Subsection 1100(17)

The taxpayer (“JDI”) and another pulp and paper company in the Irving group (“IPPL”) engaged in several transactions to effectively transfer non-capital losses from a third company (“IOL”) in the Irving group to JDI. In a representative transaction, IOL acquired pollution control equipment (“PCE”), that IPPL had been using in its pulp facilities, from IPPL on a rollover basis at a nominal agreed amount. JDI then almost immediately acquired the PCE from IOL for $120 million (claiming 100% of this amount as CCA for that year), and agreed to operate the PCE in consideration for “throughput fees” payable to it by IPPL pursuant to “Operating and Services Agreements” (“OSAs”) governed by New Brunswick law. In a separate “contract services” agreement, IPPL agreed to perform the operating services required of JDI under the OSAs on behalf of JDI and for a daily fee. In January of the next year, after having earned $1.3 million in throughput fees, the taxpayer transferred the PCE “back” to IPPL on a rollover basis with a nominal elected amount.

Mainville JCA rejected the ARQ position (stated at para. 37, TaxInterpretations translation) “that an essential precondition for a services contract is the existence of a services business,” noting that the ARQ did not provide any common law authority for this proposition and that, in any event, the Court of Quebec had made a finding of fact that the operation of the PCE was within the scope of JDI’s business. In also rejecting the ARQ submission that IPPL did not validly operate the PCE on behalf of JDI, he stated (at paras. 43-44, 46):

[I]t is undisputed that a taxpayer may carry on a business through an agent. …

The fact that the agent and the principal are related companies does not change this principle. This was the case in Stubart … .

As the trial judge concluded, we are dealing with clear contracts and uncontradicted evidence that confirm that the designation of the transactions as services agreements does reflect their true legal effects. It is a principle of tax law that, in the absence of sham, recharacterization is only possible where the label attached to a transaction does not properly reflect its actual legal effects.

The taxpayer ("JDI") and another pulp and paper company in the Irving group (“IPPL”) participated in transactions to effectively transfer non-capital losses (“NCLs”) from an oil refining company (“IOL”) in the Irving group to the taxpayer. In December 2002, IOL acquired pollution control equipment (“PCE”), that IPPL had been using in its pulp facilities, from IPPL under TA s. 85(1) and TA s. 518, at an agreed amount of $3. In the same month, JDI acquired the PCE from IOL for $120 million (claiming that amount in CCA thereon for 2002), and agreed to operate the PCE in consideration for “throughput fees” and cost reimbursements payable to it by IPPL pursuant to “Operating and Services Agreements” (“OSAs”) governed by New Brunswick law. In January 2003, after having earned about $1.3 million in throughput fees, JDI transferred the PCE “back” to IPPL on a rollover basis with an elected amount of $3. Further transactions to a similar effect were implemented in 2003, with one variation being that in May and June transactions, the PCE was sold by IOL to a wholly-owned inactive subsidiary (“IRF’) of the taxpayer, with IRF making substantial CCA claims that generated a NCL, and then being wound-up under inter alia s. 88(1.1) into the taxpayer.

The ARQ attacked on the basis that the PCE constituted leasing property to the taxpayer (and, subsequently, to IRF), so that the Quebec leasing property restriction rules denied the deduction of CCA so as to generate NCLs. In particular, although the OSAs provided that the taxpayer (and then IRF) was to operate the PCE, the taxpayer delegated to IPPL, in consideration for fees, the performance of all the such operating services, so that nothing had changed “on the ground.”

In allowing the taxpayer’s appeal and finding that the PCE generated business income rather than leasing revenue to it (and IRF), Fournier JCQ accepted that submissions of the taxpayer (quoted in English at para. 98) that a “legal right of exclusive possession is essential to the existence of a lease at common law” and that here no legal right of possession of the PCE is conferred upon IPPL under the Operating and Services Agreement, let alone an exclusive right of possession.” Furthermore (para. 109, TaxInterpretations translation) whether the taxpayer had “delegated or subcontracted to IPPL the performance of its contractual obligations (Contract Services) to operate and maintain the PCE is irrelevant”: similarly to Stubart, the taxpayer “carried on business through an agent, in this case IPPL” (para. 127).

A British corporation ("WBDL") entered into a distribution agreement with a California corporation ("WBI") pursuant to which WBI was granted the right to license and to exhibit and distribute the picture, largely in Canada and the U.S., but with WBDL retaining control of the master negative. WBDL was found not to be "leasing" the film to WBI because it did not provide "exclusive possession at a rent for a term" (see p. 243).

In the ordinary course of trade of a finance subsidiary ("GMAC"), it provided a financial package to car dealers, which entailed (1) GMAC purchasing a vehicle from its manufacturing affiliate on the same terms as if the dealer had ordered the vehicle, (2) GMAC providing the dealer with an option to purchase the vehicle, and (3) GMAC in the interim charging a "handling fee" to the dealer in order to recover its interest expense and a profit. It was found that "although cars was not what [GMAC] was trading in, in the ordinary course of selling its financial package, it would, inevitably, be involved in the sale of cars [as a consequence of the dealers' exercise of their options]. So, in the ordinary course of its trade as a financial dealer, it sold the cars, even though it was not out of such sales that it made its profits".

Dickson J.A. found that the hiring of a cash register was a chattel lease notwithstanding a clause that provided that the lease was irrevocable for the full term and that the aggregate rentals would not abate by reason of the hirer's right to retake possession on default. The right of the hirer to collect the full balance of rentals for the remaining term following a default (minus any proceeds received from a sale or re-leasing within the 60-day period following default) instead represented a penalty clause that was void.

Dickson J.A. also accepted a definition of a lease of chattels as "a contract by which the hirer obtains a right to use the chattel hired, in return for the payment of the price of the hiring to the owner'".

In finding that an agreement pursuant to which the plaintiff transferred 14 cows to his brother-in-law who was required to return the same number of cows (but not necessarily the same cows), was a sale rather than a bailment, MacKay J.A. stated (at p. 717):

"When the original chattel delivered is to be returned in the same or an altered form the title does not pass but the transaction constitutes a bailment with the title in the bailor, but if the transaction as made by the contract between the parties does not require the party receiving the chattel to return it in its original or an altered form but permits the possessor to return another chattel of equal value or to pay the money value thereof, the relation of vendor and purchaser is created and the title to the property passes to him and is in him.

The essential difference between bailment and sale is the locus of the title."