Date: 19991110
Docket: A-249-96
| CORAM: DESJARDINS J.A. |
LÉTOURNEAU J.A.
NOËL J.A.
IN RE the Income Tax Act
BETWEEN:
CONSTRUCTION BÉROU INC.
(formerly FORTIN & MOREAU INC.),
Appellant
(defendant and cross-plaintiff),
- and -
HER MAJESTY THE QUEEN,
Respondent
(plaintiff and cross-defendant).
REASONS FOR JUDGMENT
DESJARDINS J.A.
[1] The question the Court has to decide is whether in the 1982 taxation year the appellant made an "acquisition" of dump trucks within the meaning of ss. 13(21)(b), 20(1)(c) and 127(10.1)(d) of the Income Tax Act ("the Act") when it signed leasing contracts with two finance companies, Compagnie de Location C.A.C. and RoyLease Ltée.
[2] The details of these contracts and the facts out of which the case at bar arose have been explained at length by my brother Noël J.A. Accordingly, I do not have to restate them. I would simply note that in addition to having possession and use of the dump trucks the risks inherent in the purchase and possession of those trucks were assumed by the appellant and the contracts contained purchase options. The leasing contracts were also consistent with the description contained in Interpretation Bulletins IT-233 of July 14, 1975 and IT-233R of February 11, 1983, in particular subparas. (c) and (d) of para. 3. They met the requirements for arriving at the conclusion that in accordance with those Bulletins the contracts were sales and not leases for the purposes of depreciation, the capital cost allowance and the investment tax credit.
[3] At the relevant time the Act contained two provisions of fundamental importance in the case at bar: ss. 54(c)(v) and 248(3). The provisions were adopted following the Royal Commission on Taxation ("the Carter Commission")1 which had recommended the imposition of a tax on capital profit. The Carter Commission recommended that the word "disposition" has a broad meaning so as to cover a range of situations.1 The White Paper on Tax Reform did not go as far as the recommendations of the Carter Report on several points.1 However, the principle of a tax on profit on capital was recognized. Accordingly, the concept of a "disposition" giving rise to capital profit had to be defined with the greatest possible precision. On December 23, 1971 the federal Parliament adopted s. 54(c )(v) of the Act, which reads as follows:
| 54c) "disposition de biens" comprend, sauf dispositions contraires expresses,
. . . . . mais, pour plus de précision, ne comprend pas . . . . .
|
54(c) "disposition" of any property, except as expressly otherwise provided, includes
. . . . . but, for greater certainty, does not include . . . . .
|
[4] And as there had to be only one meaning of "disposition" applicable throughout Canada, s. 248(3) of the Act was specially adopted for its application in the civil law:
| 248. (3) Aux fins de l'application de la présente loi dans la province de Québec, l'expression "droit de jouissance" à l'égard d'un bien signifie le droit de la personne qui a ou avait la pleine propriété d'un bien, même si ce bien et grevé d'une servitude, le droit détenu par un usufruitier, un preneur dans un bail emphytéotique, un grevé dans une substitution ou un bénéficiaire dans une fiducie. |
248. (3) In its application in relation to the Province of Quebec, a reference in this Act to any property that is or was beneficially owned by any person shall be read as including a reference to property in relation to which any person has or had the full ownerhip whether or not the property is or was subject to a servitude, or has or had a right as a usufructuary, a lessee in an emphyteutic lease, an institute in a substitution or a beneficiary in a trust; and a reference in this Act to the beneficial owner of any property shall be read as including a reference to a person who has or had, accordingly as the context requires, such ownership as a right in relation to that property. [my emphasis] |
[5] The French version of s. 248(3) was improved by the 1985 Act1 to read:
| 248(3) Pour l'application de la présente loi dans la province de Québec, "propriété effective", à l'égard d'un bien, s'entend notamment du droit de la personne qui a ou avait la pleine propriété d'un bien, même si ce bien est grevé d'une servitude, du droit détenu par un usufruitier, un preneur dans le cas d'un bail emphytéotique, un grevé dans le cas d'une substitution ou un bénéficiaire dans le cas d'une fiducie. |
| [My emphasis] |
[6] The federal Parliament accordingly devised, for tax purposes and for all of Canada, a common concept covering the ideas of "disposition" ("disposition de biens") and "beneficial ownership" ("propriété effective"), both in civil and common law: the corollary of these provisions being that when there was a "disposition" for a party to a contract the other party made an "acquisition"1 or obtained the "beneficial ownership" of it.
[7] As my brother Noël J.A. relates in para. 65 of his reasons, the parties admitted that the effect of s. 54(c)(v) was to incorporate into the Act the common law rule that property is subject to a disposition when there is a transfer of "beneficial ownership", even though the "legal ownership" remained unchanged, and that the rule stated in s. 54(c)(v) applies both to the system of capital gains taxation and to the machinery of depreciation.
[8] Having said that, in so far as the leasing contracts in the case at bar may be seen as contracts recognizing "beneficial ownership" like the contracts given as examples in s. 248(3) of the Act, the beneficial ownership of the dump trucks was acquired by the appellant when the contracts were concluded in 1982. The fact that the leasing operation involves the sale by a manufacturer or distributor to a finance company of a thing selected by the customer for his own use and the lease of that thing by the finance company to the customer1 does not in any way alter the proposition just stated. Since the appellant had the possession and use of the dump trucks in addition to assuming the risk and obligations pertaining to them,1 it obtained "beneficial ownership" of that property in 1982.
[9] However, my brother Noël J.A. concludes that this cannot be the case. In his view, the contracts in question cannot be treated as, for example, instalment sales, because the parties had a different intent. In support of this he cites the option clauses in the contract, which provided that the transfer of title and ownership in the trucks would only take place when the option was exercised and the option price paid,1 concluding that the parties intended to exclude the application of s. 248(3) of the Act since the sale of the dump trucks was not to occur until a later date.
[10] I do not think these clauses should be interpreted in this way and given the effect suggested by Noël J.A.
[11] It is true that clause 20, for example, states that at the time the appellant (the lessee) exercises the purchase option it [TRANSLATION] "will not receive title and ownership to the equipment leased until after the lessor has been paid the purchase option price in cash. . ."1 (my emphasis).
[12] However, I do not regard this as a clause which bars the application of s. 248(3) of the Act. It is a standard clause which reflected the state of the civil law applicable at the time, according to which the lessee only obtained a real right over the thing leased at the option stage. In Traité de droit civil - Le louage des choses1 Prof. Jobin in fact explains at p. 71:
| [TRANSLATION] |
| Certain contracts contain a purchase option in the customer's favour, but it is not a standard clause. The customer may undoubtedly become owner of the thing at the end of the contract but this is merely a possibility, and it also does not carry with it any real right prior to that final stage. Even when there is a purchase option, it will be noted that the essence of a leasing in Quebec does not imply a transfer of ownership. The contract does not confer a real right on the customer, simply a jus ad rem. |
[My emphasis]
[13] However, in 1982 when the leasing contracts were signed s. 248(3) of the Act was already in place and provided that for tax purposes certain contracts were capable of transferring the "beneficial ownership". For the sake of comparison, and to clarify my analysis, I would add that although a usufructuary is not the owner of property at civil law he can in fact have "beneficial ownership" of the property within the meaning of s. 248(3) of the Act, since that subsection creates its own ideas of "beneficial ownership".
[14] In the case at bar, despite clause 20 of the contracts governing the parties" rights at civil law, tax law by s. 248(3) of the Act recognized that the appellant had acquired beneficial ownership of the dump trucks since it met the three requirements, possession, use and risk, recognized by the courts.
[15] I see no evidence in clause 20 of an intent by the parties to exclude s. 248(3) of the Act. On the contrary, the parties acted in compliance with the civil law because this was the legal system governing their actions. They also acted consistent with the Interpretation Bulletins, and this indicates that they intended to meet the requirements of s. 248(3) of the Act.
[16] I conclude that for the 1982 taxation year the appellant is entitled to the depreciation of property under s. 13(21)(b) of the Act. In so doing, at that date it "acquired" the said property withing the meaning of ss. 20(1)(c) and 127(10.1)(d) of the Act and thus also became entitled to deduct interest and to claim the depreciation tax credit.
[17] I would dispose of this case as suggested by my brother Létourneau J.A.
| J.A. |
Certified true translation
Bernard Olivier, LL. B.
Date: 19991115
Docket: A-249-96
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
NOËL J.A.
BETWEEN:
CONSTRUCTIONS BÉROU INC.
(Formerly Fortin & Moreau Inc.),
Appellant
AND:
HER MAJESTY THE QUEEN,
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] I have had the benefit of reading the reasons of my brother Noël J.A., and I cannot agree with his conclusions and some of their justifications.
[2] However, I agree with him that subsection 248(3) of the Income Tax Act ("the Act") evidences a valuable effort by Parliament to treat beneficial ownership in property in the same way as various forms of ownership recognized in the civil law of Quebec so as to obviously offer to the taxpayers in Quebec the same benefits that this concept affords the taxpayers in the common law provinces. This was not an easy task to perform at the time because the concepts of ownership were different in the two legal systems, and the divisions of the ownership right, more limited in civil law than in common law, were not conceptually necessarily identical to those of the common law. Yet, the attempt by Parliament to harmonize the two systems with a view to providing fair and equal treatment to all Canadian taxpayers cannot be doubted. Hence, the necessity for a judicial interpretation which allows for the implementation of this legislative intent.
[3] In adddition, subsection 248(3) of the Act, in my view, provides a legislative basis for the application in Quebec of Interpretation Bulletin IT-233R. That subsection confirms and supports the conclusion which I have reached in light of the Act regarding the concept of acquisition of property for purposes of a capital cost allowance.
[4] Before providing reasons for my decision, I hasten to point out that the question raised by the appeal at bar, which takes us back to 1982, can no longer arise at the present time, at least in the same acute form, for as my brother has noted since 1990 the parties to a leasing may determine between themselves who will benefit from the deductions for capital cost allowance and interest. At the same time, that does not mean we should underestimate the importance of this case to the appellant and to taxpayers who may have similar cases pending. Further, we must be careful not to assess and judge, from the viewpoint of jurists having the benefit of the subsequent clarification of the legal nature of the leasing contract, decisions made by businessmen in good faith in 1982 in accordance with the chronic legal uncertainty surrounding a leasing and the commitments made by Revenue Canada to correct this uncertainty for tax purposes and so promote economic development.
[5] I refer for the facts of this case to the description given of them by my brother judge, and in particular to the facts which establish that the appellant had obtained the usual incidents of the right of ownership over the property, namely possession, use and risk of loss, together with the obligations resulting from those incidents.
Appellant"s right to capital cost depreciation on property acquired and deduction of interest paid to acquire property
[6] In my view, the property acquired by the appellant in 1982 by a leasing was depreciable property within the meaning of paragraph 13(21)(b) of the Act, which defined such property as follows:
| Sec. 13(21)(b) "depreciable property". "Depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which he has been allowed, or, if he owned the property at the end of the year, would be entitled to, a deduction under regulations made under paragraph 20(1)(a) in computing income for that or a previous taxation year . . . |
[My emphasis.]
[7] In fact, in The Minister of National Revenue and Wardean Drilling Limited1 it was held that there was an acquisition of property for purposes of the capital cost allowance when there was a transfer either of title to the property or of all the incidents of the said title, except for legal title which remained in the vendor as security for payment of the purchase price in accordance with accepted commercial practice.
[8] At 172 and 173 Cattanach J. wrote:
| In my opinion, the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk . . . |
| As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. |
[My emphasis.]
[9] In other words, there was an acquisition of property within the meaning of paragraph 13(21)(b) of the Act when the person obtaining it held either legal ownership or beneficial ownership.
[10] In Quebec civil law the ownership right could not be dismembered in the same way as at common law. Over the years Quebec civil law, gradually and from necessity, has been adapted to correspond to certain commercial situations and particular subdivisions of the ownership right which the common law had devised to meet the demands of these situations. For example, the Civil Code of Quebec now recognizes movable hypothecs with or without delivery2 and, since the early 1980s, the Quebec legislature has imported the concept of a loan on property in stock which already existed in sections 178 et seq. of the Bank Act, and which involved making to the assignee, that is, the lending institution, a transfer of ownership sui generis hitherto unknown to Quebec civil law and inconceivable in traditional civil law theory3.
[11] In 1980, in Olympia and York Developments Ltd. v. The Queen4, Addy J. of the Trial Division, while recognizing the special nature of Quebec civil law and the fact that there had not been a sale in strict legal terms as it was agreed between the parties that the sale would not take place until the selling price was paid in full, nonetheless concluded that there was a disposition of property within the meaning of subsection 20(5)(b) of the Act for purposes of the capital cost allowance. Addy J. came to this conclusion as he adopted the interpretation given to the word "acquired" by Cattanach J. in Wardean Drilling Limited , supra.
[12] This conclusion seems to me to be not only reasonable but inevitable, as acquisition is the counterpart of disposition and it was admitted that under subparagraph 54(c)(v), applicable at the time, there was a disposition of property when there was a transfer of beneficial ownership even though the seller retained legal ownership:
| Sec. 54 |
| (c) "disposition" of property. - "Disposition" of any property, except as expressly otherwise provided, includes |
| [. . . ] |
| but, for greater certainty, does not include |
| (v) any transfer of property by virtue of which there is a change in the legal ownership of the property without any change in the beneficial ownership thereof, other than a transfer by a trust resident in Canada to a trust not resident in Canada or a transfer to a trust governed by |
| (A) a registered retirement savings plan, |
| (B) a deferred profit sharing plan, |
| (C) an employee profit sharing plan, |
| (D) a registered home ownership savings plan, or |
| (E) a registered retirement income fund by a person who is, immediately after the transfer, a beneficiary under the plan or fund, or a transfer by any such trust governed by a plan or fund to a beneficiary thereunder . . . |
[13] There was thus a correlation between these two concepts (disposition and acquisition), since the seller of property who reserved legal title to it had the legal ownership of it and the purchaser became the beneficial owner.
[14] In short, according to these two cases, disposition or acquisition of property for purposes of the capital cost allowance exists under the Act when the normal incidents of title such as possession, use and risk are transferred. I agree with this legal interpretation given for tax purposes to the word "acquired" contained in the definition of "depreciable property". For practical purposes this interpretation has the merit of recognizing, for tax legislation that applies throughout Canada, a business practice that has no boundaries and of avoiding the danger of becoming too embroiled in unnecessary, sectoral and above all sterile and inequitable legalism at a time when the trend in the civil law is to approximate more closely to the common law. In addition, it is significant that Parliament, which annually amends the Act inter alia to alter legislative provisions when they are so interpreted that they do not meet the objectives sought, has not thought it appropriate to overturn this thirty-year-old interpretation. Further, this interpretation is consistent with the legislative intent stated in subsection 248(3) of the Act, which, as I have already mentioned, is intended to treat beneficial ownership of property in the same way as various forms of ownership recognized in the civil law of Quebec.
[15] This is the historical background against which the introduction of the leasing at issue here into Quebec civil law must be analysed for tax purposes, and against which, therefore, we must read and interpret Interpretation Bulletin IT-233R, February 11, 1983, issued by Revenue Canada.
[16] As my brother judge mentioned, a leasing was an innominate contract, but a contract which in legal terms, and especially in Quebec civil law, prompted controversy and raised questions as it did not square with the principles of French and Quebec civil law. C. Gilbert described the situation in 1988 as follows5:
| [TRANSLATION] |
| The leasing, a credit instrument invented by businessmen for their use, is a strange animal in legal terms. Its widespread use is accompanied by misunderstanding of its exact rules: some go so far as to call it a mystery. Judges and commentators use colourful imagery to explain its special nature. |
[17] For E. De Cannart D"Hamale6:
| [TRANSLATION] |
| The complex nature of the operation does not adequately explain this controversy. It really resembles the natural phenomenon of rejection of imperfect grafts. The legal concepts involved, taken from English law, do not fit readily into our own concepts. |
[18] In France the leasing agreement, though it incorporated certain aspects of other contracts, was recognized in 1975 as a financial operation tending to the acquisition of ownership by the user, the purchase option being the decisive test for determining whether it was a lease or an acquisition7. In the absence of such a stipulation the transaction was an ordinary lease, whatever its other features might be.
[19] Introduced into the Civil Code of Lower Canada in 1973 by section 1603, under the heading "Of the Lease of Things", solely so it could be excluded from the scope of the rules contained in that heading, the leasing gave rise to uncertainty in the Quebec courts about the tests for distinguishing an ordinary lease from this innominate contract. The then Minister of Justice noted that the leasing is commercial in origin and not legislative, and that the law had stepped in after the fact to make order in legal terms in a situation produced by the worlds of business and finance8.
[20] Prof. Godin describes the leasing as a form of financing contract which developed as an adjunct to traditional securities (privileges and hypothecs) covered by the Civil Code of Lower Canada. In particular, he wrote9:
| [TRANSLATION] |
| Like the conditional sales contract of movable property, and the giving in payment clause and resolutory clause for immovable property, the leasing is not a security strictly speaking but rather a legal technique which is based essentially on manipulation of the ownership right itself. |
[My emphasis.]
[21] A traditional leasing transaction generally involved two contracts: a sale by a manufacturer or a distributor to a lender of property selected by a customer and the lease of the property to the said customer by the lender.
[22] Because of its uncertain legal nature and the demands of business, the leasing became transformed over time by the addition of various clauses with purchase options given to the customer by the lender. What was initially a lease contract between the lender and the customer eventually became a sale-leaseback contract in which the lender remained both owner and risk-taker. In other words, he kept both legal title and certain important incidents of the ownership right.
[23] However, it was often the case that the purchase option clause read in such a way that in legal terms it was no longer a sale-leaseback but, as the courts found, an instalment sale with retention of ownership10 in which the normal incidents of ownership (beneficial ownership) were transferred to the purchaser. Further, in the revision of Quebec civil law, the new Code ceases to call it a lease as, according to comments by the Minister of Justice tabling the bill, this did not reflect the reality of the transaction, and because the features of a lease had been extensively modified by a group of clauses which departed from the ordinary law11. However, in economic terms, as the Quebec Court of Appeal recognized, the lender"s customer was treated under the Civil Code of Lower Canada like an owner-purchaser, although strictly speaking he did not hold the real right12. In this way, for example, as purchaser of the property he had a direct legal action against the manufacturer to exercise the usual legal warranties, including that against concealed defects. The Court of Appeal accordingly recognized that the vendor"s customer had acquired the property when he obtained beneficial ownership of it, even though he lacked the real right conferred by legal ownership.
[24] I have undertaken this analysis of the leasing contract at the time because it indicates the difficult position in which Revenue Canada was placed, especially at the period in question, namely 1982. The Interpretation Bulletin issued by Revenue Canada sought, because of the legal uncertainty surrounding the idea of the leasing, to introduce a salutary degree of certainty in tax matters which is necessary for the economic development resulting from these financial and commercial transactions. In operational terms, it also allowed Revenue Canada to plan and adopt a uniform and equitable approach at the national level for such transactions, whatever might be the disparities in private law produced by the special features of one legal system as compared to another. I should mention in passing that it is interesting to see that in the appeal case Her Majesty the Queen and Mont-Sutton Inc.13, which was heard by this Court on June 16, 1999, the appellant admitted that the concept of a licence at common law14 does not exist in Quebec civil law. In order to deny a deduction to a taxpayer, the respondent argued that it was necessary to [TRANSLATION] "ensure a fair and equitable application of the Act throughout Canada" and that even if the concept of a licence was not part of Quebec civil law, "the provisions of the Act should be applied uniformly to everyone so far as possible whatever the legal system"15. It is a matter for surprise that in the appeal at bar the respondent is using the special nature of Quebec civil law as a reason for denying the appellant a deduction which is granted to taxpayers and businessmen operating under the common law system.
[25] Accordingly, for the year 1982 at issue, the Information Bulletin identified four types of lease acquisitions which, made in connection with a leasing transaction, were to be treated for tax purposes like sales or deemed to constitute a sale:
| (a) the lessee automatically acquires title to the property after payment of a specified amount in the form of rentals; |
| (b) the lessee is required to buy the property from the lessor during or at the expiration of the lease, or is required to guarantee that the lessor will receive the full option price from the lessee or a third party; |
| (c) the lessee has the right during or at the expiration of the lease to acquire the property at a price which at the inception of the lease is substantially less than the probable fair market value of the property at the time or times of permitted acquisition by the lessee; and |
| (d) the lessee has the right during or at the expiration of the lease to acquire the property at a price or under terms and conditions which at the inception of the lease is/are such that no reasonable person would fail to exercise the said option. |
[26] The respondent admitted that the transaction to which the appellant was a party could be described as a sale both pursuant to tests (c) and (d) set out in the Interpretation Bulletin.
[27] In my view, it would be inappropriate for this Court to ignore or repudiate the content of the said Bulletin 17 years later, as the respondent is asking us to do in the case at bar, since the Bulletin clearly and correctly reflects the state of the legislation and case law applicable in tax matters at the time to property acquired by a taxpayer through a leasing transaction. It is possible, and I refrain from expressing any opinion on this point, that this Interpretation Bulletin, the content of which has not essentially changed since 1975, should be amended especially to take into account the option now available to parties to such contracts. However, in 1982 a taxpayer such as the appellant who was in compliance, namely, one who obtained property from the lender in a leasing transaction under a lease-acquisition which at the time was deemed to be a sale for tax purposes, acquired the said property for purposes of the capital cost allowance mentioned in paragraph 13(21)(b) of the Act.
[28] Finally, in view of the position we have taken on the application of subsection 248(3) of the Act, I cannot subscribe to the respondent"s argument that the amendment made to the definition of "depreciable property" in paragraph 13(21)(b ) in 1980 indicates Parliament"s intention to treat only a person who becomes legal owner as the acquirer of such property. The words "or would, if the taxpayer owned the property at the end of the year" were added to the definition as a result of the addition to the Act of subsections 13(5.2) and (5.3). In my opinion, even in the absence of subsection 248(3), this argument is without foundation.
[29] Without this amendment to the definition of "depreciable property" in paragraph 13(21)(b ), subsection 13(5.2) would have been inapplicable when the acquisition and disposition of property took place in the same year, because such property could not be depreciable for the very good reason that it had not been the subject of a deduction for depreciation in the preceding year or the current year.
[30] With respect, I cannot see how the fact that Parliament introduced the word "owner" into paragraph 13(21)(b ) in such a context can lead us to exclude from the scope of that paragraph an acquirer who enjoys the normal incidents of title, except for legal title which has been retained by the seller to secure payment of the selling price in full. Of course, such an acquirer cannot dispose of the property so acquired since he does not have the jus abutendi, unless he acquires it in the same year by paying the balance of the selling price. The fact remains that under the first part of the definition of "depreciable property" in paragraph 13(21)(b ), he is an acquirer who is entitled to the depreciation deduction since it is "property acquired in respect of which the taxpayer has been allowed a deduction".
[31] In short, the result of the 1980 amendment was that a taxpayer who acquired property and resold it in the same year could also take a deduction, since the property so acquired and resold was considered to be depreciable property. Its purpose certainly was not, any more than its effect, to exclude someone who has acquired property and has not resold it, either because he did not wish to resell it or because he could not resell it as legal title to the property was still held by the seller as security for payment. In other words, paragraph 13(21)(b) covers both legal ownership and beneficial ownership by someone who only lacks legal title.
[32] It is clear that the amendment made to the definition of "depreciable property" in paragraph 13(21)(b ) in 1980 was designed only to give effect to the newly added subsections 13(5.2) and 13(5.3), not to amend the concept of acquisition as developed by the courts at the time. To see anything else in it would be to do such violence to the text and the intention of Parliament as to rewrite the provision and then maintain that it said what one would wish to see in it.
[33] Similarly, it seems clear that the appellant also acquired the property for purposes of the interest deduction mentioned in paragraph 20(1)(c) of the Act, since the interest expense incurred by the appellant was incurred to acquire the property for the purpose of earning business income.
[34] I must therefore now determine the appellant"s right to receive the investment tax credit.
