Date: 19971215
Docket: 96-2388-IT-I
BETWEEN:
MARIA CROPPER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The appellant, Maria Cropper, appeals from an assessment
of tax in respect of her 1993 taxation year. The issue arising in
this appeal is whether certain equipment is qualified
small-business property within the meaning of subsection 127(9)
of the Income Tax Act ("Act") and thus a
property eligible for the investment tax credit provided for in
subsection 127(5) of the Act.
[2] The appellant resides in Naicam, Saskatchewan, and is
married to Allan Cropper. Mr. Cropper and Mrs. Cropper each
own 50 percent of the shares of Cropper Motors Inc., through
individual holding companies. Cropper Motors Inc. carries on the
business of selling cars, farm implements and recreational
vehicles. Mr. Cropper also owns substantially all the shares of T
& A Farms Ltd. This company carries on the business of
farming and in 1993 farmed about 3500 acres; it was, and is,
managed by Mr. Cropper’s brother. Mr. Cropper keeps in
touch with his brother by office radio. The farmland and the site
of the business carried on by Cropper Motors Inc. are
contiguous.
[3] A purchase agreement entitled Contract for the Sale of
a New Farm Implement was executed between Cropper Motors Inc.
and Allan and Maria Cropper on December 31, 1993 for the purchase
and sale of various equipment including a 1993 New Holland TR96
combine and a 1993 971 New Holland header and a 1993 Rake-up
pickup. This appeal deals specifically with the sale of the
latter equipment (which I will refer to as the
"Combine") at a cost of $121,146.00.
[4] By a document entitled “New Farm Equipment
Lease” which was “effective December 31, 1993”,
Mr. and Mrs. Cropper leased the Combine to T & A Farms
Ltd. The lease was signed by Allan Cropper and Maria Cropper, in
their respective capacities of lessors, and by Allan Cropper on
behalf of T & A Farms Ltd. The lease provided that T & A
Farms Ltd. pay rent to the lessors on an amount agreed to by the
parties, according to the fair market value utilisation of the
farm equipment, and a reasonable stand-by charge for having the
machines available for use. (The lease did not provide for a
formula or other method or means to determine “fair market
value utilisation” and a “reasonable” stand-by
charge.) It also provided that T & A Farms Ltd. would be
responsible for the operating costs. The lease also provided
that:
This lease can be cancelled at any time with the consent of
both the Lessor and Lessee giving notice in writing.
This lease was essential for the appellant to fulfil the
statutory requirements of subsection 127(9) of the Act
since, to claim an investment tax credit, the qualified small
business property must be acquired by a taxpayer to be leased to
a person with whom the taxpayer does not deal at arm’s
length.
[5] According to Mr. Cropper the farm required a new Combine
and the transaction was so structured so as to obtain the
investment tax credit.
[6] Once T & A Farms Ltd. leased the Combine, Mr. Cropper
said, his brother and a hired man “spent about a
week” adjusting the Combine for a “header” to
be attached to it. There was “lots of trial and
error”. Mr. Cropper intended to use the Combine for
harvest. He explained that the Combine was acquired for the
purposes of farming and that the majority of the time the Combine
was operated on the farm to prepare the Combine for the harvest
and for experimental purposes. Mr. Cropper estimated that T &
A Farms Ltd. spent nine hours making various adjustments and
verifying if the adjustments were satisfactory. The manufacturer
of the Combine, Ford Motor Company, may have tested the Combine
for another two hours at its assembly plant.
[7] On four different occasions during the months of July and
August 1994, Cropper Motors Inc. advertised for sale under the
heading "Used Combines" a "new 93 TR96, Rake-Up
PU, chop" in The Western Producer, a newspaper
distributed in Western Canada. Mr. Cropper confirmed that the
Combine in issue was the same combine advertised for sale. Mr.
Cropper testified that “in our business, anything we have
is for sale. If I give my wife a car one day ... [I] could sell
[it] the next day”. He stated he, or rather Cropper Motors
Inc., does the same with farm equipment. He declared he could
“switch” a machine on the field of the farm if a
customer of Cropper Motors Inc. wanted to buy it.
[8] In fact, on August 25, 1994, after local area farmers,
Kent Baxter and Barry Baxter, offered to purchase the
Combine Cropper Motors Inc. repurchased the Combine from the
appellant and her spouse at the original sale price of
$121,146.00. The contract of sale was made between Allan Cropper
only and Cropper Motors Inc.; the appellant's name does not
appear on the contract for sale (Exhibit A-5). A cheque in the
amount of $121,146.00 dated “8/26/94” drawn from the
account of Cropper Motors Inc. at the Canadian Imperial Bank
of Commerce is made out solely to Allan Cropper (Exhibit
R-3).
[9] On August 29, 1994, the Combine was sold by Cropper Motors
Inc. to Kent and Barry Baxter for $130,000.00. Evidence was
led at trial by the appellant that notwithstanding the sales
contrat between Cropper Motors Inc. and the Baxters was in the
form used for the sale of new farm equipment, the Combine had
been used at the time of sale and was sold as used equipment. Mr.
Cropper stated the machine was “used to adapt the
header” although no grain had run through the Combine. The
Baxters were so advised, stated Mr. James Brady, the salesman who
sold the Combine to the Baxters. Mr. Cropper stated that the
Combine was identified on the contract by a code reference to
used Combines. Also, the financing of the purchase was at a rate
of interest for used equipment. This evidence was confirmed by
Mr. James Brady, the salesman who sold the Combine to the
Baxters.
