Newfoundland Tractor and Equipment Co. v. R., [1996] 2 CTC 2250, 96 DTC 1202

Lamarre Proulx J.T.C.C.: — These are appeals concerning the 1988, 1989 and 1990 taxation years of the Appellant.

The question at issue is whether prescribed equipment acquired by the Appellant for leasing in a prescribed area was acquired primarily for use by the Appellant and therefore is certified property under paragraph 127(9) of the Income Tax Act, (the “Act”). There is no dispute that it was used in a prescribed area. The Minister of National Revenue (the “Minister”) has taken the position that the property acquired was qualified property and not certified property, because it is property that was not acquired primarily for use by the taxpayer, whereas the Appellant takes the position that it is certified property and submits that acquisition for active leasing is equivalent to acquisition primarily for use in an area.

The definitions of “qualified property” and of “certified property” are found at subsection 127(9) of the Act as follows:

“qualified property” of a taxpayer means property (other than an approved project property or a certified property) that is

(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(i) manufacturing or processing goods for sale or lease,

(xiii) ..., Or

(d) to be leased by the taxpayer to a lessee (other than person exempt from tax under this Part by reason of section 149) who may reasonably be expected to use the property in Canada primarily for any of the purposes referred to in subparagraphs (c)(i) to (xii),

“certified property” of a taxpayer means any property (other than an approved project property) described in paragraph (a) or (b) of the definition of “qualified property”

(a) that was acquired by the taxpayer

(i) after October 28, 1980 and

(A) before 1987, or

(B) before 1988 where the property is

(I) a building under construction before 1987,

(II) machinery and equipment ordered in writing by the taxpayer before 1987,

(ii) after 1986 and before 1989, other than a property included in subparagraph (i), or

(iii) after 1988,

and that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by him, and

(b) that is part of a facility as defined for the purposes of the Regional Development Incentives Act and was acquired primarily for use by the taxpayer in a prescribed area;

At the outset of the hearing a Statement of Agreed Facts was filed. It is hereafter reproduced in its major part:

1. The Appellant, Newfoundland Tractor and Equipment Company Limited (“Newfoundland Tractor”), is a corporation incorporated under the laws of Newfoundland, with its head office at 82 Kenmount Road, St. John’s, Newfoundland.

2. Newfoundland Tractor is a Canadian- controlled private corporation which carries on the business of selling, leasing, repairing and servicing heavy industrial equipment and general line equipment and the selling of parts for such equipment from premises at St. John’s, Grand Falls-Windsor, Corner Brook and Goose Bay in the Province of Newfoundland.

4. In each of its taxation years 1985 through 1990, Newfoundland Tractor purchased certain pieces of heavy equipment (the “Equipment”), in respect of which it claimed investment tax credits (“ITCs”) at the rate applicable to “certified property” as defined in subsection 127(9) of the Income Tax Act (the “Act”).

6. With respect to the taxation years in issue, the Equipment consisted of the following:

1988

-14 Caterpillar forklifts -1 Caterpillar industrial generator set -2 Caterpillar off-highway articulated dump trucks -1 Caterpillar wheel loader

1989

-10 Caterpillar forklifts -1 Caterpillar wheel loader

1990

-8

Caterpillar

forklifts

-1

Peterson

Pacific

wood

delimber/debarker/loader/chipper

7. The Equipment was leased by Newfoundland Tractor to customers which operated the Equipment in processing facilities in the fish, mining and forestry industries at various locations within the province of Newfoundland.

8. The Equipment was prescribed machinery and equipment - depreciable in nature - within the meaning of paragraph (b) of the definition of “qualified property” in section 127(9) of the Act and Regulation 4600(2).

9. Each piece of Equipment was “acquired by the taxpayer” when Newfoundland Tractor ordered or moved it from inventory and capitalized it in the capital cost allowance schedule upon the reaching of a lease arrangement with a customer.

10. The Equipment was not used, nor acquired for use or lease, for any purpose whatever before it was acquired by Newfoundland Tractor.

11. In each case, the Equipment, as operated by the lessee, was part of a “facility” as defined for the purposes of the Regional Development Incentives Act.

12. In each case, the Equipment was operated by the lessee in a “prescribed area”, as set out in Regulation 4602(1 )(a).

13. In its tax returns for 1988, 1989 and 1990 taxation years, Newfoundland Tractor claimed an investment tax credit for the acquisition of the Equipment, at the rate applicable to “certified property” as defined in subsection 127(9) of the Act.

14. In reassessments dated July 3, 1992, the Minister of National Revenue (the “Minister”) disallowed the claim for investment tax credits in respect of the leased Equipment calculated at the rate applicable to “certified property”. The Minister takes the position that the Equipment is “qualified property” and allowed credits based on the lower rate applicable to such property. The reassessments resulted in a reduction in the investment tax credit allowed in each year, and a consequent reduction in ITC refunds and an increase in amounts claimed for capital cost allowance.