Appellant"s right to receive investment tax credit
[35] The appellant"s right to the investment tax credit is governed by the definition of "qualified transportation equipment" contained in paragraph 127(10.1)(d ) of the Act, which reads16:
(d) "qualified transportation equipment" of a taxpayer means prescribed equipment acquired by him after November 16, 1978 that has not been used, or acquired for use or lease , for any purpose whatever before it was acquired by the taxpayer and that is
| (i) to be used by him principally for the purpose of transporting passengers, property or passengers and property in Canada or to and from Canada, in the ordinary course of carrying on a business in Canada . . ., or |
| (ii) to be leased by the taxpayer, if |
| (A) the equipment is leased by the taxpayer in the ordinary course of carrying on a business in Canada . . . to a lessee who can reasonably be expected to use the equipment principally for the purposes and under circumstances referred to in subparagraph (i), and |
| (B) the taxpayer is a corporation whose principal business is a business described in any of clauses 127(10)(d)(i)(A) to (E), or any combination thereof, or is a taxpayer whose principal business is passenger, property or passenger and property transport; |
d) "matériel de transport admissible" d"un contribuable désigne le matériel prescrit qu"il a acquis après le 16 novembre 1978 et qui n"a pas été utilisé, ou qui a été acquis pour être utilisé ou loué , à quelque fin que ce soit avant son acquisition par le contribuable et
| (i) qu"il doit utiliser principalement afin de transporter des passagers, des biens, ou des passagers et des biens, au Canada ou en provenance ou à destination du Canada, dans le cours ordinaire de l"exploitation d"une entreprise au Canada autre qu"une entreprise . . ., ou |
| (ii) qu"il doit donner en location, si |
| (A) le matériel est donné en location par le contribuable dans le cours ordinaire de l"exploitation d"une entreprise au Canada . . . à un locataire dont on peut raisonnablement s"attendre à ce qu"il utilise le matériel principalement à des fins et dans des circonstances visées au sous-alinéa (i), et |
| (B) dont le revenu n"est pas inclus dans son revenu ou, dans le cas est une entreprise visée à l"une quelconque des dispositions 127(10)d )(i)(A) à (E) ou une combinaison de celles-ci, ou est un contribuable dont l"entreprise principale est le transport de passagers, de biens, ou de passagers et de biens; et |
[My emphasis.]
[36] Based on this provision, the respondent submitted that the appellant was not entitled to the investment tax credit since in an equipment lease situation it is the lender and not the lessee who may receive the credit. She drew this conclusion from subpara. (ii), which she submitted clearly established that the credit went to the taxpayer acquiring the transportation equipment in order to lease it.
[37] I agree with the respondent that in the case of an ordinary lease resulting from a leasing the provisions of subparagraph 127(10.1)(d)(ii) of the Act confer this credit on the lessor. However, we are dealing here with two successive sales contained in the same transaction: the first by the supplier Labrie Équipement to Compagnie de location C.A.C. for the six trucks, which are the subject of the claim, and a second presumed or deemed sale by C.A.C. to the appellant under the terms of the equipment lease. As C.A.C. did not purchase this property to use it or lease it, but rather to resell it, the appellant is then the party who acquired it for use and so is entitled to the investment tax credit.
[38] This is how we should read and understand paragraph 7 of Revenue Canada"s Interpretation Bulletin, which my brother judge has cited in his reasons but which I will also set out for the reader"s benefit:
| When it is determined that a lease agreement is, in substance, a sale agreement in the circumstances outlined in 3 and 4 above, the lessee will be required to account for the transaction as an acquisition of an asset and an assumption of a liability as at the inception of the lease. The lessor will similarly be required to account for the transaction as a sale of the property and the establishment of a receivable. In these circumstances the lessee-purchaser rather than the lessor-vendor may be entitled to capital cost allowance under paragraph 20(1)(a) and to any investment tax credit as contemplated by subsection 127(9). |
[39] For these reasons, I would allow the appeal with costs both in this Division and in the Trial Division. As a result, I would refer the assessment back to the Minister for a reassessment on the basis that the appellant is entitled, for the taxation year 1982, to an investment tax credit in the amount of $21,729, a capital cost depreciation totalling $84,219 and a deduction for interests paid in the amount of $48,931.
"Gilles Létourneau"
J.A.
Certified true translation
Bernard Olivier, LL.B
Date: 19991115
Docket: A-249-96
CORAM : DESJARDINS J.A.
LÉTOURNEAU J.A.
NOËL J.A.
BETWEEN:
CONSTRUCTION BÉROU INC.
(Formerly Fortin & Moreau Inc.),
Appellant,
AND:
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal from a judgment of Tremblay-Lamer J. allowing Her Majesty"s appeal and dismissing the counterclaim of Construction Bérou Inc. ("the appellant") regarding the reassessment made in respect of its 1982 taxation year.17
Facts
[2] In preparing its tax return for the year in question the appellant took the position that, under leasing contracts, it had acquired six new trucks and two used trucks during the year for use in the collection and transportation of household refuse,18 and claimed in this regard:
| - $84,219.00 as a capital cost allowance under s. 13(21)(b) of the Income Tax Act ("the Act");19 |
| - $21,729.00 as an investment tax credit under s. 127(5) of the Act; |
| - $48,931.00 as interest paid pursuant to s. 20(1)(c) of the Act. |
[3] By a reassessment made on August 2, 1984 the Minister of National Revenue disallowed each of these deductions on the ground that the appellant had not acquired the said property during its 1982 taxation year. However, the Minister by the same assessment acknowledged that the appellant had incurred a rental expense of $65,109.00. On an initial appeal the Tax Court of Canada, per Chief Judge Couture, found that the appellant had acquired the property in question for the purposes of ss. 127(5) and 20(1)(c), but that the wording of s. 13(21)(b) did not allow it to reach the same conclusion in respect of the capital cost allowance.19
[4] An appeal was then filed by Her Majesty in the Federal Court Trial Division, and this was followed by the filing of a counterclaim. On February 23, 1996 Tremblay-Lamer J. handed down a judgment affirming the assessment at issue on all points and concurrently dismissed the counterclaim.
[5] At the time leasing was an innominate contract which was expressly excluded by art. 1603 of the Civil Code of Lower Canada19 from the rules governing the leasing of things:
| Art. 1603. This chapter does not apply to a leasing made by a person who carries on the business of lending or granting credit and who, at the request of the lessee, has acquired from a third person ownership of the property forming the object of the contract provided that |
| 1. the leasing is made for commercial, industrial, professional or handicraft purposes; |
| 2. the leasing relates to a moveable; |
| 3. the lessee has personally chosen the property; |
| 4. the lessor conveys expressly to the lessee the warranty resulting from the sale entered into with the third person; and that |
| 5. the conveyance of warranty is accepted without reserve by the third person. |
[6] The contracts at issue here, which were negotiated with two separate companies, complied with the provisions of this article in all respects. In each case, the finance companies acquired the rolling stock indicated by the appellant from a supplier. The warranties were assigned by the finance companies with the consent of the supplier without reserve by the latter and the property was turned over to the appellant in return for an initial deposit and a series of monthly payments.
[7] The contracts were to last for 65 months and the total of the scheduled payments represented the cost of acquiring the trucks and bins plus an agreed rate of interest. Additionally, the contracts reflected a purchase option clause which could be exercised in the sixtieth month at a price slightly less than the total of the outstanding payments.
[8] The risks inherent in the property subject to the contracts were assumed by the appellant, who was required to indemnify the finance companies for any loss resulting from operation of the trucks. The contracts further provided that the appellant continued to owe the monthly payments even if it ceased to use the property for any reason, including its destruction by Act of God. Finally, the appellant could not sell, sublet or otherwise dispose of the property subject to the contracts without the consent of the finance companies, or use it outside North America.
[9] The parties terminated the leasing contracts prematurely in 1983 by concluding contracts of sale, so that in fact the purchase options contained in the leasing contracts were never exercised. The transaction was reflected in the financial statements of the finance companies under the heading "Receivables Under Financial Lease Contracts". The appellant"s financial statements reflected the transaction under the heading [TRANSLATION] "Fixed Assets".19 The evidence disclosed that the finance companies also claimed the capital cost allowance and the investment tax credit on the property subject to the contracts, just as the appellant did.
Points at issue
[10] The appellant claimed that it [TRANSLATION] "acquired" the property in question within the meaning of ss. 13(21)(b ), 20(1)(c) and 127(10.1)(d) during its 1982 taxation year as a consequence of signature of the leasing contracts. It admitted that the peculiar feature of these contracts is that the finance companies retain the right of ownership but pointed out that in fact practically all the incidents of the ownership right were conveyed to it. It also admitted that the contracts expressly provided that it should exercise an option in order to become owner, but submitted that in the circumstances this was a mere formality. In short, the appellant maintained that the trial judge erred in law in refusing to conclude that the contracts at issue amounted in law to sales.
[11] Secondly, the appellant argued that even if it was not owner of the property in question under the civil law, it had nonetheless acquired the property for tax purposes. In the appellant"s submission, the trial judge was mistaken in ending her analysis at the legal effects under private law and concluding that it had not acquired the property in question for tax purposes.
Trial Division judgment
[12] On the first ground of appeal the trial judge, in a clear and lucid analysis dealing with questions which often prove to be complex and arduous, set out the state of Quebec law on the point. She drew from academic analysis and precedent the fundamental distinctions between instalment sales and sales subject to a suspensive condition and concluded, very properly in my opinion, that the contracts at issue here did not transfer ownership so long as the purchase options they contained had not been exercised. In this respect I endorse the reasons of the trial judge, and do not feel any further comment is required.
[13] On the second ground of appeal Tremblay-Lamer J. simply said that the civil law was decisive in terms of taxation, as follows:
| I am unable to concur with the case law that would, in terms of taxation, have a legal effect that fails to reflect the obligations created by the applicable private law, in this case the civil law. |
| As Décary J. stated, in R. v. Lagueux et Frères Inc.: |
| In my opinion fiscal law is an accessory system, which applies only to the effects produced by contracts. Once the nature of the contracts is determined by the civil law, the Income Tax Act comes into effect, but only then, to place fiscal consequences on those contracts. With a contract, without a law and an obligation, there can be no fiscal levy. Application of the Income Tax Act is subject to a civil determination, whether such a determination be according to civil or common law.20 |
[14] It is true that when Parliament frames its statutes by reference to private law concepts without defining them or otherwise attaching to them any particular meaning, it in effect adopts the laws of the provinces. The question is one of intent: it must be determined in light of the provisions at issue whether Parliament, in assigning fiscal consequences to property "acquired", was referring to the concept of ownership as it exists under the laws of the provinces or, as the appellant contends, to a separate concept peculiar to the Act.
Relevant provisions
Depreciation
| 13(21)b) - les "biens amortissables" d"un contribuable à toute date de l"année d"imposition sont les biens acquis par le contribuable pour lesquels il est permis au contribuable ou pour lesquels le contribuable aurait le droit, s"il était propriétaire de ces biens à la fin de l"année, d"effectuer une déduction, en vertu des règlements établis en application de l"alinéa 20(1)a ), lors du calcul de son revenu pour cette année ou pour une année d"imposition antérieure . . . |
13(21)(b) "depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which he has been allowed, or, if he owned the property at the end of the year, would be entitled to, a deduction under regulations made under paragraph 20(1)(a) in computing income for that year or a previous taxation year; |
Deduction of interest
| 20(1) Nonobstant les dispositions de l"alinéa 18(1)a ) ..., peuvent être déduites ... |
20(1) Notwithstanding paragraphs 18(1)(a) ..., there may be deducted ... |
| (c) une somme payée dans l"année ou payable pour l"année (suivant la méthode habituellement utilisée par le contribuable dans le calcul de son revenu), en exécution d"une obligation légale de verser des intérêts sur |
(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on |
| . . . . . |
|
| (ii) une somme payable pour des biens acquis en vue d"en tirer un revenu ou de tirer un revenu d"une entreprise ou de faire produire un revenu par ces biens ou cette entreprise ... |
(ii) an amount payable for property acquired for the purpose of gaining or producing income from a business ... |
Investment tax credit
| 127(10.1)d) "matériel de transport admissible" d"un contribuable désigne le matériel prescrit qu"il a acquis après le 16 novembre 1978 et qui n"a pas été utilisé, ou qui a été acquis pour être utilisé ou loué , à quelque fin que ce soit avant son acquisition par le contribuable et . . . |
127(10.1)(d) "qualified transportation equipment" of a taxpayer means prescribed equipment acquired by him after November 16, 1978 that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and this is ... |
[My emphasis.]
