Tax Court of Canada Judgments

Date: 20000203

Docket: 97-2864-IT-G

BETWEEN:

GENERAL MOTORS ACCEPTANCE

CORPORATION OF CANADA, LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

INTRODUCTION

[1] General Motors Acceptance Corporation of Canada, Limited ("GMAC") appeals income tax assessments for taxation years 1985 to 1992, inclusive. The Minister of National Revenue ("Minister") added to GMAC's income amounts it received from General Motors of Canada Limited ("GMCL") purportedly as compensation for participating in GMCL sponsored low interest financing programs to promote the retail sales of motor vehicles manufactured by GMCL and its parent, General Motors Corporation, a Delaware corporation, and related corporations.

[2] At all relevant times GMAC financed a significant portion of the retail instalment sales of new General Motors vehicles by General Motors franchise dealers. GMAC is related to GMCL. GMAC acquires conditional sale contracts entered into by GMCL franchised dealers and purchasers of motor vehicles whereby the particular purchaser agrees to pay the purchase price to the dealer in instalment payments. GMAC purchases the conditional sale contracts from the dealer for value, usually the principal or face amount of the contract, provided the contract bears a rate of interest acceptable to GMAC; the purchaser, of course, then makes instalment payments to GMAC.

[3] As part of the sales promotion programs leading to the assessments in issue, General Motors dealers advertised to potential customers of General Motors vehicles the availability of financing their purchases through GMAC at "below market" interest rates.[1] GMCL incurred the cost of the programs, referred to individually as an "incentive financing program" or "rate support program".

[4] Immediately before the start of a rate support program, GMCL would inform its dealers by way of letter (sometimes referred to as a "Home Office Letter") of a program, describing what motor vehicles would be eligible for the program, the term of the program and, amongst other things, the below market interest rate.

[5] GMAC was not willing to purchase a conditional sale contract for its face or principal amount when the contract had an interest rate that was less than the rate of interest acceptable to GMAC. GMAC was prepared to pay each dealer under the program only an amount that is based on the low rate of interest of the contract; it would "discount" the principal amount of the contract. According to the appellant, it paid the difference between the reduced or discounted price of the contract and the principal amount of the contract to the dealer on behalf of GMCL and was reimbursed by GMCL. (The difference is referred to as a "rate support amount".) This is the basis of the appellant's appeal: GMAC did not receive any rate support amount for its benefit, it was GMCL's agent or conduit.

[6] With respect to the rate support programs before 1989, GMAC paid the aggregate amount to the dealer and GMCL reimbursed GMAC for the rate support amounts it paid for contracts in any given period. (This is sometimes referred to as the "one-cheque" system.) From mid 1989, GMAC issued a cheque for the rate support amount to the dealer out of GMCL's bank account and paid the balance of the price of the contract to the dealer out of its own account. (This is sometimes referred to as the "two-cheque" system.)

[7] Revenue Canada assessed GMAC amounts equal to the aggregate rate support amounts received in each taxation year from GMCL as income from its business under section 9 of the Income Tax Act ("Act") in the particular year as compensation received by GMAC for providing low rate financing. In other words, GMCL compensated GMAC for acquiring the conditional sale contracts for their principal amounts when in fact market conditions dictated GMAC should pay less.

[8] The respondent also argues that the payments by GMCL were interest or on account of or in lieu of payment of, or in satisfaction of, interest and are required to be included in the appellant's income for the taxation year in which they were made in accordance with paragraph 12(1)(c) of the Act. The respondent claims as well that the payments were received by GMAC in the year from GMCL as inducements for providing the low rate financing and are therefore to be included in the appellant's income from a business pursuant to paragraph 12(1)(x).

[9] GMAC opposes the assessments since, in its view, it had no entitlement to the rate support amounts. GMAC acted as agent or conduit of GMCL when it issued cheques to GMCL dealers out of GMCL's bank account or, in the earlier years, when it made payments to the dealers on behalf of GMCL and was reimbursed. The appellant submits that the amounts equal to the rate support amounts ought properly be included in computing its income over the term of the conditional sale contracts to which they relate as payments are made by the retail purchasers.

[10] If I find that the rate support amounts are to be included in GMAC's income in the year they were made by GMCL, the appellant argues that the conditional sale contracts it purchased from the dealers were part of its inventory and the cost amount of the contracts is relevant to its calculation of income. Therefore, pursuant to subsection 10(1) of the Act, GMAC is required to value the contracts at the lower of their cost or fair market value. GMAC should therefore be permitted to "write down" the value of the contracts to their fair market value. There is no evidence before me that the conditional sale contracts were inventory to GMAC at any time. I agree with the respondent that there is no basis to claim a write down of the conditional sale contracts.

FACTS

Preliminary Facts

[11] Before the mid 1970s General Motors Corporation, Ford Motor Company and Chrysler Corporation dominated the Canadian and United States automobile markets. According to Mr. George Peapples, a former President of GMCL, there was "little influence of competition from offshore manufacturers" in Europe and Japan.

[12] In the mid 1970s conditions changed. North America experienced substantial increases in oil prices and, at the same time, there were competitive pressures from Japanese automobile manufacturers in Canada and the United States. The Japanese manufacturers were taking away market share primarily at the expense of General Motors, Mr. Peapples recalled.

[13] By the late 1970s, Mr. Peapples testified, there was a "run-up" in interest rates and these financial pressures added to the competitive pressures from Japan. Consumers lost confidence and there was "a substantial decline in overall industry volume and forecast". Pressure was placed not only on General Motors' production systems but also on the ability of General Motors' dealers to survive in the marketplace, added Mr. Peapples. The dealers were pressing GMCL to come up with an effective sales promotion.

[14] At all times relevant to these appeals, GMCL sold its motor vehicles through franchised independent dealers. A dealer invested capital and purchased product from GMCL for sale to the public. A dealer's profit depended on its ability to sell motor vehicles. Both the dealers and GMCL searched for ways to increase motor vehicle sales in a depressed market.

