Date:
19971118
Docket:
A‑69‑94
CORAM: STRAYER J.A.
LINDEN
J.A.
ROBERTSON
J.A.
BETWEEN:
GSW
APPLIANCES LIMITED
Appellant
-
and -
HER
MAJESTY THE QUEEN
Respondent
REASONS
FOR JUDGMENT
LINDEN J.A.
[1] The central question in this appeal is
whether or not the appellant held inventory which could be the subject of an
inventory allowance deduction. Paragraph 20(1)(gg) of the Income Tax Act allows a taxpayer to deduct
a portion of the value of inventory. Both versions of that section read:
|
20.(1)...(gg) an amount in
respect of any business carried on by the taxpayer in the year, equal to that
portion of 3% of the cost amount to the taxpayer, at the commencement of the
year, of the tangible property (other than real property or an interest
therein) that was
(i) described in
the taxpayer's inventory in respect of the
business, and
(ii) held by him
for sale or for the purposes of being processed,
fabricated, manufactured, incorporated into, attached
to, or otherwise converted into or used in the
packaging of, property for sale in the ordinary
course of the business...
|
20.(l)...(gg) une somme
au titre de toute entreprise explitée par le contribuable pendant l'année,
égale au produit de 3% du coût indiqué, pour le contribuable, au début de
l'année, des biens corporels (autres que des biens immeubles ou des intérèts
dans deux-ci) qui étaient
(i)
décrits dans l'inventaire du contribuable au titre de l'entreprise
exploitée par ce dernier, et
(ii)
détenus par lui en vue d'étre vendus ou encore d'étre
tranformés, fabriqueés, manufacturés ou annexés à
des biens destinés à étre vendus dans le cours normal de l'exploitation
de l'enterprise, ou autrement convertis en ce
genre de biens ou utilisés dans l'emballage
de ce genre de biens...
|
The purpose of paragraph 20(1)(gg) is set out in Bastion
Management v. The Queen[i] where this Court states:
...properly
construed, the paragraph 20(1)(gg) deduction was meant to give some tax relief
from the effects of inflation to those taxpayers whose business involved
carrying inventory. [ii]
Without
the deduction, taxpayers carrying inventory would "realize" false
profits through the operation of inflation.
[2] In
order to qualify for the deduction, it is agreed that three conditions have to
be met. First, the taxpayer must have property in the goods which it can sell.
Second, the goods must be described in the taxpayer's inventory in respect of a
business carried on in the year. Third, the goods must be held for sale in the
ordinary course of the business, subject to the distinction between finished
and unfinished goods. Failure to satisfy any of these conditions will
disentitle the taxpayer to the benefit of the deduction. The question, then,
is whether the taxpayer satisfies these conditions.
Facts
[3] The
facts are not in dispute. The appellant, GSW Ltd., was a wholly owned
subsidiary of GSW. GSW Ltd. was in the business of manufacturing and selling
household appliances. On September 27, 1976 GSW entered into a
"Foundation Agreement" with Canadian General Electric Ltd. (CGE) for
the purposes of integrating their respective major appliance businesses. To
this end they caused a new company, Canadian Appliance Manufacturing Company
Limited-Limitée (CAMCO), to be incorporated. CAMCO was to acquire all the
assets of the subsidiaries of CGE and GSW (including the assets of the
appellant). GSW entered into an Asset Transfer Agreement with CAMCO on December
28, 1976. Under the agreement GSW agreed to cause its subsidiaries to convey
and transfer to CAMCO the assets used in carrying on the business of
manufacture, sale and servicing of major appliances. The agreement further
provided:
...the
closing (the 'Closing') of the transactions contemplated hereby shall take place
at the offices of...at 2:00p.m. on the 4th day of January, 1977 or at such
other place and time as shall be fixed by agreement of the parties (the
'Closing Date') but with effect as of the commencement of January 1, 1977 (the
'Effective Date'). (Appeal Book, vol. II, p. 166)
The closing did take place on January 4, 1977.
The appellant then sought to claim the deduction on the value of its inventory
authorized by paragraph 20(1)(gg) of the Act for 1977 (and carried back to
1976). The deduction was disallowed.
