Federal Court of Appeal Decisions

     A-497-94

CORAM:      MARCEAU J.A.

     LINDEN J.A.

     ROBERTSON J.A.

B E T W E E N :

     HER MAJESTY THE QUEEN

     Appellant

     - and -

     ROBERT J. MCMYNN

     Respondent

     ----------------------------------------------

     A-498-94

BETWEEN

     HER MAJESTY THE QUEEN

     Appellant

    

     - and -

     JOANNE MCMYNN

     Respondent

    

Heard at Vancouver on Wednesday, May 21, 1997.

Judgment rendered at Ottawa on Friday, May 30, 1997.

REASONS FOR JUDGMENT BY:      LINDEN J.A.

CONCURRED IN BY      MARCEAU J.A.

     ROBERTSON J.A.

     A-497-94

CORAM:      MARCEAU J.A.

     LINDEN J.A.

     ROBERTSON J.A.

B E T W E E N :

     HER MAJESTY THE QUEEN

     Appellant

     - and -

     ROBERT J. MCMYNN

     Respondent

     ----------------------------------------------

     A-498-94

BETWEEN

     HER MAJESTY THE QUEEN

     Appellant

    

     - and -

     JOANNE MCMYNN

     Respondent

     REASONS FOR JUDGMENT

LINDEN J.A.

     This is an appeal from a decision of the Tax Court which held that the respondents, who were in the business of leasing buses in their personal capacity, were entitled to deductions in the years 1985, 1986, 1987 and 1988 for investment tax credits pursuant to subsection 127(5) of the Income Tax Act (the "Act") and refundable tax investment credits pursuant to subsection 127.l(2) as a result of their purchase of new buses between 1985 and 1989, inclusive. The Minister of National Revenue had disallowed the investment tax credits and refundable investment tax credits on the basis that the buses which were purchased by the respondents and then leased to others were not "qualified transportation equipment" within the meaning of subsection 127(9) of the Act.

     Subsection 127(9) of the Act defined "qualified transportation equipment" as follows:

"qualified transportation equipment" of a taxpayer means prescribed equipment acquired by him after November 16, 1978 and before 1989 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

(a) 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 or carrying on a business in Canada other than a business

(i) the income from which is exempt from income tax by virtue of any provision of this Act, or

(ii) the income from which is not included in his income or, in the case of a non-resident person, his taxable income earned in Canada, or

(b) to be leased by the taxpayer, if

(i) the equipment is leased by the taxpayer in the ordinary course of carrying on business in Canada, the income from which is other than income referred to in subparagraph (a)(i) or (ii), to a lessee who can reasonably be expected to use the equipment principally for the purposes and under the circumstances referred to in paragraph (a), and

(ii) the taxpayer is a corporation whose principal business is a business described in subparagraph (d)(i) of the definition of "qualified property" or is a taxpayer whose principal business is passenger, property or passenger and property transport.

     It was agreed between the parties that the buses acquired by the respondents are "prescribed equipment" as defined. The issue in dispute, therefore, is whether the respondents have used the buses "principally for the purpose of transporting passengers...in Canada...in the ordinary course of carrying on a business in Canada"...pursuant to paragraph 127(9)(a) or whether they can be treated as a "corporation...whose principal business is passenger...transport" pursuant to paragraph 127(9)(b).

     The appellant, Robert H. McMynn, had worked as a bus driver for a company which decided to privatize. He started his own corporation called ISL, began purchasing buses personally with his wife, Joanne T. McMynn, and leasing the buses to his own company, ISL. The business grew and more buses were purchased over the years, which were rented to ISL and others -- including large bus lines, smaller bus companies, hockey teams and tour operators -- as needed by them. The appellant husband eventually sold his interest in ISL, but continued, along with his wife, to invest in buses which he personally leased to others. The business prospered. Mrs. McMynn was found to be active in the business by the Tax Court Judge. He also found that Mr. McMynn was aware of the investment tax credit in issue in this case and "factored that into formulating the overall lower rental rates".

     Based on these facts, which I have described only briefly, the Tax Court Judge reversed the Minister's reassessment and found that the taxpayers were entitled to rely on the incentive provisions. In my view, this was an error of law and the appeal must be allowed.

     Utilizing the "words-in-total-context" approach, the taxpayers do not fall within the language or the purpose of the provisions of section 127 of the Act. They do not fall within paragraph 127(9)(a) because the buses were not used by them "principally for the purpose of transporting passengers...in the ordinary course of carrying on a business in Canada..." Rather, they were engaged in the business of providing the means whereby others could engage in transporting passengers in the ordinary course of their business. The argument of the respondents to the effect that they need not actually transport passengers physically is not persuasive. I am of the view that they do.

     The decision of this Court in Lor-Wes Contracting Ltd. v. The Queen¹, which was relied on by the Tax Court Judge, is distinguishable from this situation. There it was held that a subcontractor who built logging roads was entitled to a tax credit on the basis of a similar provision on the basis that it was engaged in logging. Here the taxpayer was not engaged in transporting passengers; it was engaged in renting buses to others who were engaged in transporting passengers.

     The French version of the provision makes this interpretation crystal clear. It indicates as follows:

...

(a) qu'il compte utiliser principalement pour transporter des voyageurs,...

In the French version, therefore, as in the English version, the purport of the words used by Parliament in this paragraph requires that the equipment be used by the taxpayer himself to transport travellers in order to claim the benefit of the incentive.

     The taxpayers similarly do not come within subparagraph 127(9)(b)(ii) as lessors of the equipment, for they are not operating as a corporation, as clearly required by the wording of the provision. It was not disputed that the taxpayers carried on their business in their personal capacities, not corporate form. There is no reason to think that these particular words were used by accident; they were clearly meant to limit the tax incentive only to corporations which leased equipment, not individuals who did so. Parliament enacted these provisions in a certain form to benefit taxpayers who complied with the particular wording, not to favour all of those taxpayers occupied in some aspect of the transportation industry. Mr. Justice Sobier correctly expressed the intention of Parliament in Asa (Y.) v. M.N.R.² , where, in a similar context, he wrote:

There was a clear intention to differentiate between a taxpayer who uses the equipment and one who leases the equipment to another who uses it in turn. Those two taxpayers both own the equipment but in the case of the taxpayer who leases the equipment, the lessor must be a corporation. That is clear.

This style of wording, which limits the availability of the incentive to those who carry on business as a corporation, is utilized elsewhere in the Act. For example, "qualified construction equipment" is also defined so as to include those who either use the equipment "principally for the purpose of construction" or who, as corporations, lease equipment to those whose principal business is construction. Hence, it is obvious that restricting to lessors who are corporations the availability of the incentive was deliberately done. The reason for this wording was to ensure that taxpayers would deduct the investment tax credit against the source generating the income, thereby preventing the use of the tax credit as a tax shelter. The drafters sought to prevent individuals from taking advantage of the incentive provisions to shelter other income.

     The use of the Budget paper was not helpful in this case, because the words used in it were more general that those employed in the legislation itself. There is no ambiguity in the meaning of the words used in the Act so as to invite reliance on the Budget paper.³

     In addition, the taxpayers do not fall within the language used in the latter part of subparagraph 127(9)(b)(ii) because the taxpayer's principal business is not "passenger...transport". These words are very close to the language used in paragraph 127(9)(a). Hence, in my view, the meaning of these words is the same as those used in paragraph 127(9)(a). Therefore, the taxpayers in this case are not engaged in "passenger...transport." It is their customers who are engaged in "passenger transport". The taxpayers facilitate that enterprise by renting buses to their customers who then use them in passenger transport, so they do not qualify for the incentive.

     Once again, the French version clinches this interpretation of the words used in paragraph 127(9)(b):

(b) qu'il compte louer

...

(ii) que le contribuable soit une corporation dont l'enterprise principal...consiste a transporter des voyageurs...

Clearly, based on the French version (as well as the English one), to obtain the benefit of the incentive, where the buses are rented, the taxpayer must be a corporation and its principal business must be to transport travellers. Thus, the taxpayers do not come within the French or English version of the provision.

     Nor was I persuaded to alter my view by the respondents' argument based on subparagraph 127(9)(d)(i) of the definition of "qualified property".

     In my view, therefore, the appeal should be allowed with costs. The decision of the Tax Court Judge should be set aside and the reassessment of the Minister of National Revenue for the years 1985, 1986, 1987 and 1988 should be affirmed.

                         "A.M. Linden"

                     J.A.

"I agree

Louis Marceau J.A."

"I agree

J.T. Robertson J.A."

     IN THE FEDERAL COURT OF APPEAL

     A-497-94

B E T W E E N :

     HER MAJESTY THE QUEEN

     Appellant

     - and -

     ROBERT J. MCMYNN

     Respondent

     ----------------------------------------------

     A-498-94

BETWEEN

     HER MAJESTY THE QUEEN

     Appellant

     - and -

     JOANNE MCMYNN

     Respondent

    

     REASONS FOR JUDGMENT

__________________

¹      (1985), D.T.C. 5310.

²      (1991), 9l D.T.C. l, at p.8. See also Labrador Offshore Shipping Company Limited v. The Queen (1990), 90 D.T.C. 6096 at 6099-6100).

³      See Fibreco Pulp Inc. v. The Queen (1995), 95 D.T.C. 5423 (F.C.A.); British Columbia Telephone Co. v. The Queen (1992), 92 D.T.C. 6129 (F.C.A.)