Date: 20040621
Docket: A-526-03
Citation: 2004 FCA 240
SEXTON J.A.
EVANS J.A.
BETWEEN:
HEWLETT PACKARD (CANADA) LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on May 31, 2004.
Judgment delivered at Ottawa, Ontario, on June 21, 2004.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: SEXTON J.A.
EVANS J.A.
Date: 20040621
Docket: A-526-03
Citation: 2004 FCA 240
CORAM: NOËL J.A.
SEXTON J.A.
EVANS J.A.
BETWEEN:
HEWLETT PACKARD (CANADA) LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1] This is an appeal from a decision of Judge Hershfield of the Tax Court of Canada (2003 DTC 1324) rendered October 16, 2003, confirming the reassessments issued against Hewlett Packard (Canada) Ltd. (HP) which denied in part the capital cost allowance (CCA) claimed with respect to its car fleet for the 1995, 1996 and 1997 taxation years.
Introduction
[2] The issue in this appeal turns on the tax treatment resulting from HP's business practice which is to provide its employees with new cars each year for use in the course of their employment. For that purpose, a fleet of up to 750 cars is purchased from Ford and sold back to Ford annually.
[3] Pursuant to paragraph 20(1)(a) of the Income Tax Act (the Act), a taxpayer may deduct annually a portion of the cost of capital assets acquired by it and used to earn income to the extent permitted by the Income Tax Regulations (the Regulations). Paragraph 1100(1)(c) of the Regulations permits a taxpayer to claim a deduction equal to a stipulated percentage of the undepreciated capital cost (UCC) of property of a prescribed class held by it at the end of each taxation year.
[4] The deduction permitted with respect to automobiles (class 10) is 30%. However, by virtue of an amendment which came into force during the 1980s, newly acquired depreciable assets are subject to the "half year rule". Under that rule, only one half of the CCA otherwise available may be claimed in the year of acquisition, the balance being available in the next.
[5] In order to attenuate the effect of the half year rule and maximize the CCA available to it each year, HP arranged its affairs with Ford's consent so that it would purchase its new fleet of cars immediately prior to the close of its taxation year and sell the old fleet back to Ford at the beginning of the next. This allowed HP to claim CCA on the UCC computed by reference to both the old and the new fleet, albeit spread over two years.
[6] The reassessments in issue in this appeal challenge HP's entitlement to claim CCA with respect to the old fleet. The question to be decided is whether HP can be said to have disposed of the old fleet prior to the end of each taxation year for purposes of the Act, despite the fact that it continued to own it at that time.
The Facts
[7] The facts are set out in great detail in the decision under appeal and give rise to no disagreement. It is sufficient for present purposes to provide a brief summary.
[8] HP's taxation year ends October 31. In October of each year, HP purchased a fleet of new cars from Ford to replace the fleet which had been acquired in October of the prior year. The process of exchanging the cars was initiated and completed within the month of October each year, with the result that the employees would begin using the new cars (and cease using the old ones) prior to October 31.
[9] By agreement, the registration of the change of ownership of the old fleet was effected after October 31, each year. This was done with the intent of preventing Ford from disposing of the old fleet before that time and in order to evidence the parties' understanding that ownership of the old fleet would not revert to Ford prior to the close of HP's taxation year.
[10] Ford would take possession of most of the cars comprised in the old fleet in the weeks and days leading to October 31 of each year. Payment by Ford for the returned cars was effected by way of set off against the amount payable by HP for the new fleet which was due November 15 of each year. The price at which Ford repurchased the old fleet was computed on the basis that the cars had been used by HP during a period of 13 months.
[11] The Tax Court Judge conducted his analysis on the basis that the transactions underlying the car exchange took place in the respective provinces where the employees surrendered possession of the new cars and took possession of the new ones (mainly Ontario and Quebec). GST and provincial sales tax was paid on this basis.
[12] Based on its ownership of the old and the new fleet at the end of the taxation years in issue, HP claimed CCA on the UCC relating to both fleets. [The actual definition of UCC is based on a complicated formula set out in subsection 13(21). The relevant feature for present purposes is that CCA may be claimed with respect to the UCC of a class of property held by the taxpayer at the close of a taxation year.]
