18 October 1982 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

October 18, 1982 HEAD OFFICE Corporate Rulings Directorate D.E. Holtz

RE: XXXX

This is in reply to your memorandum of April 29, 1982 concerning the sale of equipment by XXXX.

Your submission included a copy of correspondence received from XXXX concerning non-arm's length sales. As you stated in your memorandum that this matter has been resolved, we have not reviewed that material.

Your remaining problem concerns the sale of used equipment by XXXX who maintains that these are capital dispositions. We do not agree with the taxpayer's position, but rather we are of the opinion that all sales are income transactions.

This opinion is supported by the case of Canadian Kodak Sales Limited v. MNR (54 DTC 1194), where the Exchequer Court found that all sales were on account of income. We feel that your case against XXXX is even stronger than the Kodak case.

XXXX

The exception would be for sales of obsolete equipment (as stated in IT-102R ), but we fail to see how "obsolete" equipment could produce a profit on a sale. We would expect that "obsolete" equipment would produce a loss on disposition. Therefore, we believe that the taxpayer's argument that they are selling obsolete equipment is not a valid one.

You may, however, encounter difficulties with respect to the "forced sales" pursuant to condition 4(a) of the lease agreements.

As we understand these "forced sales," they may in fact take one of two forms. If the lessee simply wishes to purchase the equipment, he may use this clause as almost an "option to purchase." He refuses to return the equipment or states that it is lost, which results in a payment to the lessor. These would be sales of equipment and characterized as income transactions as discussed above. However, in cases where the lessee actually does lose or destroy the equipment, the question may arise as to whether there has actually been a sale Technically, XXXX is receiving compensation for damages, and although there is a disposition there is not a sale. If this position is advanced by the taxpayer and upheld, the receipt could be capital and may actually qualify for a rollover pursuant to section 44. However, we believe that a counter argument might be sustained that such receipts are part of the ordinary business of XXXX in that these transactions recur yearly and are actually predictable. Even though there may not have been a sale, as such, we would still categorize the proceeds as an income receipt based on the Kodak case. Although the taxpayer has not presented this argument, we thought you should be aware that such an argument does exist.

In summary, we agree with your opinion that sales of used equipment are income transactions.

As far as the question of an inventory allowance, we are of the opinion that the equipment does not qualify during the period it is being leased. It would qualify for the inventory allowance after the lease expires and while it is "held for sale," but we understand that there is no such time period involved at the commencement of the year. Therefore, the equipment does not qualify for the inventory allowance.

Chief Finance, Insurance & Leasing Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch