Date: 19971215
Docket: 96-2388-IT-I
BETWEEN:
MARIA CROPPER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The appellant, Maria Cropper, appeals from an assessment of tax in respect of her 1993 taxation year. The issue arising in this appeal is whether certain equipment is qualified small-business property within the meaning of subsection 127(9) of the Income Tax Act ("Act") and thus a property eligible for the investment tax credit provided for in subsection 127(5) of the Act.
[2] The appellant resides in Naicam, Saskatchewan, and is married to Allan Cropper. Mr. Cropper and Mrs. Cropper each own 50 percent of the shares of Cropper Motors Inc., through individual holding companies. Cropper Motors Inc. carries on the business of selling cars, farm implements and recreational vehicles. Mr. Cropper also owns substantially all the shares of T & A Farms Ltd. This company carries on the business of farming and in 1993 farmed about 3500 acres; it was, and is, managed by Mr. Cropper’s brother. Mr. Cropper keeps in touch with his brother by office radio. The farmland and the site of the business carried on by Cropper Motors Inc. are contiguous.
[3] A purchase agreement entitled Contract for the Sale of a New Farm Implement was executed between Cropper Motors Inc. and Allan and Maria Cropper on December 31, 1993 for the purchase and sale of various equipment including a 1993 New Holland TR96 combine and a 1993 971 New Holland header and a 1993 Rake-up pickup. This appeal deals specifically with the sale of the latter equipment (which I will refer to as the "Combine") at a cost of $121,146.00.
[4] By a document entitled “New Farm Equipment Lease” which was “effective December 31, 1993”, Mr. and Mrs. Cropper leased the Combine to T & A Farms Ltd. The lease was signed by Allan Cropper and Maria Cropper, in their respective capacities of lessors, and by Allan Cropper on behalf of T & A Farms Ltd. The lease provided that T & A Farms Ltd. pay rent to the lessors on an amount agreed to by the parties, according to the fair market value utilisation of the farm equipment, and a reasonable stand-by charge for having the machines available for use. (The lease did not provide for a formula or other method or means to determine “fair market value utilisation” and a “reasonable” stand-by charge.) It also provided that T & A Farms Ltd. would be responsible for the operating costs. The lease also provided that:
This lease can be cancelled at any time with the consent of both the Lessor and Lessee giving notice in writing.
This lease was essential for the appellant to fulfil the statutory requirements of subsection 127(9) of the Act since, to claim an investment tax credit, the qualified small business property must be acquired by a taxpayer to be leased to a person with whom the taxpayer does not deal at arm’s length.
[5] According to Mr. Cropper the farm required a new Combine and the transaction was so structured so as to obtain the investment tax credit.
[6] Once T & A Farms Ltd. leased the Combine, Mr. Cropper said, his brother and a hired man “spent about a week” adjusting the Combine for a “header” to be attached to it. There was “lots of trial and error”. Mr. Cropper intended to use the Combine for harvest. He explained that the Combine was acquired for the purposes of farming and that the majority of the time the Combine was operated on the farm to prepare the Combine for the harvest and for experimental purposes. Mr. Cropper estimated that T & A Farms Ltd. spent nine hours making various adjustments and verifying if the adjustments were satisfactory. The manufacturer of the Combine, Ford Motor Company, may have tested the Combine for another two hours at its assembly plant.
[7] On four different occasions during the months of July and August 1994, Cropper Motors Inc. advertised for sale under the heading "Used Combines" a "new 93 TR96, Rake-Up PU, chop" in The Western Producer, a newspaper distributed in Western Canada. Mr. Cropper confirmed that the Combine in issue was the same combine advertised for sale. Mr. Cropper testified that “in our business, anything we have is for sale. If I give my wife a car one day ... [I] could sell [it] the next day”. He stated he, or rather Cropper Motors Inc., does the same with farm equipment. He declared he could “switch” a machine on the field of the farm if a customer of Cropper Motors Inc. wanted to buy it.
[8] In fact, on August 25, 1994, after local area farmers, Kent Baxter and Barry Baxter, offered to purchase the Combine Cropper Motors Inc. repurchased the Combine from the appellant and her spouse at the original sale price of $121,146.00. The contract of sale was made between Allan Cropper only and Cropper Motors Inc.; the appellant's name does not appear on the contract for sale (Exhibit A-5). A cheque in the amount of $121,146.00 dated “8/26/94” drawn from the account of Cropper Motors Inc. at the Canadian Imperial Bank of Commerce is made out solely to Allan Cropper (Exhibit R-3).
[9] On August 29, 1994, the Combine was sold by Cropper Motors Inc. to Kent and Barry Baxter for $130,000.00. Evidence was led at trial by the appellant that notwithstanding the sales contrat between Cropper Motors Inc. and the Baxters was in the form used for the sale of new farm equipment, the Combine had been used at the time of sale and was sold as used equipment. Mr. Cropper stated the machine was “used to adapt the header” although no grain had run through the Combine. The Baxters were so advised, stated Mr. James Brady, the salesman who sold the Combine to the Baxters. Mr. Cropper stated that the Combine was identified on the contract by a code reference to used Combines. Also, the financing of the purchase was at a rate of interest for used equipment. This evidence was confirmed by Mr. James Brady, the salesman who sold the Combine to the Baxters.
[10] Counsel for the appellant informed the Court that both Messrs. Baxter were unavailable to attend at Court since the hearing of this appeal was being held during the busy harvest season. Moreover, they lived 70 to 80 miles away from Saskatoon, where the hearing of this appeal was held. Mr. Brent Ball, an officer of Revenue Canada, testified that in the course of his investigation he met with Messrs. Baxter who informed him that the Combine looked new and that they thought they were buying a new machine. In fact, he said, one of the brothers said he first saw the Combine at Cropper Motors Inc.
[11] Mr. Brady attended at the Baxter farm two days before trial and produced a document, dated September 24, 1997, executed by the Baxters, in the following form, inter alia:
When we, Barry Baxter & Kent Baxter, of Codette, Saskatchewan, purchased a New Holland TR96, serial # 554548, from Cropper Motors Inc., of Naicam, Saskatchewan on August 29, 1994, we were told that this unit had been sold to Allan & Mary Cropper on December 31, 1993, and that we would be buying this combine as a used unit.
...
There was approximately 11 hrs on the combine when we took delivery.
...
[12] The appellant's position is that it is not relevant whether or not the Combine was actually used for harvesting. Rather, it is the intention of using it in farming operations that is important for the purposes of the Act. Also, the experiments performed with the Combine was farming.
[13] The respondent's submissions was to the effect that if the equipment was not used in the field, it could not be said that it was used for the purposes of farming.
Analysis
[14] Subsection 127(5) of the Act provides that a taxpayer may deduct from his or her tax payable amounts equal to the total of his or her investment tax credits. "Investment tax credit" is defined in subsection 127(9) as meaning the amount equal to
(a) the total of all amounts each of which is the specified percentage of
(i) the capital cost to the taxpayer of approved project property, certified property, qualified construction equipment, qualified property, qualified small-business property or qualified transportation equipment acquired by the taxpayer in the year,
(ii) [...][1]
"Qualified small-business property" is defined in subsection 127(9) of the Act as follows for the 1993 taxation year[2]:
"qualified small-business property" means property, acquired by a taxpayer who was an eligible taxpayer at the time the property was acquired, that, if this subsection were read without reference to subsection (11.2), would be
...
(c) qualified property of the taxpayer if the definition "qualified property" were read without reference to paragraphs (a) and (d) of it and if the reference in paragraph (b) of it to "after June 23, 1975" were read as a reference to "after December 2, 1992 and before 1994",
...
and where the property was acquired by the taxpayer to be leased to a person with whom the taxpayer does not deal at arm's length and the property is used by the person in Canada primarily for the purposes described in any of the definitions "qualified construction equipment", "qualified property" and "qualified transportation equipment", for the purposes of this subsection, the taxpayer shall be deemed to have acquired the property for that use;
“Qualified property” is defined in subsection 127(9) of the Act. The relevant portions are as follows:
"qualified property" of a taxpayer means property (other than an approved project property or a certified property) that is
...
(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,
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
(c) to be used by the taxpayer in Canada primarily for the purpose of
...
(x) farming or fishing,
..., or
[15] There is no need to analyse in great detail whether the appellant meets all of the criteria to qualify for the investment tax credit. As I see it the issue in this appeal is whether the Combine was used by T & A Farms Ltd. “primarily for the purpose of ... farming".
[16] There are a number of facts in this case which lead me to find that the Combine was not used by the appellant primarily for the purpose of farming. Mr. Cropper dealt with Cropper Motors Inc., T & A Farms Ltd. and any property he owned jointly with the appellant in any manner he wished without interference of any other director of either corporation or the appellant. Mr. Cropper could have caused the sale of the Combine to him and his appellant to be rescinded at any time Cropper Motors Inc. found a purchaser for the Combine. This was his practice. Anything his family or T & A Farms Ltd. had acquired from Cropper Motors Inc. by loan, lease or sale, was, as far as he was concerned, still available for sale by Cropper Motors Inc. to an arm’s length third party. No lease or sale to a non-arm’s length person stood in his way. The transfer back of the Combine from Mr. Cropper or the appellant to Cropper Motors Inc. was not an unusual occurrence. Indeed, Cropper Motors Inc. was advertising the Combine for sale as "new" at the time the Combine was leased by Mr. and Mrs. Cropper to T & A Farms Ltd.
[17] It may well be that T & A Farms Ltd. acquired the Combine for farming. It may well be that the work carried on to adapt the Combine to the header was work that one may consider to be farming. However, at all relevant times, the appellant, T & A Farms Ltd., Mr. Cropper and Cropper Motors Inc. all knew that if a prospective customer of Cropper Motors Inc. wished to purchase the Combine, the Combine would be taken from the farm and made available to Cropper Motors Inc. for sale and delivery to the customer. The Combine, therefore, could not be said to have been used by T & A Farms Ltd. primarily for the purpose of farming. The directors of T & A Farms Ltd. knew that when the corporation leased the Combine the lease may be cancelled at any time for the return to Cropper Motors Inc. and it may never be used for farming by T & A Farms Ltd. T & A Farms Ltd. did not have “first call” on the Combine; its use by T & A Farms Ltd. was subject to the whim of Mr. Cropper. T & A Farms Ltd. did not use the property primarily for farming. If it used the Combine, it used the property primarily for purposes other than farming.
[18] The appeal is therefore dismissed.
Signed at Ottawa, Canada this 15th day of December 1997.
"Gerald J. Rip"
J.T.C.C.
[1] This portion of the definition of "investment tax credit" was amended by S.C. 1996, c. 21, s. 30(12) applicable to taxation years beginning after 1995.
[2] The definition of "qualified small-business property" was added by S.C. 1994, c. 8, s. 15(9), applicable to property acquired after December 2, 1992. It was subsequently repealed by S.C. 1996, c. 21, s. 30(9), applicable to taxation years beginning after 1995.