[13] The Minister issued reassessments disallowing the CCA claimed with respect to the old fleet, on the ground that the process of exchanging the fleets each year resulted in a change of use of the old fleet prior to the close of the taxation year, thereby giving rise to a deemed disposition of the old fleet pursuant to paragraph 13(7)(c) of the Act:
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13(7) Subject to subsection 70(13), for the purposes of paragraphs 8(1)(j) and 8(1)(p), this section, section 20 and any regulations made for the purpose of paragraph 20(1)(a),
(a) where a taxpayer, having acquired property for the purpose of gaining or producing income, has begun at a later time to use it for some other purpose, the taxpayer shall be deemed to have disposed of it at that later time for proceeds of disposition equal to its fair market value at that time and to have reacquired it immediately thereafter at a cost equal to that fair market value;
... |
13(7) Sous réserve du paragraphe 70(13), les règles suivantes s'appliquent dans le cadre des alinéas 8(1)j) et p), du présent article, de l'article 20 et des dispositions réglementaires prises pour l'application de l'alinéa 20(1)a):
a) le contribuable ayant acquis un bien en vue d'en tirer un revenu et qui commence, à un moment postérieur, à l'utiliser à une autre fin est réputé en avoir disposé à ce moment postérieur pour un produit de disposition égal à sa juste valeur marchande à ce même moment et l'avoir acquis de nouveau immédiatement après à un coût égal à cette juste valeur marchande;
[...] |
[14] The reassessments were confirmed by the Tax Court of Canada, albeit on different grounds, and the present appeal ensued.
Decision Under Appeal
[15] The Tax Court Judge did not accept that the old fleet had been subjected to a change of use, on the ground that it had not been shown that the old fleet had began to be used for "some other purpose" prior to the close of the years in issue as contemplated by paragraph 13(7)(a).
[16] After a lengthy analysis, the Tax Court Judge found that the old fleet remained the property of HP until midnight on October 31 of each of the relevant taxation years pursuant to the private law of the common law provinces.
[17] Although possession of the old fleet passed to Ford on or before October 31 of each year, the cars did not become part of Ford's inventory until November 1st. As to the passage of risk, the Tax Court Judge qualified the evidence as "somewhat muddy" but noted that as a legal matter, risk ultimately lies with the owner.
[18] The Tax Court Judge found that the parties had the genuine intent that title in the old fleet remain with HP throughout the respective taxation years and that their actions, and the terms of the contract, were not inconsistent with that intent. Relying on subsection 18(1) of the Sale of Goods Act of Ontario and the equivalent provisions of the Sale of Goods Act of the other provinces (which provide essentially that title passes when the parties intend it to pass), he held that ownership of the old fleet was in the hands of HP at the close of each year.
[19] He went on to question whether the transfer of ownership under the applicable private law is an adequate basis for determining whether depreciable property has been disposed of under the Act. The Tax Court Judge reasoned that relying on the private law of the provinces, pursuant to which the passage of title is a function of intent, could give rise to abuses.
[20] The Tax Court Judge recognized that a disposition takes place under the Act when there is a change of ownership in accordance with the applicable private law. However, he relied on the open-ended definition of the term "disposition of property" in subsection 13(21) to conclude that a disposition can also take place for purposes of the Act when the seller becomes entitled to proceeds of disposition, even though ownership remains unchanged according to the applicable private law:
|
13(21) In this section,
...
"disposition of property" includes any transaction or event entitling a taxpayer to proceeds of disposition of property;
...
|
13(21) Les définitions qui suivent s'appliquent au présent article.
[...]
« disposition de biens » Sont compris dans la disposition de biens une opération ou un événement donnant droit au contribuable au produit de dispositions de biens.
