Laurent Goulet & Fils Inc. v. Minister of National Revenue, [1992] 1 CTC 2419, 92 DTC 1610

Tremblay, T.C.C.J.:—This appeal was heard on November 2, 1990 at Quebec City, Quebec.

1. Point at Issue

The question is whether the appellant company is correct in claiming the $12,884 tax credit for the 1986 taxation year. The appellant relied on subsection 127(9) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The respondent disallows the said tax credit, alleging that the slasher which is the property for which the investment tax credit was claimed was not bought by the appellant, simply leased. In the respondent's submission, one of the conditions of subsection 127(9) of the Act for the tax credit to be granted is that the property be bought, not simply leased as in the instant case.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the same judgment, the Court held that the facts presumed by the respondent to support assessments or reassessments are also presumed to be true until the contrary is shown. In the instant case, the facts presumed by the respondent are described in paragraphs 5(a) to (i) of the respondent's reply to the notice of appeal. At the outset of the inquiry, counsel for the appellant admitted or denied these facts. This paragraph reads as follows:

[Translation]

5. In making the reassessment of July 27, 1989 at issue, the respondent relied inter alia on the following facts:

(a) the appellant is a company which operates forest machinery; [admitted]

(b) on July 4, 1985 the appellant leased a Tanguay slasher (serial No. 1C1021F190) from Hewitt Equipement Ltée, the lessor, as described in lease contract No. LF-01743 concluded with that company; [admitted (Exhibit A-1)]

(c) lease contract No. LF-01743 provides for the payment to Hewitt Equipement Ltée by the appellant of a monthly rental of $8,000 for rental of the slasher; [admitted]

(d) on July 4, 1985, Hewitt Equipement Ltée also gave the appellant an option to purchase the aforementioned slasher, by contract No. PF-13583; [admitted (Exhibit A-2)]

(e) under the contract the option was to be exercised in July 1986 for a price which the parties considered in July 1985 as not below the fair market value of the slasher at the time the option might be exercised; [denied]

(f) the appellant did not exercise this purchase option and paid Hewitt Équipement Ltée three months' rental, namely $24,000; [denied]

(g) on January 24, 1986 the appellant leased the same slasher without an option to purchase, not from Hewitt Equipement Ltée but from Location Pierre Lafleur Ltée, at a monthly rental of $4,352.91; [denied]

(h) the appellant only leased the slasher in question during the taxation year

ending April 30, 1986 to use it in connection with its business; [denied]

(i) the respondent accordingly:

— disallowed the $32,209 investment tax credit claimed, and accordingly the $12,884 investment tax credit refund claimed for the 1986 taxation year; [admitted]

— but allowed a deduction for rental expenses of $36,118 instead of the $6,298 interest expense deduction claimed. [admitted]

3. Facts

3.01 The appellant's 1986 taxation year began on May 1,1985 and ended on April 30, 1986. The appellant's principal work is sawing trees and loading them on vehicles.

3.02 According to Exhibit A-2, in granting the purchase option Hewitt Equipement Ltée agreed that 100 per cent of the rental paid would be deducted from the purchase price of the slasher. That price was set at $164,000. On Exhibit A-2, the following information appears:

If you exercise this option a conditional sale contract will result, subject to the terms and conditions stipulated in the contract, which provides that we will remain sole owners of the machinery until payment in full is made, and which sets out the conditions and remedies in the event of non-payment.

The purchase option was to be exercised in July 1986 at the latest.

3.03 According to Mr. Laurent Goulet, president of the appellant company, in January 1986 the Hewitt Equipement Ltée salesman met with him in his office to find out whether he was interested in exercising the purchase option, in which case Hewitt Equipement Ltée would suggest the name of an institution that would finance the purchase. At that time, the appellant had made three payments totalling $24,000. Mr. Goulet accepted on behalf of the appellant.

3.04 Shortly thereafter, Location Pierre Lafleur Limitée, which has its office at 4300 rue Jean-Talon Ouest, Montreal, sent the appellant a contract entitled [Translation] "vehicle rental contract" (Exhibit A-3), which was completely filled in and required only signature. This contract was dated January 24, 1986. It contains, inter alia, the following:

3.05 Clause 2 of contract A-3, titled LICENCE", contains the following:

Ownership title and ownership of all vehicles leased shall remain with the lessor, and said vehicles shall be registered in the lessor’s name.

On the registration transaction form No. 4015464 issued by the Régie de l'assurance automobile du Quebec (Exhibit A-6), the name Location Pierre Lafleur Ltée appears in the space reserved for the name of the leasing company in the event of a long-term lease. The name of Laurent Goulet & Fils Inc. is also in the space reserved for the lessee.

