Westcon Engineering and Contractors Ltd. v. MNR, 77 DTC 284, [1977] CTC 2387 (T.R.B.)

A W Prociuk (orally: November 17, 1976):—The appellant, Westcon Engineering and Contractors Ltd, presently of the City of Kelowna, British Columbia and formerly of Saskatoon, Saskatchewan, appeals from the respondent’s reassessment dated January 21, 1974 in respect of its income for the taxation year 1970 wherein the net proceeds of disposition of an aircraft formerly leased by the appellant and later purchased by it, under an option contained in the said lease, was treated as income.

Also in issue herein is the reassessment by the respondent of the appellant’s leased equipment, being three forklift trucks and two trucks leased pursuant to options to purchase for a nominal sum of $1 and in the case of two items for 5% of the original cost, all at the expiration of the term of each lease respectively (see Exhibit A-5). The respondent treated these leases as conditional sales contracts and adjusted the capital cost allowance in respect of said items and equipment on that basis.

The appellant’s ground of appeal is that the net proceeds from the sale of the aircraft were a capital gain and that the respondent erred in law and in fact in characterizing the leases in respect of the two trucks and the three forklift trucks as conditional sales contracts. The appellant raised a further matter in respect of the second issue in that the reassessment being some three years later prejudiced its position because it was too late for the appellant to amend its return as far as capital cost allowance was concerned to its benefit because specifically it, the appellant, was precluded from adjusting the capital cost allowance in relation to its taxable income to obtain the maximum tax benefits.

While the Board appreciates the fact that there are occasions, as in the instant case, that a reassessment will create a hardship of this nature—of the nature complained of—the respondent, in my view, acted and was within the statutory period of limitations and his authority to do so is beyond question.

The facts of the case are essentially not in dispute. In respect of the aircraft the appellant states its position as follows in the statement of facts of its amended notice of appeal:

1. The Appellant is a company incorporated pursuant to the laws of the Province of Saskatchewan and is registered to carry on business in the Provinces of British Columbia, Alberta, Saskatchewan and Ontario. The company’s business consists of the manufacture, distribution and selling of pre-cast concrete products such as sidewalk slabs, curbs, septic tanks, etc. In addition the company manufactures, sells and distributes steel form ties for use in association with installation of concrete basements for housing. The company has over the course of the years maintained offices in the said Provinces and manufacturing plants in Alberta, Saskatchewan and Ontario.

2. The nature of the company’s business made it useful and desirable to own and operate an aircraft permitting the president and other responsible officers and employees of the company to supervise and travel between the various offices and clients of the company with a minimum of expense and loss of time.

3. In 1965 the company acquired a 1958 Cessna Model 310B aircraft for use in association with the company’s business. The formal documentation at the time required the company to enter into a lease agreement dated January 15th, 1965 whereunder the company undertook to lease the said aircraft for a period of five years commencing January 15th, 1965, paying a rental of $743.49 monthly over the term of the lease.

4. Having acquired the said aircraft in the manner aforesaid the company did operate and use said aircraft for a period of four years until 1969.

5. In 1969 the usefulness of the aircraft of the company ceased and the decision was made to dispose of the aircraft in the best interests of the company. The company authorized an agent to find a buyer for the aircraft and in March of 1969 the company sold the aircraft.

6. In order to grant title to the aircraft the company exercised an option to purchase thereby acquiring title ahead of the sale to the buyer. The said option to purchase had been provided for by the lessor of the aircraft in the original lease agreement of January 15th, 1965.

7. The sale of the aircraft was arranged at a time when the aircraft was no longer of use to the company and the amount of the selling price paid by the buyer to the company reflected the then existing market value of the said aircraft. The aircraft was sold for a consideration of $19,900.00, and the aircraft was acquired by the company in terms of the capital purchase in the amount of $12,408.11. It is the difference between the cost of acquisition of the aircraft and the sale price of the aircraft which the Minister has taken into income for purposes of computation of income tax.

The respondent stated his position in respect of this transaction in paragraph 10 of the amended reply to the notice of appeal which reads as follows:

10. On March 7, 1969, the Appellant exercised this second option and acquired title to the aircraft paying to the lessor the sum of $10,122.91, plus the monthly payment for March of $743.49. On the same date the Appellant resold the aircraft to Frank Knogler of Saskatoon for $19,000.00 The Appellant reported the gain on this transaction as a capital gain.

The respondent further goes on to say in paragraph 13:

13. In re-assessing the Appellant for its 1970 taxation year, he assumed, inter alia:

(b) On March 7, 1969, the aircraft, to the knowledge of the Appellant, had a fair market value considerably in excess of the cost at which the Appellant could acquire the aircraft under the terms of the option contained in the lease.

(c) On March 7, 1969, for the sole and exclusive purpose of realizing the profit that could be obtained by exercising the option and reselling the aircraft at its fair market value, the Appellant purchased the Cessna 310B under the option clause contained in the lease and resold it the same day to Frank Knogler.

(d) That the only purpose motivating the Appellant in acquiring title to the aircraft was the prospect of realizing a profit on its resale.

Mr Given, president of the appellant company, gave evidence and stated that at the end of the four years of the lease, that is, early in 1969, it was decided that he would go to England for a year or so and that the aircraft would no longer be required by the appellant as he, Mr Given, was the only one who operated it. At this point the lease was reviewed and the possibility of selling the aircraft was canvassed. A buyer was found who was willing to pay a price in excess of $7,000 over the amount the appellant would be obliged to pay to the lessor to obtain ownership of title to the aircraft.

There is no question that the appellant acted prudently and in accord with good business practice in proceeding in the manner that it did. The alternative would have been to terminate the lease and to return the aircraft to the lessor. It chose the first method and made a profit on the transaction.

The question is whether or not this is income or capital. It is clear from the evidence that the appellant proceeded to acquire title to the aircraft with full knowledge that it would turn it to account immediately, which it did.

The appellant argues that it was not in the business of buying and selling airplanes and that this was an isolated transaction. In my view this does not, of itself, assist the appellant. There are numerous cases where an isolated single transaction was held to be a venture in the nature of trade. The appellant’s clear intention at the time of the purchase was to make a profit on resale. The respondent taxed the said profit and, in my humble opinion, was correct in doing so. The appeal on this issue is accordingly dismissed.

Dealing with the issue of the leasing of other equipment, that is the trucks and forklifts, it need hardly be repeated again that the burden of proof, that is, of establishing that the assumptions of fact on which the respondent based his assessment are ill-founded, rests with the appellant.

In his amended reply to notice of appeal the respondent states as follows in paragraph 14(a) and (b):

14. In re-assessing the Appellant for its 1970 taxation year with respect to the forklift trucks, he assumed, inter alia:

(a) That the forklift trucks and other trucks covered by the alleged leases referred to in paragraph 8 and 9 of the amended Notice of Appeal had an original capital cost in 1967 of approximately $50,000.00, with the alleged leases being for periods of four to five years.

(b) That in each case the alleged leases provided the lessee might purchase the assets at the expiration of the lease, for amounts of either $1.00 or other amounts, and in fact bore no relation to the actual anticipated value of the assets at the end of the alleged leases.

The evidence is lacking in respect of the fair market value of the items purchased by the appellant when it exercised its option and particularly what relationship the said value had to the actual price paid.

Giving the matter my best consideration on the basis of the evidence before the Board, including the exhibits filed, I must conclude that the appellant has not met the onus of proof that the Income Tax Act places on it in situations of this kind and the appeal on this issue is also dismissed.

Appeal dismissed.