Tremblay T.C.J.:
1 This appeal was heard under the informal procedure at Québec, Quebec, on January 16, 1997.
1. Point at issue
2 According to the Notice of Appeal and the Reply to the Notice of Appeal the question is whether, on the one hand, the respondent was justified in including in the appellant's income a recapture of depreciation of $36,241 in respect of the disposition of equipment for the 1990 taxation year, and on the other hand, whether the respondent was justified in refusing capital cost allowance of $2,614 claimed by the appellant for the 1990 taxation year in respect of equipment which the respondent alleges was disposed of during that year.
2. Burden of proof
3 2.01 The appellant has the burden of showing that the respondent's reassessment is incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 486 (S.C.C.), 3 DTC 1182,[1948] C.T.C. 195 (S.C.C.).
4 2.02 In the instant case the facts assumed by the respondent are set out in subparagraphs (a) to (j) of paragraph 6 of the Reply to the Notice of Appeal. Those assumptions read as follows:
[TRANSLATION]
6. In arriving at these reassessments the Minister considered inter alia the following facts:(a) during the taxation year at issue the appellant was a shareholder in C. Savard Inc. (hereinafter “the Company”);
(b) before the sale of the following equipment, representing the only equipment of a prescribed class which he owned, the appellant leased it to the Company:
1968 Vohl snowblower serial No. NV 202
Austin grader with 13-foot blade
1978 Holla site trailer with equipment; [denied]
(c) under the contract of sale between Christian Savard and the Company dated August 3, 1990, the said equipment was sold to the Company as follows:
| Equipment | Proceeds of disposition |
|---|
| 1968 Vohl snowblower serial No. NV202: | $25,000 |
| [denied as written] | |
| Austin grader with 13-foot blade: | $15,000 |
| [admitted] | |
| 1978 Holla site trailer with equipment: | $10,000 |
| Total | $50,000 |
| [admitted] | |
(d) the 1968 Vohl snowblower, the Austin grader and the 1978 Holla trailer were entered as assets of the Company for the fiscal year ending October 31, 1990;
(e) for the fiscal year ending October 31, 1990 a credit of $50,000, representing the amount of the contract of sale of August 3, 1990, and two debits of $10,000 each, representing payment for the trailer and a down payment on the grader, were entered in the Company's ledger under the “Owed to Christian Savard” account, leaving a balance of $30,000 at October 31, 1990; [denied]
(f) in analyzing the Company's “Owed to Christian Savard” account for the fiscal year ending October 31, 1991, the Minister noted that the credit balance of $30,000 had been repaid and that advances and a repayment had been recorded, leaving a debit balance of $8,558; [denied as written]
(g) the disposition of the equipment produced a recapture of depreciation corresponding to the difference between the proceeds of disposition and the undepreciated capital cost (hereinafter “the U.C.C.”), determined as follows:
| Proceeds of disposition | U.C.C. | Recapture of depreciation | |
|---|
| Austin grader | $15,000 | $1,959 | $13,041 |
| Vohl snowblower | $25,000 | $1,800 | $23,200 |
| Total | $40,000 | $3,759 | $36,241 |
| [denied] | | | |
(h) as the appellant wished, the gain resulting from sale of the Holla trailer was taxed as follows:
| Proceeds of disposition | $10,000 | |
| Adjusted cost base | $ 3,500 | |
| Capital gain | $ 6,500 | |
| Taxable capital gain | | |
| (3/4of capital gain) | $4,875 | [admitted] |
(i) in adding to the appellant's income a taxable capital gain in respect of the said sale, the Minister allowed the appellant a capital gains deduction of $4,875;
(j) the Minister disallowed the capital cost allowance of $2,614 claimed by the appellant on the said equipment for the 1990 taxation year, that equipment being the only equipment of a prescribed class disposed of in the year. [denied]
3. Facts in evidence
5 3.01 The appellant told the Court that as the result of an investigation by the respondent he was reassessed for his 1990, 1991, 1992, 1993 and 1994 taxation years and asked to pay enormous amounts. The Savard company had to declare bankruptcy. The Quebec Department of Revenue followed the lead of Revenue Canada.
6 Over the last two years, after numerous and difficult discussions the appellant was able to have the 1994, 1993, 1992 and 1991 assessments by Revenue Canada cancelled. Revenue Québec apparently also cancelled the 1990 assessments.
7 3.02 The appellant filed a voucher (Exhibit A-1) listing the equipment of C. Savard Inc. at October 31, 1993, which had been prepared by his accountants Samson Bélair et Associés. It reads as follows:
[TRANSLATION]
C. Savard Inc.
31/10/93
Machinery breakdown
| Loader | 32,700 ø | | |
| 12/9/90 | 1970 VOHL snowblower | Quarries Sold - Raymond Denis | 35,970 ø |
| 3/8/90 | 1968 VOHL grader | Sold - Luc Lefebvre | 25,000 ø |
| 3/8/90 | 1968 Austin grader | 15,000 ø | |
| 17/9/90 | 1970 VOHL snowblower | Sold - Ex. A.S. Inc. | 35,970 ø |
| 9/2/91 | Bomag (. ......) | (Pledge L. Landry) | 13,080 ø |
| 16/12/91 | Volvo snow [illegible] | (Sold - Pavage Langlois) | 7,056.40 ø |
| Difference caused by cost disposing of caterpillar in 91 26,160 v. 24,075 | 2,085 | |
| 12/03/93 | Caterpillar tractor (new) | Sold to J. Duquette | 48,600 |
| 04/06/93 | 40 KT trailer | Sold to L. Landry | 16,756.20 |
| 232,217.60 | | | |
Notes:
8 3.03 The appellant argued that there must have been a mistake as the company never owned a 1968 VOHL grader. It was a 1963, not a 1968, VOHL grader that it had had.
9 He filed together as Exhibit A-2 a contract for the sale of equipment owned by him, which equipment he sold to the company on August 3, 1990, and an addendum dated August 4, 1990. They read as follows:
[TRANSLATION]
CONTRACT FOR SALE OF EQUIPMENT CONCLUDED BETWEEN:ANDIt is agreed that the vendor will assign the following equipment to the purchaser for the sums stated below:
| 1968 Vohl snowblower serial No. NV 202 | $25,000.00 |
| Austin grader with 13-foot blade | $15,000.00 |
| 1978 Holla site trailer with equipment | $10,000.00 |
| $50,000.00 | |
The terms of payment are as follows: payment for the trailer on August 3, 1990 ($10,000), payment of a down payment on the grader on September 5, 1990 ($10,000). The mode of payment of the remaining $30,000 is to be specified at a later date.Signed by us on August 3, 1990.
| (s) C. Savard | (s) Lauréanne Landry |
| Christian Savard | C. SAVARD INC. |
10 3.04
[TRANSLATION]ADDENDUM TO CONTRACT OF SALE of August 3, 1990.
BETWEEN: Christian Savard and C. SAVARD INC.
Important terms set by vendor:
1. It is agreed that Christian Savard will assign to C. Savard Inc. the equipment described in the sales contract only when he has received full and final payment for the sale of the three pieces of equipment, namely $50,000.
2. Until the final payment is made, Christian Savard will remain owner of the equipment, which will be loaned to the company free of charge in return for payment advances on the debt of $50,000.
3. The equipment, which still remains the property of Christian Savard, will therefore continue to be licensed in his name.
| (s) Christian Savard | (s) C.S. |
| Christian Savard | C. SAVARD INC. |
| (s) Lauréanne Landry Savard | |
| C. SAVARD INC. | |
WITNESS:
________
11 3.05 As Exhibit A-3 the appellant filed two cheques for $10,000, both issued by C. Savard Inc., one on August 3, 1990 bearing No. 1313, drawn on the National Bank of Canada, 1reavenue, Charlesbourg, and the other, drawn on the same bank on September 5, 1990, bearing No. 1321, in payment for the trailer and in part payment for the Austin grader, purchased for $15,000. Another $5,000 was allegedly paid to complete payment for the Austin grader (cheque No. 1636: paras. 3.15 & 3.17).
12 3.06 The appellant argued that the $25,000 for the VOHL snowblower was never paid and so, pursuant to the addendum (3.04), it was not the company's property. The appellant apparently always remained owner of it.
13 3.07 The appellant maintained he personally sold the VOHL snowblower for spare parts to Les Excavations A. Savard Inc. on September 7, 1994 for $800 (Exhibit A-5). With this contract there was filed a fax from the buyer dated January 15, 1997, stating that it had [TRANSLATION] “no former registrations or photocopies thereof for this blower purchased for spare parts”. Also attached to Exhibit A-5 was a resolution of the board of directors of Les Excavations A. Savard Inc. dated September 9, 1994, authorizing [TRANSLATION] “the purchase of a VOHL snowplough, licence No. FE 17638-1, 1970 ... and the purchase of another snowplough for spare parts (permanently taken out of service), VOHL 1963, model HUB 75”.
