Maurice
Boisvert:—
These
appeals
concern
assessments
against
two
corporations
with
respect
to
the
1966
and
1967
taxation
years,
in
the
case
of
Lagueux
et
Frères
Inc,
and
1966
only,
in
the
case
of
Lagueux
et
Théberge
Inc.
The
cases
were
heard
at
Quebec
City,
Province
of
Quebec,
on
June
15,
1971,
by
the
Tax
Appeal
Board
as
it
was
then
constituted.
Both
appeals
involve
an
interpretation
of
contracts.
The
parties,
who
are
proceeding
jointly,
contend
that
the
contracts
in
question
are
for
the
leasing
of
machinery
used
in
their
logging
operations,
whereas
the
respondent
contends
that
they
are
sales
contracts
giving
entitlement
to
a
capital
cost
allowance
and
not
a
deduction
for
rental
paid
for
the
use
of
the
said
machinery.
Lagueux
et
Frères
Inc,
now
incorporated
under
the
name
of
Industries
Maibec
Inc
and
hereinafter
called
“Lagueux”,
operates
a
sawmill
at
St-Pomphile,
L’islet
County,
P
Q.
Lagueux
et
Théberge
Inc,
now
incorporated
under
the
name
of
Opérations
Forestières
Maibec
Inc
and
hereinafter
called
“Théberge”,
carries
on
wood
cutting
operations
on
forest
concessions
in
the
State
of
Maine,
USA.
Its
operations
consist
in
obtaining
timber
cutting
rights
from
individuals
or
companies,
and
it
hauls
the
timber
to
the
St-Pamphile
sawmill.
The
evidence,
which
was
not
refuted,
established
that
the
timber
supply
contracts
were
for
a
one-year
duration
only;
therefore
it
was
more
practical
for
the
two
companies
to
lease
machinery
and
trucks
for
both
the
sawmill
and
lumbering
operations.
On
April
1,
1965,
Lagueux
leased
a
GMC
truck
from
Corporate
Plan
Leasing
Limited
for
a
period
of
thirty-six
months
for
a
consideration
of
$3,425.76,
of
which
$95.16
was
payable
in
advance
and
the
balance
in
consecutive
monthly
instalments
of
$95.16
each.
During
1966,
Lagueux
paid
$1,141.92
in
rental.
Since
all
the
contracts
are
similar
in
substance,
for
purpose
of
the
decision,
only
the
one
filed
as
exhibit
A-1
need
be
reproduced:
(TRANSLATION)
1.
The
Lessee
undertakes
to
lease
from
the
Lessor,
and
the
Lessor
leases
to
the
Lessee,
the
movable
property
described
in
each
of
the
schedules
herein
contained,
for
the
term
and
at
the
rental
payable
as
indicated
in
the
said
schedules,
the
whole
under
the
terms
and
conditions
contained
and
set
forth
in
this
agreement
and
in
the
schedules.
2.
The
movable
property
described
in
any
one
of
the
schedules
is
hereinafter
designated
as
“equipment”,
and
in
the
case
of
more
than
one
schedule,
all
the
movable
property
described
in
all
of
the
schedules
is
hereinafter
collectively
designated
as
“equipment”,
depending
on
the
context.
3.
The
Lessee
shall
not
have
any
real
right
over
the
equipment
and
cannot
acquire
such
a
right
hereunder,
and
shall
have
only
the
right
to
use
the
equipment
as
Lessee
in
accordance
with
the
conditions
herein
contained.
4.
The
Lessee
shall,
at
its
own
expense:
(a)
maintain
the
equipment
free
from
any
lien
or
encumbrance
and
from
ali
attachments,
execution
or
legal
proceedings;
(b)
obtain
all
permits,
licences
and
registrations
required
for
the
use
of
the
equipment
by
the
Lessee;
(c)
pay
all
fees,
costs,
expenses
and
taxes
relative
to
the
equipment
or
its
use
by
the
Lessee;
(d)
maintain
the
equipment
in
good
operating
condition,
substantially
the
condition
it
was
in
at
the
commencement
of
the
present
lease,
except
for
depreciation
due
to
normal
wear
and
tear;
(e)
permit
the
Lessor
to
inspect
the
equipment
at
any
convenient
time;
(f)
take
out
insurance
policies
on
the
equipment
from
responsible
insurance
companies
giving
the
type
of
coverage
and
the
amounts
of
coverage
approved
by
the
Lessor
and
with
losses
payable
to
the
Lessor
and
to
the
Lessee
according
to
their
interests;
(g)
promptly
return
the
equipment
at
its
expense
to
the
Lessor
after
the
expiration
or
termination
of
the
term
of
the
lease.