3.06 On February 11, 1985 Hewitt Equipement Ltée sold Location Pierre Lafleur Ltée the slasher for $140,458.50 (Exhibit 1-3). That exhibit states that the slasher had already been shipped to Laurent Goulet & Fils Inc. It is only for that purpose that 1-3 mentions the appellant's name.

3.07 It seems clear that in its 1986 tax return the appellant claimed the investment tax credit refund of $12,884, which was disallowed. After it was disallowed, the appellant's accountant sent to the respondent form T2S(1) titled "declaration of income" [sic], claiming rental expenses of $36,118 incurred in the 1986 fiscal year. This was also noted in the presumed facts and admitted by the appellant in paragraph 5(i) of the reply to the notice of appeal, mentioned above (2.02).

3.08 Mr. Goulet states that after the assessment issued on July 27, 1989 disallowing the investment tax credit refund, the respondent claimed $16,678.02 from the appellant (Exhibit A-4). The appellant's bank account was attached on October 23, 1989. The appellant was forced to borrow the amount owing. It is still making monthly payments of $441.62 to repay the loan. This debt will cost it a total of $25,000.

3.09 Mr. Goulet also said that at the time of the original rental from Hewitt Equipement Ltée the salesman, Mr. Serge Harvey, told him that he would be entitled to the investment tax credit. This was one of the reasons he decided to acquire the slasher.

3.10 Mr. Goulet testified that, in 1987, the appellant sold the slasher to his son. The latter then continued making the monthly payments and the final payment of $13,744.60. There apparently was no written contract to this effect, only a verbal agreement.

3.11 Mr. Marc-André Castonguay, credit manager for Hewitt Equipement Ltée, confirmed that he authorized the contract for rental of the slasher to the appellant (Exhibit A-l). He also confirmed the sale of the slasher to Location Pierre Lafleur Ltée in February 1986 (Exhibit 1-3). He said that Location Pierre Lafleur Ltée could provide the appellant with financing. He maintains that Location Pierre Lafleur Ltée does rentals exclusively.

4, Act—Case Law and Doctrine—Analysis

4.01 Act

The principal provision of the Income Tax Act involved in the instant appeal is that which defines "qualified property" in paragraph 127(9)(b), reading as follows:

127.(9) In this section,

"qualified property" of a taxpayer means property (other than 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 . . .

4.02 Case law and doctrine

The case law and doctrine cited by the parties are as follows:

1. M.N.R. v. Wardean Drilling Ltd., [1969] 2 Ex. C.R. 166, [1969] C.T.C. 265,69 D.T.C. 5194;

2. Cesser Estate v. The Queen, [1989] 2 C.T.C. 31, 89 D.T.C. 5274 (F.C.T.D.);

3. Saskatchewan Wheat Pool v. The Queen, [1985] 1 C.T.C. 31, 85 D.T.C. 5034 (F.C.A.);

4. The Queen v. Lagueux & Frères Inc., [1974] C.T.C. 687, 74 D.T.C. 6569 (F.C.T.D.);

5. Fortin et Moreau Inc. v. M.N.R., [1990] 1 C.T.C. 2583, 90 D.T.C. 1436 (T.C.C.);

6. Laliberté v. M.N.R., 89-247 (T.C.C.) (unreported);

7. J.F. Burns Sand & Gravel Ltd. v. M.N.R., [1968] Tax A.B.C. 218, 68 D.T.C. 226;

8. Browning Harvey Ltd. v. M.N.R., [1990] 1 C.T.C. 161, 90 D.T.C. 6105 (F.C.T.D.);

9. Pitman v. M.N.R. (1950), 2 Tax A.B.C. 176, 50 D.T.C. 295;

10. Interpretation Bulletin IT-331R.

4.03 Analysis

A—Argument of counsel for the appellant

4.03.1 Counsel for the appellant argued that on the date contracts A-l and A-2 were concluded, namely July 4, 1985, the appellant already intended to acquire the slasher. Moreover, it was in part because of the information received from the salesman for Hewitt Equipement Ltée, Mr. Serge Harvey, that it would be entitled to the investment tax credit, that it made its decision (3.01, 3.02 and 3.09).

4.03.2 Further, counsel submitted, the appellant always had the machinery in its possession, from July 1985 until 1987 when it sold the machinery to Mr. Goulet's son. It therefore had the machinery throughout the year at issue, that is the appellant's 1986 fiscal year. Counsel contended that, where personal property is concerned, possession amounts to title.

4.03.3 Far from waiting till July 1986, the appellant exercised its purchase option in January 1986. If it had exercised its purchase option with Hewitt Equipement Ltée, it would have concluded a conditional sale contract in accordance with the clause in contract A-2 (3.02).