Development of Marketing Programs

[15] Mr. Peapples' first position at GMCL was as its finance manager. As such, he participated in the corporation's monthly price review group. This group included members of GMCL's marketing and comptroller's staff. Generally, the members of the group prepared various proposals, such as what they thought was necessary for GMCL to stay competitive in the marketplace at any given time. They analyzed factors current in the industry, including identifying products backing up in dealers' inventory lots and what was needed to stimulate sales. Mr. Peapples stated there was "a lot of dialogue", "a lot of interaction", between GMCL's marketing organization and its dealers so as "to get a flavour of what might need to be done in different regional markets". GMCL would work "quietly" with selected dealers to develop a program. Attempts would be made to recognize what program would be advantageous at a given time and the market during a given year.

[16] The costs of GMCL's incentive type programs were borne by GMCL, Mr. Peapples testified. In some cases GMCL would set up a reserve at the outset of a program which would be charged against revenue at the time, depending on the success of the program or how much of the reserve was used.

Rate Supported Programs

[17] As part of a broad overall marketing strategy by GMCL to stimulate the market so its dealers could sell the volume of inventories that they had and then, in turn, purchase more product from GMCL, the price review group proposed a rate support program. The rate support program, Mr. Peapples declared, was one of many marketing programs enacted by GMCL to promote its products. The main purpose of the rate support program, Mr. Peapples explained, was to assist dealers in selling their vehicles, and by assisting, "we recognize that we are going to bear the cost of helping the dealers sell ... so that the dealer would be more inclined to move aggressively in support of the program, recognizing that they would not be at risk in losing any profit ... that they were able to establish in a sales contract ... negotiated with the retail customer". Other incentive programs included extended warranties, cash rebates, free air conditioning and free automatic transmission. The first rate support program appears to have taken place in 1981. In short, a rate support program gave consumers of motor vehicles the ability to finance the purchase of a vehicle at interest rates that were less than GMAC's normal rates.

[18] GMAC would also give its advice in developing a rate support program. However most of the interest rates that GMCL believed it needed to establish, Mr. Peapples insisted, were driven by an analysis of GMCL's own marketing people and its dealers "getting a sense of where is the right interest rate to move volume in the marketplace". Once the interest rate was established, GMCL measured the cost of the program to it. The total cost would be measured by the anticipated volume of sales generated by the program. Advertising costs would also be allocated to the program. When a program proposal was accepted, GMCL would communicate with its dealer organization to put the program in place.

[19] In brief, it was GMCL who designed the low-rate program. It was GMCL who established the interest rate in the market that would be rate supported. GMCL determined which particular makes and models of vehicles would be eligible for low-rate financing and the term of such program.

Typical Retail Transaction Requiring Financing

[20] Throughout the taxation years under appeal, a typical transaction whereby a retail customer financed his purchase through a low rate financing program was as follows:

(i) The dealer and the customer would negotiate the retail price of the vehicle;

(ii) The dealer and the customer would enter into a formal purchase and sale agreement. The agreement, among other things, identified the purchaser and vendor of the vehicle, the vehicle's serial number, the price of the vehicle and, where the purchase of the vehicle was financed, the amount of the purchase price to be financed. The amount financed was "subject to approval" by GMAC. GMAC would never see this agreement but was aware of its existence, of course. This agreement was the first formal document created between the dealer and the customer;

(iii) The customer also filled out an application for credit through the dealer. He or she would provide information as to his or her address, employer, monthly income and references. The amount sought to be financed was also entered on this document. The document was a form prepared by GMAC and provided to the dealer by GMAC;

(iv) The dealer, together with the customer, would enter the information on the credit application form to GMAC. The customer, in completing the credit application form, consented to the dealer "and/or" GMAC preparing a consumer report. For all practical purposes, the customer was making an application to GMAC for credit;

(v) GMAC then either approved or rejected the application. GMAC may also suggest changes to the terms negotiated if it was not willing to accept the application. The primary factor influencing GMAC in approving or rejecting the application was the credit worthiness of the customer. GMAC would take about one hour to decide on the application;

(vi) If GMAC was satisfied with the credit worthiness of the customer, the dealer received an approval number and a conditional sale contract, also a GMAC form was prepared and completed by the customer and dealer. The information on the conditional sale contract was similar to that on the purchase and sale agreement. The conditional sale contract provided for the number and amount of instalments, the finance charge (or interest rate) and the assignment of the contract by the dealer to GMAC. The dealer assigned the contract "for value received"; no amount of consideration is specified.[2]

GMAC Interest Rates

[21] Normally GMAC acquires from dealers conditional sale contracts having an "acceptable" interest rate that is not less than what is referred to as GMAC's "buy" rate at a given time and not greater than its "cap" rate. The "buy" rate is the minimum rate of interest in a conditional sale contract that GMAC will purchase for the principal or face amount of the contract. The "cap" rate is generally one to one-half basis points in excess of the "buy" rate; the "buy" rate sets the ceiling on what the dealer may obtain if it wanted to do business with GMAC.

[22] In determining a "buy" rate GMAC considers its cost of funds, administrative costs, historical experience as to losses and prepayments as well as other factors present in carrying on its business. GMAC will normally acquire a conditional sale contract that has an interest rate not less than the "buy" rate and not greater than the "cap" rate. A contract with an interest rate above the "buy" rate would generate additional profit to the dealer since the purchase price paid by GMAC for the contract would be adjusted to reflect the "cap" rate. The spread in rates is also a tool available to the dealer when negotiating the sale of a vehicle. GMAC would pay the dealer for an assigned contract usually a day after the assignment. GMAC's policy was not to acquire contracts having an interest rate above its "cap" rate. The price GMAC pays the dealer for the conditional sale contract is the amount that GMAC's yield to maturity on the contract equals GMAC's buy rate.

[23] In a rate support program, GMAC finances the purchase of a motor vehicle at a rate of interest that is less than its buy rate. GMAC acquires the conditional sale contract having the lower rate of interest. GMAC's position is that it acquires the contract under a rate support program at a discount and GMCL pays the dealer the difference between the face value of the contract and the discounted amount paid by GMAC. This is the "rate support" amount. The dealer receives the full amount of the contract. This amount has been paid to the dealer by GMAC to the extent of what, to it, is the value of the contract based on the low interest rate and the balance of the principal amount; the rate support amount, is paid by GMCL. The dealer has no knowledge of the arrangement between GMAC and GMCL for payment to it.