5.
Without
the
prior
written
consent
of
the
Lessor,
the
Lessee
agrees
(a)
not
to
sell,
offer
for
sale,
transfer,
mortgage,
pledge,
sublet
or
lend
the
equipment
and
not
to
compromise
it
in
any
way;
(b)
not
to
remove
it
or
permit
it
to
be
transported
out
of
Canada,
and
not
to
abandon
possession
of
it;
(c)
not
to
install
the
equipment
in
or
secure
it
to
a
building,
or
immobilize
it
in
such
a
way
that
the
Lessor
cannot.
validly
exercise
its
right
to
take
over
the
equipment
on
the
expiration
or
termination
of
these
presents;
(d)
not
to
change,
add
to
or
improve
the
equipment.
6.
The
Lessee
undertakes
to
idemnify
and
compensate
the
Lessor
for
all
losses,
penalties,
fines,
costs,
expenses
and
expenditures
incurred
by
the
Lessor
with
respect
to
the
equipment
as
a
result
of
loss,
theft,
destruction
or
damage
to
the
equipment
or
of
injuries
suffered
by
a
person
or
his
death,
or
of
loss,
destruction
or
damage
caused
to
any
property
in
any
way
whatever
by
the
equipment
or
as
a
result
of
its
use,
possession
or
operation
by
the
Lessee
or
by
any
other
person
whether
or
not
authorized
by
the
Lessee.
7.
It
is
expressly
agreed
that
the
Lessor
offers
no
guarantee
or
representation,
express
or
tacit,
with
regard
to
the
quality,
condition,
performance,
Suitability
or
capacity
of
the
equipment,
or
to
the
effect
that
the
said
equipment
complies
with
the
laws
in
force
at
the
location(s)
where
the
Lessee
may
want
to
use
the
equipment.
8.
The
Lessor
may
affix
on
the
equipment
plates
or
other
marks
that
the
Lessor
deems
suitable
indicating
that
the
equipment
is
the
property
of
the
Lessor,
and
the
Lessee
agrees
that
it
will
not
remove,
obliterate,
erase
or
cover
such
plates
or
marks,
and
will
repair
any
damage
to
or
replace
the
said
plates
or
marks.
9.
The
parties
agree
that
if
the
Lessee
failed
to
pay
any
sum
payable
hereunder
(whether
or
not
payment
had
been
requested),
or
if
it
failed
to
observe
any
of
the
terms
and
conditions
of
this
agreement,
or
if
a
receiving
order
were
issued
against
the
Lessee,
or
if
it
called
a
meeting
of
its
creditors,
or
if
it
made
any
assignment
in
favour
of
its
creditors,
or
if
it
made
an
arrangement
or
composition
with
its
creditors,
or
if
the
Lessee
otherwise
acknowledged
its
insolvency,
or
if
it
concluded
a
deed
of
sale
or
an
outright
sale
of
its
assets,
or
if
the
Lessee
ceased
to
do
business,
or
if
an
attachment
were
or
threatened
to
be
executed
on
the
Lessee’s
assets,
or
if
a
distraint
against
the
Lessee’s
assets
took
place,
or
if
the
Lessee
left
any
judgment
against
it
unsettled
for
a
period
of
ten
days
(without
appealing
it),
at
such
time
and
in
any
such
case,
at
the
Lessor’s
option,
this
agreement
may
be
terminated
by
the
Lessor
(without
any
prior
notice
or
request
on
the
part
of
the
Lessor,
even
if
the
Lessor
may
have
allowed
a
similar
incident
previously
without
exercising
its
rights
and
privileges
hereunder)
and
at
such
time
the
Lessor
shall
be
entitled
to
recover
and
repossess
the
equipment
(the
Lessee
undertaking
to
pay
to
the
Lessor
the
cost
of
such
re-
posession)
and
for
that
purpose
to
enter
any
premises
occupied
by
the
Lessee,
and
the
unpaid
balance
of
the
rental
shall
immediately
become
due
and
payable.
It
is
agreed
and
understood
that
such
termination
of
this
agreement
shall
not
affect
or
prejudice
any
other
claim
of
the
Lessor
against
the
Lessee
in
accordance
with
this
agreement,
or
the
Lessor’s
right
to
enforce
such
claim
by
action
at
law
or
otherwise.
