Machinery and Equipment


Atlantic Packaging Products Ltd. v. Canada, 2020 FCA 75

the number and frequency of similar dispositions of depreciable property was relevant to capital account treatment

The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco under s. 85(1) for Newco shares and sold the Newco shares to Cascades. CRA assessed on the basis that the sale of the Newco shares was on income account.

In its Notice of Objection and in its Notice of Appeal, the taxpayer took the position that s. 54.2 deemed the gain on the share sale to be a capital gain, but advertently refrained from arguing that it was a capital gain on general principles.

In finding that the latter issue could not be raised on an appeal to the Court of Appeal, Webb JA stated (at paras. 35-37):

The critical question that arises is whether all of the relevant evidence to decide the new issue that is now raised by Atlantic Packaging was before the Tax Court. In its memorandum, Atlantic Packaging refers to the six factors that have been considered by the courts in determining whether the gain realized on a disposition of a particular property is an income gain or a capital gain. These are set out in Happy Valley Farms … .

…[O]ne of the considerations that is listed as a relevant factor is the frequency or number of other similar transactions completed by the taxpayer. While it would be presumed that Atlantic Packaging would not be frequently selling off an entire division, there is no indication of whether Atlantic Packaging followed a similar pattern or similar transactions in disposing of other depreciable property. …

[T]he absence of this evidence is sufficient for this Court to reject Atlantic Packaging’s argument that this new issue should be considered by this Court. The Crown has been deprived of any opportunity to explore the facts related to the frequency or number of similar transactions … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54.2 transfer of assets representing 68% of the FMV of the assets of a business division did not satisfy the “substantially all” test 223
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Act - Section 27 - Subsection 27(1.3) raising of new issue would prejudice the Crown 222

C.A.E. Inc. v. Canada, 2013 DTC 5084 [at 5944], 2013 FCA 92

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) and had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property characterization of depreciable property or inventory done on annual basis 371
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) change in use on depreciable property conversion to inventory 124
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) applied to conversion of depreciable property into inventory 184
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(b) 370

General Construction Co. Ltd. v. Minister of National Revenue, 59 DTC 1169, [1959] CTC 300, [1959] S.C.R. 729

A construction company ("Mannix") had formed a joint venture (the "first joint venture") with two other arm's length companies to contruct a portion of a pipeline, with Mannix having an undivided 40% interest in the first joint venture. Mannix then entered into a second joint venture agreement with the taxpayer (which carried on an earth moving business) and another company under which the taxpayer acquired a 15% interest in Mannix's 40% interest in the first joint venture in consideration for its agreement to make cash payments. Mannix rented machinery and equipment to the first joint venture.

It was agreed, close to the conclusion of the first joint venture, that Mannix would acquire the interest of the taxpayer in that venture, thereby taking over the taxpayer's interest in the machinery and equipment, and that Mannix would pay to the taxpayer the taxpayer's total capital contributions to the second joint venture net of distributions made to date, plus an additional sum of $90,000.

The sum of $90,000 was found by Martland J. to be a taxable profit to the taxpayer given that: the taxpayer had entered into the second joint venture with a view to recouping its investment and making a profit at the conclusion of that venture; the $90,000 represented an estimate of the profit which the taxpayer would have become entitled to receive upon a winding-up of the joint venture; and it was not the intention of the taxpayer to sell, or of Mannix to buy, an interest in a going concern.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments payment received on buyout of JV interest found to be compensation in lieu of future profits 140

Canadian Kodak Sales Ltd. v. MNR, 54 DTC 1194, [1954] CTC 375 (Ex Ct)

The taxpayer, whose business was to purchase photographic equipment from affiliates and sell them to customers, in 1940 acquired the business of another affiliate, which consisted of leasing out "recordaks" (i.e., machines which took reduced photographs and microfilms of documents) to customers for all of the economic life of the recordaks. In 1951, the taxpayer informed its customers that they now could purchase the leased recordaks, and in 1951 and 1952, 40% and 5%, respectively, of the customers did so.

The resulting gains were taxable. The recordak division was part of the taxpayer's business of exploiting photographic equipment and, once the decision was made to sell recordaks, their sale occurred in the ordinary course of that business.

See Also

Klemen v. The Queen, 2014 DTC 1170 [at 3613], 2014 TCC 244

licensed equipment internally transferred in one-off transaction

The taxpayer directly or through corporations acquired equipment to refurbish and rent to junior oil companies. He reported a capital gain on his transfer of equipment to a corporation ("CHL"), which was wholly-owned by him through a holding company, in exchange for a $135,000 credit to his "shareholder" loan account. The transferred equipment previously had been provided by him for use by CHL free of charge.

