Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336
Hickman Motors Limited Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Hickman Motors Ltd. v. Canada
File No.: 24994.
1996: October 30; 1997: June 26.
Present: La Forest, L’Heureux‑Dubé, Sopinka, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the federal court of appeal
Income tax ‑‑ Deductions ‑‑ Capital cost allowance ‑‑ Assets of subsidiary company transferred to parent company on winding-up at year’s end ‑‑ Parent company holding assets and receiving revenue from them for five days ‑‑ Assets then transferred to new company ‑‑ Whether s. 88 winding‑up provisions deeming flow through acquisition by parent company at capital cost creating rights for parent ‑‑ Whether parent company can deduct capital cost allowance for assets transferred from subsidiary ‑‑ Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 20(1), 88 ‑‑ Income Tax Regulations, C.R.C., c. 945, ss. 1102(1), (14).
Hickman Motors Ltd., a company in the car‑sales business, acquired all the assets of its subsidiary, Hickman Equipment Ltd. pursuant to the voluntary liquidation and winding-up of Hickman Equipment in late 1984. Among these assets were certain items of depreciable property used in the subsidiary’s heavy equipment leasing business. Hickman Motors owned the assets from December 28, 1984 to January 2, 1985. On January 2, 1985, it sold the assets to a related corporation, Hickman Equipment (1985) Ltd. In its 1984 tax return, Hickman Motors claimed the applicable capital cost allowance in respect of these heavy equipment assets. The Minister of National Revenue disallowed the claim on the ground that the assets had not been acquired by Hickman Motors for the purpose of producing income.
At issue are: (1) whether s. 88 of the Income Tax Act creates any rights for the appellant and, if so, what those rights are, and (2) whether the capital cost of the property acquired in the winding‑up of a subsidiary is applicable to the income from the parent’s business, within the meaning of s. 20(1)(a).
Held (Sopinka, Cory and Iacobucci JJ. dissenting): The appeal should be allowed.
Per La Forest, McLachlin and Major JJ.: To deduct the capital cost allowance at issue, the appellant first must have had a business source of income to which the assets related (s. 20(1) of the Income Tax Act). The appellant, since it carried on the business of leasing equipment, possessed the necessary business source of income to claim capital cost allowance. It was unnecessary to enter into the “sub‑source” issue.
The assets for which the capital cost allowance was claimed must be acquired for the purpose of producing income, so as to avoid the exclusion relating to assets for a non‑income producing purpose, such as pleasure or personal needs, established by Regulation 1102(1). Here, the appellant was deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14), which states that where property is acquired as the result of the winding-up of a Canadian corporation under s. 88(1) of the Act, and the property immediately before it was so acquired was property of a prescribed class, the property shall be deemed to be the property of that same prescribed class. Since the property was depreciable property in the hands of Hickman Equipment just prior to the winding-up, it is deemed to be acquired by the appellant as depreciable property ‑‑ i.e., for the purpose of gaining or producing income. So long as the appellant did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remained eligible for a capital cost allowance deduction. There was no evidence that this occurred. The fact that the assets produced revenue establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(c). The fact that the revenue was small or earned over a short period of time does not take it out of this category.
Per L’Heureux‑Dubé J.: Section 88(1) does not create any right for the parent company to claim a CCA deduction for property acquired from its subsidiary. That right is to be found in s. 20 of the Act. Where a parent acquires depreciable property from a subsidiary as a result of a wind‑up pursuant to s. 88(1), the deductibility of CCA is not automatic: the parent must satisfy the requirements of s. 20(1)(a), that is, the property must be held by the parent for the purpose of producing income from the parent’s business.
“Income from a business” includes “income from an undertaking of any kind whatever except an office or employment”, as distinguished from another source which would be excluded from the s. 248(1) definition. Here, the income is corporate, so the presumption that income is sourced from business applies. No evidence rebutting this presumption was before the courts. The issue of "income from property" does not arise in this case.
Where two or more business sources exist, the relevant business source must be identified and the income from each individual source computed separately. The appellant adduced clear, uncontradicted evidence that from December 29, 1984, to January 2, 1985, only one integrated business of sales, servicing, leasing and rental of cars and trucks, and of construction, forestry and rock‑drilling equipment existed. It complied with the definition of “business” in s. 248(1).
The evidence, viewed as a whole, shows that the appellant has discharged its burden of proving that it did in fact actively carry on the equipment‑related business. Both courts below drew improper inferences from the established facts, asked the wrong questions and incorrectly applied the law. An appeal court can accordingly look at the facts as they appear on the record and assess them through the appropriate law.
If an item of property produces income, then its purpose is indeed to produce income. The test is as follows. Does the property produce income? In the affirmative, the deduction is allowable. Where the property does not produce income, was it acquired for the purpose of producing income? This is determined by an objective evaluation of the specific facts and circumstances of each case in relation to appropriate jurisprudence, having regard to whether the taxpayer acted in accordance with reasonably acceptable principles of commerce and business practices. In the affirmative, the deduction is allowable. In the negative, the deduction is not allowable.
The appellant adduced clear, uncontradicted evidence that the property produced revenue. The CCA deduction was allowable because the requirements of Regulation 1102(1)(c) were met. Therefore it was not necessary to conduct the second part of the test dealing with the objective purpose.
The test for determining the purpose of producing income is not similar to the test for determining the question of whether a business has a reasonable expectation of profit. They differ in terms of their general thrust. The “reasonable expectation of profit” test is principally directed at differentiating between a business and a personal pursuit such as a hobby, etc., whereas the “purpose of producing income” test presupposes a business and is directed at determining whether an asset is appropriately used in the business. The “reasonable expectation of profit” criteria cannot be mechanically transferred into the “purpose of producing income” requirement in Regulation 1102(1)(c) for CCA purposes.
Under Regulation 1102(1)(c), the property does not have to produce revenue during a specified minimum period: where revenue is produced, it is sufficient that it be produced during a time period of any duration.
Whether the income produced by an item of property is material or immaterial, in relation to the taxpayer’s other income, is irrelevant to the application of Regulation 1102(1)(c). Under Regulation 1102(1)(c), where the revenue produced by an item of property is immaterial in relation to the overall business income, the taxpayer is not required to show this specific item of property separately in the financial statements. The appellant’s cost/benefit decision with respect to materiality was not unreasonable. Since the Act does not require that revenue be shown in financial statements, and absent any issue of credibility, the evidence adduced by the appellant was sufficient.
If the revenue is unreasonably low in relation to the value of the revenue‑generating property, the property is deemed not to produce income, and the second part of the “purpose of producing income” test, dealing with the objective purpose, is to be applied. The revenue produced by Equipment’s property was not unreasonably low in relation to that property’s value.
The appellant’s initial onus of proof is met where a prima facie case is made out. The onus shifts to the Minister to rebut the prima facie case made out by the taxpayer and to prove the assumptions. The appellant adduced clear, unchallenged and uncontradicted evidence. The respondent adduced no evidence whatsoever. Where the onus has shifted to the Minister and the Minister has adduced no evidence whatsoever, the taxpayer is entitled to succeed.
Per Sopinka, Cory and Iacobucci JJ. (dissenting): The capital cost allowance claimed was not applicable to a business source of income as required by s. 20(1).
Section 88(1) creates no right in a taxpayer to claim capital cost allowance. In the event of a transfer of property between related corporations, s. 88(1) permits a “flow‑through” of both the property’s cost amount and its undepreciated capital cost. While s. 88(1) does fix the undepreciated capital cost of the property at a certain level, nothing in the section gives the parent corporation the right to depreciate the property further. Section 88(1) in and of itself creates no rights to a tax deduction. Any right to claim capital cost allowance must be based in s. 20(1).
The relevant business source therefore must be identified and the capital cost shown to be wholly applicable to it. The taxpayer must compute income or loss separately from each individual business. On this point, the Act is clear. The capital cost allowance must be shown to be generally applicable to a particular business and not just to “business”, generally speaking.
Here, the appellant’s car and truck business was one potential business source. The existence of another business, the heavy equipment leasing business, was disputed by the Crown. The trial judge found that the appellant did not continue to operate the business previously run by Equipment. The Federal Court of Appeal reinforced this finding. Thus, the courts below made concurrent findings of fact which should not be interfered with absent palpable error or fundamental error of law. Not only did the trial judge commit no such palpable error, his finding on this point is strongly supported by the evidence.
First, there is no evidence that the appellant ever received any income from the assets. Second, even if the appellant did receive such income, that income cannot be characterized as income from business. Unless the taxpayer actually uses the asset as part of a process that combines labour and capital, any income earned therefrom does not qualify as income from a business, but rather falls into the category of income from property. Here, the appellant did nothing at all with the Equipment assets. It simply assumed ownership of the property and, allegedly, passively received income from the outstanding leases. Therefore, with regard to the alleged heavy equipment leasing business, the evidence does not establish that the appellant engaged in the kind of economic activity which constitutes a business for the purposes of the Income Tax Act.
The evidence also does not show that the appellant used the heavy equipment assets in its automobile business. Accordingly, it cannot deduct capital cost allowance in respect of those assets from the income earned from its car and truck dealership.
Section 88(1) does not create any right to claim capital cost allowance. Rather, it displaces the normal rules applying to the disposition of property turning the transfer from subsidiary to parent into a tax‑free transaction. It does not fix the character of the transferred property immutably or the nature of the income produced by that property. The nature of the income produced from the property may change following a s. 88(1) rollover. The transferred property may produce income from business in the hands of the subsidiary and income from property in the hands of the parent.
Cases Cited
By McLachlin J.
Referred to: Clapham v. M.N.R., 70 D.T.C. 1012; Bolus‑Revelas‑Bolus Ltd. v. M.N.R., 71 D.T.C. 5153; Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536.
By L’Heureux‑Dubé J.
Distinguished: R. v. Mara Properties Ltd., [1996] 2 S.C.R. 161; referred to: Moldowan v. The Queen, [1978] 1 S.C.R. 480; Lessard v. Paquin, [1975] 1 S.C.R. 665; 2747‑3174 Québec Inc. v. Quebec (Régie des permis d’alcool), [1996] 3 S.C.R. 919; Canadian Marconi v. R., [1986] 2 S.C.R. 522; Smith v. Anderson (1879), 15 Ch. D. 247; Carland (Niagara) Ltd. v. M.N.R., 64 D.T.C. 139; Attridge v. The Queen, 91 D.T.C. 5161; Bay Centre Apartments Ltd. v. M.N.R., 81 D.T.C. 489; Gloucester Railway Carriage and Wagon Co. v. Comrs. Inland Revenue (1923), 129 L.T. 691, aff’d (1924), 40 T.L.R. 435; Anderson Logging Co. v. The King, [1925] S.C.R. 45; Bolus‑Revelas‑Bolus Ltd. v. M.N.R., 71 D.T.C. 5153; Royal Trust Co. v. M.N.R., 57 D.T.C. 1055; Ghali v. Canada (Minister of Transport), [1996] F.C.J. No. 1404 (QL); Mark Resources Inc. v. The Queen, 93 D.T.C. 1004; Bellingham v. Canada, [1996] 1 F.C. 613; Canada v. McLaren, [1991] 1 F.C. 468; The Queen v. Vancouver Art Metal Works Ltd., 93 D.T.C. 5116; Docherty v. M.N.R., 91 D.T.C. 537; Vander Nurseries Inc. v. The Queen, 95 D.T.C. 91; Mountwest Steel Ltd. v. The Queen (1994), 2 G.T.C. 1087; Uphill Holdings Ltd. v. M.N.R., 93 D.T.C. 148; M.N.R. v. Wardean Drilling Ltd., 69 D.T.C. 5194; M.N.R. v. Société Coopérative Agricole de la Vallée d’Yamaska, 57 D.T.C. 1078; Weinberger v. M.N.R., 64 D.T.C. 5060; Naka v. The Queen, 95 D.T.C. 407; Page v. The Queen, 95 D.T.C. 373; Clapham v. M.N.R., 70 D.T.C. 1012; Dobieco Ltd. v. Minister of National Revenue, [1966] S.C.R. 95; Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102; Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098; Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359; First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337; Kamin v. M.N.R., 93 D.T.C. 62; Goodwin v. M.N.R., 82 D.T.C. 1679; MacIsaac v. M.N.R., 74 D.T.C. 6380; Zink v. M.N.R., 87 D.T.C. 652; Magilb Development Corp. v. The Queen, 87 D.T.C. 5012; Waxstein v. M.N.R., 80 D.T.C. 1348; Roselawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271; Gelber v. M.N.R., 91 D.T.C. 1030.
By Iacobucci J. (dissenting)
Moldowan v. The Queen, [1978] 1 S.C.R. 480; C.B.A. Engineering Ltd. v. M.N.R., [1971] C.T.C. 504; Poulin v. The Queen, 94 D.T.C. 1674; Vincent v. Minister of National Revenue, [1965] 2 Ex. C.R. 117; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727.