10.
This
agreement
as
originally
executed
contains
schedules
numbers
..
.
.
An
additional
schedule
may
be
attached
at
any
time
or
several
schedules
may
be
attached
at
any
time
or
from
time
to
time.
Any
additional
schedule
shall
form
an
integral
part
of
this
agreement
from
the
date
of
such
schedule
provided
that
such
schedule
is
signed
on
behalf
of
the
Lessee
by
the
Lessee’s
President,
Vice-President
or
Secretary-Treasurer,
and
countersigned
on
behalf
of
the
Lessor
by
the
Lessor’s
President,
Vice-President
or
Secretary-Treasurer.
When
countersigned
by
the
Lessor,
the
signatory
for
the
Lessor
shall,
conclusively
for
all
purposes,
be
presumed
to
be
the
Lessor’s
Secretary.
11.
In
the
interpretation
of
this
agreement
that
word
“equipment”
means
all
the
equipment
described
in
each
or
all
of
the
schedules
attached
hereto,
and
each
and
every
one
of
its
parts
and
any
part
replaced
or
substituted.
12.
Time
shall
be
of
the
essence
of
this
agreement.
13.
This
agreement
shall
be
subject
to
the
laws
of
the
Province
of
Quebec.
14.
Should
the
Lessor
assign
this
agreement
or
the
sums
payable
hereunder,
the
Lessee
undertakes
to
recognize
such
an
assignment
whether
or
not
the
Lessor
has
given
notice
thereof
to
the
Lessee,
and
to
pay
all
the
amounts
payable
hereunder
as
indicated
in
writing
from
time
to
time
by
the
assignee.
15.
The
Lessor
and
the
Lessee
agree
that
this
document
constitutes
the
complete
agreement
between
the
parties
and
shall
benefit
and
bind
the
respective
parties
and
their
respective
heirs,
executors,
administrators,
legal
representatives
and
successors,
on
the
condition,
however,
that
neither
this
agreement
nor
any
right
relating
thereto
may
be
transferred
by
the
Lessee
without
the
written
consent
of
the
Lessor.
This
agreement
may
not
be
modified
or
amended
in
any
way
other
than
by
a
written
document
executed
by
the
two
signatories,
or
in
accordance
with
the
provisions
set
forth
in
paragraph
10
of
this
agreement.
16.
This
contract
shall
be
binding
on
the
Lessor
only
when
countersigned
by
the
Lessor
under
its
corporate
seal.
On
April
30,
1965
Corporate
Plan
Leasing
Limited
sent
the
following
letter
to
Lagueux:
(TRANSLATION)
Re:
Lease
Contract
No.
1342
This
letter
concerns
Contract
No.
1342
and
any
schedule
attached
thereto
between
the
undersigned
as
Lessor
and
you
as
Lessee.
You
may
purchase
the
equipment
specified
in
each
individual
schedule
upon
the
expiration
of
the
initial
term
of
the
lease
for
a
price
equivalent
to
5
per
cent
of
the
original
cost
payable
at
the
end
of
the
said
period,
provided
that
you
have
given
the
undersigned
not
less
than
thirty
(80)
days’
and
not
more
than
sixty
(60)
days’
written
notice
of
your
intention
to
do
So,
and
that
you
have
duly
and
punctually
paid
the
rental
mentioned
in
the
contract
on
the
dates
and
in
the
manner
specified
therein,
and
that
you
have
duly
and
punctually
observed
and
met
each
and
every
one
of
the
terms,
requirements
and
conditions
of
the
contract.
The
two
appellants
thus
leased
numerous
pieces
of
equipment
and
machinery.
The
contracts
are
couched
in
similar
terms
and
all
contain
an
option
to
purchase
upon
expiration
of
the
leases.
A
question
of
law
is
involved:
Does
this
type
of
contract
constitute
a
sale
or
a
lease?
In
order
to
rule
on
these
appeals,
the
matter
must
be
placed
in
the
context
of
business
as
it
is
conducted
nowadays.
The
leasing
of
machinery,
trucks,
vans,
bulldozers,
automobiles
and
so
forth
is
a
widespread
business
or
industry.
Wheatcroft’s
comments
in
The
Law
of
Income
Tax,
Surtax
and
Profit
Tax,
on
page
1272-1-549,
describe
very
well
what
should
be
understood
by
such
a
contract:
Hiring
and
hire-purchase
payments
Just
as
rent
of
business
premises
is
a
deductible
expense
so
are
hiring
charges
paid
for
hire
of
other
capital
assets.
A
problem,
however,
arises
when
a
trader
enters
into
a
hire-purchase
agreement
for
the
use
and
ultimate
acquisition
of
a
capital
asset
such
as
machinery.
The
normal
form
of
such
an
agreement
today
provides
for
(i)
an
advance
payment,
often
described
as
consideration
for
the
ultimate
option
to
purchase,
(ii)
a
series
of
monthly
payments
for
hire
of
the
article,
which
determine
should
the
hirer
return
the
article,
and
(iii)
an
option
to
the
hirer,
if
and
when
he
has
paid
all
the
monthly
payments,
to
acquire
the
article
for
a
nominal
sum.
It
is
also
common
to
insert
a
clause
providing
for
a
further
payment
if
the
article
is
returned
before
the
last
payment
and
there
is
also
usually
an
obligation
to
maintain
the
article
in
good
condition
during
the
currency
of
the
agreement.
On
such
an
agreement
the
strict
view
would
appear
to
be
that
the
advance
payment
and
the
payment
ultimately
paid
on
exercising
the
option
are
capital
payments
and
not
deductible
in
computing
the
trader’s
profit,
although
they
may
entitle
him
to
capital
allowances,
whilst
the
monthly
payments,
being
expressed
as
hiring
charges,
are
deductible
and
so
are
not
eligible
for
capital
allowances.
Any
other
view
involves
disregarding
the
form
of
the
transaction.
In
these
appeals
we
are
confronted
with
the
problem
described
above.
However,
we
are
enlightened
by
the
decision
in
Darngavil
Coal
Co
Ltd
v
Francis
(Surveyor
of
Taxes),
7
TC
1.
On
page
11
it
reads:
Here
is
a
Company
which
gets
its
wagons
under
what
is
known
as
a
hire-
purchase
agreement.
It
pays
so
much
a
year.
It
undertakes
to
keep
the
wagons
in
repair.
It
pays
so
much
a
year
for
a
period
of
years
and
at
the
end
of
that
period
of
years
it
has
an
option,
if
it
likes,
to
make
what
is
practically
a
nominal
payment,
and
then
the
wagon
belongs
to
it.
It
is
perfectly
clear,
on
many
decided
cases,
that
during
the
course
of
the
period
of
years
the
wagon
still
is
the
property
of
the
Wagon
Company
and
not
of
the
Coal
Company.
But
the
Coal
Company
wishes
to
use
it,
and
accordingly
an
extra
payment
is
made
in
respect
of
that.
No
discrimination
is
made
between
the
two
kinds
of
payment;
it
is
a
lump
sum
that
is
paid.
Now,
in
that
case
there
are
two
things
going
on
concurrently—there
is
a
sale
and
purchase
agreement
under
certain
terms—not
a
sale
at
the
present
moment,
but
an
option
on
certain
terms
on
a
future
date
to
have
a
sale—and
on
the
other
hand
there
is
also
concurrent
with
that
a
hiring
agreement.
Now,
it
is
equally
clear
that
so
far
as
the
Coal
Company
have
the
use
of
the
wagon
by
the
hiring
of
it
during
that
time,
that
is
a
properly
deductible
expense,
just
as
if
the
Coal
Company
had
no
wagons
at
all
but
simply
hired
their
wagons
from
day
to
day,
in
which
case
it
would
be
a
certainly
deductible
expense.
It
is
equally
clear,
I
think,
that
they
could
not
claim
to
deduct
the
whole
of
what
they
paid
to
the
Wagon
Company,
because
a
large
portion
of
what
they
paid
is
really
a
payment
for
an
option
at
a
future
date
to
get
a
wagon
at
a
sum
that
is
far
under
its
real
value.
In
Siblock
v
MNR,
9
Tax
ABC
413,
54
DTC
38,
W
S
Fisher,
QC,
then
a
member
of
the
Tax
Appeal
Board,
ruled
that
rental
paid
for
leasing
of
various
kinds
of
machinery
was
deductible.
It
should
be
mentioned
that
before
1963
the
Income
Tax
Act
contained
provisions
affecting
this
type
of
contract.
Section
18
read
in
part
as
follows:
18.
