Plaza Pontiac Buick Limited v. Her Majesty the Queen, [1991] 2 CTC 259, 91 DTC 5547

Jerome, A.C.J. [Orally]:—I indicated yesterday that I would deliver judgment in this matter and I am now prepared to do so. In my view, this appeal must be dismissed. There are three or four reasons. The first and foremost is that, in my opinion, the purpose of paragraph 20(1)(gg) is of paramount importance. It was, as I understand it, a measure inserted into the income tax law with a 10-year life span and it was intended to address a period of constant and substantial inflation. The result was an increase in year-over-year value of inventory that was largely a creature of inflation and nothing else. Accordingly, to afford some relief to people who were victimized by the phenomenon this paragraph was enacted and provided taxpayers with the opportunity to adjust by three per cent the value of their inventory to make it more fairly reflect the true value.

It is the taxpayer's thesis in the present case that that really should be extended to vehicles sold by the plaintiff taxpayer Plaza Pontiac Buick Ltd. or at least taken into inventory by the plaintiff for the purpose of sale and which were later leased rather than sold. I question whether that kind of special relief intended to assist people who had artificially overvalued unsold inventory. I stress the word “unsold”, because otherwise the program would make no sense, the intent of the paragraph would make no sense.

I grant that since these vehicles in question in the years in dispute here were under lease they were technically unsold because they can't be sold and leased at the same time. I think that an invidious comparison or assessment or analysis might be done, but I don’t want to get into it particularly to attempt to determine really whether these leased vehicles were closer to being sold than they were to being unsold. That is a kind of discretional process that I don't think serves very well here, but clearly the vehicles were not in inventory. They were not unsold vehicles either because while they were out under lease quite clearly they had been converted from inventory into revenue. That process, to repeat, was not by way of a sale because it was by way of lease, but it is far closer to a sale than it is to the situation of those vehicles which had not moved into the hands of a customer and had not produced revenue as the leased vehicles had.

So I conclude that the purpose of the paragraph, designed as it was to provide a fairer adjustment, an adjustment so as to achieve a fairer year-end valuation during those periods of inflation to the taxpayer a valuation on the unsold inventory, would make no sense in applying to this taxpayer's inventory of vehicles which were not unsold, not on the lot, but were in fact out under lease and for which the plaintiff taxpayer was receiving funds, funds that had been done by way of an agreement of the taxpayer.

Indeed the taxpayer's accountants recognized the difference since in several references to Exhibit A4, for example, the balance sheet at December 31,1977 lists inventories of new and used vehicles in one amount, inventory of leased vehicles at cost in another amount, at cost less accumulated depreciation. The taxpayer's accountants treated the two differently and indeed they were different. I think that was appropriate.

In addition, on the statement of earnings the year ended December 31, 1977 sales of new and used cars, parts and so on is shown as one entry; leasing revenue another. Cost of sales and expenses, cost of sales is shown as one item, depreciation on the leased vehicles is shown as another item. So clearly they were treated separately.

Finally, in schedule “J”, the last page of that A4 Exhibit, I note that the page schedule "J", of course, is devoted entirely to leasing revenue differentiating it from the revenue on the sale of new and used cars and it was treated as a separate category and I note as well confirmation that the revenue was reported and depreciation on the vehicles was taken or capital cost allowance was taken.

In addition, it seems to me that the vehicles to qualify for this special treatment under paragraph (gg) would have to be held for sale. In the simplest of terms to me vehicles which were out under lease to a customer cannot be at the same time held for sale. I here again stress that every lease had a term in it in which it was the option of the taxpayer plaintiff, Plaza Pontiac Buick, not the lessee, but at the option of the plaintiff that the vehicle would be considered sold upon the expiry of the lease term. So that all it took to convert the lease to a sale was the exercising of that option by the plaintiff.

The evidence is that counsel endeavoured to describe the leasing activity as somewhat minor in nature, secondary in nature, not an important aspect of the business and something which was done without profit, something which was done for the convenience of those customers who requested it. That description does not accord with the reality, in my opinion. The schedule “J” to which I have just referred identifies the revenues in one of the years in question from leasing as in excess of a million dollars.

I take it from the agreed statement of facts that at an given time approximately 400 cars were under lease and that that is not far off the customary total inventory of new and used vehicles during that period of time. As a result of leasing at least 150 cars were sold every year and that amount stood at a very substantial percentage of the total sales of the dealership. So that, in my view, leasing was a very significant part of the plaintiff's business.

I, therefore, consider the facts to be these: the plaintiff engaged in leasing activity which is different from sale, but not greatly since it was the plaintiff? option to consider it as a sale and I take it that that happened in almost every case. The lease, therefore, was closer, in my opinion, to simply a different way of structuring a sale, loading the greater cost at the end of the convenience of the customer instead of at the front by way of a downpayment or trade-in. I would assume that all the calculations were done so that all the deals worked out equally or very close. But, in any event, that doesn't change the decision one way or another. The leasing activity was, in these circumstances, a substantial part of the plaintiff's business. It accounted for a good deal of revenue. It accounted for a good many ultimate sales and it placed money in the pocket of the taxpayer in return for inventory which was in the hands of customers who were paying for it through a lease. It would be, in my opinion, a contradiction in terms to consider this as unsold inventory and in addition a contradiction in terms to consider that the benefit of a special inventory allowance such as the one in question here ought to have been available to the plaintiff.

I accordingly conclude that his action by way of an appeal from the Tax Court will be dismissed. I don't propose to add costs against the plaintiff. It is a serious case. It was an issue argued well and a comprehensive presentation. It just happens to fail. I don't think it is the kind of case where it is frivolous of the taxpayer and ought not to have been in court. I take it the Tax Court wrote a lengthy judgment which I haven't seen, but, in any event, it was not a frivolous point. It was a serious issue, so I don't propose to award costs.

Therefore, the endorsement will be for reasons given orally from the bench this action is dismissed, no order as to costs.

Appeal dismissed.