[...] |
|
"proceeds of disposition" of property includes (a) the sale price of property that has been sold, (b) compensation for property unlawfully taken, (c) compensation for property destroyed and any amount payable under a policy of insurance in respect of loss or destruction of property, (d) compensation for property taken under statutory authority or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given, (e) compensation for property injuriously affected, whether lawfully or unlawfully or under statutory authority or otherwise, (f) compensation for property damaged and any amount payable under a policy of insurance in respect of damage to property, except to the extent that the compensation or amount, as the case may be, has within a reasonable time after the damage been expended on repairing the damage, |
" produit de disposition" Le produit de disposition de biens comprend: a) le prix de vente de biens qui ont été vendus; b) les indemnités pour biens pris illégalement; c) les indemnités afférentes à la destruction de biens et les sommes payables en vertu d'une police d'assurance du fait de la perte ou de la destruction de biens; d) les indemnités afférentes aux biens pris en vertu d'une loi ou le prix de vente de biens vendus à une personne ayant donné un avis de son intention de les prendre en vertu d'une loi; e) les indemnités afférentes aux biens ayant subi un préjudice, légalement ou illégalement, ou en vertu d'une loi ou de toute autre façon; f les indemnités afférentes aux dommages causés aux biens et les sommes payables en vertu d'une police d'assurance au titre des dommages causés à des biens, sauf dans la mesure où ces indemnités ou sommes, selon le |
|
(g) an amount by which the liability of a taxpayer to a mortgagee is reduced as a result of the sale of mortgaged property under a provision of the mortgage, plus any amount received by the taxpayer out of the proceeds of the sale, and (h) any amount included because of section 79 in computing a taxpayer's proceeds of disposition of the property;
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cas, ont, dans un délai raisonnable après que les dommages ont été subis, été dépensées pour la réparation des dommages; g) le montant de la réduction de la dette dont un contribuable est débiteur envers un créancier hypothécaire découlant de la vente du bien hypothéqué en vertu d'une clause du contrat d'hypothèque, plus la partie du produit d'une telle vente reçue par le contribuable; h) les sommes incluses, par l'effet de l'article 79, dans le calcul du produit de disposition de biens pour un contribuable. |
(my emphasis)
[21] The Tax Court Judge said at paragraph 47 of his reasons:
"The effect of the Act, in my view, is that a disposition occurs at the earlier of when determined pursuant to settled commercial law principles and when there is an absolute enforceable entitlement to be paid, ..."
[22] Focussing on this last question, the Tax Court Judge found that HP had an "absolute enforceable entitlement to be paid" for the old fleet on or prior to October 31 of each year (reasons, paragraph 47). He therefore held that HP had disposed of the old fleet prior to the end of each of the three taxation years, despite the fact that it continued to own it at that time. He concluded his reasons by saying (paragraph 49):
I appreciate that it may seem curious that the effect of my decision is that there can be an absolute entitlement to proceeds of sale before a "sale" or a passing of property has occurred. While it may seem curious, it does not in my view evidence any error in reasoning. That the law will recognize the transfer date to be the date the parties intend, does not suggest that the parties cannot have, before that time, a binding enforceable contract to proceed which creates for the vendor an entitlement to proceeds of disposition at that earlier time. In such case, the earlier time is the time that there is a disposition for the purposes of section 13 of the Act.
[23] Having found that ownership in accordance with the applicable private law was not determinative, the Tax Court Judge did not feel the need to decide whether ownership also remained with HP insofar as the transactions governed by the laws of the province of Quebec were concerned.
Alleged Errors in the Decision Under Appeal
[24] Both the appellant and the respondent take issue with the reasons given by the Tax Court Judge in support of his decision. The Crown argues that the Tax Court Judge committed an error in law when he held that no change of use of the old fleet had taken place prior to the end of the relevant taxation years pursuant to paragraph 13(7)(a). According to the Crown, it is the particular purpose of the use to which an asset is put (i.e., gaining and producing income) which determines whether there has been a change of use, and it is clear on the facts of this case that the old fleet was no longer used to earn income during the weeks and days leading up to October 31 of each year.
