Date: 20011107
Docket: 1999-2684-IT-G
BETWEEN:
JOHN STEVENSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 1999-2685-IT-G
BETWEEN:
KELVIN STEVENSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowman, A.C.J.
[1] These appeals were heard together and are from assessments for the 1993, 1994, 1995, 1996 and 1997 taxation years of the appellants. Many of the issues have been settled.
[2] Specifically, the parties agreed to the following.
(a) Based on my oral reasons in Clifford James Savage and Daryl Savage v. The Queen, 1999-1851(IT)G and 1999-1852(IT)G, rendered immediately prior to the hearing of these appeals, the respondent concedes the appellants' position with respect to the value of the equipment traded in on the purchase of a new tractor and combine and therefore the appellants' position on the cost of the new combine and tractor.
(b) It is agreed that the tractor was acquired prior to 1994 and therefore qualifies for the investment tax credit, and was not available for use until 1994 for purposes of capital cost allowance. It is also agreed that the trade in of the tractor was made in 1994 and that therefore the disposition took place in 1994.
(c) It is further agreed that the combine that was acquired was not available for use before 1994 and that the combine that was traded in was disposed of in 1994.
[3] To ensure that the formal judgments accurately respect the concessions made by the parties I have asked counsel for the appellants to draft the formal judgments and that they be approved as to form by counsel for the respondent.
[4] The sole remaining issue is whether a combine purchased by the appellants was a "qualified small-business property" or a "qualified property" within the meaning of subsection 127(9) of the Income Tax Act. For the appellants to be entitled to an investment tax credit in respect of the combine it has to be "qualified property", as defined, and to have been acquired after December 2, 1992 and before 1994. It is admitted that the combine was acquired between those dates and that it otherwise meets the criteria of "qualified small-business property" subject to one exception. The respondent alleges that it did not meet the condition in the definition of "qualified property" or "qualified small-business property" in subsection 127(9) of the Income Tax Act in that it had
not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer ...
[5] Subsection 127(9) grants an investment tax credit in respect of the cost of qualified small-business property. It is obviously incentive legislation designed to encourage businesses, including farming businesses, to invest in new machinery and equipment. Evidently the incentive was effective. Both the appellants, father and son, testified that it was one of the considerations that motivated their buying the combine when they did. This fact, although interesting, is not particularly germane to what has to be decided here.
[6] What is fatal to the appellants' claim according to the Crown is that the combine — a 1993 Duetz-Allis R72 combine with a cost of $210,000 was tested by an organization set up by the Government of Saskatchewan to assist the agricultural industry, the Prairie Agricultural Machinery Institute ("PAMI"). The manufacturer delivered the combine to Humboldt, Saskatchewan where it was tested in working conditions in the fields of farmers. It actually harvested grain.
[7] During the period of testing title remained with the manufacturer. PAMI did not purchase or acquire any interest in the combine. When testing was completed it was delivered to the dealer, Farm World Equipment Ltd., who sold it to the appellants as a new vehicle with a new vehicle warranty.
[8] A great deal of time at trial was devoted to disputing the Crown's allegation that the combine was "used" by PAMI for its own purposes for a total of 337 hours. I shall deal briefly with this point although I do not regard the number of hours of testing as particularly relevant to the question whether testing a piece of equipment owned by a manufacturer prior to its sale to a customer constitutes "use" for the purposes of subsection 127(9).
[9] Mr. Wassermann, an engineer employed by PAMI, testified that the machine operated in the field at most about 115 hours. PAMI usually attaches its own meter which tests only when the machine is threshing. The engine meter on the combine measures (a) when the machine is threshing, (b) when the machine is moving, (c) when the machine is idling, (d) when the key is turned on.
[10] The documents upon which the Crown relies in arriving at a figure of 337 hours are not indicative of the field or operating hours.
[11] I note in passing that the testing of the combine done by PAMI is painstaking, exhaustive and meticulous, to judge by its reports filed in evidence.
[12] Mr. David Cook, the president of Farm World Equipment Ltd. confirmed Mr. Wassermann's conclusions — 1317 acres were harvested in 1992 and 50 in 1993. Normally this combine would harvest 25 acres per hour. To harvest 1317 acres would therefore in normal circumstances require about 53 hours. It required 115 hours because of the frequent stops and tests that were done.
[13] The life expectancy of these combines is 3,500 field hours. 40 or 115 hours is an extremely small fraction of the combine's expected life.
[14] Mr. Cook testified that his dealership sold the appellants the combine under a Form A contract, which means a new combine with a new machine warranty. He testified that the clocks on these combines are "hopelessly inaccurate". He confirmed that the meter starts running once the key is turned on. He described PAMI's testing as "awesome". This is borne out by the detailed reports prepared. I can easily see how 115 hours could be spent in testing the machine. The evidence is clear that the figure of 337 hours is inaccurate. I find that the combine had about 115 hours of field or operating time when it was sold. However I would have reached the same conclusion had the figure been 337 hours.
[15] I do not think that where a manufacturer tests a piece of equipment, or causes it to be tested on its behalf by an independent organization such as PAMI, it can be said that it is, during the testing period, being "used for any purpose whatever". How does a manufacturer test a piece of equipment other than by having it perform the very task for which it is designed, that of harvesting crops? Testing new equipment by or at the behest of the manufacturer is an essential part of the manufacturing process.
[16] I have concluded that the combine was not used for any purpose prior to its acquisition within the meaning of subsection 127(9). Any other conclusion would be a purely mechanical one (The Queen v. Swantje, 94 DTC 6633, aff'd. 96 DTC 6310) and would be inconsistent with at least two principles of interpretation. The first is that if two interpretations are possible, one of which leads to an absurdity and one of which does not, the interpretation that does not should be preferred (Victoria City v. Bishop of Vancouver Island, [1921] 2 A.C. 384 at p. 388).
[17] The second is that a statute should be construed in a manner that best conforms to the scheme of the legislation (Highway Sawmills Ltd. v. M.N.R., 66 DTC 5116). This principle has been stated in a number of ways. In Communauté Urbaine du Québec v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3 at p. 17, Gonthier J. spoke of the teleological approach, which involves an identification of the telos or purpose of the legislation. Quite obviously the purpose of the legislation is to encourage investment in new machinery and equipment. The Federal Court of Appeal in Lor-Wes Contracting Ltd. v. The Queen, 85 DTC 5310, interpreted section 127 in accordance with the incentive that it was intended to provide and I think it is appropriate that I do so also in this case.
[18] Counsel for the appellants referred to Interpretation Bulletin IT-331R, paragraph 18.
Used Property
18. As indicated in 9, 10, 12 and 13 above, qualified property, qualified transportation equipment, qualified construction equipment, and certified property must be property which was not used for any purpose whatever before it was acquired by the taxpayer. The property must not only be new when acquired by the taxpayer but it must not have been acquired for use or lease or for any purpose whatever by any previous owner. As a result of these requirements, if a property that has been used or was acquired for a use (even though unused) is transferred to a new owner, eligibility for the investment tax credit is not transferable. In such a situation the former owner remains eligible for this credit provided the other requirements are satisfied. A piece of equipment that is used regularly for demonstration purposes (a "demonstrator") would not qualify; however, new equipment that is demonstrated to or "test" driven by, a prospective purchaser of that particular piece of equipment would not normally be considered to have been "used for a purpose".
[19] Administrative practice is not binding on the court. I agree however with the approach in the bulletin but it does not go far enough.
[20] Counsel referred as well to a decision of Beaubier J. in Whyte v. R., [1999] 4 C.T.C. 2678, 99 DTC 994. In that case he held that testing of a combine by a prospective purchaser did not constitute use within the meaning of subsection 127(9). I agree. Neither does testing by the manufacturer before delivery to the dealership prior to sale to the purchaser.
[21] Beaubier J. in Miller v. The Queen, 2000 DTC 2535, reached the opposite conclusion in the case of a combine that had previously been leased to another farmer, for use in his farming operations but not for the purpose of testing.
[22] I am in respectful agreement with the conclusion of Beaubier J. in both cases. His decision in Whyte is however closer to the fact situation here.
[23] The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment:
(a) to allow the appellants the investment tax credit on the basis that the 1993 Duetz-Allis R72 combine is "qualified small-business property" within the meaning of subsection 127(9) and therefore qualifies for the small-business investment tax credit;
(b) to give effect to the agreement between the parties on the other issues referred to at the beginning of these reasons.
[24] Counsel for the appellants is directed to prepare draft judgments and submit them to counsel for the respondent for approval before submitting them to the court for issuance and entry.
Signed at Ottawa, Canada, this 7th day of November 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE NOS.: 1999-2684(IT)G, 1999-2685(IT)G
STYLE OF CAUSE: Between John Stevenson and
Her Majesty The Queen AND
Between Kelvin Stevenson and
Her Majesty The Queen
PLACE OF HEARING: Prince Albert, Saskatchewan
DATE OF HEARING: August 31, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF REASONS FOR JUDGMENT: November 7, 2001
APPEARANCES:
Counsel for the Appellants: Grant Carson, Esq.
Counsel for the Respondent: Karen Janke
COUNSEL OF RECORD:
For the Appellants:
Name: Grant Carson, Esq.
Firm: Carson & Co.
Melfort, Saskatchewan
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada