Henuset Bros Lid (No 2) v. Minister of National Revenue, [1976] CTC 2039, [1976] DTC 1043

The Chairman:—This is the appeal of Henuset Bros Ltd from an income tax assessment in respect of the 1971 taxation year.

By a notice of assessment dated March 15, 1974, the Minister disallowed the capital cost allowance claimed by the appellant for the taxation year 1971 on ten Caterpillar tractors on the ground that the appellant had not acquired title to the said tractors during the 1971 taxation year.

The appellant company, of which Mr Arthur Henuset and his brother Henry are the principal shareholders, was incorporated in 1954, and was principally engaged in pipeline construction in the Province of Ontario and in the Western Provinces.

In order to meet its commitments, the appellant, in the early part of 1971, had purchased some 25 trucks and approximately 25 tractor trailers. In August of 1971, the appellant bought four used D8 Caterpillar tractors at $80,000 each, but was not completely happy with the machines. In December of 1971, the appellant also purchased ten new D8 Caterpillar tractors in order to carry out its winter commitments. The purchase of these ten tractors gives rise to the issue in this appeal.

In his testimony Mr Arthur Henuset stated that the appellant company, having decided to purchase new tractors, had contacted several dealers, and among them was a firm in Tulsa, Oklahoma, where the purchase price quoted was only 5% over cost. However, this company had no machines in stock and it would have taken a considerable time to manufacture these machines, ana this would have caused unwarranted delays in the execution of the appellant’s winter contracts.

Therefore the tractors were eventually purchased from R Angus Alberta Limited. In giving evidence, Mr Jim Cummings, general manager of the Angus company, stated that negotiations for the purchase of the tractors commenced in October 1971 and were completed on December 29, 1971 at which time Mr Cummings himself and Mr Henry Henuset signed the Bill of Sale for a total amount of $770,000 (Ex A-5).

The Conditional Sale Agreement between the parties (Ex A-1) required that the appellant make a down payment of $10,000 on each of the 10 tractors purchased and, consequently, a cheque for $100,000, dated December 30, 1971 was made payable to R Angus Alberta Limited (Ex A-4). On the same date, December 30, 1971 a series of 10 promissory notes for the balance of payment for each of the tractors was issued to the vendor whereby two payments of $8,000 were to be made on February 1, 1972 and March 1, 1972 and a third payment of $52,285 was to be made on June 1, 1972 in respect of each of the 10 tractors. All these notes, totalling some $680,000, were paid off on or about March 15, 1972 (Ex A-3).

The invoice (Ex A-2) concerning the purchase of these tractors and dated December 30, 1971 listed the serial numbers of each tractor as well as the ancillary equipment involved in the sale. Mr Cummings explained that a serial number could not have been issued for any of the tractors unless the tractor had been completely constructed and ready to ship.

Mr Cummings denied the Minister’s allegation that modifications on the tractors had been asked for and testified that no work of any kind had to be done on the machines before shipping. Each unit comprised the tractor itself, the hydraulic control unit and a #8 angle dozer, all of which were to be shipped as soon as possible.

It is on record that six tractors were shipped from Peoria to Calgary on January 10, and one tractor on each of January 25 and February 2, 1972, and that all eight were stored in the Angus yard in Calgary.

Counsel for the respondent pointed out that the appellant did not take physical possession of any of the tractors before February 1972 and took possession of the last only in May of 1972. Said counsel further pointed out that the appellant had not insured the tractors. However, it was stated in evidence that the appellant’s policy was to insure its trucks but not to insure its heavy equipment, and this policy of the appellant was in fact negotiated, and is reflected in the Sales Agreement (Ex A-1). However, the risks to any or all of the tractors were clearly assumed by the appellant.

In argument, counsel for the respondent contended that the tractors were built by the Caterpillar Company in Peoria which was the legal owner of the machines, and that R Angus Alberta Limited, an agent of that company, did not obtain legal title to the tractors until January 12, 1972 when Caterpillar invoiced its agent, R Angus Alberta Limited, for the amount of the selling price. Therefore counsel concludes that the appellant could not have obtained title to the tractors from R Angus Alberta Limited on December 30, 1971.

