Date: 20010226
Docket: A-628-99
2001 FCA 34
CORAM: DESJARDINS J.A.
DÉCARY J.A.
LÉTOURNEAU J.A.
BETWEEN:
WALTER KOWDRYSH
Appellant
AND:
HER MAJESTY THE QUEEN
Respondent
Heard at Saskatoon, Saskatchewan, Tuesday, February 13, 2001
Judgment delivered at Ottawa, Ontario, Monday, February 26, 2001
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
CONCURRED IN BY: DESJARDINS J.A.
DÉCARY J.A.
Date: 20010226
Docket: A-628-99
2001 FCA 34
CORAM: DESJARDINS J.A.
DÉCARY J.A.
LÉTOURNEAU J.A.
BETWEEN:
WALTER KOWDRYSH
Appellant
AND:
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
This proceeding is an appeal by a Saskatchewan farmer who, pursuant to the Finance Minister's incentives in 1992 for small businesses to accelerate investment, bought a new farming equipment, i.e., an air seeder, and was later refused by Revenue Canada the small business investment tax credit he claimed with respect to this qualified small-business property.
The economic statement made by the Finance Minister, which allowed for Temporary Small Business Investment Tax Credit, required that the investment be made after December 2, 1992 and before 1994. Revenue Canada refused the tax credit to the appellant on the basis that property in the air seeder had not passed to the appellant in 1993. The judge of the Tax Court of Canada upheld Revenue Canada's contention and, on this issue, dismissed the appellant's appeal with respect to the 1991, 1992 and 1993 taxation years. Hence, a further appeal to this Court.
The relevant provisions of the Income Tax Act (Act) governing investment tax credits are to be found in subsections 127(9) and (11.2). Subsection 127(9) defines "investment tax credit" and "qualified small-business property" as follows:
"investment tax credit"
"investment tax credit" of a taxpayer at the end of a taxation year means the amount, if any, by which the total of
(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 property, qualified small-business property or qualified transportation equipment acquired by the taxpayer in the year,
(ii) a qualified expenditure made by the taxpayer in the year or,
[...]
"crédit d'impôt à l'investissement"
"Le crédit d'impôt à l'investissement" d'un contribuable à la fin d'une année d'imposition correspond à l'excédent éventuel du total des montants suivants:
a) l'ensemble des montants dont chacun représente le pourcentage déterminé:
(i) soit du coût en capital pour le contribuable d'un bien admissible, d'un bien admissible de petite entreprise, d'un bien certifié, d'un bien d'un ouvrage approuvé, de matériel de construction admissible ou de matériel de transport admissible, que le contribuable a acquis au cours de l'année,
(ii) soit d'une dépense admissible que le contribuable a faite au cours de l'année,
[...]
"qualified small-business property"
"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", or
[...]
"bien admissible de petite entreprise"
"bien admissible de petite entreprise" s'entend d'un bien, acquis par un contribuable qui était un contribuable admissible au moment de l'acquisition du bien, qui constituerait, sans le paragraphe (11.2), l'un des biens suivants:
[...]
c) un bien admissible du contribuable, à supposer qu'il ne soit pas tenu compte des alinéas a) et d) de la définition de cette expression et que le passage "après le 23 juin 1975" à l'alinéa b) de cette définition soit remplacé par le passage "après le 2 décembre 1992 et avant 1994";
[...]
(the underlining is mine)
Subsection 127(11.2) contains a deeming provision determining the time of expenditure and acquisition whereby a property is deemed not to be acquired and an expenditure made with respect to that property before the property is considered to have become available for use by the taxpayer. I reproduce the exact wording of the subsection:
127(11.2) Time of expenditure and acquisition
- In applying subsections (5), (7) and (8), paragraphs (a) and (a.1) of the definition "investment tax credit" in subsection (9) and section 127.1,
(a) certified property, qualified property and first term shared-use-equipment are deemed not to have been acquired, and
(b) expenditures incurred to acquire property described in subparagraph 37(1)(b)(i) are deemed not to have been incurred by a taxpayer before the property is considered to have become available for use by the taxpayer, determined without reference to paragraphs 13(27)(c) and (28)(d).
127(11.2) Moment de l'acquisition
- Pour l'application des paragraphes (5), (7) et (8), des alinéas a) et a.1) de la définition de "crédit d'impôt à l'investissement" au paragraphe (9) et de l'article 127.1, les biens suivants sont réputés ne pas avoir été acquis, et les dépenses suivantes, ne pas avoir été engagées, par un contribuable avant le moment, déterminé compte non tenu des alinéas 13(27)c) et (28)d), où les biens sont considérés comme devenus prêts à être mis en service par lui:
a) un bien certifié, un bien admissible et du matériel à vocations multiples de première période;
b) les dépenses engagées pour l'acquisition de biens visés au sous-alinéa 37(1)b)(i).
In other words, for the purpose of an investment tax credit, a property is not acquired until that property has become available for use and, under subsection 13(27) of the Act, a property acquired by a taxpayer carrying on a business of farming is available for use at the time the property is delivered to the taxpayer and is capable of performing the function for which it was acquired:
13(27) Interpretation - available for use
- For the purposes of subsection (26) and subject to subsection (29), property (other than a building or part thereof) acquired by a taxpayer shall be considered to have become available for use by the taxpayer at the earliest of
[...]
13(27) Bien prêt à être mis en service
- Pour l'application du paragraphe (26) et sous réserve du paragraphe (29), le bien qu'un contribuable acquiert, à l'exception de tout ou partie d'un bâtiment, est considéré comme devenu prêt à être mis en service par lui au premier en date des moments suivants:
[...]
(g) in the case of property acquired by the taxpayer in the course of carrying on a business of farming or fishing, the time at which the property has been delivered to the taxpayer and is capable of performing the function for which it was acquired,
g) dans le cas où le contribuable a acquis le bien dans le cadre de l'exploitation d'une entreprise agricole ou d'une entreprise de pêche, le moment où le bien lui est livré et peut servir aux fins auxquelles il a été acquis;
Counsel for the appellant submitted that the effect of subsection 127(9) in its tortuous form is to waive, for the purpose of the investment tax credit, the available-for-use rule found in subsection 127(11.2). The waiver is effected by expressly mentioning in the definition of qualified small-business property that it is to be "read without reference to subsection (11.2)". This means that Parliament eliminated the requirement that the property be delivered and capable of performing the function for which it was acquired. I agree, but an essential fact remains: the property must have been acquired by the taxpayer within the time frame governing the investment tax credit. This appears clearly from subsection 127(9) which refers to property acquired by a taxpayer. What is then the meaning to be given to the word "acquired" in the specific context of this Temporary Small Business Investment Tax Credit program? Or perhaps more accurately stated, the issue becomes one of determining the moment or time at which the acquisition is made.
Counsel for the respondent relied upon the decision of this Court in Canada v. Construction Bérou Inc. [1999] F.C.J. No. 1761 and submitted that a buyer could benefit from the program only if he had either a legal title to the farming equipment or its beneficial ownership during the period of December 2, 1992 until December 31, 1993. As a matter of commercial reality, it should be stated that these equipments are costly and that many are acquired through financing conditions which reserve title to the property to the seller until the purchase price is fully paid. In practice, under this definition of "acquired", a farmer would have to have beneficial ownership in order to qualify for the tax credit because he would rarely, if ever, satisfy the condition of title ownership.
This position taken by counsel for the respondent leads to a double aberration which she admitted. First, a farmer, on the one hand, who would have bought a farming equipment before the program was even conceived and put into effect would benefit from it if he was fortunate enough to have the equipment delivered after December 2, 1992 up to December 31, 1993. He would be so entitled because he would then have beneficial ownership of an equipment which was not bought as a result of an investment enticed by the program. On the other hand, and this is the second aberration, a farmer who would have bought after the program came into force, and pursuant to that program, would be disqualified from it if the equipment was delivered to him after December 31, 1993 because he would have had no beneficial ownership prior to December 31, 1993. He would be disqualified from a program especially designed for him in the interest of boosting Canadian economy. The interpretation suggested by the respondent transforms the investment tax credit program into a prejudicial lure for many farmers who responded to the Government's call for a stimulation of the economy. I do not believe that this is what the Minister of Finance and Parliament intended.
Counsel for the appellant submitted that the notion of "acquisition" should be equated with that of "investment". In its form, the submission is too broad because the lender of money to buy farming equipment could claim the credit as an investor.
However, a proper interpretation of the word "acquired" requires that the nature of the tax credit program be considered. It also requires that the commercial reality applicable to the dealers and producers of farming equipment as well as to farmers to whom the program applies be taken into account.
As previously mentioned, the investment tax credit program was a temporary one, well limited and circumscribed in time. Farming equipments are large and costly equipments which need long lead time to manufacture. Dealers and manufacturers work on a roll according to a normal estimated turnover each year. Of necessity, an investment tax credit program like the one adopted in this case would create a surge in the demand and clog the production and delivery process of these equipments.
In addition, farmers in Saskatchewan do not harvest their crop in December or January. I am sure they would not mind having another crop, but this is not the Canadian reality. Therefore, the Canadian winter being what it is, it is not unreasonable for a farmer to defer the delivery of the equipment that he has bought in the fall until the following spring. In the same vein, it is not unusual for a farmer to engage in trade-ins of equipment only in the fall, after a profitable harvest is completed at the end of which the machinery may have shown signs of age and fatigue.
In my view, in the context of this temporary investment tax credit, especially in the farming industry where substantial investments are made with respect to costly, large, sophisticated and specialized equipment which requires a considerable amount of time for production, verification, approbation, transportation and delivery, the term "acquired" and the time of "acquisition" take a different meaning and connotation. With respect, I believe that, for the purpose of this special temporary tax credit program, farming equipment was acquired when the equipment in an ascertained form was purchased by means of a binding and enforceable contract.
I am comforted in this view by the fact that Parliament, in enacting subsection 127(9), waived the requirement of delivery with the ensuing possession and use. In other words, for all practical purposes, Parliament waived the necessity of beneficial ownership for the purpose of qualifying under the tax credit program. It seems that Parliament was aware of possible delays in the delivery of farming equipment as a result of an increased demand and because of potential organisational problems between suppliers and dealers over which a farmer who participated in the investment program would have had no control. It is not unreasonable to infer that Parliament intended that farmers who, during the existence of the program, bought farming equipment through a binding and enforceable contract not be prejudiced by the usual conditions of an acquisition. This is why it altered the time at which the property of farming equipment was acquired by suppressing the application of the adverse deeming provision that property is not acquired and an expenditure is not made until that property is delivered. It thereby removed a serious impediment to accessing the program.
In the present instance, the evidence establishes that the appellant bought the new air seeder on November 30, 1993 while the investment tax credit was in force. He traded in his old one for $22,615 and made a first payment of $2,500 post-dated to December 4, 1993. The balance of $7,900 was paid on delivery. It is admitted by the respondent that there was a binding and enforceable contract between the appellant and Farm World for an air seeder Model 3165 H with the serial numbers allocated to it on the same day the contract was signed. I should add that I find significant, as evidence of a binding contract between the parties, the fact that Farm World, to whom the appellant traded his old air seeder, tried to resell it as of the date of the trade, i.e., from November 30, 1993 on.
In my view, the farming equipment bought by the appellant was sufficiently ascertained at that time for the purpose of this investment tax credit program. The fact that the allocated serial numbers were not affixed on the air seeder until the time of delivery on February 15, 1994 does not diminish or undermine the specificity or individuality of the equipment bought.
Furthermore, it is conceded by the respondent that the manufacturing of the appellant's equipment was nearly fully completed before the expiry of the program on December 31, 1993 and that only 2 to 3%, representing 30 hours of work, remained to be done. The balance of the work was done in January 1994. If there could have been a doubt that the equipment bought by the appellant was ascertained on November 30, 1993, and I have concluded that there was none, this doubt would have, in any event, been dissipated by December 31, 1993 before the program expired.
I respectfully disagree with the learned Tax Court judge's characterization of the sale as one of future goods and, therefore, his conclusion that the contract of sale between the appellant and Farm World was merely an agreement to sell the goods. For the reasons that I have explained, I do not agree with him when he concluded that the air seeder was only acquired when it was delivered on February 15, 1994. It is obvious from his decision that the delivery of the equipment was the overriding consideration in his determination of the time at which the material was acquired.
For these reasons, I would allow the appeal with costs and set aside the decision of the Tax Court. Rendering the decision that should have been rendered, I would vacate the Minister's reassessments of the appellant's income for the 1991, 1992 and 1993 taxation years and refer the matter back to the Minister for reconsideration and reassessment on the basis that the appellant is entitled to benefit from the Small Business Investment Tax Credit for those years.
"Gilles Létourneau"
J.A.
"I agree
Alice Desjardins J.A."
"I concur
Robert Décary J.A."