Statutes and Regulations Cited
Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 3(a), 4(1)(a), 9(1), 13(7)(a), 18(1)(a), (b), (h), 20(1)(a), 31, 85(5.1) [ad. S.C. 1980‑81‑82‑83, c. 140, s. 50(2)] (a) [ad. idem], (e) [ad. idem], 88(1) [rep. & sub. S.C. 1980‑81‑82‑83, c. 48, s. 48(1)], (a)(iii) [rep. & sub. S.C. 1974‑75‑76, c. 26, s. 52], (c) [rep. & sub. S.C. 1977‑78, c. 1, s. 43(3)], (e), (1.1) [rep. & sub. S.C. 1984, c. 1, s. 39(4)], (e) [ad. idem], 172(2), 248(1) [am. S.C. 1984, c. 1, s. 104(1)].
Income Tax Regulations, C.R.C., c. 945, ss. 107(1), 1100(1)(a)(xvi), 1102(1)(c), (14).
Authors Cited
Arnold, Brian J., Tim Edgar and Jinyan Li, eds. Materials on Canadian Income Tax, 10th ed. Toronto: Carswell, 1993.
Beechy, Thomas H. Canadian Advanced Financial Accounting, 2nd ed. Toronto: Holt, Rinehart and Winston of Canada, 1990.
Bennion, F. A. R. Statutory Interpretation: A Code, 2nd ed. London: Butterworths, 1992.
Canada. Department of Finance. A Corporate Loss Transfer System for Canada. Michael Wilson, Budget Papers, Budget Speech, May 1985. Ottawa: Department of Finance, 1985.
Canadian Institute of Chartered Accountants. CICA Handbook, vol. 1. Toronto: Canadian Institute of Chartered Accountants, 1969 (loose‑leaf).
Chasteen, Lanny G., et al. Intermediate Accounting, 1st Canadian ed. Toronto: McGraw-Hill Ryerson, 1992
Couzin, Robert. “Current Tax Provisions Relating to Deductibility and Transfer of Losses”, in Policy Options for the Treatment of Tax Losses in Canada. Toronto: Clarkson Gordon Foundation, 1991, p. 3:3.
Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994.
Durnford, John. “The Distinction Between Income from Business and Income from Property, and the Concept of Carrying On Business” (1991), 39 Can. Tax J. 1131.
Harris, Edwin C. Canadian Income Taxation, 4th ed. Toronto: Butterworths, 1986.
Hogg, Peter W., and Joanne E. Magee. Principles of Canadian Income Tax Law. Scarborough: Carswell, 1995.
Kerans, Roger P. Standards of Review Employed by Appellate Courts. Edmonton: Juriliber, 1994.
Krishna, Vern. The Fundamentals of Canadian Income Tax, 5th ed. Scarborough: Carswell, 1995.
Owen, John R. “The Reasonable Expectation of Profit Test: Is There a Better Approach?” (1996), 44 Can. Tax J. 979.
APPEAL from a judgment of the Federal Court of Appeal (1995), 95 D.T.C. 5575, [1995] 2 C.T.C. 320, 185 N.R. 231, dismissing an appeal from a judgment of Joyal J., [1993] 1 F.C. 622, (1993), 59 F.T.R. 139, 93 D.T.C. 5040, [1993] 1 C.T.C. 36, dismissing an appeal of tax assessments. Appeal allowed, Sopinka, Cory and Iacobucci JJ. dissenting.
James R. Chalker, for the appellant.
Roger Taylor and André LeBlanc, for the respondent.
//McLachlin J.//
The judgment of La Forest, McLachlin and Major JJ. was delivered by
1 McLachlin J. -- While I concur in the general approach and the conclusion of Justice L’Heureux-Dubé, I prefer to decide the appeal on somewhat narrower grounds.
2 In order to deduct the capital cost allowance at issue, (1) Hickman Motors Ltd. must have had a business source of income to which the assets related (s. 20(1) of the Income Tax Act, S.C. 1970-71-72, c. 63); and (2) the assets must have been acquired for the purpose of producing income (Income Tax Regulations, C.R.C., c. 945, Regulation 1102(1)(c)).
3 On the first question, I agree with L’Heureux-Dubé J. that the evidence establishes that Hickman Motors Ltd. carried on the business of leasing equipment and hence possessed a business source of income related to the assets for which capital cost allowance was claimed. This established, it is unnecessary to enter on the “sub-source” issue.
4 The second question is whether the assets for which the capital cost allowance was claimed were acquired for the purpose of producing income, so as to avoid the exclusion established by Regulation 1102(1). The exclusion is aimed at ensuring that the asset for which the deduction is claimed is an asset associated with income production as distinguished from an asset acquired for a non-income producing purpose, such as pleasure or personal needs.
5 In this case, Hickman Motors Ltd. is deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14), which states that where property is acquired as the result of the winding-up of a Canadian corporation under s. 88(1) of the Act, and the property, immediately before it was so acquired, was property of a prescribed class, the property shall be deemed to be the property of that same prescribed class. Since the property was depreciable property in the hands of Hickman Equipment just prior to the winding-up, it is deemed to be acquired by Hickman Motors Ltd. as depreciable property-- i.e., for the purpose of gaining or producing income.
6 So long as Hickman Motors Ltd. did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remains eligible for a capital cost allowance deduction. There is no evidence that this occurred.
7 The fact that the assets produced revenue, as the reasons of L’Heureux-Dubé J. demonstrate, establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(1)(c). The fact that the revenue was small or earned over a short period of time does not take them out of this category. We need not decide whether a different result might flow if the evidence viewed as a whole showed that the assets possessed a non-revenue function: see Clapham v. M.N.R., 70 D.T.C. 1012 (T.A.B.); Bolus-Revelas-Bolus Ltd. v. M.N.R., 71 D.T.C. 5153 (Ex. Ct.). Nor is the case of assets held for such a short period of time that the revenue produced was too small to calculate (e.g., the case of the instantaneous or same day rollover) before us. Here the assets served only one function, to produce income. That Hickman Motors may have intended to retransfer the assets to Hickman Equipment (1985) Ltd. is of no moment. The evidence admits of only one conclusion: that the assets were business assets associated with the production of income.
8 The fact that the directors of the taxpayer may have intended to obtain a tax saving by acquiring the asset is irrelevant. It is a fundamental principle of tax law that “[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”: Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.), at p. 19, per Lord Tomlin. As Wilson J. put it in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 540, “[a] transaction may be effectual and not in any sense a sham (as in this case) but may have no business purpose other than the tax purpose”.
Conclusion
9 I would allow the appeal and allow the claimed deduction, with costs throughout to the appellant.
//L’Heureux-Dubé J.//
The following are the reasons delivered by
L’Heureux-Dubé J. --
I. Introduction
10 This appeal involves a fact-driven technical question of income taxation. The narrow issue is whether the appellant can claim Capital Cost Allowance (CCA) from a specific business it operated for a period of five days. This depends upon proper application of the “purpose of . . . producing income” requirement set out in s. 1102(1)(c) of the Income Tax Regulations, C.R.C., c. 945, read together with the phrases “from a business or property” and “applicable to that source” in s. 20(1) of the Income Tax Act, S.C. 1970-71-72, c. 63 (ITA), in the factual context of this appeal. In my opinion, the CCA deduction is allowable.
II. Background
A. Factual Context
11 The appellant Hickman Motors Ltd. (Hickman Motors) is a General Motors automobile and truck distributor in St. John’s, Newfoundland. It is a member of a group of associated companies held by Hickman Holdings Ltd. (Hickman Holdings), which is controlled by brothers Albert Hickman and Howard Hickman. In 1980, Hickman Holdings owned A. E. Hickman Ltd. (AEH). AEH, at that point, was itself acting as a holding company: it held the shares of Hickman Motors, Atlanta Insurance Ltd., Verdun Sales Ltd. and Hickman Equipment Ltd. (Equipment). AEH also had a number of operating divisions in different business areas, operating out of Cornerbrook, Fortune and Grand Falls, Newfoundland. Equipment was in the business of construction equipment. It had four franchises: John Deere for construction equipment such as backhoes and bulldozers, Tree Farmer for forestry equipment, Ingersoll-Rand for rock-drilling equipment and P&H Ltd. for crane operations. At one point in the mid-1970s, Equipment operated as a division of AEH, rather than as a separate corporation set up as a subsidiary of AEH.
12 The Hickman name is well-known in Newfoundland. The business started in 1905, and until now the Hickmans have been proud to have honoured their commitments and met all their responsibilities to other people. Beginning in the early 1980s, the Hickman Group began to experience dramatic change, serious financial losses, and difficulties with its creditors and its bankers. The consolidated financial statements of AEH showed a profit, but the non-consolidated ones showed significant losses. Equipment lost $1.8 million in 1981, and $122,000 in 1984. These losses were described by the appellant’s witness as “pretty significant operating losses . . . frightening losses” that had the potential of making Equipment go bankrupt.
13 The Group strived to ensure that this bankruptcy would not occur because it would have had a spill-over effect on Hickman Motors and AEH. As a condition for the operating line of credit for Equipment, the Canadian Imperial Bank of Commerce (CIBC) had guarantees from most of the Group’s subsidiary companies. In the event of Equipment’s going bankrupt, the income streams of all the companies in the Group would have been impacted because both Hickman Motors and AEH could have been called to honour the bank guarantees. Also, John Deere required the guarantee of AEH as a condition of Equipment’s having the John Deere franchise. There would have been a tremendous loss of customer confidence in the business of Hickman Motors as the Hickman name was involved in three of the businesses. In 1982-83, it was decided to remove both Hickman Motors and Equipment as subsidiaries of AEH, thus allowing it to focus on its building supply operation.
14 On November 30, 1984, the Hickman Group’s auditing firm presented a “package proposal” to get financing from CIBC. This involved a corporate reorganization which occurred as follows. On December 14, 1984, the appellant Hickman Motors acquired all the shares of Equipment. On December 28, 1984, Equipment was voluntarily liquidated and wound up into its parent Hickman Motors. Its assets, including non-capital losses in the amount of $876,859 and depreciable property with an undepreciated capital cost of $5,196,422, became the property of the appellant. On January 2, 1985, those same assets, net of the liabilities of Equipment, were sold to the appellant’s newly created and wholly owned subsidiary, Hickman Equipment (1985) Ltd. (Equipment 85). In its 1984 tax return, the appellant claimed a capital cost allowance of $2,029,942 in respect of the assets it had received from Equipment on the winding-up, which was disallowed by the Minister of National Revenue.
B. Issues
15 The only issues to be resolved are the following:
1. Does s. 88 ITA create any rights for the appellant; if so, what are they?
2. Is the capital cost of the assets acquired in the winding-up applicable to the income from the appellant’s business, within the meaning of s. 20(1)(a) ITA?
By consent the parties withdrew all the other issues that were raised in the courts below.
C. Judgments Appealed From
16 As regards the s. 88 issue, both the Trial Division, [1993] 1 F.C. 622, and the Federal Court of Appeal, 95 D.T.C. 5575, held that, in themselves, the s. 88 provisions do not create a right to deduct CCA.
17 As regards the s. 20 issue, both judgments focused on the taxpayer’s “intention to earn income” from the equipment-related items of property. The Trial Division found, at p. 633, that the appellant never intended to carry on the business of a heavy equipment dealer:
. . . it is difficult to see how the assets . . . were used in the business of the plaintiff to produce income. . . . The mere fact that these assets were available for leasing does not . . . affect the real purpose of the acquisition. I should find that the short turnover period of some four days is a pretty clear indication that there was neither an intention nor, for practical purposes, any more than a notional attempt to earn income from the assets acquired on the winding-up. [Emphasis added.]
18 The Federal Court of Appeal, at p. 5579, substantially applied the “reasonable expectation of profit” test set forth by this Court in Moldowan v. The Queen, [1978] 1 S.C.R. 480, and inferred that,
[w]hile I would not wish to be taken as suggesting that there is any temporal requirement to a taxpayer’s holding of property for the purposes of earning income, the fact that this taxpayer held the property here in issue only over the period of a long holiday week-end is surely indicative of the fact that it had no intention of actually earning income from the property. [Emphasis added.]
I will deal in greater detail with specific parts of these judgments in the appropriate sections infra.
D. Positions of the Parties Before This Court
19 The appellant claims that the scheme of the ITA as a whole should apply in the case of related groups to permit the transfer of accumulated pools of undeducted expenses, loss carry overs, or tax credits: Michael Wilson, A Corporate Loss Transfer System for Canada, Department of Finance Budget Papers, Budget Speech, Canada, May 1985, at p. 3:
In the Canadian corporate income tax system, each corporation is taxed as a separate entity. This can lead to situations in which one corporation in a commonly-owned group has tax losses or unused deductions or tax credits while other corporations in the group face tax liabilities. If the businesses within the separate corporations were instead operated as divisions within a single corporation, the unused losses, deductions or credits from one line of business could generally be used to reduce the amount of corporate tax payable on income from another.