It seemed to me at the time of the hearing and it still does, that the respondent was forcing his argument beyond normally accepted bounds. What the respondent is implying is that R Angus Alberta Limited did not have the right to sell what it did not own and therefore could not transfer the titie for the tractors to the appellant at the moment when the appellant made its down payment of $100,000 and issued promissory notes for the balance due on the tractors according to the duly signed Agreement of Sale. Such a transaction, in my opinion would come very close to being a fraudulent sale on the part of R Angus Alberta Limited, if that interpretation is to be put on its powers as an agent for the Caterpillar Company. According to accepted procedural practices, it would be incumbent on the respondent to prove to the Board that the sale made by R Angus Alberta Limited to the appellant was fraudulent before this Board could conclude that legally the title for the tractors did not pass to the appellant on December 30, 1971 when the payments were made. This the respondent did not do, and the Board sets aside any further consideration of that aspect of the respondent’s argument.

The respondent further contends that the appellant did not have title to, nor actual possession of the tractors on December 30, 1971, that it could make no use of the tractors in 1971, and that it was not subject to any risk in respect of the said machines.

In support of his argument, counsel for the respondent cited a decision of the Exchequer Court of Canada in the case of MNR v Wardean Drilling Limited, [1969] 2 Ex CR 166: [1969] CTC 265; 69 DTC 5194. In my opinion, the facts in the Wardean case are manifestly different from those in' the present appeal.

Wardean Drilling had decided to order an additional drilling rig. The necessary invoices and the terms of payment between the vendor and purchaser in respect of the construction of the rig were exchanged late in 1963 in the form of a contract However, in 1963 the rig had yet to be built and was in fact completed and delivered only in 1964 at which time it was held to have been legally acquired by the purchaser. In that case, the Minister of National Revenue disallowed any capital cost allowance on the rig in 1963, and the Exchequer Court affirmed the Minister’s decision.

The distinctions to be made between the facts in the Wardean case and the facts of the present appeal are:—1. In the Wardean case there is no evidence that any moneys were paid for the ordered rig at the date of the signature of the contract other than a a credit of $1,500 which the manufacturer applied as a down payment on the eventual purchase of a rig yet to be built. In the present appeal, $100,000 in cash was paid on December 30, 1971, and promissory notes covering the entire balance of the purchase price of the tractors were issued

on the same day.

2. At the date of signature of the Wardean contract, Wardean Drilling Ltd had certain rights under the contract but it could not have any rights in the rig itself because the rig did not exist at the time. Nor was it possible at the time the contract was signed, for Wardean Drilling to take possession of the rig, use it or assume the risks on it. In the present instance, not only did the appellant have legal rights arising from the contract, but it also had rights to and in the tractors themselves from the moment the contract was signed. Contrary to what the respondent suggested, I am satisfied, on the basis of evidence adduced, that the tractors and their accessories were entirely complete and ready to operate on December 30, 1971.

3. In the Agreement of Sale in the Wardean case, it was stipulated that title was to pass and notes were to be issued as of the date of shipment. In the present appeal, the Conditional Sale Agreement, as pointed out by counsel for the respondent does contain the vendor s reservation of title and property as security for the sale price. However, in the Wardean case cited by the respondent, Mr Justice

Cattanach held “that a purchaser has acquired assets of a class in Schedule B (to the Income Tax Regulations) when title has passed,

assuming that the assets exist at that time, 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.’

Notwithstanding that in the present appeal title remained with the vendor as security for the purchase price, the appellant, in my opinion, which is based on Cattanach, J’s decision in Wardean Drilling Limited, acquired for income tax purposes ten existing and completed tractors, and had acquired the possession and use of these machines as of December 30, 1971. I do not believe it was necessary for the machines to have been delivered to the apppllant’s doorstep before the company could acquire legal possession of the tractors and, in my opinion, as of December 30, 1971, the appellant would have had a perfect right to use and operate the machines in Peoria if it had so chosen.

Both Mr Cummings and Mr Henuset stated that it was well understood between them that all risks to the tractors, either in the stock yards in Peoria or en route to Calgary or in the Angus stock yard, were entirely assumed by the appellant as of December 30, 1971. These statements were not contradicted at any time.

I hold therefore that the appellant did acquire the ten tractors in question on December 30, 1971 within the meaning of section 1100 of the Income Tax Regulations, and that the appellant is entitled to claim capital cost allowance in respect of the said tractors for the 1971 taxation year in accordance with paragraph 11(1)(a) of the Income Tax Act. The appeal In respect of the 1971 taxation year is therefore allowed.

Appeal allowed.