At the suggestion of Mr. Harvey, the Hewitt Equipement Ltée representative, however, the appellant was given an appropriate financial institution to finance the purchase. The appellant gave its consent in good faith (3.03). Shortly afterwards, it signed contract A-3 (3.04). This was a leasing as mentioned in article 1603 of the Civil Code, which will be discussed below. Contract A-3 was pursuant to contract A-l and A-2. The option was exercised in January 1986, and thus within the July 1986 deadline mentioned in contract A-2 (3 02). The final payment of $13,744.60 (3.04) gave the ownership to the appellant, which in fact happened, even though the appellant had sold it before all the payments were made to Mr. Goulet's son (3.10), and this was after the end of the year at issue.

4.03.4 Counsel for the appellant cited Interpretation Bulletin IT-33IR, which deals with the investment tax credit. Paragraph 21 on lease option agreements as a means of purchase reads as follows:

21. If a leasing agreement is entered into, it may be necessary to determine whether the payments are in substance payments of rent or payments on account of the purchase price of property. Where an examination of the transaction indicates that a" lessee" is in fact purchasing a property, that taxpayer is entitled to the investment tax credit on the property if it otherwise qualifies. Where the examination of the agreement indicates that a lease does in fact exist, the lessor is entitled to the investment tax credit on property that otherwise qualifies. IT-233R discusses Lease-Option and Sale-Leaseback agreements.

Further, counsel for the appellant noted, Location Pierre Lafleur Ltée took into account the payments made to Hewitt Équipement Ltée in determining in contract A-3 the price on the basis of which the payments would continue. The original price in contract A-l was $164,000 (3.02). The appellant had paid $24,000 (3.03), and $140,000 therefore remained. The price set by Location Pierre Lafleur Ltée was $137,046 (3.04).

4.03.5 Paragraph 18 of Bulletin IT-331 R deals with the condition that, to qualify for an investment tax credit, the property must be new. It should not have been used before the purchase by a prior purchaser. This paragraph reads as follows:

18. As indicated in 9, 10, 12 and 13 above, qualified property, qualified transportation equipment, qualified construction equipment and certified property must be property which was not used for any purpose whatever before it was acquired by the taxpayer. The property must not only be new when acquired by the taxpayer but it must not have been acquired for use or lease or for any purpose whatever by any previous owner. As a result of these requirements, if a property that has been used or was acquired for a use (even though unused) is transferred to a new owner, eligibility for the investment tax credit is not transferable. In such a situation the former owner remains eligible for this credit provided the other requirements are satisfied. A piece of equipment that is used regularly for demonstration purposes (a'"demonstrator") would not qualify; however, new equipment that is demonstrated to or "test" driven by, a prospective purchaser of that particular piece of equipment would not normally be considered to have been used for a purpose”.

Once again, counsel argues that the appellant always had the slasher in its possession from July 1985 until the end of the 1986 fiscal year on April 30. No other owner used it.

B—Argument of counsel for the respondent

4.03.6 Counsel for the respondent based her conclusion that the appeal should be dismissed inter alia on the argument that the property was not acquired by the appellant and that, further, the property was also acquired by someone other than the appellant.

4.03.7 To qualify within the meaning of s. 127(9) above (4.01), property must have been acquired after June 23,1975. It is not the date which is at issue, but the acquisition.

What is the ordinary meaning of the word "acquérir" (acquire)? As its first meaning, Petit Robert gives "devenir propriétaire de (un bien, un droit), par achat, échange, succession" (to become owner of (property, right) by purchase, exchange, inheritance) The Private Law Dictionary of the Quebec Research Centre of Private and Comparative Law defines the words "acquire" and "acquisition" as follows:

Acquire

(Prop. and Obi.) To effect the acquisition of property.

Acquisition

(Prop. and Obi.) Fact of becoming owner of property . . .

In the submission of counsel for the respondent, there is no written evidence that the appellant exercised the purchase option. Contract A-3 is a rental contract and not a conditional sale as provided in contract A-l (3.02).

In Wardean Drilling Ltd. (4.02.1), at page 271 (D.T.C. 5197), Cattanach, J. had to decide on the time an oil platform was purchased:

In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk.

At page 271 (D.T.C. 5198), he returned to the same theme as follows:

. . . or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements.

In Saskatchewan Wheat Pool (4.02.3), at pages 33-34 (D.T.C. 5037-38), it was held that the risk of loss by act of God is certainly a good way of identifying ownership of property.

4.03.8 It is quite clear from contract A-l that it is Hewitt équipement Ltée which was owner, and that it is this company which would suffer loss in the event of destruction by act of God.

