Date: 20000915
Docket: 98-813-IT-G
BETWEEN:
BOIS DAAQUAM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Tardif, J.T.C.C.
[1]
The respondent denied the appellant an investment tax credit for
the 1993 taxation year following the purchase of an
excavator.
[2]
The appellant was and still is a company carrying on forestry and
wood processing activities. Its main business is sawing and
selling processed wood. To ensure its supply of raw material, the
appellant purchased cutting rights and woodlots; for cutting the
timber, it hired workers and used specialized equipment.
[3]
The wood was processed solely at one of the appellant's two
sawmills in St-Just-de-Bretennières in
the county of Montmagny in the province of Quebec, Canada.
[4]
The appellant's sawmills and headquarters are located in
Canada just a thousand or so feet from the border between Canada
and the United States of America. Because of its geographic
location, the company did a considerable amount of cutting on
American soil, especially at the end of the 1980s.
[5]
Since the company sold a large part of its output of processed
wood in the United States, it purchased substantial quantities of
wood (raw material) there. This reduced its transportation costs,
since the trucks were used to transport both the raw material and
the processed wood.
[6]
The processed wood was mainly fir and spruce from both Quebec and
the United States. Generally speaking, the operating costs
associated with timber cutting were higher in the United States
than in Quebec because cutting rights were more expensive there.
On the other hand, businesses were subject to no reforestation
requirement in the United States.
[7]
In 1993, the appellant held cutting rights on an immense area in
the United States which had been estimated to contain about 800
million feet of timber at the time the rights were purchased in
1987. It had obtained those cutting rights from a company of
which it was co-owner with the Kruger company, the latter being
interested in the chips produced by the appellant's sawing
operations.
[8]
At that time, despite the intensity and extensiveness of its
operations, Bois Daaquam Inc. was not very profitable; the
financial statements showed losses or a very small profit on
sales of several tens of millions of dollars.
[9]
To make operations more profitable and efficient, a decision was
made to purchase an excavator, a machine that was more efficient,
flexible and useful in view of the various constraints associated
with logging operations and environmental safety.
[10] The
appellant argued that, at the time the excavator was acquired in
July 1993 (Exhibit A-1), it firmly intended to use it
primarily on Canadian soil. That intention resulted largely from
the fact that timber-cutting operations on American soil
were bound to decrease considerably given that the quantities of
timber that could be cut on its immense piece of land had been
greatly overestimated. According to the evidence, the initial
estimates had failed to consider a number of constraints that
prevented access or made access prohibitively expensive and this
rendered certain places inaccessible.
[11] Claude
Girard, in his capacity as controller, stated that the company
knew when the excavator was acquired that the quality of the
timber available on American soil was much lower than initially
anticipated.
[12] That
meant that the company had to review and re-evaluate its
planning with respect to timber cutting. After all the
appropriate factors were assessed, it was agreed that cutting
operations would thereafter be focused more on Quebec, to the
detriment of cutting operations in the United States. One of the
factors weighing in favour of that change of focus was the fact
that cutting rights were more expensive in the United States than
in Quebec.
[13] Mr.
Girard said that, since the excavator was purchased primarily to
be used for timber-cutting work in forests, there was no
doubt at that time that it would be used primarily in Canada,
especially since the environmental requirements were stricter and
more numerous in Canada.
[14] In actual
fact, the excavator was used mainly in the United States after it
was acquired. It was operated by a Canadian and insured and
registered in Quebec; it was also repaired and maintained in
Quebec. The excavator was also used to perform several jobs on
Canadian soil during the months following its acquisition.
[15] The
evidence showed that it was a machine with a useful life of more
than 25 years.
[16] The
excavator was used to build roads that provided access and
allowed the cut timber to be brought out. It was so used in
particular on American soil during the first few years after it
was acquired.
[17] On
Canadian soil, the excavator was used mainly for maintenance work
around either of the sawmills and to load and unload trucks; for
that type of operation, the bucket was replaced by lifting tongs.
According to witness Donald Cloutier, the excavator was also
used to clean ditches around either of the sawmills.
[18] The
performance of such maintenance and cleaning work around the
sawmills prompted the respondent to say that there was reason to
question whether the excavator was qualified property.
[19] In this
regard, it is my view that that work had no disqualifying effect
with respect to the role or use of the property in question,
since, although the work may not have been directly related to
logging operations, it was incidental, necessary, useful, indeed
essential to the efficient operation of the logging business.
[20] The tax
credit that gave rise to these proceedings is provided for by the
following provisions of the federal Income Tax Act
("the Act"):
127(9)
. . .
"qualified property" of a taxpayer means property
(other than an approved project property or a certified property)
that is
. . .
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975,
. . .
(c) to be used by him in Canada primarily for the
purpose of
. . .
(ix) logging,
. . .
[21]
Subparagraph 127(9)(c)(iii) of the Act sets out a
test of intention. This is made very clear by the following
decisions:
Dragon Construction Limited v. M.N.R., 89 DTC 464;
Setrakov Construction Ltd. v. M.N.R., 89 DTC 396;
Capilano International Inc. v. The Queen, 95 DTC
915.
[22] It is
therefore necessary to assess the appellant's intention at
the time it decided to acquire the excavator.
[23] The facts
must be analysed so as to discover the intention that prevailed
when the property was acquired. Trying to determine intention is
a difficult exercise that only very rarely allows one to draw any
absolute conclusion, especially since an informed business
decision generally contemplates various alternatives that may
affect or change the nature or focus of the initial
intention.
[24] Moreover,
economic reality is such that the decision makers and actors who
form the intention preceding a decision must deal with changing
or constantly evolving realities dictated by the speed of
technological developments and by the modern economy.
[25] On this
question of assessing intention, it is appropriate to recall the
principle stated by the Supreme Court of Canada in Symes v.
Canada, [1993] 4 S.C.R. 695 (at p. 736), a decision in which
Iacobucci J. said the following:
. . .
As in other areas of law where purpose or intention
behind actions is to be ascertained, it must not be
supposed that in responding to this question, courts will be
guided only by a taxpayer's statements, ex post facto
or otherwise, as to the subjective purpose of a particular
expenditure. Courts will, instead, look for objective
manifestations of purpose, and purpose is ultimately
a question of fact to be decided with due regard for all of
the circumstances. . . . [Emphasis added.]
[26] In the
case at bar, the evidence showed that, at the time the excavator
was acquired, the projections and expectations for the American
logging camp had to be lowered, thus requiring the appellant to
redirect its cutting operations to other camps located mainly in
Canada.
[27] Intention
must also be assessed by looking at the useful life of the
qualified property acquired. Some property, such as computer
equipment, has a very short useful life and must be replaced
regularly. However, other property, such as the excavator at the
centre of these proceedings, is much more durable; the evidence
showed that the excavator had a useful life of more than 20
years.
[28] Intention
must, of course, be assessed before and at the time of the
acquisition, but it is also helpful to consider what happened
after the acquisition so as to confirm or disprove the alleged
intention. As well, the analysis must concern a period that is
also based on the useful life of the property for which the tax
credit is being claimed.
[29] As for
the "primarily" condition, there is no doubt in my mind
that it concerns the nature of the operations or the
business's field of activity and not the place of use. The
Honourable Judge Mogan of this Court reached the same conclusion
in Capilano International Inc. v. The Queen, 95 DTC 915,
at page 919. The following extract is worth citing:
. . . On the evidence, I cannot conclude that the Sercel 368
was to be used primarily in Jordan even if the word
"primarily" could be construed as modifying the place
of use. In my opinion, however, the word "primarily"
in paragraph 127(9)(c) modifies only the purpose for which the
equipment was to be used; and that purpose was always
exploring for petroleum or natural gas. . . .
[Emphasis added.]
[30] If
Parliament had wanted to have this concept or condition apply to
the place of use, it would no doubt have worded the requirement
as follows:
"to be used by him primarily in Canada".
[31] To obtain
the credit, the appellant also had to prove on the balance of
evidence that the excavator was used primarily for the purpose of
logging. In this regard, although the respondent expressed some
reservations following Mr. Cloutier's testimony, this
aspect of the case was not discussed at length and it is my view
that the weight of the evidence has shown in a satisfactory
manner that the piece of equipment in question was used primarily
for the purpose of logging.
[32] As for
the fundamental issue of whether the appellant intended to use
the qualified property in Canada, I think that the weight of the
evidence shows that it did. Admittedly, the excavator was used on
American soil after it was acquired, but its use was divided
between Canada and the United States. Moreover, the excavator was
regularly moved and used on Quebec soil.
[33] Even if
my interpretation of the expression "in Canada primarily for
the purpose of" were incorrect, I do not think that this
would have any effect on the overall assessment, since, once
again, the appropriate conclusion would be that the excavator was
qualified property.
[34] The
excavator was used on American soil for a short time if one
considers the fact that it was durable property with a useful
life of over 20 years. The evidence showed that the
excavator's presence on American soil was dictated by special
circumstances that had no effect on the intention that prevailed
when it was acquired. I think that account must also be taken of
the fact that the American logging camp was close to the
appellant's place of business in Quebec and that the
excavator was taken back there regularly for maintenance and
repairs and also, above all, for the performance of important
work.
[35]
Accordingly, the appeal should be allowed with costs to the
appellant.
Signed at Ottawa, Canada, this 15th day of September 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 29th day of November
2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-813(IT)G
BETWEEN:
BOIS DAAQUAM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 23, 2000, at
Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the
Appellant:
Stéphane Lalancette
Counsel for the
Respondent:
Martin Gentile
JUDGMENT
The
appeal from the assessment made under the Income Tax Act
for the 1993 taxation year following the purchase of an excavator
for $218,075 is allowed, with costs, and the assessment is
referred back to the Canada Customs and Revenue Agency for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of September 2000.
J.T.C.C.
Translation certified true
on this 29th day of November 2001.
Erich Klein, Revisor
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