. . .
The corporate tax system in the United States provides for tax consolidation. The United Kingdom has a system of loss transfers. Many other countries also have systems to provide for the transfer of losses, deductions or tax credits. [Emphasis added.]
20 One of the reasons why Canada has not been able to achieve a more liberal system of corporate group taxation is the two-tier federal-provincial income tax system: Robert Couzin, “Current Tax Provisions Relating to Deductibility and Transfer of Losses”, in Policy Options for the Treatment of Tax Losses in Canada (1991), p. 3:3, at p. 3:12.
21 According to the respondent, the party who should be taking CCA is Equipment 85, not the appellant Hickman Motors. In the respondent’s opinion, the interposition for a few days of Hickman Motors in the transfer of the assets from Equipment to Equipment 85 should not make any difference, and the CCA deductions could be taken by Equipment 85 in subsequent years. However, during the oral hearing before us, counsel for the respondent conceded that it is always possible that the deduction might end up being lost forever.
22 The respondent relies quite heavily on the findings and inferences of fact made by the trial judge, and confirmed by the Court of Appeal. The respondent argues that the courts below made no palpable and overriding error in their findings. That deference argument was strongly emphasized both in the respondent’s brief and in argument before us. It is quite clear that the respondent advocates a formalistic application of the principle of appellate deference to trial-level findings of fact. Accordingly, before addressing the substantive legal issues, it is necessary to review this principle briefly.
III. Trial-Level Findings of Fact
23 Counsel for the appellant pointed out in oral argument that some of the trial-level factual findings were wrong. The uncontradicted evidence shows that Hickman Motors held the assets during five days, not four days as found by the trial judge at p. 633. Also, counsel pointed out that Hickman Motors’ leasing revenue was not 1.9%, as the trial judge found, but $1.9 million, which in reality makes 2.5% of the total revenue. It is noteworthy that in addition to these factual errors, the trial judge stated at least four times during the hearing that he was “overwhelmed” or “confused”, which is quite understandable given the complexity of the case. I consider that the appellant is right about the above errors, although they do not affect the substance of the decision. Except for these errors, I wish to emphasize that I take the facts as found by the trial judge, and confirmed by the Court of Appeal, as they appear in the record. However, we ought to look at those facts through the prism of the appropriate law.
24 A reviewable error of law exists where there has been a mistake of law, such as addressing the wrong question, applying the wrong principle, failing to apply or incorrectly applying a legal principle, or drawing an improper inference from established facts. In the case at bar, both courts below drew improper inferences from the established facts, asked the wrong questions and incorrectly applied the law.
25 It is to be noted at the outset that in the present case, the credibility or reliability of witnesses is not an issue. There was only one witness for the appellant and the respondent called no witnesses. Neither the Trial Division nor the Court of Appeal raised any issue of credibility. Where credibility is not in question, an appeal court is in as good a position to evaluate the evidence as the trial judge: Lessard v. Paquin, [1975] 1 S.C.R. 665, at pp. 673-75. Accordingly, in my view, our Court is in as good a position as the Trial Division to evaluate the evidence in the record, should the need arise.
26 The following statement by Roger P. Kerans, a Justice of the Alberta Court of Appeal, aptly describes the appropriate relief in the present case (Standards of Review Employed by Appellate Courts (1994), at p. 203):
Often, the error of the first tribunal was about a question of law. In that case, its findings of fact remain undisturbed. Usually, the reviewing court will, in such a case, refuse to order a new trial. It will instead vary the conclusion, or affirm the conclusion, after applying the correct view of the law to the facts found by the first tribunal. [Emphasis added.]
27 While accepting the findings of fact (after correcting the errors), if the courts below have misapplied the law to the facts, it is open to an appeal court to examine the “proper inferences to be drawn from the evidence”, by looking at the facts as they appear on the record and assessing them through the prism of the appropriate law, which is what I will now turn to.
IV. Analysis
1. Section 88
28 The provision at issue here reads as follows:
88. (1) Where a taxable Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound up after May 6, 1974 and not less than 90% of the issued shares of each class of the capital stock of the subsidiary were, immediately before the winding-up, owned by another taxable Canadian corporation (in this subsection referred to as the “parent”) and all of the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by persons with whom the parent was dealing at arm’s length, notwithstanding any other provision of this Act, the following rules apply:
(a) subject to paragraph (a.1), each property of the subsidiary that was distributed to the parent on the winding-up shall be deemed to have been disposed of by the subsidiary for proceeds equal to,
. . .
(iii) in the case of any other property, the cost amount to the subsidiary of the property immediately before the winding-up;
. . .
(c) the cost to the parent of each property of the subsidiary distributed to the parent on the winding-up shall be deemed to be the amount deemed by paragraph (a) to be the proceeds of disposition of the property. . . .
29 Hugessen J.A., speaking for the Federal Court of Appeal, came to the conclusion, at pp. 5577-78, that this provision creates no rights to any deductions at all:
While I am prepared, in general terms, to agree with the appellant’s characterization of the purpose and intent of subsection 88(1), I cannot agree that it gives rise to the results contended for. In and of itself, the subsection creates no rights to any deductions at all.
. . .
I conclude, accordingly, that section 88 does not create for the appellant an independent right to claim capital cost allowance on the property which it acquired on the winding-up of its subsidiary “Equipment”. Such a claim can only succeed if the appellant can demonstrate that it otherwise meets the requirements of the Act and Regulations.
30 I agree with this analysis of s. 88(1). The relevant parts of s. 88(1)(a)(iii) are the following:
88. (1) . . .
(a) . . . property . . . shall be deemed to have been disposed of by the subsidiary for proceeds equal to,
. . .
(iii) . . . the cost amount to the subsidiary. . . . [Emphasis added.]
31 The cost amount is defined in s. 248(1):
248. (1) . . .
“cost amount” to a taxpayer of any property at any time means. . . .
(a) where the property was depreciable property of the taxpayer of a prescribed class, that proportion of the undepreciated capital cost. . . . [Emphasis added.]
32 Section 88(1)(a)(iii) provides that the property disposed of by a subsidiary on winding-up is deemed to have been disposed of for proceeds equal to its undepreciated capital cost (UCC). This implies that there can be neither a recapture, nor a terminal loss, as far as the subsidiary is concerned. As far as the parent company is concerned, the relevant parts of s. 88(1)(c) are the following:
88. (1) . . .
(c) the cost to the parent . . . shall be deemed to be the amount deemed by paragraph (a). . . .
33 The property acquired from the subsidiary by the parent on winding-up is deemed to have been acquired at a cost equal to the above-stated amount, as determined pursuant to s. 88(1)(a)(iii), that is, the UCC. In other words, the whole transaction is deemed to have occurred at the UCC rather than some other value such as, for example, the laid-down acquisition cost or the fair market value.
34 It is appropriate to distinguish the instant case from R. v. Mara Properties Ltd., [1996] 2 S.C.R. 161. In so far as its interrelation with the present case is concerned, in my opinion Mara stands for the following proposition: upon winding-up, a subsidiary automatically distributes its assets to its parent pursuant to s. 88(1), and those assets should be grouped with the parent’s assets of the same character. Here, Equipment’s assets were distributed to the appellant and should be grouped with the parent’s assets of the same character. But that is not the issue here. The issue here is this: once the winding-up is done and the assets are distributed, what happens afterwards? Can the parent claim CCA on those assets? This issue is outside the scope of both Mara and s. 88 itself.
35 In my opinion, and I agree with both the trial judge and the Court of Appeal in this respect, s. 88(1) does not create any right for the parent company, in this case the appellant Hickman Motors, to claim a CCA deduction for property acquired from the subsidiary Hickman Equipment. If there is such a right, it is to be found in s. 20 ITA, which I will now discuss.
2. Section 20
36 Section 20(1)(a) and the Regulations must be read in conjunction, as is clearly stated in the provision:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation. . . . [Emphasis added.]
37 Section 20(1)(a) creates a deduction for the capital cost of property, “as is allowed by regulation”. Section 20(1)(a) cannot be read in a vacuum: the applicable regulations must be read concurrently. Because of its language, reading it without considering the regulations would not be in accordance with appropriate principles of statutory interpretation: F. A. R. Bennion, Statutory Interpretation: A Code (2nd ed. 1992), at pp. 805 et seq.; see also Ruth Sullivan, Driedger on the Construction of Statutes (3rd ed. 1994), at p. 198; 2747-3174 Québec Inc. v. Quebec (Régie des permis d’alcool), [1996] 3 S.C.R. 919, at pp. 1011-15.
38 At this stage, I must stress that both the trial judge and the Court of Appeal did not examine the facts through the appropriate legal landscape. According to s. 20 ITA and the Regulations, the following questions had to be asked. Is there “income from a business”? What is the appropriate “business source” of income? What is the “part of the capital cost” that can be deducted? Is the amount “wholly” or “partly” applicable to the source? Was the item of property “acquired for the purpose of producing income”? In order to address this last question, the following had to be asked: Does the item of property produce any revenue? If it does not, is its purpose to produce income? By not asking the proper questions, and by not drawing the appropriate inferences from the established facts as regards the legal landscape, both courts below made errors of law which must be reviewed by looking at the facts through the prism of the applicable law.
39 In my opinion, the applicable law as regards the case at bar is as follows. Where a parent acquires depreciable property from a subsidiary as a result of a wind-up pursuant to s. 88(1), the deductibility of CCA is not automatic. The nature of the property and the nature of its income are not forever fixed as a result of a s. 88(1) rollover. The nature of the property and the nature of its income may change. To claim CCA, the parent must satisfy the requirements of s. 20(1)(a), that is, the property must be held by the parent for the purpose of producing income from the parent’s business. As I see it, both my colleague Justice Iacobucci and I agree on that statement of the law. However, we disagree on the application of that proposition of law to the facts of the case at bar. In my opinion, a proper analysis of the evidence as it appears in the record, to which I will now turn, can only lead to the conclusion that, in the case at bar, the appellant met the requirements for CCA.
A. Income From a Business Source
40 Is there “income from a business”? From the evidence, the appellant had, for the 1984 fiscal year, sales of $75,275,000 and an income before extraordinary items of $1,528,000. Next, the deduction in s. 20(1) can only apply to “income from a business or property”. The issue of “income from property” has not been argued and does not arise in our case. We must now determine whether the source of the above income is in fact a “business”. It is appropriate to look at the definition of “business” in s. 248(1):
248. (1) . . .
“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and . . . an adventure or concern in the nature of trade but does not include an office or employment. . . . [Emphasis added.]
41 “Income from a business” accordingly includes “income from an undertaking of any kind whatever except an office or employment”, as distinguished from another source which would be excluded from the s. 248(1) definition. As discussed by Vern Krishna, The Fundamentals of Canadian Income Tax (5th ed. 1995), at pp. 277 and 772, there is a rebuttable presumption that corporate income derives from business: Canadian Marconi v. R., [1986] 2 S.C.R. 522; Smith v. Anderson (1879), 15 Ch. D. 247 (C.A.). Here, the income is corporate, so the presumption that income is sourced from business applies.
42 Of course, the above presumption is rebuttable. However, neither the examination-in-chief nor the cross-examination of the appellant’s witness revealed evidence to that end, and the respondent adduced no evidence whatsoever. As the presumption was not rebutted, I conclude that the appellant’s income is sourced from business, as distinguished from another source.
43 Moreover, the record discloses positive evidence that Hickman Motors did indeed carry on the equipment-related sales and rental activities during the period: (1) the equipment rental business was in fact carried on; (2) Hickman Motors assumed the business risk and other obligations; (3) it is a common practice in the construction industry to buy the rented equipment just before the December 31 year-end, so there was a clear opportunity for doing business during that specific period; (4) Equipment in fact sold a backhoe on December 21, 1984; (5) evidence of rental revenue, and a bundle of rental invoices applicable to the period, as detailed infra; (6) the equipment was available for sale, and was advertised as such; (7) on December 31, 1984, Hickman Motors accepted an order for rental of at least one piece of equipment.
44 While my colleague Iacobucci J. asserts, at paras. 145 and 157 of his reasons, that the appellant “did nothing at all with the Equipment assets”, his reasons do not explicitly refer to any evidence, adduced by the respondent, that would rebut the appellant’s clear evidence and prove that the appellant “did [nothing] at all with these assets”. At paras. 147 and 148 of his reasons, Iacobucci J. challenges one piece of evidence, the December 31 invoice. Even without the December 31 invoice, I am satisfied that the rest of the evidence, viewed as whole, shows that the appellant did in fact actively carry on the equipment-related business activities.