[25] For its part, HP alleges that the Tax Court Judge erred in law in holding that under subsection 13(21) a taxpayer may have "proceeds of disposition" with respect to property that has yet to be "sold". According to HP, the Tax Court Judge, after having found that ownership of the old fleet remained with HP at the close of each year, was bound to hold that HP was entitled to claim CCA with respect to the old fleet.
Analysis and Decision
[26] The question relating to the change of use can be disposed of fairly quickly. The Tax Court Judge found as a fact that the process of transferring the old fleet back to Ford in exchange for the new fleet amounted to the reasonable recycling of redundant depreciable assets in the ordinary course of business. This finding is not challenged on appeal.
[27] The Tax Court Judge then went on to provide what I consider to be a full answer to the contention of the Crown (paragraph 41):
The [Crown's] main argument is that there has been a change in use of the old fleet once the new fleet has been put in use. As suggested in these Reasons, it is unreasonable in my view to think that an asset being replaced is not still being used in the course of business where it is being held for the purposes of disposal. An asset used in a business that is regularly replaced cannot be said to have its use changed simply because it has ceased being used in the course of its replacement. A part of the business operation is to sell off such "circulating" depreciable assets. Provided that they are not put to any use other than being held for or in the course of resale, it cannot, in my view, be said that they are held for a purpose other than producing income notwithstanding that they are redundant after the replacement is complete. Taking such assets out of use is consistent with, indeed virtually essential to, the required liquidation of the asset. Liquidation of a circulating depreciable asset is consistent with the original income earning purpose for which it was used. There has been no commencement of another use when a redundant asset is held for sale.
[28] I agree with the reasoning of the Tax Court Judge. It seems clear that a change of use pursuant to paragraph 13(7)(a) requires that the asset in issue be used "for some other purpose", and no such other purpose was evidenced in this case.
[29] I now turn to the question whether HP's ownership of the old fleet at the close of the three taxation years in issue entitled it to CCA as claimed.
[30] I note as a preliminary matter that, in order to claim CCA in respect to the old fleet, it was not sufficient that HP retained legal ownership, if beneficial interest had been conveyed to Ford. As will be seen momentarily, the Act is not concerned with bare legal title.
[31] In this respect, it is clear from the record that the parties understood that if HP was to have the right to claim CCA with respect to the old fleet, it had to retain both legal title and beneficial interest until midnight on October 31 of each year. The Tax Court Judge found as a fact that the parties had the genuine intent that HP retain unqualified ownership and as their actions, and the terms of the contract, were not inconsistent with this intent, he gave effect to it. This conclusion has not been challenged on appeal.
[32] Prior to the decision under appeal, it had been thought that ownership of a depreciable asset at year end, as determined by the applicable private law, brought with it the right to claim CCA. The leading case on point is the decision of the Exchequer Court in M.N.R. v. Wardean Drilling Limited, 69 DTC 5194.
[33] The issue in that case was whether the taxpayer was entitled to claim CCA with respect to a rig said to have been acquired shortly before the close of its 1963 taxation year. The Tax Review Board relying on the broad definition of "property" in paragraph 139(1)(ag) of the Act (now subsection 248(1)) had held that, once a binding and enforceable contract had been signed, property was acquired for tax purposes, whether ownership in the property had been transferred or not:
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139(1)(ag) "property" means property of any kindwhatsoever whether real or personal orcorporeal or incorporeal and, withoutrestricting the generality of the foregoing, includes a right of any kind whatsoever, a share or chose in action ... |
139(1)(ag)"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 ... |
(my emphasis)
[34] The decision of the Tax Review Board was reversed on appeal. Cattanach J. approached the matter as follows (page 5197):
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. (my emphasis)
[35] He went on to say (page 5197):
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. (emphasis and double emphasis are mine)
[36] He then focussed his analysis on the Sale of Goods Act, R.S.A., 1955 c. 295, Alberta being the situs of the contract, and formulated what has now become the classic test of acquisition (page 5198):
... 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.
[37] Applying the relevant provisions of the Sale of Goods Act of Alberta, Cattanach J. went on to hold that property in the rig had not passed (page 5198):
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 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.
[38] Section 20, as it then read, provided that property in specific or ascertained goods is transferred at such time as the parties intend. As noted by the Tax Court Judge in this case, the same rule continues to apply throughout the common law provinces (see Fridman, Sale of Goods in Canada, 4th ed., (Scarborough: Carswell, 1995), at 72, commenting on s. 18 of the Ontario Sale of Goods Act and the corresponding sections in the legislation of other provinces: 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.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.M. 1987, c. S-10, 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)).
[39] Interestingly, the language and reasoning used by Cattanach J. in developing the classic test is essentially the same as that used by the Supreme Court of Alberta in Hendrickson v. Mid-City Motors, [1951] 3 D.L.R. 276, which held that a conditional sale agreement gave rise to a sale under theSale of Goods Act of Alberta (section 21), even though title remained with the seller as security. The Court said at page 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.
[40] It seems clear that the classic test set out by Cattanach J. in Wardean Drilling is no more than a statement of the rule under which ownership to property passes pursuant to the Sale of Goods Act of Alberta (i.e., property passes when legal title passes, or if legal title is reserved, when beneficial ownership is conveyed). That Cattanach J. disposed of the issue by applying the Sale of Goods Act of Alberta is not surprising as the ratio of his decision is that only a right "in the property itself" can allow taxpayers to claim CCA (Wardean, page 173) and such a right cannot be acquired otherwise than under the applicable private law, in that instance the law of Alberta.
[41] Wardean Drilling has been consistently followed with respect to transactions governed by the laws of the common law provinces (see for instance The Queen v. Henuset Bros. Ltd. No. 1, 77 DTC 5169 (F.C.); Kirch Construction Ltd. v. The Queen, 88 DTC 6503 (F.C.); Borstad Welding Supplies v. The Queen, 93 DTC 5457 (F.C.); The Queen v. Browning Harvey Limited, [1990] 1 C.T.C. 161 (F.C.)). Indeed, since 1972, the Act has recognized the distinction between legal and beneficial ownership, and expressly provides that a disposition of property can only occur when there is a change in beneficial ownership:
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54 "disposition" of any property, except as expressly otherwise provided, includes
(a) any transaction or event entitling a taxpayer to proceeds of disposition of property,
...
but, for greater certainty, does not include
...
(e) 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, ... |
54 "disposition de biens" Sont compris dans la disposition de biens, sauf dispositions contraires expresses :
(a) toute opération ou tout événement donnant droit au contribuable au produit de la disposition de biens,
[...]
il demeure toutefois entendu que le terme ne vise pas :
[...]
e) un transfert de biens à la suite duquel il y a un changement dans la propriété légale du bien sans changement dans la propriété effective de ce bien, [...] |
[42] Although this provision is found in subdivision C dealing with capital gains, it is also applied with respect to CCA and specifically paragraph 13(21)(c), the provision with which we are concerned. The Minister takes this view in Interpretation Bulletin IT-170R which provides:
4. Subparagraph 54(c)(v) [now 54] 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 (unless the contrary is expressly stated). 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.
[43] In my view, the fact that the rule in section 54 is stated "for greater certainty" makes it clear that, unless otherwise provided, the Act follows the common law, in that there is no "disposition" unless there is a change in the beneficial ownership of the subject property (see as to this Douglas S. Ewens, "When is a 'Disposition'", Report of Proceedings of the Twenty Sixth Tax Conference, 1974 at page 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)).
[44] The Tax Court Judge's reasons acknowledge that a "disposition of property" within the meaning of subsection 13(21) takes place when property is sold in accordance with the laws of the province where the transaction takes place. He must also be taken to acknowledge the reverse side of that coin, that is, property is acquired when ownership passes pursuant to these laws (Wardean Drilling, supra).
[45] However, relying on the open-ended definition of the term "disposition of property" in subsection 13(21), the Tax Court Judge held that property can also be disposed of when entitlement to the proceeds of disposition becomes absolute, even though ownership has not yet passed. The novel rule that he adopted is that a disposition takes place either when ownership in the property is transferred to the purchaser, or when the entitlement to the consideration becomes absolute (Reasons, paragraph 47), whichever happens first.