19. The issue to be decided in this appeal is whether the Equipment can be properly classified as “certified property” within the meaning of subsection 127(9) of the Act, as claimed by the Appellant, and thus subject to the higher rate of investment tax credits applicable to such property. More specifically, since it is agreed that the other elements of the definition are met, the issue is whether the Equipment “was acquired primarily for use by the taxpayer in a prescribed area”.

Although the Statement of Agreed Facts is fairly descriptive, the Appellant wished to adduce evidence.

Evidence was adduced by the Appellant to show its active participation in maintaining in good operative condition the rental fleet. The evidence showed that the Appellant was not a passive lessor but an active lessor. In this manner, the Appellant would have fulfilled the objective and purpose of the investment tax credit sought.

Mr. James Finn, a director and controller of the Appellant, Mr. Brennan a salesman and a lift truck representative, Mr. Carl Hamelin, a service manager and Mr. Sampson, an account manager in the leasing department of the Royal Bank of Canada, were witnesses for the Appellant.

The Appellant had been selling Caterpillar products since 1927.

The on-site users preferred leasing to purchasing in a market where the purchase prices have escalated. The seasonal aspect of the operations of the lessees was also a factor in their decision to rent rather than purchase. They had the use of the machine without acquiring it. The equipment was acquired pursuant to the salesmen having visited potential clients and having determined the equipment that was needed and was most likely to be in demand. Fish plants accounted for 90% the Appellant’s clients and because of the corrosive effect of salt on equipment, those were difficult conditions for the equipment.

There was a plan to monitor the leased equipment from time to time. If there were major repairs to be done, that were not due to misuse or improper use by the lessee, the Appellant would do them at its cost.

The increase of the tax credit was passed to the on site users by a reduction in the rental rate. This reduction in the rental rate also allowed the Appellant to be competitive in a field where competition never ends. However, the evidence was silent as to how the other competitors calculated the investment tax credit.

The purpose of Mr. Sampson’s testimony was to show that a financial institution, in its leasing activities, does not participate in the maintenance of the equipment. The financial institution acquires the ownership of the equipment and leases it to the client. The lease is usually a 60-month term lease with a purchase option. The dealer endorses the lease. No sample document was tendered during the evidence. It was clear however that the financial institution did not participate in the maintenance of the equipment leased. The equipment does not become a rental fleet for the financial institution as it becomes for the Appellant.

Counsel for the Appellant submitted that it may be found in many court decisions that the word “use” may include “leasing of property”. He referred among others to the decision of this Court in Funtronix Amusements Ltd. v. Minister of National Revenue [1989] 2 C.T.C. 2296, 89 D.T.C. 545 and more particularly to the following passages at page 2298 (D.T.C. 546):

In effect, it is entirely consonant with the scheme and language of the Income Tax Act and the Income Tax Regulations to say of an owner of property who makes it available to others for a fee that the owner is using property for the purpose of earning income therefrom although these other persons have the day-to-day use of the property....

It is generally recognized, I think, that the reference in such provisions to a taxpayer who uses property for the purpose of gaining or producing income therefrom, covers, for instance, the situation of a lessor who has rented his property.

According to the language of the Act, in a lease context, the lessor is using the property for the purpose of gaining income therefrom although during the term of the lease the day-to-day enjoyment of the property is that of the lessee....

...looked at from another angle. In effect, the evidence clearly showed that the appellant was the user of the property in the sense that if had access to such equipment at all times and could alter the computer programs stored in such equipment.

Respecting this case, it has to be said immediately that the word “use” being analyzed came from the following provision of the Act:

13(7) For the purposes of this section, section 20 and any regulations made under paragraph 20(1 )(a), the following rules apply: ...

(b) where a taxpayer, having acquired property for some other purpose, has commenced at a later time to use it for the purpose of gaining or producing income therefrom, or for the purpose of gaining or producing income from a business, he shall be deemed to have acquired it at that later time at its fair market value at that time.

[Emphasis added in the Funtronix case above).]

It can be seen that the word “use” is employed in a context very different to the context at issue.

Counsel for the Appellant tried to distinguish the decision of the Federal Court-Trial Division, in Labrador Offshore Shipping Co. v. R. (sub nom. Labrador Offshore Shipping Co. v. Canada), [1990] 1 C.T.C. 134, 90 D.T.C. 6096, where Martin J., found that the use contemplated under subparagraph 127(9)(a.l) of the Act [1] , did not include the leasing of a vessel but was the physical use of the property, by saying that this finding was an obiter dictum as it was not necessary to decide the issue being litigated. In counsel’s view the issue being litigated could have been determined by the only fact that the use of the ship was not in the prescribed area. He also tried to distinguish it by the fact that the plaintiff, in that case, had no employees or office space, contrary to the Appellant’s important rental fleet operations.

