J.D. Irving – Court of Quebec finds that a property serviced by the user was not a leasing property
The taxpayer and another pulp and paper company in the Irving group (“IPPL”) engaged in several transactions to effectively transfer non-capital losses (“NCLs”) from an oil refining company (“IOL”) in the Irving group to the taxpayer. In a representative transaction, IOL acquired pollution control equipment (“PCE”), that IPPL had been using in its pulp facilities, from IPPL on a rollover basis at a nominal agreed amount. The taxpayer almost immediately acquired the PCE from IOL for $120 million (claiming 100% of this amount as CCA for that year), and agreed to operate the PCE in consideration for “throughput fees” and cost reimbursements payable to it by IPPL pursuant to “Operating and Services Agreements” (“OSAs”) governed by New Brunswick law. In January of the next year, the taxpayer transferred the PCE “back” to IPPL on a rollover basis with a nominal elected amount – so that similar transactions could be repeated for that year, and so on.
The ARQ attacked on the basis that the PCE constituted leasing property to the taxpayer, so that the Quebec leasing property restriction rules denied the deduction of CCA so as to generate NCLs. In particular, although the OSAs provided that the taxpayer was to operate the PCE, the taxpayer delegated to IPPL, in consideration for fees, the performance of all such operating services, so that nothing changed “on the ground.”
In allowing the taxpayer’s appeal and finding that the PCE generated business income rather than leasing revenue to it, so that the targeted NCLs were generated, Fournier JCQ accepted the submissions of the taxpayer that a “legal right of exclusive possession is essential to the existence of a lease at common law” and that here “no legal right of possession of the PCE is conferred upon IPPL under the Operating and Services Agreement, let alone an exclusive right of possession.” Furthermore, the delegation of the performance of the services to IPPL (who had been performing them all along) did not detract from the services nature of the OSAs: similarly to Stubart, the taxpayer “carried on business through an agent, in this case IPPL.”