Reasons of the Trial Judge
[4] McKeown J. determined that, in order
to qualify for the deduction, contrary to this Court's decision in Bastion, the
inventory had to be owned by the taxpayer and held for sale (if finished goods)
or held for sale in the ordinary course of the business (if unfinished goods).
Nevertheless, he found that, because the appellant had already struck the Asset
Transfer Agreement before the commencement of 1977, the appellant did not have
tangible property held for sale. He states:
In the case
before me the taxpayer had already committed the inventory to be sold pursuant
to the agreements made in 1976. In fact these agreements were completed and the
inventory was sold as part of the overall sale. The December 28th and September
27th agreements amount to equitable transfers. (Reasons, p. 11, Appeal Book,
vol. II, p. 259)
The
Trial Judge dealt with other arguments raised by the appellant, but ultimately
decided the case on the basis of ownership of the property.
Submissions of the Parties
[5] For
the appellant, Mr. Arnold Englander, in his usually thorough and creative way,
concedes that the distribution of its assets during the course of its
winding-up is not in the ordinary course of the business. It was for this reason
that the appellant did not originally seek an inventory allowance on the
non-finished goods portion of its inventory. However, the appellant
submits that the words "in the ordinary course of the business" in
subparagraph 20(1)(gg)(ii) are not meant to modify "held for sale."
It is the appellant's position that this Court erred in deciding Bastion. In
that case, he contends that this Court failed to take into account the French
text, which uses the words "ou encore" where the english text
uses only "or". According to the appellant this must indicate that
the clauses of the subparagraph are distinct. Therefore, there is no necessity
that the finished inventory be held for sale in the ordinary course of the
business; this is only required for unfinished materials.
[6] The
appellant finds support for this argument in the subsequent enactment of
subsections 20(17) and (18)[iii]. Subsection 20(17) has the effect of
reducing the inventory deduction in certain circumstances. Those circumstances
are described in subsection 20(18):
20. ...
(18)
Definitions. For the purposes of this subsection and subsection (17),
(a)
"Qualifying Inventory" - "qualifying inventory" means
tangible property (other than real property or an interest therein or property
of a taxpayer that becomes property of a new corporation by virtue of an
amalgamation or merger) described in subparagraphs (1)(gg)(i) and (ii); and
(b)
"Specified transaction".-"specified transaction" means
(i)
a distribution by a corporation of qualifying inventory on or in the
course of its winding-up.
[7] These provisions limit the
applicability of the inventory deduction in the case of specified
transactions. "Qualifying inventory" is defined as inventory which
qualifies for a deduction under paragraph 20(1)(gg) and a "specified
transaction" includes the winding-up of a subsidiary with the distribution
of assets to the parent. If finished inventory had to be held for sale in the
ordinary course of the business, then, it is said, that paragraph 20(18)(a) would
never be applicable because the winding-up of a subsidiary does not occur in
the ordinary course of business. Mr. Englander, also presented some very
imaginative arguments in support of the position that GSW Ltd. was carrying on
a business in the year.
[8] Mr. Harry Erlichman for the respondent
relies in large part on the reasoning of McKeown J. In addition, he submits
that, on both the English and French versions of the section, the inventory
must be held for sale in the ordinary course of the business in order to
qualify for the deduction. The winding up of the company is not something
which occurs in the "ordinary course of the business."
Analysis
[9] As indicated above, three conditions
must be satisfied in order for the taxpayer to claim the deduction. In
deciding this case, however, because of the view taken by this Court and
because of the concession of Mr. Englander, it is necessary to deal only with
the requirement that the taxpayer hold the inventory for sale in the ordinary
course of the business. In doing so, we reject the appellant's arguments with
respect to this Court's decision in Bastion. In that case, the taxpayer
was a futures trader. Ordinarily, the business did not stock inventory. In an
effort to take advantage of paragraph 20(1)(gg) the taxpayer purchased large
quantities of gold and silver bullion just prior to its year end, at the same
time issuing offsetting futures contracts for the sale of the bullion just
after its year end at the same price. The Minister disallowed the deduction
and ultimately this Court upheld the Minister's reassessment. The central
question was whether or not the provision required the taxpayer to hold the
goods for sale "in the ordinary course of the business." This Court
found that the provision made sense only if it required that all inventory be
held for sale in the ordinary course of the business. This Court stated:
Despite the
awkwardness and complexity [of the subparagraph], however, in my view Mr.
