Setrakov Construction Ltd. v. Minister of National Revenue, [1989] 2 CTC 2147, 89 DTC 396

Teskey, T.C.J.: —The appellant herein appeals from a notice of reassessment dated September 24, 1985 concerning its 1980 taxation year wherein a Business Tax Credit of $21,892.70 was disallowed on the basis that the asset purchased did not qualify under subsection 127(10) of the Income Tax Act.

The appellant disputes the assumption of facts put forward by the respondent in his amended reply to notice of appeal and submits that the asset was in fact “qualified property" pursuant to said subsection 127(10).

In 1980 the relevant portions of subsection 127(10) read as follows:

127(10) For the purposes of subsection (9), a “qualified property" of a taxpayer means

(b) prescribed machinery and equipment acquired by the taxpayer after June 23,1975 that has not been used for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(v) exploring or drilling for petroleum or natural gas.

The respondent relied upon the following assumptions of fact:

(a) the appellant acquired a Caterpillar in 1980;

(b) the appellant acquired the Caterpillar for the purpose of leasing it to Crowbar Construction Co. Ltd. ("Crowbar");

(c) the Caterpillar was leased to Crowbar;

(d) the relationship between the appellant and Crowbar was that of lessor-lessee, not that of principal-agent, trustee-beneficiary, or any other arrangement;

(e) the appellant's principal business was a construction operation and not leasing property, manufacturing property that it sells or leases, the lending of money, the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills for exchange of other obligations representing part or all of the sale price of merchandise or services, or selling or servicing a type of property that it also leases, or any combination thereof.

The evidence adduced at trial confirms the Minister’s assumptions of fact in subparagraphs (a) and (e) above.

The Court finds the following additional facts:

(i) The appellant ordered a new Caterpillar D-8 tractor serial #D8-77V13103 (hereinafter referred to as the "Cat") on March 21, 1980 and took delivery on March 31, 1980 when it was paid for in full.

(ii) At the time the said "Cat" was ordered, the appellant was expecting to receive approximately $300,000 worth of contracts from major oil companies for work in Canada that would fall under subparagraph (c)(v) above i.e. "exploring or drilling for petroleum or natural gas" and to use the "Cat" exclusively in those contracts.

(iii) After the completion of the purchase and before the construction season commenced, the said oil companies abandoned their projects in the territorial area the appellant operated in.

(iv) The appellant was owned and operated by Eugene Setrakov.

(v) Throughout the months of April and May in 1980 the "Cat" was kept at the appellant's shop yard ready for use by the appellant exploring for petroleum should the oil companies reverse the decision set forth in (iii) above.

(vi) The appellant, because the oil exploration work in his working area had dried up, entered into a contract on June 7, 1980 with Crowbar Construction Limited (hereinafter referred to as "Crowbar") rather than leave the "Cat" idle. Crowbar was owned and operated by Lambert Maier a son-in-law of Eugene Setrakov.

(vii) It was agreed that Crowbar would take the "Cat" to his working area approximately 260 km away and use it for his contract work and to pay the appellant all the money the "Cat" made.

(viii) Crowbar had numerous contracts with various companies such as Page Petroleum, Saskatchewan Oil, Dome Petroleum, Bow River Pipeline and Gulf Canada. The appellant had no connection in any manner with these contracts. Crowbar did all the bidding and negotiating for the work, performed the work with its own machinery and the "Cat", hired its own operators as well as paid all expenses. The "Cat" was used exclusively in Saskatchewan for preparing sites for the drilling for petroleum or natural gas.

The appellant had no control over:

(i) the use of the “Cat”,

(ii) the charges Crowbar would charge for the “Cat”, or

(iii) where the "Cat" would be used.

(ix) It was understood the appellant could get the "Cat" back at anytime if it needed the "Cat" for its own operation. The appellant maintained insurance on the "Cat" with the Royal Insurance Corporation of Canada.

The only written evidence that passed between the appellant and Crowbar are Exhibits A-15 and A-16.

A-15 is a statement dated November 16, 1981 from the appellant to Crowbar which in part says "Re D-8 Rental". The D-8 refers to the "Cat".

A-16 is a 1981 statement from the appellant to Crowbar concerning a contract entered into by the appellant on behalf of Crowbar with Saskatchewan Telephone which in part says "D-8 'Cat' rental payment cheques (not cashed)". The D-8 "Cat" rental refers to the "Cat".

The original notice of objection dated June 17, 1986 (Exhibit A-3) by the appellant states "The equipment was leased to Crowbar Construction."

This was later amended by Exhibit A-4 to read: "The equipment was given to Crowbar Construction as our agents.”

The two issues herein are:

(1) Does the finding of facts as set forth above place the appellant within the said subsection 127(10)?

(2) Once the appellant falls within subsection 127(10), can its action disentitle it to the tax credit?

Issue 1

To determine the first issue the Court must interpret the words "to be used by him”. The Court is of the opinion that the important element is the intention of the purchaser at the time of purchase. The Court accepts as authority for this the decision of the Newfoundland Supreme Court in Stead Lumber Co. Ltd. v. Lewis (1958), 13 D.L.R. (2d) 34, wherein it interpreted the words "furnished to be used” as found in the Mechanics Lien Act of that province. The Court finds that at the time the "Cat" was purchased, the appellant intented to use it in Canada primarily for exploring for petroleum or natural gas. The only reason the appellant did not actively use the equipment for this purpose is that exploration work in his trade area was halted by the oil companies. It is immaterial to this case that the "Cat" was actively used for this purpose by Crowbar.

Issue 2

Having decided that the appellant was entitled to the investment tax credit at the time of purchase, the remaining issue to be decided is: can he lose the credit because of the transaction with Crowbar entered into on June 7 of the same year? The Court is of the view that the operative time is the time of purchase and once a taxpayer is entitled to the tax credit, it cannot be lost. Therefore, it is not necessary to categorize the agreement between the appellant and Crowbar as it makes no difference to the outcome of this appeal. Authority for this conclusion is the decision of the Federal Court of Appeal in Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79, 85 D.T.C. 5310, and in particular the comments on page 5314 under the heading "Purpose of provision".

After receiving the written argument from the appellant in this case, my brother Judge Rip on May 12, 1989 released his judgment in Dragon Construction Ltée v. M.N.R., [1989] 2 C.T.C. 2047 wherein he came to the same conclusion with which I agree.

A similar point of view is to be found in Interpretation Bulletin IT-331 R dated October 25, 1985. This is said at page 10:

The Department considers that a property was acquired "to be used" or "for use" where it was actually used within a reasonable period of time after it was acquired. Where the property has not been put to any use for an extended period of time after it was acquired or, if used, not for its intended use, the property may still be considered acquired "to be used" or “for use” if the taxpayer can show sound business reasons as to why it is not being used as originally intended, e.g., if it would be economically unsound to carry out the original intention because of unforeseen or changed circumstances.

The appeal will be allowed with costs. The assessment will be referred back to the respondent for reconsideration and reassessment to allow the appellant to use the said tax credit.

Appeal allowed.