on February 15, 1994;

i) As part of the consideration for the sale, the Appellant traded in a Bourgault 2155H air seeder (the "Trade-in") which was received by Farm World on April 11, 1994;

j) The remainder of the payment for the Farm Machinery was made by way of a cheque dated December 4, 1993 for $2,500 and a cheque dated February 24, 1994 for $7,900.00;

k) 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;

l) The Farm Machinery was not in existence, produced, nor in a deliverable state as at December 31st, 1993;

m) In reporting income for the 1991 taxation year, the Appellant claimed an Investment Tax Credit in the amount of $1206.48 to which he was not entitled;

n) In reporting income for the 1992 taxation year, the Appellant claimed an Investment Tax Credit in the amount of $1901.12 to which he was not entitled;

o) In reporting income for the 1993 taxation year, the Appellant claimed an Investment Tax Credit in the amount of $193.80 to which he was not entitled;

p) In reporting income for the 1993 taxation year, the Appellant claimed a deduction for Capital Cost Allowance in respect of the Farm Machinery in the amount of $1040.00 to which he was not entitled; and

q) In reporting income for the 1993 taxation year the Appellant improperly included in his Capital Cost Allowance Schedule disposals in the amount of $22,615.00 in relation to the Trade-in which was not actually disposed of until 1994.

B. ISSUES TO BE DECIDED

9. The issues are:

a) Whether the Appellant was entitled to claim an Investment Tax Credit of $1206.48 in the 1991 taxation year in respect of the Farm Machinery;

b) Whether the Appellant was entitled to claim an Investment Tax Credit of $1901.12 in the 1992 taxation year in respect of the Farm Machinery;

c) Whether the Appellant was entitled to claim an Investment Tax Credit of $193.80 in the 1993 taxation year in respect of the Farm Machinery;

d) Whether the Appellant was entitled to claim a deduction for Capital Cost Allowance in the amount of $1,040.00 in respect of the Farm Machinery in the 1993 taxation year; and

e) Whether the Minister properly assessed interest pursuant to subsections 161(1) and 160.1(1) of the Act, for the 1991, 1992 and 1993 taxation years.

[4] The Respondent also served a Request to Admit, to which the Appellant admitted paragraphs 3, 4, 6, 7, 8 and 10, which read:

3. On November 30, 1993, Farm World ordered the Farm Machinery from Bourgault, as evidenced by invoice #5124, which is document #1 in this Request to Admit.

4. On December 6, 1993, Bourgault Industries confirmed the order with Farm World and indicated a tentative shipping date of February 15, 1994.

...

6. The Farm Machinery was shipped to Farm World on February 15, 1994 as evidenced by document #1 in this Request to Admit.

7. Farm World completed a pre-delivery check for Bourgault on the Farm Machinery on February 15, 1994 as evidenced by the "Bourgault Air Seeder Pre-delivery Inspection Checklist", which is document #3 in this Request to Admit.

8. Farm World delivered the Farm Machinery to the Appellant on February 15, 1994 as evidenced by the Farm World Contract #002883, which is document #4 in this Request to Admit.

...

10. The remainder of the payment for the Farm Machinery was made by way of a cheque dated December 4, 1993 for $2,500 and a cheque dated February 24, 1994 for $7,900.00.

[5] On November 30, 1993 the Appellant and Farm World executed a Form A "Contract for the Sale of New Farm Equipment" pursuant to the Agricultural Implements Act of Saskatchewan. In it the Appellant agreed to purchase a Bourgault 3165H Model Air Seeder with auger, tines and with a triple tank 1994 Model for $33,015.00. The Form A did not contain the serial numbers of either the machine purchased or the trade-in. (Exhibit A-1 tab 1)

[6] Mr. Kowdrysh traded in a Model 2155H Bourgault Air Seeder for $22,615.00, gave a $2,500.00 cheque post-dated to December 4, 1993 and agreed to pay the balance of $7,900.00 on delivery. Delivery by April was satisfactory to Mr. Kowdrysh but he believes that it was delivered in February, 1994. Farm World picked up his trade-in at his farm near Yellow Creek, Saskatchewan. The Form A was signed at Mr. Kowdrysh's home. Delivery date was agreed to be FOB, but was blank and was not discussed when it was signed. The parties understood that Mr. Kowdrysh did not need the Air Seeder until the spring of 1994 for planting.