Objections raised by appellant
[15] The word "acquired" is not defined in the Act but evokes the notion ownership according to its ordinary meaning.20 At the same time, the meaning to be given to this word is also dependent on the context in which it is used. According to the appellant, a series of decisions including Olympia and York v. R.,20 M.N.R. v. Wardean Drilling Limited,20 R. v. Henuset Bros. Ltd. [No. 1],20 W.C. Gartry v. R.20 and Robert Bédard Auto Ltée v. M.N.R.20 have given the word "acquired" a meaning which is peculiar to the Act and distinct from the concept of ownership. Though admitting there is a long list of judgments to the opposite effect, the appellant submitted there was at least an ambiguity as to the meaning to be given to the word "acquired" for tax purposes, and drew the Court"s attention to Interpretation Bulletins IT-233 and IT-233R as interpretive tools.
Interpretation Bulletins IT-233 and IT-233R
[16] It will be useful to look at these bulletins at once. In theory they reflect the Department"s approach, and as the appellant indicated, even though they do not have the force of law, in cases of ambiguity they may serve to reveal the legislative intent.20
[17] Bulletin IT-233 dates from July 14, 1975. It was revised on February 11, 1983 and replaced by Bulletin IT-233R. Like its predecessor, the latter deals with leasing agreements with sale or leaseback options. Paragraphs 1 to 7 are of interest:
| 1. It is necessary to determine, with regard to leasing agreements, whether payments in respect of those agreements are in substance payments of rent or payments on account of the purchase price of property or, in the case of sale-leaseback agreements, repayments of a loan. As there is no special provision in the Income Tax Act dealing with such agreements, this determination must be made on consideration of both the terms of the agreement and the factual circumstances relevant to both the making and execution of that agreement. |
| 2. Individual cases will be treated in accordance with the general comments contained in this bulletin. |
| Lease-Option Agreements |
| 3. The Department"s principal concern in lease-option agreements is to ensure that significant sums paid for the purchase of property are not charged against income as rent but are accounted for in such a manner that they may, if applicable, be subject to capital cost allowance and its recapture. The enactment of subsection 13(5.2) (see 10 below) resolved, in part, the Department"s concern in this matter but it is still considered necessary to determine whether or not the object of a transaction at its inception is to transfer the ownership in property from a lessor to a lessee. Therefore, under conditions similar to those that follow, a transaction is considered to be a sale rather than a lease : |
| (a) the lessee automatically acquires title to the property after payment of a specified amount in the form of rentals, |
| (b) the lessee is required to buy the property from the lessor during or at the termination of the lease or is required to guarantee that the lessor will receive the full option price from the lessee or a third party (except where such guarantee is given only in respect of excessive wear and tear inflicted by the lessee), |
| (c) the lessee has the right during or at the expiration of the lease to acquire the property at a price which at the inception of the lease is substantially less than the probable fair market value of the property at the time or times of permitted acquisition by the lessee. An option to purchase of this nature might arise where it is exercisable within a period which is materially less than the useful life of the property with the rental payments in that period amounting to a substantial portion of the fair market value of the property at the date of inception of the lease, or |
| (d) the lessee has the right during or at the expiration of the lease to acquire the property at a price or under terms or conditions which at the inception of the lease is/are such that no reasonable person would fail to exercise the said option. |
| 4. The option to purchase may be part of or separate from the lease agreement itself or may be a verbal agreement or undertaking. Where, although not specified in the agreement, it becomes apparent, for example, as a result of previous similar transactions undertaken by the parties involved, that it is the intention that the lessee be allowed to acquire the property at the termination of the lease for an amount that is less than its probable fair market value, the transaction is considered to be a sale. |
| 5. The Department is aware that many lease contracts are in the nature of "financial leases", in which the lessor is providing a financial service only. As a result certain costs or obligations that are usually considered incidental to ownership, such as taxes, insurance, maintenance and other obligations become the responsibility of the lessee. In the Department"s view, the assumption of these obligations by the lessee or any other conditions of the lease that may be indicative of a sale are not, in and by themselves, conclusive in determining whether the transaction is in substance a sale. Such conditions only add corroborative support where a transaction can be considered to be a sale under the circumstances stated in 3 above. |
| 6. In relation to the above factors the registration of the transaction as a conditional sales contract is also not a decisive factor. |
| 7. When it is determined that a lease agreement is, in substance, a sale agreement in the circumstances outlined in 3 and 4 above, the lessee will be required to account for the transaction as an acquisition of an asset and an assumption of a liability as at the inception of the lease. The lessor will similarly be required to account for the transaction as a sale of the property and the establishment of a receivable. In these circumstances the lessee-purchaser rather than the lessor-vendor may be entitled to capital cost allowance under paragraph 20(1)(a) and to any investment tax credit as contemplated by subsection 127(9). [My emphasis.] |
[18] Subparagraphs (c) and (d) of paragraph 3 deal with two situations which when they are present in a lease contract with an option mean that the agreement will be held to be a sale rather than a lease. In the case at bar the evidence before the Trial Division was that the options at issue here met each of these requirements.
[19] The evidence was that the parties had agreed on an overall amount which included the cost of acquiring the equipment from a supplier and financing costs, and this amount was payable on a schedule of 65 monthly payments. The cost of the option was set at 10 per cent of the purchase value of the property and could be exercised after five years, that is in the sixtieth month. Since the cost of exercising the option at the time provided for its exercise was slightly below the five unpaid monthly payments,20 it may be assumed that the appellant would not have hesitated to exercise it as intended by paragraph 3(3) of the Interpretation Bulletin, especially considering the "probable" value of the property within the meaning of paragraph 3(c).
[20] In this connection the evidence showed that with the passage of time the International trucks had in fact a market value varying between $38,000 and $49,000 per unit after five years of use.21 As to the "probable" value of the equipment insofar as it could be estimated when the contracts were signed Victor Fortin, the appellant"s president, testified as follows:
| [TRANSLATION] |
Listen, at the time we estimated, I cannot express any thought, but in my mind, Your Ladyship, a truck is worth, so long as it is well maintained, five years is not its life, that is not right. Its real life is . . . If we are unable to make a truck last between seven and ten years we cannot do business. So in my mind it was about half-price, minimum, after five years.22
The supplier who provided the appellant with the equipment, for its part, indicated that the latter"s useful life was at least ten years.23 Since the price of exercising the option was set at 10 per cent of the price of the equipment at purchase,24 and this equipment had an approximate life of ten years, it should ordinarily after five years" use have had a value approximately equal to 50 per cent of its original cost. It thus goes without saying that the option price appeared "substantially less than the probable fair market value of the property" at the time it was to be exercised within the meaning of paragraph 3(c) of the Interpretation Bulletin. Put another way, the option could be "exercisable within a period which is materially less than the useful life of the property" within the meaning of that subparagraph.
[21] In addition to the fact that the leasing contracts embodied the corroborative elements mentioned in paragraph 5 of the Interpretation Bulletin, they also met the decisive tests set out in paragraph 3(c) and (d), according to which they were to be regarded as sales rather than leases. In these circumstances, the Court reacted rather negatively at the hearing to the actions of the Minister, who appeared to have issued an assessment that ran contrary to his own policy. At the same time, I should note that the appellant made no argument in this regard except to emphasize the fact that in the circumstances the Bulletin should be regarded as an especially persuasive tool of interpretation.
[22] It must be said that Bulletin IT-233R has been surrounded by uncertainty since 1986.25 In 1988 representatives of the Department confirmed that the Bulletin was under review but made certain qualifications.25 In 1990 representatives of the Department indicated that the policy would remain the same as that stated in 1988.25 This message was repeated in 1991.25 The situation in fact remained unchanged until 1995, when Revenue Canada said that it would rely on the courts to resolve the matter:
| At the 1991 Canadian Tax Foundation Conference and most recently at the 1993 Congress of the Association de planification fiscale et financière, Revenue Canada indicated that Interpretation Bulletin IT-233R, Lease - Option Agreements; Sale - Leaseback Agreements, would be revised. However, since there are several cases currently before the courts dealing with issues pertinent to this bulletin, the revision to IT-233R has been deferred until decisions in these cases are rendered. In the interim, the guidelines in IT-233R describing circumstances in which a transaction structured as a lease will be treated as an acquisition and disposition of property continue to represent our general position in this regard.25. [My emphasis.] |
[23] Up to now Bulletin IT-233R has still not been changed. However, it should be noted that the problem surrounding the tax treatment of leasing or the contract of lease with a purchase option was partly resolved after 1990 by the introduction of s. 16.1, which for purposes of ss. 13(21)(b) and 20(1)(c), allows the parties to such a contract to determine by mutual agreement which of them will be entitled to these deductions.25
[24] The appellant noted that the policy stated by Interpretation Bulletin IT-233R is consistent with the Act and reflects the intention of Parliament. In its submission, application of the Act should be guided by the economic and commercial reality of the transactions. In this connection it cited the dictum of Dickson C.J. in Bronfman Trust v. The Queen:
| I acknowledge, however, that just as there has been a recent trend away from strict construction of taxation statutes (see Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at pp. 573-79, and The Queen v. Golden, [1986] 1 S.C.R. 209, at pp. 214-15), so too has the recent trend in tax cases been towards attempting to ascertain the true commercial and practical nature of the taxpayer"s transactions. There has been, in this country and elsewhere, a movement away from tests based on the form of transactions and towards tests based on what Lord Pearce has referred to as a "common sense appreciation of all the guiding features" of the events in question: B.P. Australia Ltd. v. Commissioner of Taxation of Australia, [1966] A.C. 224 (P.C.), at p. 264. See also F. H. Jones Tobacco Sales Co., [1973] F.C. 825 (T.D.), at p. 834, [1973] C.T.C. 784, at p. 790, per Noël A.C.J.; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 8 A.T.D. 190 (High Ct.), at p. 196, per Dixon J.; and Cochrane Estate v. Minister of National Revenue, 76 D.T.C. 1154 (T.R.B.), per Mr. A.W. Prociuk, Q.C. |
| This is, I believe, a laudable trend provided it is consistent with the text and purposes of the taxation statute. Assessment of taxpayers" transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer"s sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.25 [My emphasis.] |
[25] The Interpretation Bulletin in fact focuses on a specific economic situation. In particular, paragraphs 3(c) and (d) make it possible to anticipate in the initial year of a contract of lease with option, in light of objective commercial criteria, if it is more likely than not that the option will be exercised and treat the contract accordingly from the time of its signature, subject I assume to this treatment being reversed by a reassessment if the option is not exercised.
[26] At the same time, I do not think that the conclusions of the trial judge as to the nature and effects of the contracts in question under Quebec law depend on "juristic classification of form" in the sense intended by Dickson C.J. in Bronfman Trust. At civil law the transfer of the right of ownership depends on the contractual will or intent of the parties. It follows that the parties to a contract may validly stipulate that the ownership title will remain with the seller even though the incidents of the ownership right are otherwise passed on to the buyer. As the trial judge explained in her reasons, even an instalment sale does not amount to a sale since the condition that passage of title is dependent on full payment of the selling price is intrinsic to the contract and so does not have the effect of applying retroactively when it is fulfilled.25 When title is retained by a seller solely in order to guarantee payment, reservation of the ownership right is still significant since it deprives the buyer of the jus abutendi, namely the right to dispose of the thing or to make a final use of it, one of the three incidents of the ownership right.26 The fact that in the case at bar civil law places ownership of the trucks in the hands of the finance companies is not an aspect of juristic formalism: rather, it is a legal reality which is required under Quebec law to the extent, of course, that it is applicable.