Spiro's interpretation is the one that is most in accord with the purpose of
the provision, its context, its language and common sense. Its aim was to
provide relief against the effects of inflation to those taxpayers "whose
business required them to invest in and carry an inventory of tangible
goods" (see Mattabi Mines, supra).[iv]
[10] The
appellant in this case asks us to reconsider the decision in Bastion in
light of the French version of the text, which was not brought to the attention
of the Court in Bastion.
[11] In the
appellant's view the use of the word "encore" in conjunction with
"ou" in paragraph 20(l)(gg), where the English uses only the word
"or" indicates that the entire clause which follows is separate from
the preceding clause. Therefore, the words "vendus dans le cours normal
de l'exploitation de l'enterprise" do not modify "détenus par lui en
vue d'être vendus". We do not agree with this interpretation. The word
"encore" seems to be more accurately interpreted as a linguistic
flourish which allows the drafters to join the two clauses together more
smoothly. It is a matter of esthetics not one affecting the meaning of the
provision. Further, the words "dans le cours normal de l'exploitation de
l'enterprise" in the French version appear in the middle of the subparagraph,
which makes it even clearer than it is in the English version, that they are
meant to modify both uses of the word "vendus".
[12] Another
consideration is the placement of the words "annexés à des biens destinés
à être vendus dans le cours normal de l'exploitation de l'enterprise". This must be
interpreted as applying to materials (finished or unfinished) that are to be
attached to goods that are held for sale in the ordinary course of the
business. It would defy logic if goods that are to be attached to goods
destined to be sold in the ordinary course of the business qualified for the
deduction only if those goods to which they are destined to be attached are
unfinished. Furthermore, if we read it to mean both finished and unfinished
goods, then consistency demands that the expression "dans le cours normal
de l'exploitation de l'enterprise" apply identically to both categories of
goods. In other words "dans le cours normal de l'exploitation de
l'enterprise" cannot mean one thing with respect to goods attached to
other goods and another thing with respect to those other goods themselves.
[13] The Bastion
interpretation is further supported when we examine the status of packaging.
The distinction advanced by the appellant would force us to say that packaging
used for unfinished goods would qualify for the deduction (as long as those
goods were held for sale in the ordinary course of the business), but if used
for finished goods would not qualify for the deduction. If the two clauses are
distinct then the reference to packaging would not apply to finished goods. In
the English version "the packaging of" precedes "property for
sale in the ordinary course of the business." But in the French text this
clause follows that phrase and refers to "l'emballage de ce genre de
biens." If we read "ce genre de biens" as referring only to
unfinished goods then the result is unavoidable; the phrase cannot refer to
unfinished goods and finished goods as two distinct categories because
the words are in the singular. Therefore, "ce genre de biens" must
refer to goods in general, whether finished or unfinished, that are
"destinés à être vendus dans le cours normal de l'exploitation de
l'enterprise."
[14] The
appellant urges us to accept the argument that the subsequent enactment of
subsections 20(17) and (18) only makes sense if "held for sale" is
not modified by "in the ordinary course of the business." The
appellant argues that the definition of "qualifying inventory" as
tangible property described in subparagraphs 20(1)(gg)(i) and (ii) requires
that at the time of the specified transaction, the inventory be held for
sale or for the other purposes mentioned in subparagraph 20(1)(gg)(ii).