GMAC's Role

[24] The rate support program was made available only to retail customers who financed the purchase of the motor vehicle through GMAC. GMAC is an important cog in any GMCL rate support program. GMAC is a wholly-owned subsidiary of General Motors Acceptance Corporation of New York which, in turn, is a wholly-owned subsidiary of General Motors Corporation. GMCL is also a wholly-owned subsidiary of General Motors Corporation. The business of GMAC is to finance the purchases of inventory of new motor vehicles manufactured by General Motors Corporation and its subsidiary corporations, including GMCL, by GMCL's dealers and to finance the purchase of new General Motors vehicles by retail customers of GMCL's dealers as well as used motor vehicles of any make.

[25] Mr. Peapples explained that the most effective and efficient way for GMCL to carry out the program with its dealer organization was through GMAC. GMAC had a presence in many, if not all, General Motors dealerships. GMAC carried on business from coast to coast in Canada. GMCL was able to draw on the resource base of GMAC and found it most efficient for GMAC to administer the program for GMCL. One organization would deal with multiple combinations of marketing programs that GMCL was implementing under rate support. If a particular consumer did not wish to have his purchase financed through GMAC, there were existing incentive programs structured with a cash rebate component to it. Cash rebates were paid directly by GMCL to the consumer.

[26] Notwithstanding that GMAC and GMCL are members of the General Motors corporate group, GMAC is a "stand alone financial institution" that is an independent business, stated Mr. Peapples, who at relevant times, was also a director of GMAC. GMAC has a responsibility to earn income on its invested capital and to meet its financial obligations on the debt it incurs. He insisted that GMCL is not in a position to influence GMAC in terms of rates that GMAC puts in the marketplace; this is determined by the marketplace.

[27] As I appreciate Mr. Peapples' evidence, GMAC was prepared to assist GMCL in developing, creating and pursuing the rate support programs so long as GMAC was not out of pocket. To GMAC, the more contracts it acquires from dealers, the more profit GMAC earns. Thus, GMAC saw a financial benefit in participating in the rate support programs since this would result in additional instalment contracts available for purchase. However, as far as GMAC was concerned, its income from acquiring any single contract is determined by the actual interest rate specified in the contract and the amount financed, without regard to any rate support program.

[28] GMAC administered the rate support programs for GMCL. Mr. Peapples emphasized that GMCL "would not expect GMAC to do anything other than what they were expected to do, and that was to buy conditional sale contracts from the dealers at their going market buy rates and ... we would then in turn make sure that those funds, if GMAC in the earlier years paid that money out as a premium over the discounted rate, we would reimburse GMAC for that ... [or] flow the money directly to the dealers [in the latter years]."

Rate Support Programs: One-cheque System

[29] A rate support program was usually announced in a Home Office Letter to dealers. A typical example of a program is described in a Home Office Letter of March 21, 1985. The program supported an interest rate of 9.9 per cent. In the earlier years of the rate support program, including early 1985, the dealers participated financially in the program in that they may have surrendered their normal GMAC financing income and had to provide rate support to GMAC of approximately one per cent. Later on GMCL assumed all the costs of a program. A dealer participating in a rate support program could not negotiate an interest rate with the purchaser other than the rate fixed by GMCL.[3] The supported rate was always less than GMAC's buy rate.

[30] At the same time that GMCL sent a Home Office Letter to its dealers, GMAC would write to its branch managers throughout Canada informing them of the rate support program. GMAC also sent a memorandum describing its participation in the plan to all General Motors dealers. With respect to the March 1985 plan, for example, the memorandum stated that "GMAC ... is offering ..." a low-rate interest plan and GMCL "has agreed to rate support" GMAC on units financed under the plan. A dealer wishing to participate in a rate support program in the early years would sign a copy of the GMAC memorandum agreeing to the conditions of the program. Later, the dealer had to opt out of the program.

[31] GMAC paid the principal amount of the conditional sale contract to the dealer. However, Mr. Peapples testified, "At that point in time [GMAC was] incurring on our behalf the differential of the discounted rate and their buy rate. And so the dealer at that point had received in a sense our cost of money to make sure ... that particular dealer was appropriately compensated for the sale price of the vehicle. And then we in turn would reimburse GMAC ... over a 30 or 60 day period for having previously flowed those funds to the dealer on our behalf."

[32] No formal written agreement was entered into between GMCL and GMAC until 1988 because of their particular relationship, said Mr. Peapples. "We just didn't ... feel there was a need ...".

[33] The Board of Directors of GMAC approved each rate support program. For example, in a report to the directors on April 3, 1985, the President of GMAC, Mr. W.J. Watson, who was also a witness, described the March 1985 plan and advised that GMCL

... will reimburse [GMAC] for each contract purchased under the plan for the difference between 14.50% TPA and 9.9% TPA less a discount of 7.00% which accounts for the fact that no rebate adjustment will be made in the event of early termination. In view of the upfront payment of the support amount, the remaining balance will be discounted at 13.00%. The 14.50% rate includes a 0.10% increment for non-recourse and represents the estimated rate required to break even using a marginal cost, for mid-term funds, of 13.00%.[4]

This information was also incorporated in the directors' resolution approving GMAC's participation in the plan. The "upfront payment" was the money received by GMAC from GMCL. Mr. Watson agreed with respondent's counsel that the amounts GMAC received from GMCL under a rate support program were received absolutely without any restriction, subject to GMCL "agreeing to the eligibility of all the transactions that GMAC had financed".

[34] Rate support programs were supported by advertising. Examples of print advertising were produced at trial. Some advertisements represented that "... GM Dealers Association are offering a special interest rate" provided the potential customer qualifies under the "standard GMAC credit payments". Or, the dealer is offering special financing on GMAC credit.