[7] Gerard Bourgault testified that Mr. Kowdrysh's Air Seeder order was processed by Bourgault Industries Ltd. on November 30, 1993. It was confirmed to Farm World on December 6, 1993. Start weld was January 6, 1994. Assembly start was January 25, 1994, and takes 30 hours. The shipping date was February 15, 1994. All of the components of that Air Seeder were at the factory at St. Brieux, Saskatchewan two weeks before January 7, 1994. The necessary welding would have been completed shortly after January 7 and the actual cost of final assembly amounted to about 2 to 4% of the total retail cost of the Air Seeder. The actual production run for Mr. Kowdrysh's Air Seeder was frozen by the manufacturer on October 18, 1993. The serial numbers were allocated before production but were not affixed until the Air Seeders were finally assembled or were out of the paint booth.

[8] Bourgault Industries Ltd. invoiced Farm World for the Kowdrysh Air Seeder on February 16, 1994 (Exhibit R-1, Tab 1). The norm is that Bourgault Industries Ltd. receives a deposit when Farm World's order is received and there is no evidence to the contrary in this case. It was received November 30, 1993. When Bourgault Industries Ltd. ships to Farm World, its equipment is subject to a "Reservation of Title" (Exhibit R-1, Tab 6) by which it retains title until the full purchase price is paid.

[9] Mr. Kowdrysh paid the balance of $7,900.00 when the Air Seeder, Serial #4906, was delivered to his farm by Farm World. He believes that was mid-February, 1994. Assumption (h) is true. Farm World tried to sell the Kowdrysh trade from November 30, 1993 on. Mr. Kowdrysh and Farm World had dealt with each other before and each knew that the other would carry out its part of the transaction. There was complete trust between the parties.

[10] Assumptions 6(b) through (h) inclusive, and (l) through (p) inclusive were not refuted by the evidence.

[11] This was a contract by Farm World to sell "future goods" as that term is defined in the Saskatchewan Sale of Goods Act (R.S.S. 1978, Cap S-1, s. 2). Thus, subsection 7(3) of the Sale of Goods Act applies. It reads:

7(3) Where by a contract of sale the seller purports to effect a present sale of future goods the contract operates as an agreement to sell the goods.

[12] Mr. Kowdrysh identified the Air Seeder by a serial number 4906 on February 15, 1994 when the Air Seeder was actually delivered to Mr. Kowdrysh. It was not until this date that property passed from Farm World to Mr. Kowdrysh. For these reasons, the sale of the Air Seeder did not occur until February 15, 1994. Furthermore, Mr. Kowdrysh did not transfer his trade-in to Farm World until February 15, 1994 because there is no evidence to indicate that the trade-in actually passed to Farm World at any other date. Until then, Mr. Kowdrysh could have done whatever he wanted with the trade-in and paid its value on the contract to Farm World.

[13] For these reasons, the Court determines:

(a) The Appellant purchased Bourgault's Air Seeder Serial Number 4906 on February 15, 1994;

(b) The Appellant transferred the trade-in Model 2155H Bourgault Air Seeder to Farm World on February 15, 1994 for $22,615.

(c) This matter is referred to the Minister of National Revenue for reconsideration and reassessment of the assessments of Investment Tax Credit and of capital cost allowance accordingly. Based upon the foregoing, the appeals for 1991 and 1992 are dismissed and the appeal respecting 1993 is allowed in respect to the assessment respecting the Appellant's claim of cost allowance, which is to be recalculated.

[14] Because success is divided, there is no order as to costs.

Signed at Ottawa, Canada, this 3^rd day of September 1999.

"D.W. Beaubier"

J.T.C.C.