14 3.08 With his Notice of Appeal the appellant filed a letter to Jean-Paul Fortin, the respondent's investigator in this matter. The letter is dated September 20, 1994 and paragraph 2 reads as follows:
[TRANSLATION]
1990.- 1.-
For the 1990 taxation year the snowblower in question - proceeds of disposition $25,000 - should not be recorded as income. The snowblower was not sold to C. SAVARD INC. and we offer evidence of this in the form of the registration attached hereto. As I indicated to you, the $25,000 mentioned in a resolution of C. SAVARD INC. was so mentioned as a precaution in the event that the company might at some point have the cash assets required to purchase the equipment, since the company was using that equipment and operating it as if it was its property. The snowblower in question was therefore not sold or paid for and is still in my own name.
15 3.09 As part of Exhibit A-4 the appellant filed a registration certificate in the name of Christian Savard for a VOHL vehicle HUB 75-63 (snowblower), plate No. FE 18726, valid from 90 01 08 to 90 12 31, certificate No. SAOY 41P3A (OR). Also included in Exhibit A-4 was a photocopy of Quebec licence plate FE 18726.
16 3.10 Finally, as Exhibit A-6 the appellant filed the following:
1 - cheque No. 2128 issued by the Saint-Luc de Forestville Caisse populaire, being a payment of $6,000 by A. Savard Inc. dated January 22, 1990 for [TRANSLATION] “Machinery rental from 1-11-89 to 15-1-90”: appearing thereon is the number “C-89-15”;
2 - cheque No. 2250, Saint-Luc de Forestville Caisse populaire, being a payment of $6,000 to Christian Savard on March 16, 1990; appearing thereon is the following: [TRANSLATION] “Rental [the rest is illegible] - 15-01-90 to 15-03-90 - C-89-25”;
3 - cheque No. 2229, Saint-Luc de Forestville Caisse populaire, being a payment of $3,000 to the appellant by A. Savard Inc. on May 1, 1990 as the [TRANSLATION] “Last payment for machinery rental, winter 89-90”;
4 - a financial statement of business income from machinery rental:
| Income | $15,000.00 |
| Various expenses, including electricity, school and municipal taxes, etc. | $10,286.15 |
| 5 - appellant's 1990 T1 general tax return Total income is | $14,996.92 |
| including $4,713.87 of business income Tax owed: | $1,177.57 |
17 3.11 Jean-Paul Fortin, the respondent's auditor, filed as Exhibit I-1 a series of five cheques totalling $22,000 drawn on the National Bank of Canada and issued by C. Savard Inc. to Christian Savard, the appellant:
| Cheque No. | Date | Amount | Reference |
|---|
| 1892 | 07/01/91 | $5,000 | C. 90-25, Code 263 |
| 1971 | 22/01/91 | $5,000 | C. 90-28, Code 263 |
| 2311 | 08/04/91 | $2,000 | C-90-50, Code 263 |
| 2416 | 14/05/91 | $5,000 | C-90-59, Code 263 |
| 2417 | 14/05/91 | $5,000 | C-90-59, Code 263 |
18 The two cheques for May 14, 1991 are signed by Christian Savard and the others by his wife Lauréanne L. Savard.
19 3.12 As Exhibit I-2 Mr. Fortin filed Christian Savard's 1991 T1 general tax return.
20 His income amounted to $8,858.29, his taxable income was $3,858.29, and there was no tax payable.
21 3.13 As Exhibit I-3 the witness Fortin filed a statement of income and expenses for the appellant for 1989. It showed income totalling $24,344, including an amount of $5,344 in unemployment insurance benefits. All expenses of whatever nature amounted to $15,496.92, leaving a net profit of $8,847.08.
22 The document was signed by Christian Savard.
23 3.14 As Exhibit I-4 the auditor Fortin filed an extract from the financial statements of C. Savard Inc., signed by Samson Bélair / Deloitte & Touche.
24 This extract, titled [TRANSLATION] “Notes to financial statements for fiscal year ending October 31, 1990 (unaudited)”, concerns long-term debt. It is therein stated, in the final item:
[TRANSLATION]
| Owed to a director | |
| Balance owed on purchase of | | |
| rolling stock, without interest | | |
| Payment due within one year | |
| Payment due after one year | |
25 Mr. Fortin stated that if the $22,000 in cheques (3.11) paid in 1991 is included, the amount of $30,000 owed to a director is cancelled out. Thus, according to Mr. Fortin, the snowblower was in fact sold and paid for and the appellant could not claim depreciation on it.