[35] For the programs carried out during the period 1981 to mid 1989 the appellant says that GMCL authorized GMAC to pay the dealer the rate support amount and GMCL subsequently reimbursed GMAC. GMAC paid the dealer one-cheque for an aggregate amount that included the discounted price for purchase of the contract and the rate support amount. GMAC claimed reimbursement of the rate support amount by submitting monthly reports or statements to GMCL setting out the make, model, vehicle identification number and the date of sale by the dealer of the vehicles sold during the particular program together with a calculation of the rate support payment. GMCL would review the list and make payment by way of cheque to GMAC. If, later on, through the regular audit process, GMCL discovered that a dealer had included an ineligible vehicle in the overall flow of money for a rate support program, Mr. Peapples stated, GMCL would have the dealer refund the money to GMCL in the normal charge-back process GMCL had with its dealers.

[36] In cross-examination Mr. Watson agreed that once GMAC approved an application for credit, GMAC had an obligation to acquire the conditional sale contract from the dealer and pay the dealer the face amount of the contract notwithstanding that the arrangement with the customer or the dealer was premised on the contract having the supported rate. The program and the modalities of payment were an internal matter between GMAC and GMCL. GMAC had to pay the dealer the principal amount of the contract in full. Mr. Watson admitted that in GMAC's relationship with the dealers there was no discounting of conditional sale contracts under a rate support program. The dealers were paid what was due to them, that is, the principal amount of the contracts. However the principal amount, Mr. Watson declared, was not what the value of the contracts were to GMAC; GMAC "overpaid" the dealer for the value of the contract. GMAC paid the dealer more than what the contract was worth and expected to be reimbursed by GMCL for the overpayment.

Rate Support Programs Clarified

[37] Sometime after 1985 Revenue Canada questioned whether rate support payments by GMCL to GMAC were truly reimbursements to GMAC. Revenue Canada took that position that GMCL compensated GMAC, not its dealers, for the shortfall between GMAC's buy rate and the rate supported amount. In 1987 Revenue Canada reassessed GMAC for its 1981 to 1983 taxation years by adding the amounts paid by GMCL to the appellant's income. In 1988 GMAC appealed the assessments to the Federal Court; these appeals await the disposition of the appeals at bar.

[38] The 1987 assessments, coupled with the fact that as late as 1988 there was no attempt by GMAC and GMCL to reduce to writing anything concerning their respective roles in the rate support programs, caused some anxiety at GMCL.

[39] At time of trial Mr. Neil MacDonald was General Counsel to GMCL. Mr. MacDonald worked in GMCL's legal department until July 1987 when he was transferred to the corporation's tax staff. One of his first jobs on the tax staff was to "look at the tax aspects" of the rate support programs. He was aware of the 1987 assessments and Revenue Canada's position that the rate support payments by GMCL were taxable to GMAC in the years they were made. GMAC had no lawyers on staff but had access to the lawyers working at GMCL. In any event, Mr. MacDonald reviewed the tax problem from both GMCL's and GMAC's perspectives and considered that a major problem was that the nature of the relationship between the two corporations had never been documented. He decided to make efforts to document the relationship so that it would at least "solve the problem going forward".

[40] Mr. MacDonald reviewed the rate support programs and the relationship with Canadian and United States personnel at GMAC. On March 17, 1988 he prepared a memorandum together with a draft letter for signature by GMAC's Treasurer and Comptroller that would be sent to GMCL's Treasurer. The letter purported to confirm past practice and outlined the agreement between GMAC and GMCL for future programs. Various drafts, substantially similar, were prepared. The only significant change from the first draft was reference that the rate support amount to be paid by GMAC would be adjusted to reflect anticipated early payments by retail customers that, based on GMAC's experience, should be reduced by 16.50 per cent. GMCL would have no right to refund any portion of rate support payment in the event of early payment by a retail purchaser. The draft letter also provided, among other things, that:

Since the Contracts to be purchased will bear a reduced rate of interest, GMAC will discount the amount it will purchase the Contracts for by an amount equal to the difference between the present value of the payments due under the below market interest rate Contract and the present value of the payments which would have been received had the Contract been issued with the same face amount but carried GMAC's market rate of interest (the "Discount").

Notwithstanding such Discount, GMAC agrees to pay to the dealer on GM's behalf, the difference between GMAC's purchase price as determined by the method above described and the face amount financed under the Contract. GM will reimburse GMAC the difference within a reasonable time thereafter, but in any event no later than 60 days following payment by GMAC to the dealer.

[41] A formal letter in terms substantially similar to the draft letter was executed by the parties on or about July 7, 1988. In GMCL's Vehicle Terms of Sale Bulletin No. 89-1 to its dealers for 1989 model motor vehicles GMCL stated its right to institute marketing programs that included discounts and payments to dealers in respect of certain models of vehicles.

Two-cheques

[42] On December 19, 1988 GMCL sent a Home Office Letter to its dealers announcing a rate support program to run for five days commencing December 27. GMCL informed its dealers that when they assign a contract under this program to GMAC they would

receive two-cheques at time of settlement, one from GMAC and one from GM[CL], on eligible vehicles financed through GMAC during the program period. The GMAC cheque will reflect the amount of the discounted contract. The cheque from GM[CL] will represent the price reduction to you and equal the balance of the contract. The two-cheques will add to the total amount of the contract.

[43] By letter dated February 13, 1989 GMCL confirmed with GMAC another rate support program. GMCL advised the appellant that GMCL "has agreed with the dealers to reduce the sale price to the dealers of vehicles sold by them" during the new program by an amount equal to the discount, that is the difference between the amount GMAC pays the dealer for the contract and the face amount of the contract. In order "to provide the dealer with the reduction at the earliest opportunity, and [...] administrative simplicity", GMCL authorized GMAC to execute cheques drawn on GMCL's bank account at a chartered bank. GMAC agreed to sign the cheques for the discount on GMCL's behalf and to deliver the cheques to the dealers at the time it purchases the contracts. A similar letter for another program was sent to GMAC on March 14, 1989.