(1)
A
lease-option
agreement,
a
hire-purchase
agreement
or
other
contract
or
arrangement
for
the
leasing
or
hiring
of
property,
except
immovable
property
used
in
carrying
on
the
business
of
farming,
by
which
it
is
agreed
that
the
property
may,
on
the
satisfaction
of
a
condition,
vest
in
the
lessee
or
other
person
to
whom
the
property
is
leased
or
hired
(hereinafter
in
this
section
referred
to
as
“lessee”)
or
in
a
person
with
whom
the
lessee
does
not
deal
at
arm’s
length
shall,
for
the
purpose
of
computing
the
income
of
the
lessee,
be
deemed
to
be
an
agreement
for
the
sale
of
the
property
to
him
and
rent
or
other
consideration
paid
or
given
thereunder
shall
be
deemed
to
be
on
account
of
the
price
of
the
property
and
not
for
its
use;
and
the
lessee
shall,
for
the
purpose
of
a
deduction
under
paragraph
(a)
of
subsection
(1)
of
section
11
and
for
the
purpose
of
section
20,
be
deemed
to
have
acquired
the
property,
under
the
contract
or
arrangement
on
account
of
the
rent
or
other
consider
ation.
Since
this
provision
has
been
removed
from
the
Act
it
would
be
pointless
to
quote
it
in
its
entirety.
By
rescinding
this
provision
the
legislator
certainly
wanted
to
bring
rent
paid
under
such
contracts
under
the
application
of
section
12
of
the
Act
which
states
that
any
“outlay
or
expense
for
the
purpose
of
gaining
or
producing
income
from
property
or
a
business”
is
deductible
provided
it
does
not
violate
any
other
provision
of
the
Act.
In
this
case
it
is
obvious
that
the
business
depended
for
its
existence
on
the
leasing
of
pieces
of
equipment,
machinery,
trucks
and
so
on.
It
was
up
to
the
appellant’s
directors
to
decide
what
was
the
most
profitable
for
the
operation
of
the
business.
No
one
is
obliged
as
the
head
of
a
business
or
as
a
taxpayer
to
make
an
enormous
capital
outlay
for
equipment
if
he
can
operate
in
another
way,
gain
the
same
income
and
make
the
same
profits
which
become
taxable.
The
net
profit
of
Lagueux
amounted
to
$150,253
for
1966
and
$80,379
for
1967.
For
1966
the
profits
of
Théberge
amounted
to
$33,551.
As
one
might
guess,
no
evidence
was
adduced
on
the
amount
of
the
capital
cost
of
the
leased
machinery,
and
once
deducted,
to
what
extent
the
taxable
net
profits
would
have
been
affected.
In
his
Reply
to
the
Notice
of
Appeal,
the
respondent
cites
Marcotte
v
MNR,
25
Tax
ABC
129,
60
DTC
519.
The
facts
proved
in
that
appeal
neither
closely
nor
vaguely
resemble
those
proved
in
the
present
appeals.
I
had
before
be
a
question
of
the
interpretation
of
contracts
—
that
and
only
that.
The
contracts
are
clear
and
leave
no
doubt
as
to
form
or
substance.
Furthermore,
they
are
all
contracts
between
persons
dealing
at
arm’s
length.
They
are
contrary
neither
to
the
Act
nor
to
public
order.
The
conclusions
I
have
arrived
at
are
supported
by
the
following
comments
taken
from
Sale
of
Goods
by
G
H
L
Fridman,
on
page
8:
Contracts
of
sale
of
goods,
therefore,
must
be
differentiated
from
such
contracts
as
hire
and
hire
purchase,
options
to
buy,
and
mortgages
of
goods.
In
hire
purchase,
for
example,
the
ultimate
intention
of
the
parties
is
that
property
should
pass
from
the
bailor
to
the
bailee:
but
something
more
must
be
done,
beyond
the
making
of
the
contract,
before
this
result
is
achieved.
Indeed,
this
is
so
true
that
it
may
be
said
that
a
person
who
buys
on
hire
purchase
is
not
in
law
a
buyer
at
all,
but
is
simply
one
who
pays
for
the
hire
of
goods
plus
an
option
to
buy.
He
may
never
exercise
his
option
to
buy:
there
is
no
legal
compulsion
upon
him
to
do
so.
It
is
not
until
such
option
has
been
exercised
by
him
that
he
becomes
a
buyer
of
the
goods.
For
the
above
reasons,
the
appeals
are
allowed.
Appeals
allowed.
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