Machinery and Equipment

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 … .

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).

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.

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.