[44] GMAC and GMCL were then carrying on rate support programs under a "two-cheque" system as opposed to a "one-cheque" system referred to earlier. On April 7, 1989 the Board of Directors of GMCL adopted a resolution authorizing GMAC to execute GMCL cheques in accordance with a "two-cheque" agreement. By letter dated September 11, 1989 GMCL and GMAC again formalized the "two-cheque" system for future programs. The parties agreed, among other things:

Since the Contracts to be purchased will bear a reduced rate of interest, GMAC will purchase each Contract for an amount (the "Purchase Price") equal to the present value of the payments due under the Contract discounted at GMAC's market rate of interest for comparable Contracts. The Purchase Price of the Contract will be increased by GMAC to reflect its experience with prepayments of contract principal by retail customers. The difference between the Purchase Price and the principal amount of the contract will be referred to as the "Discount" hereinafter.

GM has and may agree with GM dealers to reduce the sale price to the dealers of vehicles sold by them during the Finance Programs. In order to provide the dealer with this price reduction at the earliest opportunity, and to accommodate GMAC's administrative procedures, GM has authorized GMAC to prepare and sign cheques equal to the Discount, plus such additional amounts as GM may authorize, drawn on GM's bank account #000 005-9 at the Royal Bank of Canada or on such other banks as may be authorized by GM from time to time. GMAC further has agreed to deliver such cheques to dealers simultaneous with its payment for Contracts.

GMAC has agreed to handle and otherwise treat GM cheques delivered to GMAC with the same degree of care, and subject to the same safeguards, as it does its own cheques. GMAC has agreed that only those persons who are authorized to execute GMAC's cheques and whose names have been communicated to the Treasurer of GM shall execute GM cheques. Any unused cheques will be returned to GM as soon as practicable upon advice by GM. GMAC will not be liable to GM for any matter concerning the issuance and handling of the GM cheques other than gross negligence on GMAC's part. GM will indemnify and hold harmless GMAC against any loss, cost, expense, claim or demand brought against GMAC by any party or suffered by GMAC with respect to the GM cheques not due to negligence on GMAC's part.

[45] Mr. Watson confirmed that under the "two-cheque" system GMAC delivered simultaneously to the dealer its cheque and GMCL's cheque. Mr. MacDonald acknowledged that a dealer was not aware of any understanding or agreement between GMAC and GMCL as to the payment of the cheques, or the earlier reimbursements, nor did it care. This was an internal General Motors matter. The dealer knew from the Home Office Letter that when it assigned a conditional sale contract to GMAC, it would receive two-cheques aggregating the face amount of the contract.

[46] Mr. Watson also acknowledged that prior to the introduction of the two-cheque system, the dealers were not aware of any reduction in the sale price of a vehicle, referred to in the Home Office Letter of December 19, 1988. He agreed with respondent's counsel that the dealer's cost of a motor vehicle changed once the dealer negotiated its sale to a customer under a rate support program.

Accounting and Tax Treatment By Appellant

[47] GMAC's method of accounting for the acquisition of the conditional sale contracts is consistent in all years under appeal, whether the contract was or was not rate supported. The contract, when acquired, went on the balance sheet at its acquisition cost to GMAC. That acquisition cost, in turn, was equal to the present value of the stream of payments to be made under the contract, discounted or reduced, at GMAC's buy rate. The difference between the acquisition cost of the contract and the total of all payments to be made under the contract was recorded as unearned income and amortised into income over the life of the contract.

[48] When GMAC acquired from the dealer a conditional sale contract that was not rate supported, a receivable would be entered in GMAC's books of account for the full principal amount of the contract plus all the interest payable over the life of the contract. The respondent's representative at the examination for discovery agreed this was proper treatment. She also agreed that if one assumes that GMAC acquired the rate supported contracts at a discount, GMAC's accounting treatment is acceptable.

[49] GMAC computed its income in respect of conditional sale contracts in the same fashion for tax purposes as for accounting purposes. GMAC computed its income for tax purposes on the basis that the cost of each rate supported conditional sale contract was equal to the full principal amount of the contract less the rate support amount. This contract went on GMAC's balance sheet at its acquisition cost which was equal to the present value of the stream of payments to be made by the retail customer under the contract, discounted or reduced at GMAC's buy rate. The difference between the acquisition cost of the contract was recorded as earned income and amortized into income over the life of the contract. GMAC's treatment of rate supported contracts, whether for tax purposes or accounting purposes, was identical to its treatment of non rate supported contracts. The respondent agrees that this is what in fact the appellant did but does not agree that the appellant is correct.

SUBMISSIONS & ANAYLSES

[50] The issues before me are described in paragraphs 7, 8, 9 and 10 of these reasons.

(a) Payment of lost interest: paragraph 12(1)(c)

[51] Respondent's counsel submitted that GMAC was a lender of money to the retail customer and, in the matter at bar, GMCL compensated GMAC for foregone or lost interest. GMAC did not in law acquire conditional sale contracts from GMCL's dealers, he stated. Since the terms of the typical conditional sale contract are determined in advance by GMAC, this was not a "freely existing conditional sale contract", argued counsel. A loan had been negotiated before the conditional sale contract was completed. The contract "merely documents the bargain that had been reached. It acts as a loan agreement and as security". GMAC did not bargain with the dealer for the purchase of any conditional sale contracts. The mechanism of the conditional sale contracts, in respondent's view, was used to acknowledge the retail customer's indebtedness to GMAC and to provide security for the loan. The dealer was not involved in the transaction to any significant degree. GMCL, therefore, subsidized the loan and compensated GMAC in an amount equal to the rate support amount and these amounts should be included in GMAC's income as payments in lieu of interest pursuant to paragraph 12(1)(c) of the Act.

[52] For me to accept respondent's position that GMCL compensated GMAC for lost interest, I must ignore agreements legitimately entered into by the retail customer and the dealer, the dealer and GMAC, the customer and GMAC, as well as commitments undertaken by GMCL to its dealers. Legal relationships were created and there is nothing in the evidence that compels me to ignore these relationships and find that GMAC loaned money to the retail customer and that the retail customer borrowed money from GMAC. As far as I am aware, the practice carried on by GMAC did not vary from the practice carried on generally in the business of financing retail sales. At least there was no evidence that it varied. If one wants to enter the field of ignoring a legal form of transaction, one must exercise extreme caution. In the appeals at bar one is faced with contracts and relationships validly created in the normal course of business and I am not prepared to ignore them.