26 3.15 Further, there should also be taken into account the last part of the letter of September 20, 1994 received by Mr. Fortin, which sets out the appellant's position regarding the 1990 taxation:
[TRANSLATION]
| TAXATION - 1990 | Christian Savard ******** |
Summary
Amounts not reported because I thought they were strictly capital gains, as I pointed out to your representative, Mr. Fortin. What was involved was the sale of equipment.
| Ch. No. 1313 | $10,000.00 | (Sale of site trailer) |
| No. 1321 | $10,000.00 | (Sale of grader) |
| No. 1636 | $ 5,000.00 | (Sale of equipment (grader) |
| $25,000.00 | | |
Cheque No. 1775 was a repayment for the purchase of salt storage structures for C. Savard Inc. at 420 Desrochers, Ville Vanier, for the purposes of a snow removal contract in 90-91 for the town of Charlesbourg. (Copy attached)
Following the sale of equipment paid for by cheques Nos. 1313, 1321 and 1636, you can tax me on recapture of depreciation in the amount of $8,041 as we maintained in our letter of September 20, 1994 to J. Paul Fortin.
The difference between the depreciation recapture of $8,041 and the amount received constitutes a non-taxable capital gain which we claim up to an amount of $100,000.
The 1968 VOHL snowblower, serial No. NV202, was never sold to the company, as is shown by the evidence provided.
27 3.16 Lauréanne Landry Savard, a travel agent and the wife of the appellant, looked after the bookkeeping for C. Savard Inc.
28 She testified regarding the series of five cheques issued in 1991 (Exhibit I-1, para. 3.11), three of which were signed by her (Nos. 1891, 1971 and 2371), that the reference 90-25 means [TRANSLATION] “the year 1990, item 25”. Code 263, used on these five cheques, means in general that they are not for the rental of machinery but for something completely different, including [TRANSLATION] “advances to partner or suchlike”. This was a practice agreed upon with the accountant. In the case of rentals, she wrote [TRANSLATION] “rental”, as appears on Exhibit A-6 (3.10).
29 3.17 In cross-examination the witness admitted that two cheques were issued to the appellant, namely:
| - 29/11/1990 | No. 1636 | $5,000 |
| - 27/12/1990 | No. 1775 | $3,000 |
30 See appellant's explanation, para. 3.15.
4. Analysis
31 4.01 The question is whether, in calculating the appellant's income for the 1990 taxation year, the respondent was correct in adding additional income of $36,241 as a recapture of depreciation and disallowing capital cost allowance of $2,614.
32 4.02 The appellant argued that C. Savard Inc. was never the owner of the VOHL grader and that it always remained his property.
33 He based this assertion on the fact that one of the fundamental conditions for the transfer of ownership was full and final payment of the sum of $50,000 for the three pieces of equipment dealt with in contract A-2 (3.04).
34 4.03 The appellant further maintained that the 1963 VOHL grader was sold to Excavations Savard Inc. in September 1994 for spare parts together with a 1970 VOHL snowplough (3.07). The registration certificate and plate (Exhibit A-4) confirmed the appellant's statement identifying the VOHL grader as being a 1963 rather than a 1968 (3.09).
35 Finally, the rental payment cheques during the winter of 1990 (Exhibit A-6) confirmed that machinery was rented to the company (3.10).
36 4.04 The respondent did not dispute the contract concluded between the appellant and the company, but maintained that the sum of $50,000 was paid in full, by two cheques totalling $20,000 (3.05), two other cheques totalling $8,000 (3.17) and five cheques totalling $22,000 (3.11). However, the last five cheques were all issued in 1991. Even if they were in payment for the machinery, which is not clear, the fact is that at the end of calendar year 1990, which is the end of the appellant's fiscal year (though not the company's), the amount had not yet been paid in full. Accordingly, the “Important terms set by vendor” clause (3.04) stating that so long as the $50,000 had not been paid in full the equipment would remain the property of the seller is valid.
37 The respondent did not dispute this clause in the addendum (3.04). It accordingly follows that at the end of 1990 the appellant was still the owner and in a position to take depreciation on the machinery rented.
38 4.05 At the same time, the appellant was ready to agree by way of settlement that the equipment paid for by cheques Nos. 1313 ($10,000), 1321 in payment for the Austin grader ($10,000) (3.04), and 1636 ($5,000) (3.15) could be used for the purposes of recapture of depreciation which, according to him, would be $8,041. However, he claimed depreciation on the snowblower.
39 4.06 This offer of settlement was rejected by the respondent. Based on the evidence, the Court now concludes that the equipment was still the appellant's property at the end of 1990.
40 The respondent could not tax the recapture and the appellant was entitled to claim depreciation on the snowblower.
5. Conclusion
41 The appeal is allowed with costs for the 1990 taxation year and the assessment referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the foregoing.
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