Analysis and decision
[27] The question thus is whether by the Act Parliament overturned this legal entity created by private law in favour of the approach set out in the Interpretation Bulletin. Before deciding the point, it is necessary to briefly consider the legal nature of the leasing contract and review the case law prompted by this controversy.
Leasing
[28] As we have seen, in 1982 the leasing contract was an innominate contract, in that it was not subject to any particular rule. Article 1603 of the Civil Code of Lower Canada only laid down the conditions for its creation, while at the same time expressly excluding it from the rules governing leases to the extent that these conditions were met.26
[29] The explanatory notes accompanying the bill which led to the adoption of art. 1603 said of this contract:
| [TRANSLATION] |
As this is a true method of financing which assumes the appearance of a lease, this contract can only be described as an innominate contract which obeys "its own rules".27
So despite the nomenclature used in art. 1603 (lessor/lessee), the Quebec legislature clearly did not intend to give any particular coloration to the leasing contract. This message was also repeated when the new Code came into effect:
| [TRANSLATION] |
. . . as leasing is not a lease, it seemed desirable to replace the words "locateur" [lessor] and "locataire" [lessee] by "crédit-bailleur" and "crédit-preneur", but to retain the word "crédit-bail" [leasing] which is already well established. These words are also found in the International Unidroit Convention on leasing.28
The following comment was added at the same time:
| [TRANSLATION] |
As leasing is a procedure designed to finance the use of property, not its acquisition, the new Code leaves it up to the parties whether to stipulate a purchase option at the end of the leasing contract.29
[30] It follows from this that a leasing is above all a financial operation designed to finance the use of property. However, when it is accompanied by a purchase option and the option is eventually exercised, this procedure will also have been used to finance the acquisition of the subject property. The present appeal calls for the ascertainment of the legal character of a leasing with an option during the period preceding exercise of the choice which the option allows.
When is property "acquired" according to existing precedent?30
[31] In Olympia and York,31 the question was whether for tax purposes there was a sale of real property located in Quebec as the result of a transaction the effect of which was to transfer to the buyer all the incidents of the right of ownership except title, which remained in the hands of the seller to secure the payment of the selling price.
[32] After an exhaustive review of the civil law, Addy J. came to the conclusion that there had been no sale under the Civil Code of Lower Canada since the ownership title was still held by the seller. He quashed the Minister"s assessment in so far as it levied a tax as a result of the sale of the property, as follows:
| It is evident that the rights of the parties to the contract and all matters governing various agreements and legal relations arising from the actions of the parties to those agreements must be determined in accordance with the law of the Province of Quebec. |
| The rights of the parties arise out of the agreement filed as Exhibit 1 and full consideration must be given to its terms. Since there is no special definition of the word "sale" or any special meaning to be attached to it in the Income Tax Act, one must consider that word in the light of the law of the Province of Quebec as applied to the relationship created by the agreement . . .31 [My emphasis.] |
[33] Despite the fact that there had been no sale, Addy J. still considered whether recapture of depreciation on the buildings was exigible. In this regard it is useful to cite his reasons in full:
| As previously stated, the second issue to be determined is whether there was, in August 1969, a "disposition" within the meaning of section 20(5)(b ) of the former Act which would in turn then render effective sections 20(1)(a) and 20(5)(e)(ii)(A) and (B). (These sections now being numbered 13(21)(c), 13(1)(a) and 13(21)(f)(ii)(A) and (B) in the new Act.) These provisions read as follows: |
| 20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of |
| (a) the amount of the excess, or |
. . .
| shall be included in computing his income for the year. |
. . .
| (5) In this section and regulations made under paragraph (a) of subsection (1) of section 11, |
. . .
| (b) "disposition of property" includes any transaction or event entitling a taxpayer to proceeds of disposition of property; |
. . .
| (e) "undepreciated capital cost to a taxpayer of depreciable property" of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of |
. . .
| (ii) for each disposition before that time of property of the taxpayer of that class, the least of |
| (A) the proceeds of disposition thereof, |
| (B) the capital cost to him thereof, or |
| Section 20(5)(c ) states that "disposition" includes sale and several other types of payment such as compensation for damage, amounts payable under a policy of insurance, etc., but does not purport to be exhaustive of the definition of "disposition of property" contained in section 20(5)(b ) which I have quoted. In fact, section 20(5)(b) itself, which uses the word "includes" is not itself an exhaustive or restrictive definition. In this respect, in delivering judgment on behalf of the Supreme Court of Canada, Pratte J. in The Queen v. Compagnie Immobilière BCN Limitée stated at page 876: |
| The substantive definitions of "disposition of property" and "proceeds of disposition" in s. 20(5)(b ) and (c) are a clear indication that the words "disposed of" should be given their broadest possible meaning. |
| The word "acquired" used in section 20(5)(e ) is obviously the direct opposite of "disposed" (or disposition) as used in the same section and must contain substantially the same elements viewed from the side of the person acquiring the asset as opposed to the person disposing of it. The meaning of the word "acquired" as used in section 20(5) was fully considered by my brother Cattanach J. in The Minister of National Revenue v. Wardean Drilling Limited. At page 172 of the report he states: |
| With all deference I cannot accede to that view. |
| In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk. |
| and again at page 173 he states: |
| As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchase has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations. |
| That view is followed and approved by Bastin D.J., in The Queen v. Henuset Bros. Ltd. [No. 1]. He stated at page 5170: |
| It follows that all the incidents of ownership other than the legal title reserved in the vendor by the conditional sales agreements such as possession, risk and the right to use the tractors were acquired by the buyer on December 30, 1971. In my opinion the reservation of the legal title to the tractors in the vendor as security did not affect the issue any more than the taking of security on the tractors in the form of a chattel mortgage would have done. This opinion is supported by the judgment of Mr. Justice Cattanach in the case of M.N.R. v. Wardean Drilling Limited [69 DTC 5194], (1969) C.T.C. 265. |
| In the case at bar, the plaintiff had, after executing the agreement and upon delivering possession of the property to First General in September 1969, completely divested itself of all of the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title. It was absolutely and irrevocably obliged to execute and deliver a clear deed to the purchaser upon receipt of the balance of the purchase price which was payable to it. Any additional rights to which it was entitled under the agreement were solely and exclusively for the protection of that balance of purchase price and are rights which would normally be granted to a mortgagee to protect his security. |
| Having regard to what the Supreme Court of Canada said in The Queen v. Compagnie Immobilière BCN Limitée, supra, as to how the concepts of "disposition of property" and "proceeds of disposition" must be interpreted and having regard also to the statement of Cattanach J. in The Minister of National Revenue v. Wardean Drilling Limited, supra , (with which I fully agree) I find that there was in the circumstances of the present case, in September 1969, a disposition of Place Crémazie Complex by the plaintiff within the meaning of section 20 of the former Act (section 13 of the new Act).31 [My emphasis.] |
[34] As can be seen, Addy J. used the broad meaning of the word "disposition" in arriving at his decision, but it is the rule set out in Wardean Drilling which led him to conclude that a "disposition" could be said to have occurred in fiscal terms even though according to the civil law there had been no sale.31 Indeed, the trial judge characterized Wardean Drilling as the leading case on on the issue. Addy J. concluded that the second aspect of the rule of acquisition stated by Cattanach J. empowered him to ignore Quebec law. Wardean Drilling thus requires careful consideration.
[35] In that case the Court had to identify the time from which the taxpayer was entitled to claim capital cost allowance with respect to two drills which it said it had acquired during its 1963 taxation year. The transaction was subject to the laws of Alberta and Cattanach J. decided the point consistent with the Sale of Goods Act32 of that province.
[36] The decision of the Tax Review Board appealed from accepted the argument that the property was acquired for fiscal purposes once a purchase-sale contract had been signed, whether ownership in the property covered by the contract was transferred or not. This argument was based on the broader definition of the word "property" to be found in s. 139(1)(ag ) of the Act:
| "biens" signifie des biens de toute nature, qu"ils soient réels ou personnels, corporels ou incorporels, et, sans restreindre la généralité de ce qui précède, comprend un droit de quelque nature que ce soit , une action ou un droit incorporel . . . |
"property" means property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or chose in action . . . |
[My emphasis.]
[37] Cattanach J. approached the matter as follows:
The decision in this appeal turns on the question as to when the rig and substructure were "acquired" by the respondent. The submission on behalf of the respondent was, as I understood it, that goods are acquired by a purchaser thereof when the vendor and the purchaser have entered into a binding and enforceable contract of sale and purchase. The test and concept of a contract was that adopted by the Tax Appeal Board in the decision now under appeal.32 [My emphasis.]
[38] Cattanach J. rejected this approach as follows:
On the facts in the present appeal there is no question whatsoever that the contracts for the purchase and sale of the rig and substructure were completed prior to December 31, 1963. Accordingly there is no question that as at the end of the respondent's 1963 taxation year it had rights under these contracts. Such rights are "property" within the meaning of section 139(1)(ag) of the Income Tax Act but Schedule B to the Income Tax Regulations does not include a class of property which is subject to capital cost allowance such as properties which are contractual rights under the contracts here in question. In order to fall within any of the specified classes in Schedule B there must be a right in the property itself rather than rights in a contract relating to the property which is the subject matter of the contract.32 [My emphasis.]
[39] He repeated the rule of acquisition he had stated earlier:
As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations.32 [My emphasis.]
[40] Cattanach J. then rendered judgment in accordance with Alberta law:
| Property in the rig could have passed forthwith had the parties so intended. But the parties did not so intend. It was agreed, as evidenced by the note on page 5 of the invoice (Exhibit R-5) that "Title to pass and notes issued as of date shipment". Delivery or shipment was not until February 18, 1964 and accordingly property in the rig did not pass to the respondent until that date. |
It is my opinion that neither Rule I nor Rule II set forth in section 21 of the Sale of Goods Act is applicable to the circumstances of this particular contract but rather that the intention of the parties as to when property in the rig was to pass is determined by the terms of the contract in accordance with section 20 of the Sale of Goods Act.33 [My emphasis.]
[41] As can be seen, Cattanach J. refused to give the word "acquisition" a special meaning under the Act, thereby rejecting the decision rendered by the Tax Review Board, and held that there had not been any "acquisition" under Alberta law. This is the background against which the rule of acquisition stated by Cattanach J. should be read. In setting forth that rule Cattanach J. did not have it in mind to overturn applicable private law, since the judgment he rendered was to the exact opposite effect. As Chief Judge Couture explained in the case at bar, Cattanach J. in stating that rule:
is merely confirming the distinction [at common law] between the owner who holds legal title and the beneficial owner of the property, that is, the one to whom ownership belongs subsequent to a transaction, but who will receive title to the property at a later date.33
[42] At that time Chief Judge Couture added the following comment, to which we will return later:
| Incidentally, the [Civil Code of Lower Canada] does not recognize this type of dismemberment of ownership rights. This right is absolute by definition. |
| Ownership is defined in article 406 as follows: |
| Ownership is the right of enjoying and of disposing of things in the most absolute manner, provided that no use be made of them which is prohibited by law or by regulation. |
In light of this definition, it is clear that this right is indivisible, since it is impossible for more than one person to possess such authority over a thing. A thing may be the property of two or more persons, but these persons hold between them, as co-owners, all the rights associated with the right of ownership of the thing. The dismemberment of the right of ownership is allowed to the extent provided in the Code and is governing by specific provisions. A typical example is that of servitude, which grants the enjoyment of a thing or a part of that thing to someone who is not the owner.34
[43] Henuset,35the relevant passage from which is cited by Addy J. in Olympia and York,35 also dealt with a transaction subject to the laws of Alberta. The question was whether the Henuset company could claim depreciation on the cost of acquiring tractors which it said it had acquired in its 1970 taxation year. Bastin D.J., relying on the alternative rule of acquisition stated by Cattanach J. in Wardean Drilling, came to the conclusion that the sale was complete on or before December 30, 1970 in accordance with conditional sales agreements and that the tractors had therefore been "acquired" for tax purposes. The reasons indicate no conflict between this conclusion and Alberta law.