[53] McLachlin J., as she then was, considered the matter of the respondent challenging a taxpayer's legal relationships in Shell Canada Ltd. v. Canada: [5]

[39] This Court has repeatedly held that courts must be sensitive to the economic realities of a particular transaction, rather than being bound to what first appears to be its legal form: Bronfman Trust, supra, at pp. 52-53, per Dickson, C.J.; Tennant, supra, at para. 26, per Iacobucci, J. But there are at least two caveats to this rule. First, this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer's bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer's legal relationships must be respected in tax cases. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect: Continental Bank Leasing Corp. v. Canada [98 DTC 6505], [1998] 2 S.C.R. 298, at para. 21, per Bastarache, J.

[40] Second, it is well established in this Court's tax jurisprudence that a searching inquiry for either the "economic realities" of a particular transaction or the general object and spirit of the provision at issue can never supplant a court's duty to apply an unambiguous provision of the Act to a taxpayer's transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied: Continental Bank, supra, at para. 51, per Bastarache, J.; Tennant, supra, at para. 16, per Iacobucci, J.; Canada v. Antosko [94 DTC 6314], [1994] 2 S.C.R. 312, at pp. 326-27 and 330, per Iacobucci, J.; Friesen v. Canada [95 DTC 5551], [1995] 3 S.C.R. 103, at para. 11, per Major, J.; Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, at para. 15, per Cory, J.

[54] In the appeals at bar there are no allegations of sham by the respondent and the evidence does not even remotely suggest sham.

[55] GMAC did not enter into any agreements with retail customers whereby GMAC agreed to lend money directly to the customer. GMAC financed the purchase of vehicles. Borrowing of money by a purchaser is but one way of financing a purchase. Paying the balance of the purchase price by instalments over time, where title to the vehicle does not pass to the purchaser until payment is made in full, is another means of financing the purchase of vehicles. The latter method of financing is the business carried on by GMAC. [6] GMAC does not lend money directly to a retail customer nor is GMAC ever in a lender-borrower relationship with the retail customer. In M.N.R. v. T.E. McCool Ltd.,[7] a judgment of the Supreme Court of Canada, Estey J. held that "terms such as 'borrowed capital', 'borrowed money', in tax legislation have been interpreted to mean capital or money borrowed with a relationship of lender and borrower between the parties". This is the approach that I should apply here. As my confrère Judge Dussault, T.C.C.J. explained in Autobus Thomas Inc. v. The Queen,[8] the balance of the sale price in a conditional sale contract assigned to a bank is a debt that does not result from a loan or advance by the bank to the purchaser. GMAC provides the mechanics to permit a retail customer without the necessary funds with the wherewithal to purchase a motor vehicle. GMAC, it is true, becomes the purchaser's creditor on assignment of the conditional sale contract, but no lender-borrower relationship is created between them.

[56] Respondent's counsel cited the reasons for judgment of the Court of Quebec[9] and the Quebec Court of Appeal[10] in appeals by GMAC against assessments made pursuant to the Quebec Taxation Act (R.S.Q., c. I-3). In these appeals GMAC claimed it was a "loan corporation" and not an ordinary corporation for purposes of the Quebec Taxation Act and therefore liable for a lower rate of tax on its paid up capital. The term "loan corporation" is not defined by legislation.

[57] GMAC was not successful before the Court of Quebec but was successful before the Court of Appeal. LeBel J.A., as he then was, reviewed various agreements concerning GMAC, GMCL, GMCL dealers and the retail customer, as well as the actual business activities carried on by GMAC. He approved the comments of Pierre André Côté in his treatise on statutory interpretation,[11] in particular M^e Côté's conclusion respecting the recent series of cases decided by the Supreme Court of Canada on how statutory tax provisions are to be interpreted: e.g. Stubart Investments Ltd. v. The Queen[12], The Queen v. Golden[13], Bronfman Trust v. The Queen[14] and McClurg v. Canada. [15]

[58] The reasons of LeBel J.A. do not assist the respondent. The Court of Appeal did not make any finding that GMAC is in a lender-borrower relationship with consumers. The Court did not consider that GMAC loaned money directly to the consumer. The Court of Appeal held that GMAC was operating a comprehensive wholesale and retail financing system. The conditional sale contracts were in this context a particular form of taking of securities which reserved to GMAC the ownership of the property. In a subsidiary argument before the Court of Appeal, GMAC stated that in its transactions with consumers a loan agreement exists by implication before that of a conditional sale contract. The Court of Appeal found that the legal form and nature of the contracts for financing inventory and consumer sale contracts are identical to a conditional sale or instalment sale. GMAC acquired the rights of a vendor with a reserve of ownership. In previous cases the Court of Appeal dealt with these contracts as such and so it did with GMAC.[16] LeBel J.A. stated that GMAC "jouait le rôle d'une corporation de prêts au sens générique de ce terme, en concurrence avec d'autres institutions reconnues comme telles. Elle avait alors droit de bénéficier du traitement fiscal prévu ..."[17] LeBel J.A. did not find that the activities of GMAC were substantially different from corporations recognized as loan corporations and therefore held that GMAC should be taxed in the same way as these corporations.

[59] Since I have found that GMAC was not a lender of money to the retail consumer, paragraph 12(1)(c) cannot apply. For an amount of money to constitute interest, the amount must be paid by the borrower of the money to a person who loaned money to the borrower. Before paragraph 12(1)(c) can apply, GMAC must lend money to the consumer. It would be inconsistent to recognize the bona fides of the conditional sale contract and its assignment for value to GMAC, which I have found, and at the same time find that GMAC was lending money to the retail customer and was being compensated by GMCL for foregone or lost interest. In financing contracts with retail customers of GMCL, GMAC has lost no interest because it did not lend money to the customer.