Even if it were an obiter dictum (on which I do not agree) and if the circumstances of the business were different (on which I agree), the detailed analysis made by the learned judge on the meaning to be given to the words “primarily for use in”, subparagraph 127(9)(a.l) of the Act is of the greatest importance. It expresses, in my view, the meaning to be given to these words in their context. This analysis is found at pages 139-140, (D.T.C. 6099 and 6100) of the afore mentioned decision:

In my view the use contemplated under the provisions of subparagraph 127(9)(a. 1) does not include the leasing of the vessel by the plaintiff. A lease of a property or a vessel is granting the use of the property, usually the exclusive use of the property, to the lessee. By the act of leasing the owner or lessor parts with the use or the right to use the property or equipment under consideration. It is true, but imprecise, for a lessor to say that he used his vessel to earn rent when he leases it, in fact, in such circumstances, it is not the lessor who uses the vessel but it is the lessee who uses it for his own purposes. The lessor gives the right to use the vessel to the lessee in consideration for the rent to be paid to the lessor by the lessee.

I do not find that the Funtronix decision is authority for the proposition that the use contemplated by subparagraph 127(9)(a. 1) is or could be the leasing of the vessel to Petro-Canada. In my opinion the use contemplated by subparagraph 127(9)(a. 1 ) is the physical use of the property, in this case the vessel “Balder Challenger”. Because the use of the vessel did not take place in Nova Scotia, or in any of the other areas named in subparagraph 127(9)(a. 1), the plaintiff is not entitled to avail itself of the benefits of that subparagraph.

Counsel for the Appellant used as an alternative argument that the use by a lessee constitutes the use by a lessor. This argument was based on the decision of the Federal Court of Appeal in Lor-Wes Contracting Ltd. v. R. (sub nom. Lor-Wes Contracting Ltd. v. The Queen), [1985] 2 C.T.C. 79, 85 D.T.C. 5310 and on a decision of our Court in McMynn v. R. (sub nom. McMynn v. Canada), [1995] 1 C.T.C. 2417, 95 D.T.C. 329. In my view, the decision of the Federal Court of Appeal rather reinforces the decision rendered in Labrador Offshore Shipping Co. (supra), and I quote at page 83 (D.T.C. 5313):

The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

Applying this test to subparagraph 127(10)(c)(vii) of the Act, what do we find? The respondent maintains that the phrase “by him” implies that the taxpayer claiming the benefit has to use the equipment for the purpose of logging, but in fact the location of the phrase makes it clear that it is the use of the equipment that has to be by the taxpayer claiming the benefit, not that the purpose of logging has to be uniquely his. It suffices if the ultimate purpose, as defined by the overall contractor, is that of logging.

Indeed, the reason for the phrase “by him” seems to be, as contended by the appellant, to differentiate actual use by a purchaser of equipment (covered by paragraph (c)) from the use by a lessee (covered by paragraph (d)).

What Lor-Wes Contracting Ltd. (supra) stands for is that a contractor or a subcontractor doing physical work which is an integral part of a prescribed activity is performing that prescribed activity. However, the Appellant is not in the circumstances that were existing in Lor-Wes because leasing is not the activity of a contractor or subcontractor performing part of a prescribed activity.

Counsel for the Respondent submitted that a fundamental element of the rules of legislative interpretation was explained by Lamer C.J., in a 1990 unanimous decision of the Supreme Court of Canada in Multiform Manufacturing Co. v. R., [1990] 2 S.C.R. 624, 58 C.C.C. (3d) 257, at page 630:

When the courts are called upon to interpret a statute, their task is to discover the intention of Parliament. When the words used in a statute are clear and unambiguous, no further step is needed to identify the intention of Parliament. There is no need for further construction when Parliament has clearly expressed its intention in the words it has used in the statute.

Counsel for the Respondent stated that in subsection 127(9) of the Act, the word “use” did not include lease since in the various definitions given in that subsection including the definitions at issue, both these words are used clearly for distinctive concepts. In his view, this indicated that the legislator’s intent was not to include the meaning of “lease” in the word “use”.

I find the definitions given in paragraph 127(9) of the Act very descriptive and detailed. Moreover, the definition of certified property incorporates the definition of qualified property. The introductory words of the definition of certified property are : “certified property” of a taxpayer means any property described ... in paragraph (a) or (b) of the definition of “qualified property”… In this context, it becomes clear that the legislator has examined carefully both definitions and has chosen the exact words that the legislator wanted for these two definitions. It comes out with certainty from the reading of these two definitions that the word “use” does not include the meaning of leasing since these two words have been used in these definitions for their specific and respective meaning and not one including the other. I would agree with counsel for the Appellant that in some legislative provisions the word “use” will include the operation of leasing. However, in the instant case, it cannot. Property leased is not operated by the taxpayer nor for the taxpayer. “Use”, in the legislative provisions at issue, has the meaning of physical operation by the taxpayer and lease is the granting of the use of the property by the taxpayer to the lessee. This was well expressed in the Labrador Offshore Shipping Co. (supra), decision referred to earlier and with which I entirely agree.

The appeals are dismissed with costs.

Appeals dismissed.