There is no question that from July 1985 to January 1986 the purchase option was not exercised, because the appellant was only a lessee. In Pitman (4.02.9), the following was noted, inter alia, at page 179 (D.T.C. 297):

It has long been settled law that such an option is collateral to, independent of and not incidental to the relation of landlord and tenant (Woodall v. Clifton, [1905] 2 Ch. 257, (C.A.) per Romer, L.J. at p. 279;

The respondent also relied on this argument of law in maintaining that contract A-3 with Location Pierre Lafleur Ltée is not a result of the purchase option. Nothing in contract A-3 says this expressly. Further, it is not a conditional sale as provided in contract A-l.

C—Opinion of the Court

4.03.9 I said earlier that contract A-3 was a leasing as mentioned in article 1603 of the Civil Code (4.03.3). This article of the Civil Code is part of Chapter First, titled "Of the lease of things”, of Title VII, titled "Of lease and hire", of Book Three, titled "Of the acquisition and exercise of rights of property".

Article 1603 reads as follows:

This chapter does not apply to a leasing made by a person who carries on the business of lending or granting credit and who, at the request of the lessee, has acquired from a third person ownership of the property forming the object of the contract provided that

1. the leasing is made for commercial, industrial, professional or handicraft purposes;

2. the leasing relates to a moveable;

3. the lessee has personally chosen the property;

4. the lessor conveys expressly to the lessee the warranty resulting from the sale entered into with the third person; and that

5. the conveyance of warranty is accepted without reserve by the third person.

It is clear from this article that the ""person who carries on the business of lending . . . has acquired from a third person ownership . . .”. In the case at bar, Location Pierre Lafleur, the "person who carries on the business of lending”, purchased the slasher from Hewitt Equipement Ltée. Location Pierre Lafleur is clearly the" institution that would finance the purchase" promised to Mr. Goulet in January 1986 (3.03).

It therefore follows that the owner of the property in question is the lessor, namely Location Pierre Lafleur.

In a recent judgment (D. Dumais & Fils Inc. v. M.N.R., [1991] 1 C.T.C. 2652, 92 D.T.C. 1107, Judge Alban Garon referred [to] Pierre-Gabriel Jobin and Robert Demers on leasing at page 2657 (D.T.C. 1T12):

[Translation]

As Pierre-Gabriel Jobin says in Traité de droit civil [in the section dealing with the lease and hire of things at page 71] this contract confers no real right on the user of the property, but merely a jus ad rem. Robert Demers has also expressed a similar view in a study entitled "Le Financement de l'entreprise, aspects juridiques”, which appeared in the Revue de droit de I" Université de Sherbrooke. The following passage at page 228 is of particular interest. I quote:

[Translation]

It is thus clear from an economic point of view that the relationship between the manufacturer and the lessee is one of purchaser and seller and that the participation of the credit companies in the operation is a purely financial one. The lease agreement provides that the latter offers the lessee no enjoyment and that the lessee must perform his financial obligations even if the property is unusable, though of course he will have a remedy against the manufacturer. There is a considerable advantage to the parties in this procedure. For the credit company, ownership title is the ideal security in that it cannot be challenged by preferred creditors, and offers clear protection in the event of bankruptcy. Similarly, from the tax standpoint the rules on depreciation and investment tax credits add to the attraction of this type of financing.

4.03.10 Under contract A-3, the one concluded with Location Pierre Lafleur Ltée, who would have suffered the loss in the event that the property was destroyed by act of God?

In my opinion the answer is provided by clause 8 of this contract, and I quote the following passage from that clause:

[Translation]

As soon as possible after the expiry of this contract (except as the result of a declaration of default made by the lessor under clause 18 hereof) for each vehicle, the lessor shall attempt to arrange the sale of the said vehicle at the highest possible price.

Depending on the condition of the vehicle, there could be a shortfall to be paid by the buyer (the lessee) or a refund to be paid by the seller (the lessor).

It therefore seems clear that while contract A-3 was in effect, and until it expired, the lessor was the owner and it was he who would suffer the loss. This deduction from clause 8 also confirms what is clearly stated in clause 2 above, in 3.05.

4.03.11 Another reason in support of dismissing the appeal is that a transfer of ownership took place between Hewitt £quipement Ltée and Location Pierre Lafleur Limitée on February 11, 1986 (4.03.6).

Subsection 127(9) provides as follows:

. . . means property . . . that is

(b) . . . machinery and equipment. . .

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 . . .

The appellant's arguments would have had greater weight if Hewitt équipement Limitée had financed the appellant itself after a clearly expressed purchase option, confirmed by a conditional contract of sale.

5. Conclusion

The appeal is dismissed.

Appeal dismissed.