(b) Agency

[60] The respondent argues that GMAC was neither an agent or conduit of GMCL since, among other things, GMCL was not liable to its dealers for the rate support payments. Indeed, counsel states, GMAC was obliged to pay the face amount of the conditional sale contract to the dealer and there is no evidence of GMCL's commitment to pay any amount to a dealer, even with the two-cheque system after 1988. In the respondent's view, an agency between GMCL and GMAC cannot create the obligation of GMCL to pay anything to the dealer and in the absence of such an obligation the agency has no purpose. In fact, GMAC owed the face amount of the conditional sale contract to the dealer and GMCL owed a portion of it, equal to the rate support, to GMAC. Even under the two-cheque system, the respondent states, a cheque drawn on GMCL's bank account in favour of the dealer merely discharged GMAC's liability to the dealer and GMCL's liability to GMAC.

[61] Since GMAC and GMCL carry on business throughout Canada one ought to consider the definition not only of agency as used in the common law provinces but also of mandate in Quebec.

[62] Agency has been defined as follows:

(1) Agency is the fiduciary relationship which exists between two persons one of whom expressly or impliedly consents that the other should act on his behalf, and the other of whom similarly consents so to act or so acts. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is called the agent. Any person other than the principal and the agent may be referred to as a third party.

(2) In respect of the acts which the principal expressly or impliedly consents that the agent shall do on the principal's behalf, the agent is said to have authority to act; and this authority constitutes a power to affect the principal's legal relations with third parties.[18]

[63] Professor G.H.L. Fridman describes an agency relationship in the following manner:

Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal's legal position in respect of strangers to the relationship by the making of contracts or the disposition of property.[19]

[64] The Civil Code of Quebec defines "mandate":[20]

Le mandat est le contrat par lequel une personne, le mandant, donne le pouvoir de la représenter dans l'accomplissement d'un acte juridique avec un tiers, à une autre personne, le mandataire qui, par le fait de son acceptation, s'oblige à l'exercer. Ce pouvoir et, le cas échéant, l'écrit qui le constate, s'appellent aussi procuration.

Mandate is a contract by which a person, the mandator, empowers another person, the mandatary, to represent him in the performance of a juridical act with a third person, and the mandatary, by his acceptance, binds himself to the exercise the power. The power and, where applicable, the writing evidencing it are called the power of attorney.

[65] The object of the mandate also includes the administration, in whole or in part, of the mandator's property.[21]

[66] The words used to describe the relationship of agency and mandate are, of course, different but the meaning is essentially the same: in both, one person (the principal or mandator) grants another (the agent or mandatary) the authority to represent him or her in the making of legal acts and to be bound by that person's action.

[67] So what did take place between GMAC, GMCL and the dealer? After observing Messrs. Peapples and Watson and upon reviewing the evidence adduced at trial it appears to me that what transpired in 1981 was the following: GMCL, under pressure from its franchised dealers, agreed to initiate low rate financing programs that would benefit it and its dealers. GMCL required the help of GMAC to administer and promote the programs and GMAC was happy to oblige since it would earn income on any additional conditional sale contracts it could purchase. GMCL had to ensure that its dealers would get the full face value of the contract, except in the early years when they rate supported the program to the extent of one per cent.

[68] In arranging GMAC's participation in the rate support programs, GMCL insisted that the dealers receive the face value of the contracts. This was one of the cornerstones of the program. GMAC was not prepared to absorb any loss on a contract and pay more than what market conditions warranted. GMCL agreed to incur all expenses in the rate support programs, including paying the rate support amounts. Up to this point I have no problem. Now, GMCL may have agreed to compensate GMAC for any cost it incurred in acquiring the contracts, that is, the rate support amounts. This is the Minister's theory. But GMAC and GMCL also may have agreed that while GMAC would pay the dealer the principal amount of the contract in full, as between themselves, GMAC's cost of the contract was the price determined by its buy rate and that GMCL would reimburse GMAC for the rate support amount that was included in the price paid to the dealer. This is the appellant's view: GMAC acted as GMCL's agent.

[69] The evidence strongly suggests that in 1980 or 1981 nobody at GMCL and GMAC gave much thought to the mechanics of how they would proceed. All they knew was that GMAC would not be out of pocket and would not profit from administering a rate support program, the dealer was to be paid the principal amount of the rate supported conditional sale contract in the same way as on assigning non rate support contracts to GMAC, and that GMCL would absorb the costs of the rate support program. Only in 1988 did the officials at GMCL and GMAC begin to see what they had wrought, and this was the result of tax assessments issued to GMAC at the time.

[70] The respondent is of the view that agency can only exist if GMAC "establishes that [GMCL] was liable to dealers for rate support".[22] I cannot find support in law for this submission.

[71] Agency is a relation between the principal and the agent. The principal has no obligation to a third party unless the agent does something on his behalf which creates the obligation. In the case at bar, however, GMCL represented to its dealers that it would initiate and promote sales programs and make sure the dealers were paid the face value, more or less, of the conditional sale contracts they assigned to GMAC. To this extent, GMCL had an obligation to its dealers and mandated GMAC to administer the rate support programs.

[72] Respondent's counsel also submitted that for an agency to exist, the dealer must have knowledge of the relationship and that the principal and the agent are both making payments to the dealer. As I understand the law of agency, a third party need not be aware of the purported agency. The agency relationship does not rely on the knowledge by third parties of its existence or its specific terms.

[73] As Bowstead and Reynolds states:[23]

No requirement that agent purport to act for principal. In some legal systems such reasoning would normally only be accepted in the case of an agent who when acting purported, or at least was understood, to do so on behalf of, or "in the name of", a principal, though the principal need not actually be named. The common law, however, has no such requirement: if there is preceding authority to act for the principal, the rules so far set out, other than those as to ratification, will apply despite the fact that the existence of the principal, or his connection with the transaction, is unknown to the third party. Where his existence or connection with the transaction is not known, the principal is referred to as undisclosed and the rules then applicable are referred to as the doctrine of the undisclosed principal, which can be regarded as a unique feature of common law.