[46] I have difficulty conceiving how, on the facts of this case, HP can be said to have had an absolute right to be paid on October 31 of each year, if ownership of the old fleet remained in the hands of HP at that time. For instance, what if a car in the old fleet was destroyed by an act of God towards the close of the day on October 31 of a given year? Since, risk is an incident of title under the provincial sale of goods statutes, it would seem to follow that HP would bear the loss. After analysing the evidence, the Tax Court Judge was unable to conclude that risk would lie elsewhere. In the circumstances, I fail to see how HP's entitlement to proceeds for the old fleet became absolute before title passed.
[47] But even if HP could be said to have somehow become unconditionally entitled to proceeds of disposition before title passed, I do not believe that the rule proposed by the Tax Court Judge can be justified as a pure matter of statutory construction.
[48] The Tax Court Judge found that, in providing an inclusive definition of "disposition of property", Parliament intended an "express directive" not to leave the timing of a disposition to the intention of the parties (reasons, paragraph 47). The fact that "proceeds of disposition" of property is defined in respect of a sale as "the sale price of property that has been sold" (my emphasis) is not an obstacle because the definition of "disposition of property" does not refer to the "sold date" (reasons, paragraph 48).
[49] With respect, I cannot detect the "express directive" on which the Tax Court Judge's interpretation rests. Parliament defined the term "disposition of property" in an inclusive manner with the obvious intent of leaving open the class of events or transactions susceptible of giving rise to a disposition. However, with respect to a sale transaction, Parliament specified in paragraph 13(21)(a) the entitlement which gives rise to a disposition.
[50] In the context of the Act, the words used in defining this entitlement ("sale price of property that has been sold") are presumed to bear their legal meaning (Will-Kare Paving Contracting Limited v. The Queen, 2000 DTC 6467 at paragraph 33), and having regard to the aforementioned definition in section 54, there can be not doubt that Parliament adopted the concept of a sale as it is known to law.
[51] In so doing, Parliament ensured that the time of disposition of property corresponds with the time of its acquisition, a result that is not only desirable, but essential to the proper operation of the Act. I note in this regard that, according to the analysis of the Tax Court Judge, no one would own the old fleet for tax purposes on October 31, since HP would have disposed of it as of that date and Ford would not have acquired it until the next.
[52] Before leaving the matter, I think it useful to make two further remarks. The Tax Court Judge devised his novel rule because he was preoccupied by the avoidance opportunities which could result from the application of the legal notion of a sale. He reasoned that reliance on the intent of the parties as the governing criterion for ascertaining when a transfer of ownership takes place could give rise to connivance and abuse.
[53] However, it would seem that if the parties to a contract of sale can by mutual consent decide when title passes, they can also by mutual consent decide when the proceeds of disposition become payable. I fail to see how the rule proposed by the Tax Court Judge addresses the concern that he expressed.
[54] I also have difficulty identifying the abuse which the Tax Court Judge was seeking to counter. He appeared to be of the view that HP's fleet replacement program resulted in "a doubling up of its CCA claim in the first year it was employed" (reasons, paragraph 6). I do not believe that this accurately reflects what took place.
[55] HP claimed CCA on the old fleet during that first year because it used it throughout the year. The new fleet on the other hand was acquired and put to a qualifying use before year end (see subsection 13(26)) so that its cost also formed part of the UCC at the conclusion of the year of acquisition.
[56] When regard is had to the half year rule, it is apparent that Parliament was satisfied that CCA could be claimed on the basis of 50% of the cost of newly acquired assets in the year of acquisition, so long as these assets were put to a qualified use in the year. That is precisely what happened here. I can detect no "doubling up" in the result achieved in this instance.