[44] In Gartry,35 Judge Bowman had to decide whether a boat had been "acquired" by Mr. Gartry within the meaning of s. 13(21)(b ). On the evidence, the seller had reserved the right of ownership in the boat to secure payment of the selling price. Mr. Gartry had otherwise all the incidents of the ownership right; he had also made large financial outlays to adapt the boat for the use he wished to make of it. Although the decision makes no mention of it, Mr. Gartry"s rights over the boat were probably subject to Canadian maritime law.
[45] Judge Bowman resolved the point at follows:
| The rights of Mr. Gartry in this case are significant. He undertook an exhaustive search for this particular ship. He made substantial expenditures on the ship including the purchase of new equipment and the vendor carried out his detailed instructions in making the modifications and installing the equipment. The ship had attained a uniqueness that would in my view have entitled him to an order for specific performance of the contract in a court of competent jurisdiction. His interest in the property had gone far beyond that arising from a merecontract [sic] of purchase and sale of the type considered in Wardean Drilling Ltd., supra. |
| The matter is susceptible of a different analysis that leads to the same result. Let us assume for a moment, first, that my conclusion is wrong that the extensive rights which the appellant acquired in the ship itself as modified did not amount to an acquisition or ownership of the boat within the meaning of paragraph 13(21)(b), and second, as contended by the respondent that, the expenses are on capital account on the basis that the appellant acquired an asset for the enduring benefit of the business. If that asset is not the ship as modified the asset must be the new equipment that was installed and that, for the purpose of determining the ownership of depreciable property, exists independently of the ship. |
. . . . .
| It follows therefore that even if the expense of the modifications is not on revenue account and even if the appellant had not "acquired" the boat before it sank, he did acquire such of the assets used in making the modifications that were capital assets. The cost of these assets is the cost to him of depreciable property falling within Class 7 of Schedule II to the Regulations made pursuant to the Income Tax Act.35 [My emphasis.] |
[46] It can be seen that the conclusion that the boat was "acquired" by Mr. Gartry is only one of two separate and independent conclusions on which Judge Bowman based his decision. It can also be seen that Mr. Gartry"s rights were not limited to ordinary contractual rights. Judge Bowman was clearly of the view that Mr. Gartry"s entitlement to the execution of the contract at common law (specific performance) gave him rights over the boat as such, namely to use the words of Cattanach J., rights "in the property itself rather than rights relating to the property which is the subject matter of the contract".35
[47] Finally, the appellant relied on Bédard Auto Ltée,35 in which the Tax Court had to decide whether the lease of real property with an obligation on the lessor to proceed with its purchase for an agreed price, including accumulated rental, constituted a sale. Judge Tremblay, after concluding that at civil law the contract did not transfer ownership, nonetheless found that there was a sale for tax purposes. He noted that despite reservation of the right of ownership, the lessee had possession and use and assumed the risks inherent in the property leased. Relying on Olympia and York, Judge Tremblay concluded there had been a "disposition" for tax purposes even though in Quebec law there had not been a sale.
[48] There are many decisions that take the contrary view. In R. v. Lagueux et Frères Inc.,35 the Federal Court Trial Division was called on to analyse five leasing contracts, four of which contained purchase options.35 Under those contracts the total monthly payments amounted to the cost of acquiring the property leased plus the applicable rate of interest on the unpaid amount. Additionally, all the risks inherent in the leased property were borne by the lessee.
[49] Raymond Décary J., indicating that he was relying on the rules governing the private law applicable to the point, came to the conclusion that despite the way they were described the contracts were sales. He pointed out that only private law, in particular the Civil Code of Lower Canada, could be used to determine whether there was an acquisition for tax purposes.35
[50] In Dumais et Fils v. M.N.R.,36 Judge Garon of the Tax Court (as he then was), ruled on the effect for tax purposes of a leasing contract governed by art. 1603 of the Civil Code of Lower Canada. Relying solely on the civil law, Judge Garon concluded that the finance company as lessor remained owner of the property subject to the contract and thus the taxpayer was not entitled either to the capital cost allowance or the investment tax credit.
[51] In Gaétan Lévesque Inc. v. M.N.R.,36 the Tax Court again analysed leasing contracts governed by Quebec law. The special feature of the contracts was that the right to claim capital cost allowance was acknowledged to be that of the lesser. Despite that clause the lessee claimed depreciation on the property in question. Judge Lamarre-Proulx analysed the question in light of the civil law and concluded that the lessor was the owner of the property subject to the contracts. The lessee was accordingly denied capital cost allowance. Judge Lamarre-Proulx arrived at a similar conclusion in André Laliberté v. M.N.R.,36 with respect to an assessment which denied a lessee the investment tax credit.
[52] Finally, in Laurent Goulet & Fils Inc. v. M.N.R.,36 Judge Tremblay also concluded that a leasing contract made pursuant to art. 1603 of the Civil Code of Lower Canada and coupled with purchase option did not transfer ownership. Judge Tremblay treated this conclusion, based exclusively on the civil law, as decisive for tax purposes. In doing so, he appears to have disregarded without explanation the decision which he had rendered some years earlier in Bédard Auto Ltée.
[53] Before concluding this review, I should comment briefly on two judgments of the Federal Court Trial Division.
[54] In Kirch Construction Ltd. v. The Queen,36 the taxpayer claimed to have acquired for tax purposes on the last day of its taxation year certain highway construction equipment, and sought to claim capital cost allowance on this acquisition. Strayer J. (as he then was), referring to Wardean Drilling and Henuset, said:
It has been held that property is "acquired" for the purposes of capital cost allowance when title has either passed to the taxpayer or the taxpayer had obtained all the incidents of title such as possession, use and risk.37
[55] After analysing each aspect of the question, Strayer J. came to the conclusion that at the relevant time the taxpayer had neither ownership title to the property in question nor the incidents relating to ownership title.
[56] In Borstad Welding Supplies,38 the Minister referred to the rule stated in Wardean Drilling and argued that the taxpayer had disposed of certain personal property during its 1985 taxation year. Reed J. examined the problem as follows:
The Wardean case dealt with the acquisition of oil drilling equipment. Even though the equipment had been ordered and invoices received therefor in one fiscal year, it was held that acquisition did not take place until the equipment was delivered to the purchaser. Property did not pass to the purchaser under the Alberta Sale of Goods Act, until that time. The quotation in that decision upon which the Minister relies, in making his argument, in this case is:
... a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements.39 [Italics in original.]
[57] She went on to say below:
Counsel for the Minister agrees that the determination of when title passed in this case is governed by the Sale of Goods Act, R.S.A. 1985, c. S-2. There is no dispute that property did not pass on June 1, 1985. Thus, the question becomes whether a disposition occurred because of the second branch which has been developed in the jurisprudence: whether the purchaser had acquired all the incidentals of title ... although legal title might remain in the vendor.40 [My emphasis.]
[58] She then undertook a meticulous analysis of the contract, before concluding as follows:
The parties thought they were entering into an agreement for the rental of the cylinders until such time as they were purchased, one-fifth of the total number of cylinders to be purchased in each of five consecutive years. I cannot characterize their agreement as other than what it purports to be. I cannot conclude that a disposition occurred on June 1, 1985.41
[59] It appears from this review of the case law that to the extent that Olympia and York authorized the courts to ignore the effects of Quebec law in cases arising in Quebec, it has not been followed. Only Judge Tremblay relied on this decision in Bédard Auto Ltée as a basis for concluding that a sale had occurred for tax purposes, even though the contrary result arose under the civil law. He subsequently adhered to the civil law in Goulet. In my view, the trial judge and the Tax Court judges before her were right to ignore Olympia and York, since the Act does not cast aside private law. The word "acquired" contained in each of the provisions in issue must be understood in its ordinary sense that is as referring to the acquisition of ownership of property,42 and in the absence of some indication to the contrary, ownership of property cannot be acquired otherwise than in accordance with the applicable private law.
[60] Additionally, this review of the cases also indicates that the rule of acquisition stated by Cattanach J. in Wardean Drilling has been scrupulously followed in cases from common law provinces. As indicated by the passages I have cited, this rule is that property may be acquired from the time ownership is transferred to the purchaser or when a purchaser has possession or use and assumes the risks inherent in the property in question, even though legal title remains with the seller to guarantee payment of the selling price.
[61] Bastin D.J. applied the second part of this rule in Henuset and Judge Bowman did likewise in Gartry. Reed J. applied this test in Borstad and Strayer J. in Kirch. I note that none of those decisions suggests that the rule of acquisition proposed by Cattanach J. departed from the applicable private law.43 As Chief Judge Couture noted in the case at bar,44 in Wardean Drilling Cattanach J. was simply referring to the dismemberment of the ownership right at common law and the rule that there is a disposition of property when there is a change in the beneficial ownership, even though the legal ownership remains unchanged.
Incorporation of concept of "beneficial ownership" in the Act
[62] Indeed, since the 1972 reform the Act has reflected this special feature of the common law. Section 54(c)(v) recognizes a contrario that there is a disposition of property when there is a change in its beneficial ownership, even though the seller retains legal ownership:
| 54c) " disposition de biens " comprend, sauf dispositions contraires expresses,
[...] mais, pour plus de précision, ne comprend pas [...]
|
54(c) "disposition" of any property, except as expressly otherwise provided, includes
... but, for greater certainty, does not include ...
|
[My emphasis.]
[63] Clearly this provision has reference to a dismemberment of the ownership right which has no application in civil law. However, s. 248(3), and in particular its English version, shows that Parliament has considered this point and by legislation created equivalences to the concept of beneficial ownership for purposes of its application in Quebec:
| 248(3) Aux fins de l"application de la présente loi dans la province de Québec, l"expression "droit de jouissance" à l"égard d"un bien signifie le droit de la personne qui a ou avait la pleine propriété d"un bien, même si ce bien est grevé d"une servitude, le droit détenu par un usufruitier, un preneur dans un bail emphytéotique, un grevé dans une substitution ou un bénéficiaire dans une fiducie. |
248(3) In its application in relation to the Province of Quebec, a reference in this Act to any property that is or was beneficially owned by any person shall be read as including a reference to property in relation to which any person has or had the full ownership whether or not the property is or was subject to a servitude, or has or had a right as a unsufructuary, a lessee in an emphyteutic lease, an institute in a substitution or a beneficiary in a trust; and a reference in this Act to the beneficial owner of any property shall be read as including a reference to a person who has or had, accordingly as the context requires, such ownership as a right in relation to that property. |
This subsection remained in effect for 20 years, that is, from the 1972 reform until late 1991, when an important amendment was made to it.45 In the meantime, only the French text was amended by substituting for the expression "droit de jouissance" that of "propriété effective", and by the replacement of the words "signifie le" in line 3 by the words "s"entend notamment du".46
[64] Sections 54(c)(v) and 248(3) were not raised or discussed during the appeal and so following the hearing the Court invited the parties to submit their views on the significance which these provisions might have in resolving the point at issue. Both parties responded to the Court"s invitation.
[65] It appeared from the written submissions filed by the parties that they acknowledged that the effect of s. 54(c)(v) was to incorporate into the Act the common law rule that property is subject to a disposition when there is a transfer of beneficial ownership although legal ownership remains unchanged. The parties further recognized that although the rule stated in s. 54(c)(v) expressly limited to capital gains, it also is applicable to capital cost allowance.47
[66] Having said that, what is the effect of s. 248(3)? Awkward though that provision may seem to be, it is clearly intended to treat the beneficial ownership of property in a manner which corresponds to various forms of ownership known to the civil law for purposes of its application in Quebec. Accordingly, it appears from s. 248(3) that Parliament has successively likened a beneficial owner to the full owner of property whether or not subject to a servitude, to a usufructuary, to the lessee in an emphyteutic lease, the institute in a substitution and the beneficiary in a trust.48
[67] Therefore, for purposes of application of the Act in Quebec, Parliament has given the concept of beneficial ownership a broad meaning by likening it depending on the context, and on a non-exclusive basis, to various types of ownership known to the civil law, ranging from full ownership to usufruct. I felt that s. 248(3) might have been useful to resolution of the point at issue, in so far as the transaction between the appellant and the finance companies could be viewed in legal terms as an instalment sale at civil law, or a conditional sale from a common law point of view.49 On further reflection, however, it seems clear to me that the contracts at issue here do not have the effect of a sale of whatever kind under either of our two systems of private law.
Effect of transaction in legal terms
[68] Despite the fact that there are between the civil law and common law fundamental differences,50 our two systems of private law are notable mostly because of numerous principles which they share. One of these principles is based on the decisive effect of the intent of the parties in interpreting a contract between them. As is the case under the Civil Code, the effect of any contract for the sale of personal property in the common law provinces and territories is dependent above all on the contractual intent.51
[69] Here, the parties considered the question of ownership of the property and agreed that ownership would remain with the finance companies until the time agreed upon for the exercise of the option, and that [TRANSLATION] "title and right of ownership"52 would be transferred to the appellant at that time, provided it chose to exercise the option and pay the option price. In so far as the effect of a contract is a function of the intent of the parties, I do not see how ownership of property ("legal" or "beneficial" from a common law perspective) could have been transferred to the appellant before the option was exercised.53
[70] There is no question of any sham or deception here. The appellant and the finance companies did not engage in any collusion or subterfuge against the taxation system. The option was inserted in the contractual terms of a mutual agreement. The option price and the time of its exercise were negotiated together with the other terms of the contract.54 The cost of exercising the option, which was 10 per cent of the purchase price of the property55 after a period of five years" use, cannot be regarded as symbolic, "nominal" (in the English sense) or illusory to the point that a court could ignore it.56
[71] Though it was likely, indeed very likely, when the contracts were signed that the option would be exercised,57 its exercise could not be taken for granted. Five years is a long period of time and as the parties could not foresee the future they could not, at the time the contracts were signed, have had in mind all the factors that might influence the appellant"s decision to exercise or not the option reserved to it by the contract. Apart from the fact that the "probable" value of the property was an estimated value, and so inherently uncertain, the parties could not rule out the possibility that extrinsic factors might affect the value of the property and the appellant"s interest in acquiring it when the time came.58
[72] I therefore do not believe that the appellant can repudiate the contracts it signed and claim that it acquired ownership of the property when it expressly recognized that the contracts did not have that effect. If there is no sham or deception, it is not up to the courts in tax matters to rewrite an agreement freely negotiated between two parties because one of them claims after the fact to have concluded an agreement contrary to the contract which it signed. I have already mentioned that the finance companies, for their part, claimed capital cost allowance and the investment tax credit in accordance with the right of ownership which they continued to enjoy pursuant to the contracts pending exercise of the option.
[73] Before concluding, I should say that the fact that the finance companies did not show the property covered by the contracts as assets in their financial statements and that the appellant [TRANSLATION] "capitalized" it does not contradict the effect of the contracts in legal terms. The sole purpose of the financial statements is to show the financial position of the business in question for the benefit of its shareholders; they have nothing to do with whether the contracts resulted in a sale in legal terms. In the absence of evidence regarding the applicable principles, the only conclusion that can be drawn from these financial statements is that in accounting terms the financial position of the respective businesses was better stated by the entitlement to the payment of the long-term debt in the case of the finance companies and the accounting value of the property in the case of the appellant.59
[74] In short, I come to the conclusion that Bulletin IT-233R,60 to the extent that it attempts to anticipate the future and lay down a rule that property leased under a leaseback contract is sold on signature of the contract if the price of exercising the option is "substantially less" than the "probable" value of the leased property, or if at the time the contract was signed "no reasonable person would fail to exercise the said option", is devoid of any legal basis.
[75] In legal terms, there is nothing to prevent the parties to a contract from validly stipulating that ownership of the leased property will remain with the lessor even if the cost of exercising the option as compared with the "probable" value of the leased item may appear to be "substantially less" at the time the contract is signed. One must bear in mind that the proposed value of the property falls in the realm of the probable, not that of certainty, and that contractual freedom means that the parties to a contract are free to decide for themselves that ownership of the leased property will remain with the lessor until the option is exercised, even though exercise of the option may appear to be likely, or very likely, at the time the contract is signed. One only has to think of the situation in which, despite this likelihood, the holder of the option exercises the right reserved to it by the contract not to exercise the option, to see that there is no legal basis for this aspect of the Bulletin.61
[76] Apart from the fact that the rule suggested by the Bulletin is not authorized by the Act, it results in great uncertainty and invites arbitrariness. For example, how much must the difference be between the option price and the probable value of the property at the time the option is to be exercised for the transaction to be one of sale rather than lease?62 The Bulletin provides that the amount must be "substantially less".63 Is an option price 10 per cent of the value of the purchase price, when the "probable" value of the property is 50 per cent of the purchase price, "substantially less"? Should the difference be greater or less? At what point can one disregard the terms of a contract freely negotiated between consenting parties and decree that there is a sale rather than a lease? These are imponderables which lead to no clear conclusion.
[77] In concluding, I would note that when Parliament wishes to negate or alter the legal effects of a lease contract with option, it does so expressly. This is what was done in 1990 when it introduced s. 16.1, which transforms a lease contract with option into a purchase-sale contract, provided the parties have chosen to do so,64 and this is what was done for lease agreements with options under what was at the time s. 18(1) of the Act.65 That is also the effect since 1980 of s. 13(5.2), which transforms into depreciation the difference between the fair market value and the cost of acquisition of property leased under a lease contract with purchase option, when the option is exercised at a price below its fair market value.66 Each of these provisions takes into account the nature and legal effects of option leasing contracts under private law and alters them for tax purposes by special rules. In the absence of any departure of this kind, it is incumbent on the courts to give a lease contract with option the legal effects imposed by private law.
[78] For these reasons, I come to the conclusion that the appellant did not acquire the property in question under the leasing contracts during its 1982 taxation year. I therefore suggest that the appeal be dismissed with costs.
"Marc Noël"
J.A.
Certified true translation
Bernard Olivier, LL. B.
__________________K. Le M. Carter, chairman (Ottawa, Queen's Printer, 1966-67).
"Analysis of the White Paper on Tax Reform" (Don Mills, Ontario, CCH Canadian Limited, 1969).
Olympia and York Developments Ltd. v. The Queen, [1981] 1 F.C. 691, at 709.
P.G. Jobin, Traité de droit civil - Le louage de choses, Montréal, Yvon Blais, 1988-89, at p. 69.
Minister of National Revenue v. Wardean Drilling Ltd., [1969] 2 Ex.C.R. 166, at 172.
3 Act respecting bills of lading, receipts and transfers of property in stock, S.Q. 1982, c. 55. See Caisse populaire de Daveluyville (Aro (1984) Inc.) and Her Majesty the Queen, F.C.A. No. A-316-94, judgment of October 29, 1998.
5 Claude Gilbert, "La nature et l"intérêt du crédit-bail en informatique" (1988), 29 Les Cahiers de Droit 815, at p. 818.
6 E. De Cannart D"Hamale, G. Vanderberghe, "Le contrat de leasing et l"informatique", in Le Droit des contrats informatiques : principes-applications , Brussels, Ferdinand Larcier, 1983, p. 473, at p. 476.
7 Claude Gilbert, supra , note 5, at pp. 819-820, citing various French sources including the Chambéry Court of Appeal, October 13, 1975: Recueil Dalloz Sirey 1976, p. 26; A. Blondeau, Jurisprudence française 1968-1976, vol. 2, Paris, Éd. Techniques, 1978, p. 1199; Court of Cassation, 3d Civ. Ch., June 10, 1980: Recueil Dalloz Sirey 1980; Bordeaux Court of Appeal, November 28, 1967: Gazette du Palais 1968, pp. 1 and 233.
8 Hansard (parliamentary committees), 30th Legislature, 1st session, P.L. No. 2 - Act respecting hire of things, December 21, 1973, No. 12, pp. B-215, B-219 and B-221.
9 Robert P. Godin, Le crédit-bail, La Réforme du Code civil, Obligations, contrats nommés, Les Presses de l"Université Laval, Sainte-Foy, 1993, p. 681.
10 Henri, Léon and Jean Mazeaud, Leçons de droit civil , vol. 3, "Sûretés, Publicité foncière et Principaux contrats", 2d ed., Éditions Montchrestien, Paris, p. 754.
11 Commentaires du ministre de la Justice, Civil Code of Quebec, vol. III, Les Publications du Québec, Quebec, 1993, p. 1156.
12 Pierre Gabriel Jobin, Le Louage , Traité de droit civil, 2d ed., Les Éditions Yvon Blais Inc, Cowansville, 1996, p. 55, citing Nashua Canada Ltée v. Genest, [1990] R.J.Q. 737 (C.A.); Cie d"expertise en sinistres Casualty Ltée v. Auto Hamer 1979 Ltd., [1988] R.J.Q. 241 (C.A.).
14 This common law concept refers to the acquisition of a right of use which is not exclusive to the acquirer and may be distinguished from the concept of a lease, which confers exclusive use. In other words, the use of property under licence is not a lease within the meaning of the Income Tax Act .
15 My emphasis. In Mont-Sutton Inc. , this position taken by Her Majesty is contained in paragraphs 35 and 38 of the Memorandum of Fact and Law on the cross-appeal.
16 The underlined portion of the French version of this provision contained a translation error which was corrected by 1985 amendments, to be found in S.C. 1985, c. 45, s. 72(5), to make it consistent with the English version.
17 The judgment is reported in 96 D.T.C. 6177.
18 The new trucks were International trucks and were equipped with a side-loading "Shu-Pak" type compactor. The used trucks were Mack trucks with new garbage bins of the "Dempster" hydraulic compacting type.
This decision is reported at (1990) 44 D.T.C. 1436, under the style of cause Fortin & Moreau Inc. v. M.N.R.
Under the new Code, leasing is a nominate contract subject to certain special rules. See arts. 1842 to 1850 of the Civil Code of Quebec, under Chapter III, "leasing".
19 Appeal case, vol. II, at pp. 225 and 216 respectively.
[TRANSLATION] "Acquire: 1. Become owner of (property, right) by purchase, exchange or succession." (Le Petit Robert ) Acquisition: "1. Act by individual of becoming owner of thing or holder of right. For example, art. 583 of Civil Code lists methods of acquiring right of ownership"(Le Dictionnaire du droit privé ; Centre de recherche en droit privé et comparé du Québec).
[1981] 1 F.C. 691 (Trial Division) [hereinafter Olympia and York].
[1969] 2 Ex.C.R. 166 [hereinafter Wardean Drilling].
77 D.T.C. 5169 [hereinafter Henuset].
[1994] 2 C.T.C. 2021 [hereinafter Gartry].
[1985] 2 C.T.C. 2354 [hereinafter Bédard Auto Ltée].
Harel v. Deputy Minister of Revenue of Quebec, [1977] C.T.C. 441, at 447 and 448, and Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175.
20 The difference was $166.65.
21 See the sale invoices for four of the trucks in question, Appeal Book, vol. II at pp. 209, 210, 211 and 212. The evidence further showed that one of the Mack trucks was sold in 1992 and the other was still used for short trips in the yard in 1995: vol. I of transcript, at p. 26.
22 Vol. I of transcript, at p. 27.
23 Testimony of Claude Boivin, President of Équipement Labrie Limitée, vol. I of transcript at pp. 85, 86, 87 and 88.
24 Namely $7,300 in the case of the International trucks and $9,703.20 in the case of the Mack trucks.
Wallace M. Howick, "Leasing" in Income Tax Considerations in Corporate Financing, 1986 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1986), pp. 254-94, at p. 261.
Report of the Proceedings of the Fortieth Tax Conference, Vancouver, Canadian Tax Foundation, 1988, p. 53:104.
Report of the Proceedings of the Forty-Second Tax Conference, Montréal, Canadian Tax Foundation, 1990, p. 50:43.
Report of the Proceedings of the Forty-Third Tax Conference, Toronto, Canadian Tax Foundation, 1991, p. 50:74.
Income Tax Technical News, published by Revenue Canada, Policy and Legislation Branch, No. 5, July 28, 1995.
Paragraphs (a), (b) and (c) of s. 16.1 provides that when the choice is made in favour of the lessee:
| a) le bail est réputé ne pas en être un;b) le preneur est réputé avoir acquis le bien du bailleur au moment donné à un coût égal à la juste valeur marchande du bien à ce moment . . . c) le preneur est réputé avoir emprunté de l"argent du bailleur au moment donné en vue d"acquérir le bien, et le principal de l"emprunt est réputé correspondre à la juste valeur marchande du bien à ce moment . . . |
(a) the lease shall be deemed not to be a lease; (b) the lessee shall be deemed to have acquired the property from the lessor at the particular time at a cost equal to its fair market value at that time;(c) the lessee shall be deemed to have borrowed money from the lessor at the particular time, for the purpose of acquiring the property, in a principal amount equal to the fair market value of the property at that time. |
[1987] 1 S.C.R. 32, at p. 52 [hereinafter Bronfman Trust].
25 Reasons for Judgment, supra , note 1, at 6182-6183.
The others being the jus utendi and jus fruendi. See as to this the dictum of Pratte J., giving the unanimous opinion of the Supreme Court in R. v. La Compagnie Immobilière BCN Limitée, [1979] 1 S.C.R. 865, at 876-877.
26 Article 1603 is cited in paragraph 5 above. According to Prof. Pierre-Gabriel Jobin, the reform which led to the adoption of this article actually resulted in two types of leasing: first, an innominate financing contract which enjoys wide contractual freedom provided the warranties mentioned in art. 1603 are given, and second, when the requirements of art. 1603 are not all present, a lease contract (Pierre-Gabriel Jobin, Le Louage de choses , Montreal, les Éditions Yvon Blais Inc., 1989, at p. 72).
27 Explanatory notes accompanying bill titled "Bill respecting the leasing of things", which became Chapter 74 of the 1973 Statutes.
28 Comments of Minister of Justice, Civil Code of Quebec, vol. II, p. 1157.
30 I have omitted from this review of the cases decisions rendered under provincial statutes governing securities for the sale of personal property, such as the Ontario Personal Property Security Act. These decisions turn on the special features of the legislation to which they refer and so are of limited value. Paragraph 6 of Bulletin IT-233R appears to recognize that this type of legislation operates in a different context. (The bulletin is cited in para. 17.)
31 As the definition of the word "disposition" is not exhaustive it provides a basis for the reasoning of Addy J., but the definition as such and the enumeration which it reflects do not assist in determining whether a property is "acquired" for fiscal purposes regardless of the applicable private law.
Ibid., at 174. In para. 1, s. 20 of the Sale of Goods Act provided: 20. (1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
33 Supra, note 4, at 1449. See Black"s Law Dictionary, which defines a "beneficial owner" as being inter alia : "One who does not have title to property but has rights in the property which are the normal incident of owning the property". It may safely be assumed that the second part of the rule of acquisition stated by Cattanach J. derives from the Supreme Court of Alberta judgment in Hendrickson v. Mid-City Motors, [1951] 3 D.L.R. 276, in which it was held that a conditional sale agreement gave rise to a sale under Rule I of s. 21 of the Alberta Sale of Goods Act, despite the fact that ownership title remained with the seller. At that time the Court said the following, at 284:
I conceive "title" and "property" to be two entirely different things. One person may hold bare title to property while the whole beneficial ownership rests in some other person. A reservation of title does not necessarily imply that no property shall pass to the purchaser ... . . . . . In my opinion, the whole effect of the agreement ... is to transfer to the purchaser the "property" in the goods in question, while reserving to the vendor a vendor"s lien and the right to differ [sic ] the conveyance of legal "title" to the property until payment in full.
The Supreme Court of Alberta came to this conclusion in accordance with the intent of the parties as disclosed by the wording of the contract. See also Douglas S. Ewens, ""When is a "disposition"", Report of Proceedings of the Twenty-Sixth Tax Conference , November 11-13, 1974, at p. 538. As regards application of the rule that a change in the beneficial ownership of property results in a disposition for tax purposes, see Grey v. Inland Revenue Commission, [1960] A.C. 1, at 12-14.
34 Ibid. , at 1459.The Supreme Court explained this difference as follows in Laliberté v. Larue, [1931] S.C.R. 7, per Rinfret J. at 16: [TRANSLATION] We do not have to decide a question of possession here, but one of ownership. It should perhaps be mentioned that the legal system in the province of Quebec does not include the common law concept which recognizes beneficial ownership in one person and legal title in another. In Quebec both are invariably combined in the same person. Ownership is unitary. Usufruct, substitution, trust, pledge, hypothec and privilege confer more or less extensive rights over the thing . . . but never transfer ownership.
See the passage cited in para. 33 above.
See the passage cited at para. 38 above. The Federal Court of Appeal has since held that a specific performance remedy may confer a right of ownership over the thing, that is, a beneficial interest: The Queen v. Paxton, 97 D.T.C. 5012, at 5015. See contra Douglas S. Ewens, "When is a "disposition"", supra, note 43, at p. 529.
35 See the passage from this judgment as cited by Tremblay-Lamer J., in para. 13 above.
92 D.T.C. 1107, currently on appeal (hereinafter Dumais).
91 D.T.C. 1374 (hereinafter Gaétan Lévesque), currently on appeal.
August 13, 1996, Ottawa, 89-247(IT), (T.C.C.) (hereinafter Laliberté), currently on appeal.
92 D.T.C. 1605 (hereinafter Goulet), currently on appeal.
36 88 D.T.C. 6503 (hereinafter Kirch ).
38 93 D.T.C. 5457 (hereinafter Borstad).
42 Bulletin IT-233R is quite clear in this regard, since its purpose is to determine whether "or not the object of a transaction at its inception is to transfer the ownership in property from a lessor to a lessee": see paragraph 3 of the Bulletin, supra , para. 17.
43 It would have been surprising if it were otherwise since the ratio of the judgment by Cattanach J. was that only a right "in the property itself" allowed a taxpayer to claim the capital cost allowance and such a right could not be acquired otherwise than by private law.
45 See s. 15 of the Act to amend the Income Tax Act , 1991, c. 49, given Royal Assent on December 17, 1991.
46 Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, s. 248(3).
47 The rule in s. 54(c )(v) is stated for greater certainty, since it is clear from the common law that there is no disposition unless there is a change in the beneficial ownership of property: see as to this Douglas S. Ewens, "When is a "disposition"", supra, note 43, p. 532, citing Re Tancred"s Settlement, [1903] 1 Ch. 715, Grey v. Inland Revenue Commission, [1960] A.C. 1 and Henty House Property Limited v. Federal Commissioner of Taxation (1953), 88 C.L.R. 141 (Australia); and Jacques de l"Étoile & Michel Saint-Pierre, "La définition statutaire de l"expression "disposition de biens" et son interprétation jurisprudentielle" (1984) , 6 Revue de Planification Fiscale et Successorale 325, at 329-330. See also Interpretation Bulletin IT-170R of August 25, 1980, which states in paragraph 4:
Subparagraph 54(c)(v) makes it clear for the purposes of subdivision c of Division B of Part 1 that the Act is interested only in dispositions that involve a change in beneficial ownership . . . This is also the Department"s view in respect of dispositions of depreciable property described in paragraph 13(21)(c) and the sale of trading assets under paragraph 12(1)(b). A transaction that can be described as a "sale" is therefore disregarded for purposes of this bulletin if there is no concurrent change in beneficial ownership.
48 This interpretation of s. 248(3) appears to correspond to that given by the Department of National Revenue in its Interpretation Bulletin IT-437, dealing with the right of ownership of real property: see in particular paragraph 3 of that Bulletin.
49 We have seen that a conditional sale at common law can result in the transfer of beneficial ownership, and accordingly of ownership within the meaning of the Act, and that on the other hand an instalment sale does not have this effect until the selling price is paid in full.
51 See Fridman, Sale of Goods in Canada , 3d ed., at p. 70, commenting on s. 18 of the Ontario Sale of Goods Act and the corresponding sections in the legislation of other provinces and territories:Sale of Goods Act, R.S.B.C. 1996, c. 410, s. 22 (British Columbia);Sale of Goods Act, S.N.B. 1986, c. S-1, s. 18 (New Brunswick);Sale of Goods Act, R.S.N.W.T. 1988, c. S-2, s. 21 (Northwest Territories);Sale of Goods Act, R.S.O. 1990, c. S.1, s. 18 (Ontario);Sale of Goods Act, R.S.S. 1978, c. S-1, s. 19 (Saskatchewan);Sale of Goods Act, R.S.Y. 1986, c. 154, s. 18 (Yukon);Sale of Goods Act, R.S.M. 1987, c. S10, s. 19 (Manitoba);Sale of Goods Act, R.S.P.E.I. 1988, c. S-1, s. 19 (Prince Edward Island);Sale of Goods Act, R.S.N.S. 1989, c. 408, s. 20 (Nova Scotia);Sale of Goods Act, R.S.N.F. 1990, c. S-6, s. 19 (Newfoundland).
52 This is the language used in the option clause dealing with the six International trucks. The clause covering the Mack trucks mentioned the [TRANSLATION] "right to purchase" following exercise of the option: see clauses 20 and 28 of the respective contracts, Appeal case, vol. II at pp. 93, 97, 101, 105, 109, 113 and 190 of vol. II of the appeal case.
53 A purchase option clause in principle confers no right of ownership before the date of its exercise: see J. Stuart Robertson v. R., 90 D.T.C. 6070, at 6074 (F.C.A.); Mitsui & Co. v. Royal Bank, [1995] 2 S.C.R. 187, at 201; Arthur Pitman v. M.N.R., 50 D.T.C. 295, at 297; J.F. Burns Sand and Gravel Ltd. v. M.N.R., 68 D.T.C. 226, at 229.
54 Although the contracts were standard contracts printed by the finance companies the option price and the time of its exercise were inserted in typewritten form, which indicates that the parties expressly considered this fundamental aspect of their agreement and agreed on the price and the time at which the option would be exercised.
55 $7,300 in the case of the International trucks and $9,703.20 in the case of the Mack trucks.
56 Courts are not empowered to modify the terms of freely negotiated contracts by reference to their perception of the underlying economic reality. See Shell Canada Ltd. v. Canada, [1999] S.C.J. No. 30, at paras. 38-42, online: QL (SCJ) yet to be published. Cf. A.R. Williams Machinery & Supply Company v. Dave Morin, [1933] S.C.R. 570; Chibougamau Lumber Limited v. M.N.R., [1973] C.T.C. 2174.
57 If we consider the fact that the option, the cost of which represented 10 per cent of the purchase price of the property, was to be exercised at a time when the "probable" value of the property would be approximately 50 per cent of the purchase price.
58 For example, there might have been changes in garbage collection methods or in the technology used for this purpose.
59 Cf. Canderel Limited v. The Queen, 98 D.T.C. 6100 at 6106 (S.C.C.) , Harold N. Moore v. The Queen, [1986] 2 C.T.C. 22 (F.C.A.).
60 In particular, paragraph 3(c) and (d).
61 In saying that, I expressly exclude from my reasoning, so as not to be misunderstood, deception, sham, subterfuge or any type of transaction in which the parties conceal the true nature of their agreement for a tax avoidance purpose.
62 Or the amount of the difference between the useful life of the property and the period beyond that life in which the option may be exercised, as indicated by the second assumption in paragraph 3(c) of the Interpretation Bulletin.
63 Or a period "materially less", on the second assumption stated in paragraph 3(c) of the Interpretation Bulletin.
64 Section 16.1 is cited in note 25.
65 18.(1) A lease-option agreement, a hire-purchase agreement or other contract or arrangement for the leasing or hiring of property . . . by which it is agreed that the property may, on the satisfaction of a condition, vest in the lessee . . . shall, for the purpose of calculating the income of the lessee . . . be deemed to be an agreement for the sale of the property and rent shall be deemed to be on account of the price of the property and not for its use . . . R.S.C. 1952, c. 148, s. 18, am. by S.C. 1953-54, c. 57, s. 4 and repealed by S.C. 1963, c. 21, s. 4.
66 This test would indicate a sale under Bulletin IT-233R when the difference is large, but the Act clearly does not adopt this test. Section 13(5.2) is an anti-avoidance measure the effect of which is to make the difference between the cost of exercising the option and the fair market value of the property subject to recapture rather than the less onerous capital gains treatment in the event that the property is later sold.