[74] The Civil Code also contemplates that the mandatary need not disclose the identity of his or her mandator but if the mandatary acts in his or her own name, the mandatary is liable to the third person.[24]

[75] The two-cheque system was in effect in late 1988. There is no doubt that in one of the first two-cheque rate support programs, described in GMCL's Home Office Letter of December 19, 1988, GMCL was supporting its dealers. In subsequent two-cheque programs GMCL informed its dealers that the price of vehicles to dealers would be reduced by the rate support amount. The letter of September 11, 1989 from GMCL to GMAC describes the procedures to be applied on GMAC's purchase of contracts at a reduced rate of interest, the price reduction by GMCL to the dealers selling vehicles under a rate support program and the making of the cheques by GMAC.

[76] The two-cheque system confirms an agency relation between GMAC and GMCL. All the criteria of agency is present. In the letter of September 11, 1989 GMCL authorized GMAC to issue cheques from a designated GMAC bank account under specific terms and conditions. The parties agree there is no evidence of any other agreements between GMAC and GMCL affecting the rights and obligations of these corporations. The cheques issued are payable to only one class of person, GMCL franchised dealers, and on only one condition, that the dealer negotiated the sale of a motor vehicle that is the subject of GMCL's current sale promotion program. GMAC has no right to use or allocate the money in the bank account in any other way. GMAC has no chance of profit and no risk of loss; it is GMCL who is undertaking the program in the course of its business. GMCL incurs the risk of any loss from a program.

[77] Counsel for the respondent nevertheless argued that since under the two-cheque system dealers are informed by GMCL that their cost of the vehicles are to be reduced by the rate support amount, then contrary to representations to the public, the retail customer's purchase was not financed at a lower rate. I cannot agree. Advertisements to potential consumers are meant to promote sales of product and the consumer is interested only in the price and the interest rate he or she has to pay. Advertising copy cannot affect what is actually taking place.

[78] For the purpose of these appeals it does not make a difference if the rate support amount was a reduction to the dealer's purchase price of the vehicle or if it represented part payment to the dealer for the purchase of conditional sale contracts. In both cases, the rate support amount is for a dealer's benefit; it was never the property of GMAC. The two-cheque system purportedly was intended to reflect the agreement between GMAC and GMCL before 1989, under the one-cheque system. It is true that before 1989 the dealers were not aware of any price reduction, if that is the case. But was a dealer really concerned? At the end of the day the dealer received the full face amount of the conditional sale contract from GMAC, which he expected and which was in conformity with normal business practice with GMAC with respect to non rate supported contracts assigned to GMAC. This is what GMCL represented to its dealers would take place under the low rate programs. The dealer was not concerned with the modalities of payment.

[79] Whether or not GMCL had a legal obligation to its dealers to pay the rate support amount to the dealer is not particularly relevant. The fact is that GMCL was in a business relationship with its dealers – it sold its motor vehicle products through the dealers – and for its own business purposes had to have a viable dealer network. The whole rate support concept was premised on the understanding that the dealers would be paid the full principal amounts set out in the conditional sale contracts and it is clear under the two-cheque system GMCL undertook to pay the rate support amounts to the dealers.

[80] The paper trail is not as clear during the years the one-cheque system was in use. Both parties made compelling arguments. The words used in documents and during evidence, I am sure, gave both parties some comfort. Mr. Watson reported to GMAC's directors that GMAC would be "reimbursed" by GMCL for payment of the rate support amounts to the dealers. At first blush, one could reasonably conclude that GMCL has agreed to pay back to GMAC an amount that GMAC was not prepared to have spent for acquiring a conditional sales contract. GMAC paid the face amount of the contract to the dealer at no discount to the dealer, Mr. Watson acknowledged. There are other examples. These two facts lend some support to the validity of the assessments for the 1985 to 1988 taxation years.

[81] However, in my view, such facts do not affect the agency relationship the appellant claims to have had with GMCL. For example, if GMCL agreed to incur all expenses of rate support programs, which both parties agree is true, and reimburse GMAC for all expenses GMAC incurs on its behalf, one may reasonably conclude that Mr. Watson was informing GMAC's directors that there would be no risk of loss by GMAC paying the rate support amounts. In an agency relation, the agent has no risk of loss and no potential for same. And this is what Mr. Watson conveyed to GMAC's directors. The payment in full of the principal amount of the contract to dealers does not necessarily derogate from any understanding between GMAC and GMCL that the latter would pay a portion of the price. GMCL represented to its dealers they would receive the face amount of the contracts, and had to make good to them.

[82] I accept the evidence of Messrs. Peapples and Watson. The bases of their evidence survived cross-examination. In cross-examination Mr. Watson agreed with respondent's counsel that as between GMAC and the dealer, there was no reduced rate or discount. This, too, I do not find contrary to his evidence-in-chief. As between GMAC and the dealer, the dealer was to be paid the whole principal amount of the contract; therefore there was no so-called discount. As between GMAC and GMCL, the deal, so to speak, was that GMAC was paying the dealer only the value of the contract and the balance, the rate support amount, was to be paid by GMCL. There is no legal requirement for the dealer to have knowledge of the relationship between GMAC and GMCL.

[83] I also give weight to the fact that from the outset of the rate support programs in 1981, GMAC treated the reduced price it paid for a rate supported contract in the same way as it treated the price paid for a non rate supported contract. The rate support amount was not included in the cost of the contract, but amortized over its life. From the very beginning, therefore, GMAC did not consider itself as the proprietor of the rate support amount, but realized that as the retail customer made payments, an amount equal to the rate support amount would be included in the payments over the term of the contract and therefore amortized the rate support amount. GMAC recognized that with respect to the payment of the rate support amount included in the purchase price of the contract, it did not make the payment on its own account. This is but another indication that GMAC acted as agent of GMCL.

[84] GMCL established the rate support programs to support its franchised dealer network. The goal was to sell more cars and trucks. It was GMCL who devised the programs for its own business purposes and had an ongoing interest in making sure its dealers sold more product and received the full purchase price for the product. GMCL obtained the services of GMAC to administer the plans as its agent according to its directions.

[85] Since I have held that GMAC did not receive lost interest from GMCL and that GMAC was GMCL's agent when it administered the various rate support programs during the years in appeal, I need not consider the other submissions made by the parties.

[86] The appeals are allowed with costs.

Signed at Ottawa, Canada, this 3rd day of February 2000.

"Gerald J. Rip"

J.T.C.C.

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