Because winding-up is included under the definition of "specified
transaction" it is clear that "in the ordinary course of the
business" cannot modify "held for sale," because the
distribution of assets on the winding-up of a company is not in the ordinary
course of the business. Therefore, it would be impossible for the taxpayer to
fulfil the condition of having "qualifying inventory" for the
purposes of subparagraph 20(1)(gg)(ii). If this Court were to find that
"held for sale" is modified by "in the ordinary course of the
business" then, in order to reconcile the decision in Bastion with
the enactment of these provisions, the appellant's counsel asks us to read in a
"but for" test. In other words, he suggests that the goods would have
been held for sale in the ordinary course of the business but for the
specified transaction. According to counsel for the appellant, this would make
sense of the qualifying inventory criteria.
[15] The
appellant's counsel is mistaken when he suggests that the definition of
qualifying inventory requires that at the time of the transaction it be held
for sale in the ordinary course of the business. There is a difference between
being held for sale in the ordinary course of the business and being sold in
the ordinary course of the business. Paragraph 20(1)(gg) does not require that
the inventory actually be sold in the ordinary course of the business in order
to qualify for the deduction, only that it be held for that purpose. If the
company were wound-up and the assets distributed to the parent, the taxpayer
might still qualify for the deduction. If the taxpayer were to hold the
property for sale in the ordinary course of the business, but subsequently
exchange them in a barter transaction, the deduction might not be disallowed on
that basis. Furthermore, the question arises as to why the legislature would
have wanted to distinguish between finished and unfinished goods. If we accept
the appellants reading of subsections 20(17) and (18) and its interpretation of
subparagraph 20(1)(gg)(ii) then the conclusion is that finished goods would be
affected but not unfinished goods. Unfinished goods, by virtue of the
requirement that they be held for sale in the ordinary course of the business,
could never be qualifying inventory for the purposes of paragraph 20(18)(a).
[16] When
interpreting the Income Tax Act, as with any statute, it is crucial to
remember the purpose behind its provisions. In this case we are dealing with a
government subsidy delivered through the tax system designed to help those
businesses that are forced to carry inventory during inflationary periods.
While, for purposes of this appeal, I do not find it necessary to deal with the
issue of whether or not the appellant had property in the goods on January 1,
1977, it is instructive to consider this point for purposes of statutory interpretation.
With regard to ownership it is important to look at the whole situation and
understand the relationship between the taxpayer and the goods. In Pardee
Equipment Ltd. v. The Queen[v]
, Reed J. states:
While the Federal Court of Appeal in Dresden stated that
in order to be inventory, goods have to be owned by the taxpayer, there was no
analysis in that case of the type of ownership interest that was required.
There was no analysis of the situation in which the indicia of ownership are
divided with someone other than the taxpayer holding the legal title until the
point of sale. In addition, in this case the evidence establishes that treating
the machines as inventory in the plaintiff's hands is consistent with ordinary
commercial accounting and business practices because the risks and rewards
associated with ownership rest with the plaintiff not Deere Canada.(emphasis
added). [vi]
[17] Reed J. finds a qualification to the ownership
criterion set down in The Queen v. Dresden Farm Equipment Ltd.[vii], but does so on a
principled basis. That is, by establishing that, if the "risks and
rewards" are to be the responsibility of the taxpayer, and therewith the
risk of inflation, the taxpayer may be able to come within the scope of the
deduction.
[18] Even if McKeown J. is mistaken in saying that
GSW Ltd. did not own the goods on January 1, 1977, it certainly was not
responsible for the "risks and rewards associated with ownership."
If the bottom dropped out of the major appliance market on January 1, GSW would
not have suffered. Furthermore, if inflation had run rampant, their profits
would not have been skewed, because the price had already been established by
the agreements signed in 1976. The rationale underlying the provision has no
application to the appellant's situation. Further, that rationale is unrelated
to the appellant's proposed interpretation of the Act.
[19] I, therefore, conclude that finished goods
must also be held for sale in the ordinary course of the business. At all
times during the taxation year 1977 the appellant held the goods for the
purposes of transferring them to CAMCO. They were not held for sale in the
ordinary course of the business to qualify for the deduction in paragraph
20(l)(gg). Consequently, the appeal will be dismissed with costs.
"A.M. Linden"
J.A.
"I agree
B.L. Strayer
J.A."
"I agree
J.T. Robertson
J.A."
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