[57] In the end, the respondent correctly asserts that the state of the law remains precisely as it was stated by the Exchequer Court some 40 years ago in Victory Hotels Ltd. v. M.N.R., 62 DTC 1378 (page 1386):
We have seen that s. 20(5)(b) of the Income Tax Act [now 13(21)] states that "'disposition of property' includes any transaction or event entitling a taxpayer to proceeds of disposition of property" and 20(5)(c) [now 13(21)(a)] states that "'proceeds of disposition' of property include (i) the sale price of property that has been sold,". These sections do not define but merely include as a disposition of property a transaction (a sale for instance) entitling a taxpayer to proceeds of disposition of property, i.e. to the sale price of the property sold. It would indeed appear that the meaning of "disposition of property" has been somewhat restricted by the Act when a disposal of property takes place by means of a sale; in such a case there is a disposal of property as soon as a taxpayer is entitled to the sale price of the property sold. (my emphasis)
[58] This leaves us with the car exchanges governed by the law of the province of Quebec on which the Tax Court Judge did not pronounce. He did, however, hint that HP may not have remained the owner of the old fleet when regard is had to article 1708 of the Civil Code of Quebec (paragraph 46, note 30):
The exception is Quebec which provides in article 1708 of Title Two, Chapter I, Section I of the Civil Code of Quebec that a sale is a contract by which the seller transfers ownership to the buyer for a price in money which the latter obligates himself to pay. ... I was left on my own with the task of determining whether Quebec law required different considerations. As it turns out my decision does not turn on provincial law but it is interesting to note that while I suspect research would reveal that intentions do matter in determining when a sale occurs under Quebec law, the Code seems to put emphasis on entitlement to be paid which is where the Act places it.
[59] Although the civil and the common law notions of ownership stem from different roots, there is one basic rule that is common to both systems: ownership passes when the parties intend it to pass.
[60] Under the Civil Code of Quebec, the determinative effect of contractual intent is derived from article 1385, which provides that a contract is formed by the sole exchange of the consent of the contracting parties. This implies that the parties to a contract are free to choose the conditions and terms which will govern their relationship (including the time when ownership to property sold passes), subject only to the limits imposed by public order (see Les Obligations, 5th edition, Jean Louis Baudoin, les Éditions Yvon Blais Inc., page 99, paragraph 75). In speaking of the price to be paid for property sold, Article 1708 merely confirms the corresponding obligation of the purchaser.
[61] Applying the relevant provisions of the Civil Code of Quebec in light of the findings made by the Tax Court Judge, it seems clear that the old fleet also remained the property of HP on October 31 of each year under Quebec law.
[62] That being said, I am bound to point out that, even if the application of the Civil Code of Quebec gave rise to a result different from that obtained in the common law provinces, this Court has held that, for the sake of uniformity, the common law approach should prevail even in Quebec (Construction Bérou Inc. v. The Queen, 99 DTC 5869 per Létourneau J.A. at paragraph 14, per Desjardins J.A. at paragraphs 6 and 14). It is common ground that, pursuant to this approach, the old fleet remained the property of HP at the close of each year.
[63] For these reasons, I would allow the appeal, set aside the decision of the Tax Court Judge and refer the reassessments back to the Minister for reconsideration and reassessment on the basis that HP was entitled to CCA with respect to its class 10 property as claimed in its tax returns for the years in issue. HP will be entitled to its costs here and before the Tax Court.
"Marc Noël"
J.A.
"I agree.
J. Edgar Sexton, J.A."
"I agree.
John M. Evans, J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-526-03
STYLE OF CAUSE: HEWLETT PACKARD (CANADA) LTD. and
HER MAJESTY THE QUEEN
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: MAY 31, 2004
REASONS FOR ORDER: NOEL J.A.
CONCURRED IN BY: SEXTON J.A.
EVANS J.A.
DATED: JUNE 21, 2004
APPEARANCES:
Mr. Richard B. Thomas FOR THE APPELLANT
Mr. Michael F. Friedman
Mr. J.S. Gill FOR THE RESPONDENT
Ms. Carol Calabrese
SOLICITORS OF RECORD:
Richard B. Thomas FOR THE APPELLANT
Michael F. Friedman
McMillian Binch LLP
Toronto, ON M5J 2T3
Mr. Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada
Ottawa, ON