[10] Counsel for the appellant informed the Court that both
Messrs. Baxter were unavailable to attend at Court since the
hearing of this appeal was being held during the busy harvest
season. Moreover, they lived 70 to 80 miles away from Saskatoon,
where the hearing of this appeal was held. Mr. Brent Ball, an
officer of Revenue Canada, testified that in the course of his
investigation he met with Messrs. Baxter who informed him that
the Combine looked new and that they thought they were buying a
new machine. In fact, he said, one of the brothers said he first
saw the Combine at Cropper Motors Inc.
[11] Mr. Brady attended at the Baxter farm two days before
trial and produced a document, dated September 24, 1997, executed
by the Baxters, in the following form, inter alia:
When we, Barry Baxter & Kent Baxter, of Codette,
Saskatchewan, purchased a New Holland TR96, serial # 554548, from
Cropper Motors Inc., of Naicam, Saskatchewan on August 29, 1994,
we were told that this unit had been sold to Allan & Mary
Cropper on December 31, 1993, and that we would be buying this
combine as a used unit.
...
There was approximately 11 hrs on the combine when we took
delivery.
...
[12] The appellant's position is that it is not relevant
whether or not the Combine was actually used for harvesting.
Rather, it is the intention of using it in farming operations
that is important for the purposes of the Act. Also, the
experiments performed with the Combine was farming.
[13] The respondent's submissions was to the effect that
if the equipment was not used in the field, it could not be said
that it was used for the purposes of farming.
Analysis
[14] Subsection 127(5) of the Act provides that a
taxpayer may deduct from his or her tax payable amounts equal to
the total of his or her investment tax credits. "Investment
tax credit" is defined in subsection 127(9) as meaning the
amount equal to
(a) the total of all amounts each of which is the
specified percentage of
(i) the capital cost to the taxpayer of approved project
property, certified property, qualified construction equipment,
qualified property, qualified small-business property or
qualified transportation equipment acquired by the taxpayer in
the year,
(ii) [...][1]
"Qualified small-business property" is defined in
subsection 127(9) of the Act as follows for the 1993
taxation year[2]:
"qualified small-business property" means property,
acquired by a taxpayer who was an eligible taxpayer at the time
the property was acquired, that, if this subsection were read
without reference to subsection (11.2), would be
...
(c) qualified property of the taxpayer if the
definition "qualified property" were read without
reference to paragraphs (a) and (d) of it and if the reference in
paragraph (b) of it to "after June 23, 1975" were read
as a reference to "after December 2, 1992 and before
1994",
...
and where the property was acquired by the taxpayer to be
leased to a person with whom the taxpayer does not deal at
arm's length and the property is used by the person in Canada
primarily for the purposes described in any of the definitions
"qualified construction equipment", "qualified
property" and "qualified transportation
equipment", for the purposes of this subsection, the
taxpayer shall be deemed to have acquired the property for that
use;
“Qualified property” is defined in subsection
127(9) of the Act. The relevant portions are as
follows:
"qualified property" of a taxpayer means property
(other than an approved project property or a certified property)
that is
...
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975,
that has not been used, or acquired for use or lease, for any
purpose whatever before it was acquired by the taxpayer and that
is
(c) to be used by the taxpayer in Canada primarily for
the purpose of
...
(x) farming or fishing,
..., or
[15] There is no need to analyse in great detail whether the
appellant meets all of the criteria to qualify for the investment
tax credit. As I see it the issue in this appeal is whether the
Combine was used by T & A Farms Ltd. “primarily for the
purpose of ... farming".
[16] There are a number of facts in this case which lead me to
find that the Combine was not used by the appellant primarily for
the purpose of farming. Mr. Cropper dealt with Cropper
Motors Inc., T & A Farms Ltd. and any property he owned
jointly with the appellant in any manner he wished without
interference of any other director of either corporation or the
appellant. Mr. Cropper could have caused the sale of the Combine
to him and his appellant to be rescinded at any time Cropper
Motors Inc. found a purchaser for the Combine. This was his
practice. Anything his family or T & A Farms Ltd. had
acquired from Cropper Motors Inc. by loan, lease or sale, was, as
far as he was concerned, still available for sale by Cropper
Motors Inc. to an arm’s length third party. No lease or
sale to a non-arm’s length person stood in his way. The
transfer back of the Combine from Mr. Cropper or the appellant to
Cropper Motors Inc. was not an unusual occurrence. Indeed,
Cropper Motors Inc. was advertising the Combine for sale as
"new" at the time the Combine was leased by Mr. and
Mrs. Cropper to T & A Farms Ltd.
[17] It may well be that T & A Farms Ltd. acquired the
Combine for farming. It may well be that the work carried on to
adapt the Combine to the header was work that one may consider to
be farming. However, at all relevant times, the appellant, T
& A Farms Ltd., Mr. Cropper and Cropper Motors Inc. all knew
that if a prospective customer of Cropper Motors Inc. wished to
purchase the Combine, the Combine would be taken from the farm
and made available to Cropper Motors Inc. for sale and delivery
to the customer. The Combine, therefore, could not be said to
have been used by T & A Farms Ltd. primarily for
the purpose of farming. The directors of T & A Farms Ltd.
knew that when the corporation leased the Combine the lease may
be cancelled at any time for the return to Cropper Motors Inc.
and it may never be used for farming by T & A Farms Ltd. T
& A Farms Ltd. did not have “first call” on the
Combine; its use by T & A Farms Ltd. was subject to the whim
of Mr. Cropper. T & A Farms Ltd. did not use the property
primarily for farming. If it used the Combine, it used the
property primarily for purposes other than farming.
[18] The appeal is therefore dismissed.
Signed at Ottawa, Canada this 15th day of December 1997.
"Gerald J. Rip"
J.T.C.C.
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