In finding that the taxpayer's gain was on capital account, Hogan J stated (at para. 38):

[T]he Equipment was used by the Appellant in his various business ventures over a very long period of time. It was acquired at the beginning in the 1980s and then sold to CHL in 2004 and 2005. There is no evidence to show that the Appellant sold similar equipment in earlier taxation periods. The Appellant did allow CHL and other corporations that he held an interest in to use the Equipment in their business ventures. There is no evidence to show that the Appellant modified or altered the equipment for the purpose of realizing a higher price.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Commercial Activity equipment licensed at no charge was held in commercial activity 86
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) s. 165(5) cannot be used to increase an assessment 161
Tax Topics - Income Tax Act - Section 165 - Subsection 165(5) s. 165(5) cannot be used to increase an assessment 161

Edwards v. Bairstow & Harrison, (1955), 36 TC 207, [1955] UKHL TC_36_207 (HL)

acquisition of spinning plant with a view to resale at a profit was an adventure in nature of trade

The taxpayers who were a director of a leather manufacturing company and an employee of a spinning firm, purchased a complete cotton spinning plant with a view to selling it as quickly as possible at a profit but, in the event, disposed of the plant piecemeal over the following two years at a gain.

In finding that the transaction was on income account as an adventure in the nature of trade, Lord Radcliffe noted that they had no intention of using the machinery as an income-producing asset, or of buying it to consume it or for the pleasure of enjoyment. It was not relevant that the plant was not advertised for sale (why should they do so if the sale of the plant could be achieved without advertising); even if no "work had been done on the maturing the asset to be sold", there was "no reason why a dealer should do more work in making his plant saleable than the purposes of sale required"; and even if the taxpayers did not have any special skill which placed them in an advantageous position for the purposes of the transaction, "the members of a commercial community do not need much instruction in the principles and possibility of dealing and ... given the opportunity, the existence or non-existence of special skill is of no significance whatever" (p. 230). Accordingly, this was "a commercial deal in second-hand plant" (p. 230).

Gloucester Railway Carriage and Wagon Co., Ltd., [1925] AC 469, [1925] UKHL TC_12_720 (HL)

The taxpayer manufactured railway wagons, which it sold outright (outright or under hire purchase agreements) as well as letting out wagons on simple hire (i.e., no purchase options). After the First World War there was a great scarcity of wagons and the taxpayer decided to sell all the wagons which were being hired out. In confirming that the gain on this sale was a taxable profit, Lord Dunedin stated (at pp. 474-475):

...there was here one business. A wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilized by being hired out.

Administrative Policy

2020 Ruling 2019-0834901R3 - Loss Utilization - Depreciable Property

depreciable property retained its character in superficial gain transaction

With a view to Profitco, which is an indirect wholly-owned Canadian subsidiary of a non-resident public company (“Parent”), utilizing the non-capital losses (including potentially carrying them back to a prior year) of Lossco, which is a direct wholly-owned Canadian subsidiary of Parent, Profitco transferred Class 12 property on a s. 85(1) rollover basis to Lossco in consideration for redeemable preferred shares of Lossco, then Lossco transferred the properties back to Profitco in consideration for redeemable preferred shares of Profitco having a paid-up capital equaling their redemption amount, with a joint s. 85(1) election being made at the estimated FMV of the properties, so that Lossco realized recapture of depreciation. The two preferred shareholdings were then redeemed for notes, and the notes set off.


Including re application of s. 55(3)(a) exception to the deemed dividend received by Profitco and s. 245(2). The CRA summary stated:

The proposed subject transaction conforms with the CRA's policy to not apply subsection 55(2) of the Act to internal reorganizations within a related group for loss consolidation purposes and recognizing that property retains its character on a rollover transaction between related parties is consistent with the CRA’s position in CRA View 2014-0553731I7 that depreciable property should retain its character on wind-up.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) s. 55(3)(a) application to deemed dividend arising on superficial gain transaction to utilize losses of Lossco 203
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) superficial gain transaction to transfer losses to a Profitco that is related through a non-resident parent 195

25 September 2007 Internal T.I. 2007-0226751I7 F - Gain en capital versus revenu d'entreprise

the regular refurbishing, rental then sale at a gain of machines gave rise to business profits

The corporation’s regular activities involved the purchase of particular (redacted) types of equipment or vehicles that were damaged and/or out-of-use in order to restore them and rent them, following which, it would sell them at a gain over its cost. Some were sold without even having been rented previously. It also purchased items for parts only, which were disassembled so that the parts could be used in refurbishing the other items.

The Directorate found that the items (including also the items purchased for their parts) were inventory of a business, so that the gains on resale were business profits rather than capital gains.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(b) property regular refurbished for leasing then resale at a gain was inventory 165


Carl MacArthur, "Is the Sale of Depreciable Property Capital or Income in Canada?", Tax Notes International, 14 May 2012 (an abridged version of this article appears as "CAE Inc.: Depreciable Property or Inventory?", Canadian Tax Highlights, Vol 20, No. 3, March 2012, p. 6)

The conversion of depreciable property to inventory before a disposition thereof is not contemplated under the Act's CCA scheme, and could give rise to anomalies.