45 Nevertheless, it is true that Equipment 85 renegotiated the dealership agreement with John Deere, and Hickman Motors did not do so. However, this is not evidence that Hickman Motors “did [nothing] at all with these assets”, or did not otherwise carry on the equipment-related business. Clear, uncontradicted evidence was adduced that the other dealership agreements had remained unchanged since the mid-1970s, and remained so even after Equipment 85 had assumed them.
46 The trial judge, asking the wrong questions, inferred the absence of business purpose, and the absence of intention to earn income, from the fact that the property was merely “available for leasing”. This inference is incorrect and constitutes an error of law. Where machinery is rented out, the essential core operations may at times be limited to accepting rental revenue and assuming the business risk and other obligations. At any time during that period, any client could demand the execution of any of the contractual obligations, such as fixing an engine, for example. Where, because a rental business is fortunate enough to experience no mechanical breakdowns or accidents during a period of time, it “passively” accepts rental revenue and assumes business risk and obligations, it does not necessarily follow that it is not carrying on a business during that period. Holding otherwise would imply that rental businesses are “intermittent”, that is, that they carry on a business only when something goes wrong in the operations. Such a proposition is unacceptable.
47 Contrary to my colleague Iacobucci J.’s opinion at paras. 145 and 158 of his reasons, even if the appellant “passively” received rental income during a period of time, it does not necessarily follow that it did not carry on an active business. In Carland (Niagara) Ltd. v. M.N.R., 64 D.T.C. 139, at p. 141, the Tax Appeal Board stated that:
It is not necessary that there be sustained activity before it can be maintained that a business is carried on; there may be and often are periods of quiescence in almost any business enterprise. . . . [The Commissioner of Inland Revenue v. The South Behar Railway Co., Ltd., (1925) 12 T.C. 657] indicates how little need be done to constitute a carrying on of business. I find, as a fact, that some measure of business, be it greater or lesser, never ceased to be conducted at any material time. Always, the premises were open to any customer who might call there.
Also, I note the following comment in John Durnford, “The Distinction Between Income from Business and Income from Property, and the Concept of Carrying On Business” (1991), 39 Can. Tax J. 1131, at p. 1191:
Indeed, depending on the nature of the business, the mere presence of long periods of inactivity will not alone indicate that a business is not being carried on.
48 I am satisfied that the evidence, viewed as a whole, shows that the appellant has discharged its burden of proving that it did in fact actively carry on the equipment-related business. Moreover, the respondent adduced no evidence whatsoever that could be weighed against that of the appellant. However, the respondent could have adduced evidence, as it did for example in Attridge v. The Queen, 91 D.T.C. 5161 (F.C.T.D.), where it used two experts; see also Bay Centre Apartments Ltd. v. M.N.R., 81 D.T.C. 489 (T.R.B.), where it used an expert-employee. Therefore, the appellant’s evidence must stand, and the proper inference from that evidence is that Hickman Motors did in fact carry on the equipment-related business between December 28, 1984 and January 2, 1985.
B. Determining the Appropriate Business Source
49 The next step is to ensure that the deduction is applied to the appropriate business source. Contrary to what my colleague Iacobucci J. states in paras. 136 to 138 of his reasons, there is no disagreement as to the words used in the ITA. In cases where two or more business sources exist, the relevant business source must be identified, and the income from each individual source, as the case may be, is to be computed separately. However, I cannot agree with my colleague as to his application of that principle to the facts of the case at bar. The trial judge at p. 633 inferred that the source was the “automotive” operations, implying that this source was somehow distinct from the “equipment” operations during the applicable period. Further, my colleague Iacobucci J. asserts that the appellant has several “business ‘sub-sources’” of income. This “sub-source” issue need not be decided in order to resolve the present case, and should be left for another day, for two reasons.
50 Firstly, the business activities here in question can, if necessary, be categorized into a single business source, as is clearly shown by the uncontradicted evidence:
Q. You described earlier the business of Hickman Motors Limited, Mr. Grant, during the period of December 29th, 1984 to January 2, 1985. Could you tell us what the business of Hickman Motors Limited was?
A. Well, it would have been the sales and servicing, the leasing and rental of cars, light-duty trucks, medium-duty trucks, heavy-duty trucks, and also construction equipment, John Deere equipment, also forestry equipment and also rock drilling equipment. [Emphasis added.]
51 The above testimonial evidence is clear, was not shaken in cross-examination, no question of credibility was ever raised and the respondent did not adduce any evidence whatsoever. Furthermore, the uncontradicted evidence adduced by the appellant clearly shows the following. Equipment’s market for backhoes and bulldozers, and Hickman Motors’ market for heavy-duty trucks, have the same customer base. There is a natural fit in combining Hickman Motors’ heavy-duty trucks with Equipment’s machinery. This combination is not unusual. As even the trial judge recognized, “if you’re buying a backhoe, you need a heavy truck to transport it”. This uncontradicted evidence adduced by the appellant speaks for itself: the “automobile” franchise, the “truck” franchise and the “equipment” franchises were associated into a single integrated business. Accordingly, the inference drawn by the trial judge is incorrect and constitutes an error of law. The proper inference from the above evidence is that from December 29, 1984, to January 2, 1985, Hickman Motors was a single integrated business of sales, servicing, leasing and rental of cars and trucks, and of construction, forestry and rock-drilling equipment, which was in fact an “undertaking of any kind whatever” that complied with the definition of “business” in s. 248(1).
52 From this clear, unchallenged and uncontradicted evidence of “one business”, absent any evidence to the contrary, in my view, it is fallacious and irrational to conclude that there are “two businesses”. The fallacy that the Trial Division fell into, upheld by the Court of Appeal and deferred to by Iacobucci J., appears to be as follows: the appellant adduced evidence that there is one business, therefore, it follows that there are two businesses. I cannot accept such reasoning. I note that neither the Trial Division, nor the Court of Appeal, has cited any evidence from the record that would point towards two businesses. Similarly, my colleague Iacobucci J.’s reasons do not explicitly provide any evidence in the record upon which his conclusion of “two businesses” is based. In the case at bar, the idea of two businesses is merely an unproven assumption, not a proven fact. The proven fact is that there is one business, as evidenced in the record.
53 In view of this evidence in chief, the respondent should have adduced some evidence. By way of example, as I stated in para. 11 above, Equipment used to be a division of AEH -- a building supply operation. Surely, the respondent could have adduced evidence that it had considered Equipment and AEH as two businesses, if that was the case, but it failed to do so. Such evidence, or some expert evidence, had it been properly adduced, might have pointed towards two businesses, but in this case we are left with a total absence of evidence on the part of the respondent.
54 Secondly, as my colleague Iacobucci J. states in para. 129, the respondent departed from the line of argument pursued in the courts below. Neither the parties nor the courts below cited any case law with respect to sub-sources. The case law cited by Iacobucci J. relates to the very specific area of farming businesses which are singled out for special treatment in s. 31 ITA. In the present case, we do not have the benefit of argument with respect to the various criteria for sub-sources that may or may not be applicable generally to corporations outside of the farming context.
55 As a matter of fact, in Gloucester Railway Carriage and Wagon Co. v. Comrs. Inland Revenue (1923), 129 L.T. 691 (K.B.), aff’d (1924), 40 T.L.R. 435 (C.A.), it was suggested that, prior to that case, it had never been decided that a company can have two businesses. In that case, the appellant corporation was selling, and letting out for hire, various kinds of wagons. The corporation argued that it had two businesses. The appeal was dismissed: there was one single business of making a profit generally out of wagons in one way or another. That case, which was cited with approval in Anderson Logging Co. v. The King, [1925] S.C.R. 45, at p. 55, relates to corporations outside of the farming context, and could arguably be seen as governing the case at bar. The evidence is that Hickman Motors is in the business of making a profit generally out of machines, in one way or another.
56 Given the evidence, and the incomplete argument, I do not want to pronounce on the issue of sub-sources in the context of the present case, inter alia because I have not had the benefit of full argument on the possible difficulties. For instance, “sub-sources” might be interpreted inappropriately to second-guess legitimate business decisions of taxpayers from a position of hindsight.
C. Deductibility of Capital Cost Allowance
57 Once the “income from a business source” is established, the next step is to determine what, if anything, can be deducted therefrom in order to arrive at the taxable income. Section 20(1) provides that,
20. (1) . . . there may be deducted such of the following amounts as are wholly applicable to that source or such part of the . . . amounts ... as applicable thereto. . . . [Emphasis added.]
58 The “following amount” may be either “wholly applicable” or “partly applicable” to “that source”, that is, the business source. So a specific amount could be “partly applicable” to income from a business source, and “partly applicable” to income from another source such as, for example, income from a property source. Or a specific amount could be “wholly applicable” to the business source only. Here, this distinction is not at issue: the amount sought to be deducted would be “wholly applicable” to income from the business source identified above.
59 Next, it is appropriate to examine the relevant “following amount” that is sought to be deducted, as provided in s. 20(1)(a):
20. (1) . . .
(a) such part of the capital cost to the taxpayer of property . . . as is allowed by regulation. . . . [Emphasis added.]
60 We must now determine what “part of the capital cost” is “allowed by regulation”. Regulation 1100 provides that:
1100. (1) For the purposes of paragraph 20(1)(a) of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to
. . .
(a) such amounts as he may claim in respect of property of each of the following classes in Schedule II not exceeding in respect of property
. . .
(xvi) of Class 22, 50 per cent. . . . [Emphasis added.]
In the present case, the evidence reveals that, for the most part, the capital property was included in Class 22. The corollary of Regulation 1100(1) is that if an item of property is not included in any of the classes, then no CCA deduction is allowed for such property. Regulation 1102(1) designates groups of items of property that are deemed to be excluded from all the classes:
1102. (1) The classes of property described in this Part and in Schedule II shall be deemed not to include property
. . .
(c) that was not acquired by the taxpayer for the purpose of gaining or producing income. . . . [Emphasis added.]
61 The corollary of Regulation 1102(1)(c) is that, in order for any item of property to be included in any class, it must have been acquired for the purpose of producing income. Otherwise, the item of property is deemed not to be included in any class, so no CCA is allowed for such property. Therefore, within the scope of s. 20(1)(a), the word “property” cannot mean anything other than “property acquired for the purpose of producing income”. Accordingly, in the present case, s. 20(1)(a) must be understood as follows:
. . . there may be deducted . . . such part of the capital cost . . . of property [acquired for the purpose of producing income]. . . .
D. The “Purpose of Producing Income” Test
62 In Bolus-Revelas-Bolus Ltd. v. M.N.R., 71 D.T.C. 5153 (Ex. Ct.), the corporate taxpayer was operating various concerns and decided to buy two “exhibition-park amusement rides”. But these two assets were never erected nor operated: they had been acquired and then dismantled and put in storage, out of service, and did not produce any income whatsoever. The Exchequer Court found that the taxpayer had not acquired these items of property for the purpose of producing income and held that no CCA was available.
63 Bolus-Revelas-Bolus Ltd. stands for the following proposition: where property does not produce income, courts will ascertain objectively whether the taxpayer acquired the property for the purpose of producing income; where there is no such objective purpose, CCA deduction will not be allowed. However, while Bolus-Revelas-Bolus Ltd. seems analogous to the instant case, it is clearly distinguishable because, as will be shown below, here the property did produce income. Absent extraordinary circumstances, if a business owns an item of property that produces income, then presumably its purpose is indeed to produce income. The converse proposition would be absurd; see also Royal Trust Co. v. M.N.R., 57 D.T.C. 1055 (Ex. Ct.); Ghali v. Canada (Minister of Transport), [1996] F.C.J. No. 1404 (T.D.). In other words, to avoid absurdity in the context of the present case, s. 20(1)(a) must be understood as follows:
. . . there may be deducted . . . such part of the capital cost . . . of [income-producing] property [or, alternatively, property acquired for the purpose of producing income]. . . .
64 In my view, the above formulation of the rule in s. 20(1)(a) applies in the present circumstances and the first part of the test is: does the property produce income? In the affirmative, the deduction is allowable. The word “income” is susceptible of two meanings: “gross income” (revenue) or “net income” (profit): see Mark Resources Inc. v. The Queen, 93 D.T.C. 1004 (T.C.C.); see also Bellingham v. Canada, [1996] 1 F.C. 613 (C.A.), at pp. 627-28; Canada v. McLaren, [1991] 1 F.C. 468 (T.D.), at pp. 480-81. While an item of property may produce revenue, it does not necessarily produce profit by itself, and it would be absurd to demand that each individual item of property actually yield “net income” (profit) in and of itself. Accordingly, to satisfy this first part of the test, it is sufficient to presume that if the property produces revenue, it indeed meets the requirements of Regulation 1102(1)(c).
65 The second part of the test is: where the item of property does not produce income, was it acquired for the purpose of producing income? This is determined by an objective evaluation of the specific facts and circumstances of each case in relation to appropriate jurisprudence, having regard to whether the taxpayer acted in accordance with reasonably acceptable principles of commerce and business practices. In the affirmative, the deduction is allowable. In the negative, the deduction is not allowable.
66 Both the Trial Division and Court of Appeal (at p. 5579), however, being of the opinion that “any attempt by the appellant to earn income from the assets” was “notional”, inferred that “the appellant did not acquire the property . . . for the purpose of . . . producing income”. With respect, I cannot agree with that inference. Both the Trial Division and the Court of Appeal asked the wrong question and drew an incorrect inference. In doing so, with respect, both courts erred in law.
E. Distinctions Between the “Reasonable Expectation of Profit” Test and the “Purpose of Producing Income” Test
67 The Court of Appeal held at p. 5579 that the appropriate test to be applied in determining whether property has a purpose of producing income is “similar” to the test for determining the “analogous” question of whether a business has a reasonable expectation of profit. With respect, these two tests are not “similar”, but “dissimilar”.
68 Both “revenue-producing” and “non-revenue-producing” assets can be acquired “for the purpose of producing income”. A typical example would be an administrative photocopier (non-revenue producing) as opposed to a self-service pay-per-use photocopier (revenue-producing). Both kinds of assets can be used in the same business for the purpose of producing income. One asset directly produces income, the other is used for the objective purpose of producing income. However, this is no guarantee that the business itself will make a profit. Both kinds of assets can be held by a business that shows a profit or by one that does not show a profit. This is where the “purpose of producing income” test and the “reasonable expectation of profit” test must be clearly distinguished.
69 These two tests differ in terms of their general thrust. A business that has a profit does not need to demonstrate that it has a “reasonable expectation of profit”. Where a business does not have a profit, however, it must have a “reasonable expectation of profit”, to be determined by an application of the Moldowan test (see Krishna, supra, at p. 261). In a nutshell, the “reasonable expectation of profit” test is principally directed at differentiating between a “business” and a “personal pursuit such as a hobby, etc.”, whereas the “purpose of producing income” test is directed at determining whether an asset is appropriately used in the business.
70 The “reasonable expectation of profit” test questions whether there is a business, whereas the “purpose of producing income” test presupposes a business and questions the usage of a piece of business-owned property. The “reasonable expectation of profit” test looks at the historical and anticipated results of several years of operations, and asks: “will the revenue of this operation ever be greater than its expenses, such that a profit will occur?” The “purpose of producing income” test looks at an item of property and asks: “does it produce revenue, or is it at least used for that purpose?” These two tests address very different issues. Both tests could be applied separately to the same taxpayer at the same time.
71 Most of the “reasonable expectation of profit” criteria would be repugnant to the “purpose of producing income” test. For instance, the “profit and loss experience in past years” criterion is irrelevant to the “purpose of producing income” test for CCA, because a business may very well include items of property used only for a short-term period. Similarly, the “taxpayer’s training” criterion is irrelevant to the “purpose of producing income” for CCA, because some items of property may require no particular training other than the general knowledge possessed by anyone.
72 In my view, the words and scheme of the ITA support an application of the “reasonable expectation of profit” criteria to ascertain whether a taxpayer is carrying on a business or a hobby, but not to determine the deductibility of CCA per se. See also generally John R. Owen, “The Reasonable Expectation of Profit Test: Is There a Better Approach?” (1996), 44 Can. Tax J. 979. With respect, mechanically transferring the “reasonable expectation of profit” criteria into the “purpose of producing income” requirement in Regulation 1102(1)(c) for CCA purposes is incorrect in law. In doing so, both the Trial Division and the Court of Appeal erred in law.
F. Did the Property Produce Any Revenue?
73 As I said earlier, both the Trial Division and the Court of Appeal put the cart before the horse in not addressing the first part of the test. Consequently, the inferences they drew are incorrect and we must look at the evidence in order to draw the appropriate ones. The first part of the test is: did the property produce any revenue? In the case at bar, revenue was produced by the property:
Q. The assets that were distributed to Hickman Motors Limited on December 28, 1984, the assets of Hickman Equipment Limited, were they being used by Hickman Equipment Limited in the carrying on of business immediately prior to liquidation?
A. Yes.
Q. Were these assets generating income?
A. Yes.
Q. Now what about following December 28, 1984, with respect to these assets that have been distributed to Hickman Motors Limited as a result of the liquidation?
A. They would have been used for the same income producing purposes that they had been used for previously.
. . .
THE COURT: 7.2 million of total sales in 1984; there was about 1.5 million representing income accruing from rentals and leases?
A. Yes.
Q. And the rentals, that income accruing from the rentals and leases would have come from those Class 22 assets? . . .
A. Yes. [Emphasis added.]
74 Reviewing the evidence through the appropriate prism, it is clear that the property produced revenue. Furthermore, in addition to this uncontradicted testimonial evidence, the appellant adduced clear documentary evidence of revenue from the property during the period:
Q. Perhaps you might just explain those invoices and why you are submitting them to the Court, Mr. Grant?
A. Well, if we take invoice 59762 and we look down, and it states that the rental period is from December the 5th, 1984, to January the 4th, 1985. . . . And these are only representative, I might add; most of the records have been destroyed since 1985. So we are just fortunate enough to find these samples really.
Q. And they’re similar samples of statements or invoices sent out for other pieces of equipment for rental?
A. Yes. [Emphasis added.]
75 Several invoices showing equipment rentals during the period were adduced in evidence. Furthermore, these invoices were but a mere sampling of the actual equipment-rental activity that occurred during the period. The above testimonial and documentary evidence speaks for itself and was not contradicted by the respondent. The proper inferences to be drawn are as follows. The Class 22 property produced revenue, on an annual basis, during the 1984 fiscal year, in the amount of $1.5 million. Hence, the pro-rated daily revenue therefrom was approximately $4,110. Therefore, during the five days that the appellant held the assets for doing business, the approximate pro-rated revenue was $20,550.
76 While my colleague Iacobucci J. concludes, at para. 143 of his reasons, that there was no income, his reasons do not explicitly provide any evidence from the respondent that would rebut the above evidence from the appellant. In the case at bar, this conclusion of “no income” is an unsubstantiated assumption, not a proven fact in the record. The proven fact is that there was income, as evidenced in the record.
77 As revenue is produced by the property, it is not necessary to conduct the second part of the test dealing with the objective purpose, which is the one applied by the trial judge, and the inferences made by the courts below are irrelevant. The proper inferences to be drawn show that revenue was produced and that the requirements of Regulation 1102(1)(c) are met. Therefore, the CCA deduction is allowable. I will now turn to the issues of the time period and the amount of revenue, which were incorrectly addressed by the Trial Division and the Court of Appeal.
G. Time Period Requirement
78 The Trial Division, in holding at p. 633 that “the short turnover period of some four days is a pretty clear indication that there was neither an intention nor, for practical purposes, any more than a notional attempt to earn income from the assets”, was answering the second part of the test dealing with the objective purpose, which is not the proper first question. Similarly, the Court of Appeal held at p. 5579 that holding the property “only over the period of a long holiday week-end is surely indicative of the fact that it had no intention to earn income from the property”. While the time period and the days of the week might be relevant factors as regards the second part of the test, I would prefer to leave this issue for another day. As regards the first part of the test, should the above revenue of $20,550 have been received during a period of time of any minimum duration, say six days or six weeks, or during specific days of the week? I cannot find any such reference in Regulation 1102(1)(c). Furthermore, holding otherwise here could create absurd results, given that Class 22 equipment can be used in 24-hour, continuous operations.
79 When Parliament or the executive wish to set time periods in tax law, they do so quite clearly and precisely. For example, as regards Capital Cost Allowance per se, see the following time periods: Regulation 1100(2.2)(f)(i), 364 days, and Schedule II, CCA, Class 12 (r), 7 days and 30 days. More generally, the ITA and the Regulations provide as follows: s. 232(4)(b): 6 days; Regulation 107(1): 7 days; s. 116(3): 10 days; s. 232(4)(a): 14 days; s. 62(3)(c): 15 days; s. 232(4)(a)(i): 21 days; Regulation 231(3): 30 days; s. 85(8): a month; s. 40(2)(g)(iv)(B): 60 days; s. 33.1(3): 90 days; s. 130.1(1)(a)(ii): 91 days; s. 129(2.1)(a): 120 days; s. 78(4): 180 days; s. 112(3)(a): 365 days; s. 85(7): 3 years. As regards very short time periods, I also note the following: s. 118.6(1): 10 hours; s. 8(4): 12 hours; s. 231.4(4): 24 hours; s. 6(6)(a)(ii): 36 hours; s. 225.2(5): 72 hours; Regulation 7303(7)(b)(iii) (revoked SOR/93-440): 3 days; s. 225.2(2)(a) (amended S.C. 1988, c. 55, s. 170): 3 days.
80 In view of the above, in the absence of any other indication, I would hesitate to read any time period requirement into the Regulation, since, on the one hand, there is no clear legislation to that effect, and, on the other hand, the legislator is in the best position to determine such requirements. Had Parliament intended such time restrictions to apply to CCA, it would have said so -- expressio unius est exclusio alterius; for an application of implied exclusion in tax law, see generally The Queen v. Vancouver Art Metal Works Ltd., 93 D.T.C. 5116 (F.C.A.), at p. 5117. Therefore, under Regulation 1102(1)(c), the property does not have to produce revenue during a specified minimum period: where revenue is produced, it is sufficient that it be produced during a time period of any duration.
81 Holding otherwise would likely introduce considerable uncertainty in this area of the law. The judgment of the Trial Division stands for the proposition that five days is not enough, but it does not set forth exactly what would be sufficient. It introduces uncertainty as to what time period would be sufficient in order for a taxpayer to claim CCA successfully. It is incumbent upon Parliament or the executive to specify a cut-off period if they find it expedient. Therefore, with respect, the undefined time period requirement introduced by the Federal Court Trial Division, and upheld by the Court of Appeal, constitutes an error of law and, in my view, is encroaching upon Parliament’s legislative function.
H. Materiality of the Assets’ Revenue in Relation to the Total Revenue
82 The Trial Division found at p. 633 that the amount of equipment-related revenue was “meagre” in terms of percentage of total revenue. Does Regulation 1102(1)(c) require that the revenue meet some specified minimum amount, or that it be “material” in relation to the taxpayer’s other income? I am unable to see such a requirement in Regulation 1102(1)(c). Therefore, I conclude that the question as to whether the income produced by an item of property is “material” or “immaterial”, in relation to the taxpayer’s other income, is irrelevant to the application of Regulation 1102(1)(c). Holding otherwise could lead to absurd results in situations of rapid growth in revenue.
I. Does Every Item of Property Have to be Shown in the Financial Statements?
83 The Court of Appeal held at p. 5579 that “the appellant itself did not at the time treat the property which it acquired from the winding-up of ‘Equipment’ as being a potential or actual source of income: no such income was shown in the appellant’s books for either its 1984 or its 1985 taxation years”. Where the revenue produced by an asset is “immaterial” in relation to the taxpayer’s other income, does Regulation 1102(1)(c) require that it be shown distinctly in the financial statements? This issue has been aptly described in Lanny G. Chasteen et al., Intermediate Accounting (1st Canadian ed. 1992), at p. 35:
Materiality implies that generally accepted accounting principles need to be strictly followed only in accounting for and reporting material items. Lack of materiality justifies expedient, cost-effective treatment of immaterial items.
. . .
Materiality is a somewhat elusive concept because it is dependent on (1) the relative dollar amount of an item . . . (3) some combination of the relative dollar amount and nature of an item. . . . Finally, the materiality threshold may vary from company to company. For example, a $20,000 loss from a lawsuit could be material for many companies but might not be material for a company as large as Air Canada. Because materiality judgments often involve factors peculiar to a particular situation, the CICA has not yet found it feasible to develop a set of general materiality guidelines, and materiality decisions are a matter of professional judgment in the particular circumstances. [Emphasis added.]
(See also Thomas H. Beechy, Canadian Advanced Financial Accounting (2nd ed. 1990), at pp. 38-40.)
84 In my opinion, under Regulation 1102(1)(c), where the revenue produced by an item of property is immaterial in relation to the overall business income, the taxpayer is not required to show this specific item of property separately in the financial statements. The underlying cost/benefit and policy rationales are clearly expressed in the Generally Accepted Accounting Principles (GAAP): “[t]he benefits . . . from providing information in financial statements should exceed the cost[s]. . . . [T]he evaluation of the nature and amount of benefits and costs is substantially a judgmental process”: CICA Handbook, vol. 1, s. 1000.16.
85 In the case at bar, the appellant decided not to show the specific revenue, the matched expenses, and the net income related to the specific equipment property in its financial statements:
Q. Well, if the business of Hickman Equipment Limited was wound up into Hickman Motors Limited effective December 28, 1984, why did you not show the revenues and expenses of Hickman Equipment Limited as part of the revenues and expenses of Hickman Motors Limited as at December 31, 1984?
A. Well, in our judgment at that time, the revenue -- the income and/or loss that may have been generated would not have adjusted the auditing expense and the accounting expense to reconstruct the records for the three-, four-day period. We would have had to have had our external auditors involved for a period of time and we would have had to have had our own staff involved.
. . .
A. Well, if we take invoice 59762 and we look down, and it states that the rental period is from December the 5th, 1984, to January the 4th, 1985. And one thing that it does, it illustrates some of the cost that would have been involved in prorating the revenue from the period December 29th, 1984, up to January the 2nd, 1985. [Emphasis added.]
86 The equipment-related revenue attributable to the appellant is approximately $20,550. The total revenue of the appellant is $75,275,000. Bearing in mind the GAAP, supra, I cannot find that the appellant’s cost/benefit decision with respect to materiality is unreasonable. Showing a specific property item’s revenue in the financial statements is not the only way to prove that it produced revenue. There may be other admissible evidence, such as the uncontradicted testimonial and documentary evidence in the case at bar. Holding otherwise would be unreasonable and could lead to absurd and unmanageable results where a large number of items of property produce revenue.
87 My colleague Iacobucci J., at para. 143 of his reasons, repeats the Court of Appeal’s opinion that because the revenue was not shown in the financial statements, there is no evidence of revenue. I cannot agree with that statement. For example, see Docherty v. M.N.R., 91 D.T.C. 537 (T.C.C.), at p. 539, where, in the absence of entries in the appellant’s financial statements reflecting a transaction, the court accepted the working papers and the testimony of the corporation’s accountant as evidence that the transaction had occurred. The law is well established that accounting documents or accounting entries serve only to reflect transactions and that it is the reality of the facts that determines the true nature and substance of transactions: Vander Nurseries Inc. v. The Queen, 95 D.T.C. 91 (T.C.C.); Mountwest Steel Ltd. v. The Queen (1994), 2 G.T.C. 1087 (T.C.C.); Uphill Holdings Ltd. v. M.N.R., 93 D.T.C. 148 (T.C.C.); M.N.R. v. Wardean Drilling Ltd., 69 D.T.C. 5194 (Ex. Ct.); M.N.R. v. Société Coopérative Agricole de la Vallée d’Yamaska, 57 D.T.C. 1078 (Ex. Ct.). Furthermore, where the ITA does not require supporting documentation, credible oral evidence from a taxpayer is sufficient notwithstanding the absence of records: Weinberger v. M.N.R., 64 D.T.C. 5060 (Ex. Ct.); Naka v. The Queen, 95 D.T.C. 407 (T.C.C.); Page v. The Queen, 95 D.T.C. 373 (T.C.C.).
88 In the case at bar, the ITA does not require that the revenue be shown in the financial statements and, accordingly, since no issue of credibility was raised, the evidence adduced by the appellant is clearly sufficient.
J. Proportionality of the Assets’ Revenue in relation to Their Own Value
89 The remaining issue is whether the revenue is unreasonably low in relation to the property’s value, such as to make it tantamount to no revenue at all. For example, in Clapham v. M.N.R., 70 D.T.C. 1012 (T.A.B.), a motel valued at $50,000 was rented to a controlled corporation for only $600 per year. By virtue of renting the property for much less than its fair annual rental, the appellant in Clapham showed that it was not acquired for the purpose of producing income. CCA was disallowed, even though the item of property produced some revenue. In my opinion, if the revenue is unreasonably low in relation to the value of the revenue-generating property, then it is deemed not to produce income, and the second part of the test, dealing with the objective purpose, is to be applied.
90 In the case at bar, is the revenue unreasonably low in relation to the property’s value? Cross-examination established that Hickman Motors’ leasing revenue was $1,900,000, the value of its leasing assets being $5,220,000, and that Equipment’s rental revenue was $1,500,000, the value of its Class 22 assets being $2,700,000. Thus, the fixed asset ratios (ratio = revenue ) asset) are respectively .36 for Hickman Motors and .55 for Equipment. These two ratios contrast sharply with the fixed asset ratio in Clapham, which is .01. Accordingly, I cannot infer from the evidence that the revenue produced by Equipment’s property is unreasonably low in relation to that property’s value -- and the respondent adduced no evidence to that end. It is to be noted that I am using the above numbers for showing the clear distinction between the present case and Clapham. These ratios and values will not necessarily apply in the context of other cases.
K. Onus of Proof
91 As I have noted, the appellant adduced clear, uncontradicted evidence, while the respondent did not adduce any evidence whatsoever. In my view, the law on that point is well settled, and the respondent failed to discharge its burden of proof for the following reasons.
92 It is trite law that in taxation the standard of proof is the civil balance of probabilities: Dobieco Ltd. v. Minister of National Revenue, [1966] S.C.R. 95, and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter: Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at p. 1106. The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least a prima facie case: Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679 (T.R.B.). In the case at bar, the appellant adduced evidence which met not only a prima facie standard, but also, in my view, even a higher one. In my view, the appellant “demolished” the following assumptions as follows: (a) the assumption of “two businesses”, by adducing clear evidence of only one business; (b) the assumption of “no income”, by adducing clear evidence of income. The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions: see for example MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R., 87 D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in the case at bar remained unchallenged and uncontradicted. Accordingly, in my view, the assumptions of “two businesses” and “no income” have been “demolished” by the appellant.
94 Where the Minister’s assumptions have been “demolished” by the appellant, “the onus . . . shifts to the Minister to rebut the prima facie case” made out by the appellant and to prove the assumptions: Magilb Development Corp. v. The Queen, 87 D.T.C. 5012 (F.C.T.D.), at p. 5018. Hence, in the case at bar, the onus has shifted to the Minister to prove its assumptions that there are “two businesses” and “no income”.
95 Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: see for example MacIsaac, supra, where the Federal Court of Appeal set aside the judgment of the Trial Division, on the grounds that (at p. 6381) the “evidence was not challenged or contradicted and no objection of any kind was taken thereto”. See also Waxstein v. M.N.R., 80 D.T.C. 1348 (T.R.B.); Roselawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271 (T.R.B.). Refer also to Zink, supra, at p. 653, where, even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal was allowed as the Minister failed to present any evidence as to the source of income. I note that, in the case at bar, the evidence contains no such “gaps”. Therefore, in the case at bar, since the Minister adduced no evidence whatsoever, and no question of credibility was ever raised by anyone, the appellant is entitled to succeed.
96 In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister’s unsubstantiated and unproven assumptions into “factual findings”, thus making errors of law on the onus of proof. My colleague Iacobucci J. defers to these so-called “concurrent findings” of the courts below, but, while I fully agree in general with the principle of deference, in this case two wrongs cannot make a right. Even with “concurrent findings”, unchallenged and uncontradicted evidence positively rebuts the Minister’s assumptions: MacIsaac, supra. As Rip T.C.J., stated in Gelber v. M.N.R., 91 D.T.C. 1030, at p. 1033, “the [Minister] is not the arbiter of what is right or wrong in tax law”. As Brulé T.C.C.J., stated in Kamin, supra, at p. 64:
. . . the Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions.
. . .
The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption. [Emphasis added.]
97 In my view, the above statement is apposite in the present case: the respondent, on being challenged by evidence in chief, failed to present anything more concrete than simple assumptions and failed to bring forth any foundation. The respondent chose not to rebut any of the appellant’s evidence. Accordingly, the respondent failed to discharge her onus of proof.
98 I note that, in upholding the Minister’s unproven assumptions, my colleague Iacobucci J. may be seen as reversing the above-stated line of case law, without explicitly providing the rationale for doing so. With respect for the contrary opinion, in my view, changes in the jurisprudence regarding the onus of proof in tax law should be left for another day. Furthermore, on the facts of the case at bar, sanctioning the respondent’s total lack of evidence could seem unreasonable and perhaps even unjust, given that the appellant complied with a well-established line of jurisprudence as regards its onus of proof.
V. Summary
99 Section 88(1)(c) does not create any right for the parent company to claim a CCA deduction as a result of the winding-up of a subsidiary. This right is to be found in s. 20(1)(a), read concurrently with the applicable Regulations. The appellant has discharged its burden of proving that the property was held for the purpose of producing income from its business. The appellant proved that between December 28, 1984, and January 2, 1985, it did in fact carry on an integrated car, truck and equipment business. The appellant proved that the equipment-related property produced revenue from that business during that period. Accordingly, the requirements of Regulation 1102(1)(c) and s. 20(1)(a) are met. Therefore, the CCA deduction is allowable.
100 Both the Trial Division and the Court of Appeal failed to take the revenue into consideration and, in determining whether the equipment-related assets met the requirements of Regulation 1102, made incorrect inferences, asked the wrong questions of law and applied the wrong test, which constitute reviewable errors of law. In as technical a piece of legislation as the ITA, had Parliament or the executive wanted to specify any minimum period of time, materiality requirement, or financial statement content requirement, they would have used clear language to that effect.
VI. Disposition
101 Since the appellant is entitled to a capital cost allowance deduction as claimed, I would allow the appeal with costs throughout, set aside the judgments of the Federal Court of Appeal and the Trial Division, and remit the matter back to the Minister of National Revenue for reassessment in conformity with these reasons.
//Iacobucci J.//
The reasons of Sopinka, Cory and Iacobucci JJ. were delivered by
102 Iacobucci J. (dissenting) -- I have read the reasons written by my colleagues, Justice L’Heureux-Dubé and Justice McLachlin, and, with respect, find myself unable to concur with most of their reasoning or with their conclusion. In my opinion, the appellant’s attempt to deduct capital cost allowance from its income from a business fails for the primary reason that the capital cost allowance is not, as required by s. 20(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, applicable to a business source of income. Because of my disagreement with my colleagues’ respective approaches to this case, I will set forth the relevant factual and judicial background.
1. Facts
103 The appellant, Hickman Motors Ltd., is a General Motors distributor in St. John’s, Newfoundland. It sells, services, rents and leases cars and trucks.
104 On December 14, 1984, Hickman Motors acquired all of the outstanding shares of an associated corporation, Hickman Equipment Ltd. (hereinafter “Equipment”). Equipment’s business consisted of leasing heavy equipment, such as backhoes, bulldozers, rock drilling equipment and cranes.
105 On Friday, December 28, 1984, Equipment was voluntarily wound up into Hickman Motors. Upon the winding-up, all of Equipment’s assets passed to Hickman Motors. Among these assets were certain items of depreciable property (in this case, backhoes, bulldozers, etc.) with an undepreciated capital cost of $5,196,422. Hickman Motors retained Equipment’s assets for five days and then, on January 2, 1985 (the following Wednesday, after the New Year’s holiday), sold everything to a newly incorporated, related company called Hickman Equipment (1985) Ltd. (hereinafter “Equipment 85”). From January 2, 1985, Equipment 85 carried on the same heavy equipment leasing business which had formerly been carried on by Equipment.
106 In the 1984 taxation year, the appellant, Hickman Motors, claimed $2,092,942 for capital cost allowance in respect of the Equipment assets. The Minister of National Revenue disallowed this claim, and held that Hickman Motors was not entitled to claim capital cost allowance on any of the Equipment property on the ground that Hickman Motors had not acquired the property for the purpose of gaining or producing income.
107 Hickman Motors appealed the Minister’s decision to the Federal Court (Trial Division), arguing that, since it had acquired the assets as part of a business reorganization pursuant to ss. 88(1) and (1.1) of the Act, it did not need to show that it had carried out this acquisition with the purpose of gaining or producing income therefrom. In the alternative, the company alleged that it had, in fact, acquired and used the assets in order to gain or produce income. Joyal J. ([1993] 1 F.C. 622) dismissed the taxpayer’s appeal. A subsequent appeal to the Federal Court of Appeal (95 D.T.C. 5575) was similarly dismissed.
2. Relevant Statutory Provisions
108 Income Tax Act, S.C. 1970-71-72, c. 63:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
(a) determine the aggregate of amounts each of which is the taxpayer’s income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;
4. (1) For the purposes of this Act,
(a) a taxpayer’s income or loss for a taxation year from an office, employment, business, property or other source, or from sources in a particular place, is the taxpayer’s income or loss, as the case may be, computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from that source or no income or loss except from those sources, as the case may be, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or to those sources, as the case may be, and except such part of any other deductions as may reasonably be regarded as applicable thereto; . . .
9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
85. . . .
(5.1) Where a person or a partnership (in this subsection referred to as the “taxpayer”) has disposed of any depreciable property of a prescribed class of the taxpayer to a transferee that was
(a) a corporation that, immediately after the disposition, was controlled, directly or indirectly in any manner whatever, by the taxpayer, by the spouse of the taxpayer or by a person, group of persons or partnership by whom the taxpayer was controlled, directly or indirectly in any manner whatever,
. . .
and the fair market value of the property at the time of the disposition is less than both the cost to the taxpayer of the property and the amount (in this subsection referred to as the “proportionate amount”) that is the proportion of the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition that the fair market value of the property at the time of the disposition is of the fair market value of all property of that class at the time of disposition, the following rules apply:
. . .
(e) the lesser of the cost to the taxpayer of the property and the proportionate amount in respect of the property shall be deemed to be the taxpayer’s proceeds of disposition and the transferee’s cost of the property;
3. Judgments Below
A. Federal Court (Trial Division), [1993] 1 F.C. 622
109 At trial, Hickman Motors called only one witness, Mr. Brian Grant, who manages the financial affairs of all the Hickman companies. The Crown called no witnesses.
110 Having reviewed the evidence relating to the relevant transactions, Joyal J. found that Hickman Motors had never intended to expand its business to include a heavy equipment dealership. It had always planned to hold onto Equipment's assets for only a few days prior to a subsequent transfer to Equipment 85 (at p. 632):
According to the evidence, the plaintiff, a General Motors dealer in cars and trucks, had no intention of carrying on the business of a heavy equipment dealer, which had been Equipment's mainstay and which Equipment 85 was to inherit.
111 Given that Hickman Motors had never intended to run a heavy equipment dealership, the trial judge considered whether the Act would, nonetheless, permit capital cost allowance deductions for the heavy equipment in question. Joyal J. looked first at s. 20(1), which is headed “Deductions permitted in computing income from business or property”. In particular, Joyal J. noted that s. 20(1) permits only those deductions which are wholly or partly applicable to the source in question.
112 Then, Joyal J. turned to Regulation 1102(1)(c) of the Income Tax Regulations, C.R.C., c. 945. This regulation excludes from the definition of depreciable property all assets which the taxpayer did not acquire for the purpose of gaining or producing income. In the opinion of the trial judge at p. 632, this exclusion is “consonant with the sourcing provision of section 20” (emphasis in the original).
113 Considering s. 20(1) in light of Regulation 1102(1)(c), Joyal J. held that, in order to claim capital cost allowance in respect of the heavy equipment assets, Hickman Motors must establish that it acquired the property for the purpose of producing profit from a business which it was carrying on.
114 Based on the evidence before him, Joyal J. found that Hickman Motors had not acquired the property for the purpose of producing income from its business. He emphasized two factors: first, the fact that Hickman Motors derived only a small portion of its revenues from leasing; and, second, that it held on to the assets for only five days. Joyal J. said at p. 633, “there was neither an intention nor, for practical purposes, any more than a notional attempt to earn income from the assets acquired on the winding-up.” Therefore, he held that Regulation 1102(1)(c) and, in particular, its requirement that the taxpayer acquire the property in question for the purpose of gaining or producing income operate to bar Hickman Motors’ claim for capital cost allowance.
115 Before leaving his analysis of s. 20(1)(a) and Regulation 1102(1)(c), Joyal J. made one final comment. He said at p. 633, “[i]t is evident to me that the capital cost of the assets is not applicable to the income of the plaintiff’s business of automotive sales and services which it carried on in its 1984 taxation year.”
116 The balance of the trial judge’s reasons deals with whether or not s. 88(1.1) of the Act allows Hickman Motors to claim capital cost allowance on the assets. The wording of s. 88(1.1)(e) and s. 88(1)(c) led Joyal J. to conclude that the rollover provisions of s. 88 apply only when the parent uses the subsidiary’s assets in its business. Since he had already found that Hickman Motors had not used Equipment’s depreciable property in its car sales and leasing business, the trial judge found that Hickman Motors could not use the s. 88 rollover provisions as a springboard to claiming capital cost allowance.
117 In the opinion of Joyal J., to allow Hickman Motors’ claim would lead to inconsistency within the Act as a whole. He said at p. 637:
I conclude that the specific processes found in subsection 88(1.1) with respect to the roll-over of assets and liabilities can only be applied in light of the other provisions of the Act which I have cited. To do otherwise would simply result in artificiality and create an imbalance or non-conformity in the application of the more generic provisions of the statute which Parliament had no intention of creating.
118 In conclusion, Joyal J. said that Hickman Motors could not claim capital cost allowance in respect of Equipment’s assets because it failed to satisfy the “business purpose test” contained within the sourcing provisions of s. 20(1) and within the definition of depreciable property in Regulation 1102(1)(c).
B. Federal Court of Appeal, 95 D.T.C. 5575
119 Writing for the Court of Appeal, Hugessen J.A. considered but ultimately rejected Hickman Motors’ argument that s. 88(1) creates a right to claim capital cost allowance which operates independently of s. 20(1)(a). The appellant’s claim failed for the basic reason that s. 88(1) contains no language which either charges or relieves the taxpayer from tax liability. Hugessen J.A. said at p. 5577, “[i]n and of itself, the subsection creates no rights to any deductions at all.”
120 In his view, all that s. 88(1) does is to effect a “flow-through” of the cost of property from a wound-up subsidiary to the parent corporation. Neither the fact that the subsidiary’s depreciable property has become depreciable property in the parent company’s hands, nor the fact that the parent has “inherited” the subsidiary’s undepreciated capital cost assists in determining whether the parent can claim capital cost allowance in respect of the property.
121 Hugessen J.A. pointed out that a taxpayer’s right to claim capital cost allowance arises only by virtue of s. 20(1)(a). This section incorporates the more detailed rules laid out in the Regulations, in particular, Regulation 1102(1)(c) which limits the classes of depreciable property to those assets which the taxpayer acquired for the purpose of gaining or producing income. In the opinion of the Court of Appeal at p. 5578, this regulation is “wholly consonant” with s. 18(1)(a), which limits deductions from income from a business or property to those outlays which were made for the purpose of gaining or producing income from the business or property.
122 Hugessen J.A. rejected Hickman Motors’ argument that Regulation (14) operates so as to deem the subsidiary’s assets to be depreciable property of a prescribed class in the hands of the parent company. In his opinion, this regulation has only one purpose: to prevent the acquirer of depreciable property from switching the property from one class to another.
123 Accordingly, Hugessen J.A. concluded that s. 88 did not create an independent right for Hickman Motors to claim capital cost allowance on the assets acquired on the winding-up of Equipment. He held that Hickman Motors could only deduct capital cost allowance if it met the standard requirements contained in the Act and the Regulations.
124 Hugessen J.A., therefore, turned to consider whether Hickman Motors had acquired the property in question for the purpose of gaining or producing income, as required by Regulation 1102(1)(c). He first looked at the reasons of the trial judge which describe as “notional” any attempt by Hickman Motors to earn income from the assets in question. Acknowledging the deference due to this finding of fact, Hugessen J.A. nonetheless carried out his own examination of Hickman Motors’ intention in acquiring Equipment’s depreciable property.
125 In order to determine the company’s intention, Hugessen J.A. applied a modified version of the test laid down by Dickson J., as he then was, in Moldowan v. The Queen, [1978] 1 S.C.R. 480. This test takes into account a number of factors, including profit and loss experience in past years, the taxpayer’s training, and the taxpayer’s intended course of action. Hugessen J.A. at p. 5579 found that these criteria “argue strongly against” Hickman Motors’ claim and he could not see any evidence which might “point the other way”. Specifically, the Court of Appeal noted that Equipment had, for several years, lost substantial sums of money. Furthermore, Hickman Motors was not in and had no intention of getting into the business of leasing heavy equipment (Hugessen J.A. at p. 5579):
. . . the intended course of action of the appellant, at the time the assets of “Equipment” were acquired by it, was admittedly to turn such assets over to “Equipment (1985)” within five days time.
126 Adding to the evidence which suggested that Hickman Motors had never intended to earn income from the Equipment assets was the fact that the parent company never showed any such income in its books for either the 1984 or the 1985 taxation years. Accordingly, Hugessen J.A. found at p. 5579 that the trial judge’s conclusion with regard to the intention of Hickman Motors in acquiring the property in question was “concordant with the applicable principles of law and is solidly based in the evidence”.
127 Finally, Hugessen J.A. rejected Hickman Motors’ alternative argument that it was entitled to claim a terminal loss equal to the undepreciated capital cost of the property which it received from Equipment.
4. Issue
128 In the hearing before this Court, the parties argued only one issue:
Was the capital cost of the property acquired in the winding-up of Hickman Equipment Ltd. applicable to the income from the appellant’s business, within the meaning of s. 20(1)(a), in its 1984 taxation year?
5. Analysis
129 I should like to commence my reasons with a discussion of what is not in issue before this Court. During oral argument, Crown counsel conceded that, by virtue of s. 88(1), when Hickman Motors assumed ownership of its subsidiary’s heavy equipment assets, it acquired depreciable property of a prescribed class. Departing from the line of argument pursued in the courts below, the Crown has not based its opposition to the appellant’s claim on anything contained in the Regulations. Rather, the dispute revolves entirely around the opening words of s. 20(1) of the Act, more specifically, around whether the capital cost allowance in question is applicable to a business source of income.
130 Before proceeding to an examination of the issues which arise out of s. 20(1), I ought to express my agreement with L’Heureux-Dubé J. as to the effect of s. 88(1). I agree with her and with the Federal Court of Appeal and the Trial Division judge that s. 88(1) creates no right in a taxpayer to claim capital cost allowance. In the event of a transfer of property between related corporations, s. 88(1) permits a “flow-through” of both the property’s cost amount and its undepreciated capital cost. Thus, in this case, when Hickman Motors acquired the depreciable property from Equipment, s. 88(1) deemed Hickman Motors to have “inherited” Equipment’s cost amount and undepreciated capital cost. However, while s. 88(1) does fix the undepreciated capital cost of the property at a certain level, nothing in the section gives the parent corporation the right to depreciate the property further. To repeat and adopt the comments of Hugessen J.A., s. 88(1) in and of itself creates no rights to a tax deduction. Any right to claim capital cost allowance must be based in s. 20(1) because, before this Court, the parties agreed to put aside other provisions of the Act and Regulations which might otherwise come into play, and confined their respective submissions to the effect of s. 20(1).
131 Section 20(1), which contains the specific authority for claiming capital cost allowance (at s. 20(1)(a)), provides:
Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto. . . .
In this case, the appellant will succeed in its claim only if the capital cost allowance in question was, as required by s. 20(1), “wholly applicable” to a business source of income. I say “wholly applicable” because this case raised no issue with regard to whether the capital cost allowance was partly applicable to a business source of income.
132 In order to show that the capital cost allowance in question was wholly applicable to a business source of income, the appellant must demonstrate two things: first, the appellant must identify the relevant business source; and second, the appellant must show that the capital cost allowance is wholly applicable to that particular business source.
A. Identifying the Relevant Source of Income
133 It is trite to say that s. 3(a) defines a taxpayer’s income as income from all sources. The section goes on to specify the most common sources of income, namely, business, property, and office or employment. Generally speaking, for tax purposes, when calculating income from business, a taxpayer may not lump together the revenues and expenses from all of that person’s various business enterprises. Rather, the taxpayer must compute, separately, his or her income or loss from each individual business. This provides the appropriate figure which the taxpayer then “plugs in” to the s. 3 formula for computing income for the taxation year.
134 This requirement to treat each business as a separate source arises from the wording of the applicable statutory provisions. For example, s. 3(a) states that a taxpayer must “determine the aggregate of amounts each of which is the taxpayer’s income for the year . . . from each office, employment, business and property” (emphasis added). Similarly, s. 4(1)(a) provides:
. . . a taxpayer’s income or loss for a taxation year from an office, employment, business, property or other source, . . . is the taxpayer's income or loss . . . computed in accordance with this Act on the assumption that he had during the taxation year no income or loss except from that source.... [Emphasis added.]
Section 9(1) contains similar wording, as does s. 20(1), which lists a number of deductions permitted from a taxpayer’s income “from a business or property” (emphasis added).
135 This need to segregate business income according to its various “sub-sources” has been discussed in both academic writings and the jurisprudence. In Canadian Income Taxation (4th ed. 1986), Edwin C. Harris says at p. 99:
. . . the Act provides that a taxpayer's income for a taxation year is his income from all sources, including but not limited to his income from each office or employment, each business, and each property. His income from each source-type is to be computed separately. [Emphasis added.]
In C.B.A. Engineering Ltd. v. M.N.R., [1971] C.T.C. 504 (F.C.T.D.), at p. 511, Cattanach J. explained, “[w]hen there is more than one business, each business is a source of income.” See also, Poulin v. The Queen, 94 D.T.C. 1674 (T.C.C.), at pp. 1677-78; Vincent v. Minister of National Revenue, [1965] 2 Ex. C.R. 117, at p. 125; and B. J. Arnold et. al., Materials on Canadian Income Tax (10th ed. 1993), at p. 189.
136 However, my colleague, L’Heureux-Dubé J., suggests that it is uncertain whether a taxpayer must calculate separately his or her income from each business source. I cannot agree. Indeed, I do not know how the Act could speak any more clearly on this point. As noted above, s. 3 requires a taxpayer to calculate income from “each . . . business”. Similarly, s. 9(1) refers to a taxpayer’s income from “a business”.
137 Certainly, the tax courts have not shown any confusion in this regard. For example, Garon T.C.J. in Poulin, supra, said at p. 1677:
It is known that the Income Tax Act requires income to be computed based on each source of income. See in particular ss. 3 and 4 of the Income Tax Act. Accordingly, pursuant to that Act, the income from each business, for example, must be computed separately. [Emphasis added.]
138 The requirement to calculate income from each “sub-source” separately is fundamental to the entire taxing scheme set up by Parliament. To suggest otherwise, as my colleague does, is to ignore the plain words of the Act.
139 Therefore, it is not enough for the appellant to state that the capital cost allowance, claimed in regard of the Equipment assets, is applicable to income from “business”. Instead, the appellant must show that the allowance is applicable to income from a particular business. In this case, the facts suggest two potential business sources of income: first, the appellant unquestionably operated a car and truck sales and leasing business; second, the appellant claims to have briefly operated a heavy equipment leasing business, a business which was previously carried on by the appellant’s subsidiary, Equipment.
140 Because the Crown disputes the existence of this second business source, I will now turn to consider whether the appellant has a second source of business income, in the form of a heavy equipment leasing enterprise, separate and distinct from the long-standing General Motors dealership. In my opinion, the appellant’s argument with regard to this alleged second business fails for two reasons. First, the trial judge made a finding of fact, and properly so, in my view, that Hickman Motors did not continue to operate the business previously run by Equipment. This finding of fact deserves the deference of appellate courts. Second, having examined the facts of the case myself, I fully agree with the trial judge’s conclusion. Although the appellant owned all of Equipment’s assets, it did not use those assets in a business. I shall discuss each of these reasons in turn.
141 As mentioned above, the trial judge held that Hickman Motors never intended to carry on Equipment’s leasing business. He said at p. 632:
According to the evidence, the plaintiff, a General Motors dealer in cars and trucks, had no intention of carrying on the business of a heavy equipment dealer, which had been Equipment’s mainstay and which Equipment 85 was to inherit.
The Federal Court of Appeal, although giving deference to the trial judge, reinforced this finding of fact. Thus, the courts below made concurrent findings of fact on this issue. Only just recently, this Court restated its reluctance to interfere with such concurrent findings of fact, absent palpable error or fundamental error of law: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R 727, at para. 60.
142 In this case, the trial judge committed no such error. Indeed, I fully agree with Joyal J. that Hickman Motors never carried on a heavy equipment leasing business. In reaching his conclusion, the trial judge relied on a number of factors. For example, he stressed the fact that Hickman Motors only owned the Equipment assets for a very short period of time. Joyal J. also noted that, for 1984, the appellant corporation generated $75 million in sales and that only a very small proportion of these sales was attributable to leasing. Finally, he observed that the appellant was a General Motors dealer in cars and trucks and that it had no intention of expanding its business to include heavy equipment leasing.
143 In an attempt to cast doubt on the trial judge’s finding, counsel for the appellant emphasized the fact that, over the five days when Hickman Motors owned the property in question, leases entered into by Equipment were still in existence and were still providing income. Counsel for the appellant argued that this income flow gave a good indication of the presence of an on-going business. However, there was, in fact, no evidence that Hickman Motors actually received any of this income. The company’s 1984 financial statements did not show any revenues or expenses from the Equipment assets. In my view, if there is no evidence that the taxpayer received any income, then the taxpayer cannot rely on such alleged receipt as evidence that it carried on a business.
144 Furthermore, even assuming that Hickman Motors did receive income from these assets, this does not, for tax purposes, lead necessarily to the conclusion that Hickman Motors earned income from a business. As Professor Vern Krishna notes in The Fundamentals of Canadian Income Tax (5th ed. 1995), income such as rents may be either property income or business income. He distinguishes between the two on the basis that “business” connotes some kind of activity, at p. 260:
. . . “business” refers to economic, industrial, commercial, or financial activity and involves more than mere passive ownership of property. [Emphasis in original.]
In a similar vein, Harris, supra, says at p. 143:
Passive income from the mere holding of property is classified as income from property rather than income from business.
And Peter W. Hogg and Joanne E. Magee say in Principles of Canadian Income Tax Law (1995), at p. 195:
A gain acquired without systematic effort is not income from a business. It may be income from property, such as rent, interest or dividends.
Unless the taxpayer actually uses the asset “as part of a process that combines labour and capital” (Krishna, supra, at p. 276), any income earned therefrom does not qualify as income from a business, but rather falls into the category of income from property. As the point was not argued either before us or in the courts below, I need not go on to discuss whether the appellant could claim capital cost allowance on the basis that it was applicable to income from property.
145 In this case, Hickman Motors did nothing at all with the Equipment assets. It simply assumed ownership of the property and, allegedly, passively received income from the outstanding leases. This complete lack of activity contrasts with Equipment 85’s course of action, following the January 2, 1985 transfer date. As soon as Equipment 85 obtained ownership of the property, it executed a new dealership agreement with its most important supplier, John Deere Ltd. This business activity, which followed immediately upon Equipment 85’s acquisition of the leasing assets, makes all the more apparent the complete absence of any action taken by Hickman Motors during its tenure as owner.
146 In her reasons, my colleague, L’Heureux-Dubé J., disagrees with my conclusion that Hickman Motors did nothing more than passively hold the Equipment assets. Relying on certain parts of the trial transcript, she maintains at para. 43 that there is “positive evidence that Hickman Motors did indeed carry on the equipment-related sales and rental activities” over the crucial five-day period stretching between December 28, 1984 and January 2, 1985. Specifically, my colleague points to testimony given on cross-examination by the sole witness, Mr. Brian Grant, that Hickman Motors accepted some type of rental order on December 31, 1984.
147 The testimony in question revolved around a bundle of invoices all of which were sent out on Hickman Equipment letterhead. Most of these invoices related to heavy equipment which Hickman Equipment had rented to various customers in the weeks preceding its winding-up. The last invoice in the bundle was the subject of a number of questions, during both examination-in-chief and cross-examination. In his examination-in-chief, Mr. Grant said that the last invoice, for the sale of a backhoe loader, was dated December 21, 1984, seven days before the winding-up of Equipment. However, a discussion of this same invoice, during cross-examination muddied the factual waters somewhat. On cross-examination, counsel seems to indicate that this same invoice was dated not December 21, but rather December 31, 1984. Mr. Grant, apparently contradicting his earlier testimony, agreed with counsel.
148 Thus, with regard to the question of whether, on December 31, 1984, Hickman Motors sent out an invoice of any kind, relating to the Equipment assets, the record contains inconsistent, contradictory evidence. In my opinion, such contradictory testimony does not provide a satisfactory evidentiary foundation upon which to base a conclusion that the appellant engaged in the kind of economic activity which constitutes a business for the purposes of the Income Tax Act. Left, as I am, with no clear evidence that Hickman Motors did anything other than passively hold property, I agree with the trial judge's conclusion that the appellant did not carry on a separate, heavy equipment leasing business.
149 Having determined that the appellant had only one source of business income, i.e., its long-standing General Motors car and truck dealership, I now turn to consider whether the capital cost allowance claimed is “wholly applicable to that business source”, as required by s. 20(1).
B. Is the Capital Cost Allowance “Wholly Applicable” to the Appellant’s General Motors Car Leasing and Sales Business?
150 In his reasons, Joyal J. found that the appellant never used the Equipment assets in its business. He said at p. 633, “it is difficult to see how the assets of a John Deere franchise . . . were used in the business of the plaintiff to produce income.” And at p. 638, “the assets involved could not have been realistically used in the plaintiff's business”. I can see no reason to disturb this holding as it finds ample support in the evidence presented at trial.
151 According to the testimony of the appellant’s witness, Equipment dealt in construction, forestry, rock-drilling and crane operation equipment, referred to by counsel as “non-automobile” assets. By contrast, Hickman Motors dealt in cars and trucks. Only $30,000 of the company’s $5,220,000 worth of leasing assets fell into the “non-automobile” category. The appellant’s witness testified that Hickman Motors dealt in automobiles while Equipment dealt in “non-automobiles”. I agree with the trial judge that it is difficult, if not impossible, to see how the appellant could possibly have used bulldozers, backhoes and other “non-automobile” equipment in its General Motors car and truck business.
152 If the appellant did not use the Equipment assets in its automobile business, then I fail to see how the capital cost allowance claimed in respect of those assets could be “wholly applicable” to that source of business income. Accordingly, in my opinion, the appellant may not deduct capital cost allowance, in respect of the Equipment assets, from its income from the General Motors dealership business.
153 I should point out that a rejection of Hickman Motors' claim in this case does not mean that the $2,092,942 deduction in question is, somehow, lost forever to the Hickman group of companies. On the contrary, provided that Equipment 85 meets the relevant statutory requirements (as laid out in s. 20(1) and elsewhere in the Act and Regulations), it can claim the capital cost allowance which was denied to its parent corporation.
154 To explain more fully, when Equipment's assets passed to the appellant, in December of 1984, s. 88(1) effected a “rollover” of the property from subsidiary to parent. Accordingly, Hickman Motors is deemed to have acquired the property at the subsidiary's undepreciated capital cost, in this case, $5,196,422. Subsequently, when Hickman Motors sold the property to Equipment 85, in January of 1985, s. 85(5.1) effected a further rollover and deemed Equipment 85 to have acquired the assets at the parent's undepreciated capital cost, i.e., $5,196,422. Thus, in Equipment 85's hands, the depreciable property has the same undepreciated capital cost which it had in Equipment's hands, prior to the winding-up. Throughout the entire corporate reorganization, the undepreciated capital cost has remained the same and no amount of capital cost allowance entitlement has been lost. This was conceded by counsel for the respondent Minister.
155 I would like to add one final comment. As my colleague, L’Heureux-Dubé J. states, s. 88(1) does not, in and of itself, create any right to claim capital cost allowance. All that this subsection does is to preserve certain CCA-related values. She writes at para. 35:
. . . s. 88(1) does not create any right for the parent company, in this case the appellant Hickman Motors, to claim a CCA deduction for property acquired from the subsidiary Hickman Equipment. If there is such a right, it is to be found in s. 20 ITA. . . .
I agree with this statement of the law.
156 However, over the course of her reasons, my colleague appears to retreat somewhat from this position. Indeed, the back-tracking is such that the net effect of her reasons is to turn s. 88(1) into a provision which does, in fact, give the taxpayer a substantive right to a deduction.
157 As my colleague notes, prior to the December 28 wind-up, Equipment was carrying on a business. It is further agreed that Equipment was entitled to take capital cost allowance on the property in question. On December 28, Equipment was wound up. All of its assets reverted to the parent corporation, Hickman Motors. Hickman Motors held the assets for five days and then effected a further transfer to a newly incorporated subsidiary. The evidence does not establish that Hickman Motors did anything at all with these assets over that five-day period. Moreover, and equally important for this Court to acknowledge, both the Trial Court and the Federal Court of Appeal made concurrent findings to this effect. As previously stated, there is much jurisprudence in our Court that generally prevents interfering with concurrent findings of fact in the courts below.
158 If the company received any income from the assets, it did so passively. It did not use the property in the kind of “economic, industrial, commercial or financial activity” which would imprint the resultant income with the character of income from business. Nevertheless, my colleague would allow Hickman Motors to claim capital cost allowance as applicable to income from business. The chain of reasoning appears to be as follows: since the assets produced income from business in the hands of the subsidiary, and since the parent company carried on a business, the assets must have continued to produce income from business in the hands of the parent.
159 I cannot agree. All that s. 88(1) does is to displace the normal rules applying to the disposition of property: it turns the transfer from subsidiary to parent into a tax-free transaction. What s. 88(1) does not do is to fix the character of the transferred property immutably, nor does it fix the nature of the income produced by that property. Thus, it is possible that while the transferred property produced income from business in the hands of the subsidiary, Equipment 85, it may have produced income from property in the hands of the parent. It is quite possible that a taxpayer who carries on business may receive both income from business and income from property. As Harris, supra, explains (at p. 159):
Where, however, a taxpayer who carries on a business also owns property that is not used as an integral part of the business (e.g., long-term investments held by a manufacturing corporation), the income yielded by this property will be considered property income and not business income.
Thus, the nature of the income produced from the property may change following a s. 88(1) rollover. However, my colleague’s reasons do not seem to allow for this possibility.
160 What my colleague has put forward is, in effect, a system whereby, once a s. 88(1) rollover occurs, the nature of the property and, more to the point, the nature of the income produced by that property, is forever fixed. Under her scheme, once it is determined that the assets produced income from business in the hands of the subsidiary, it necessarily follows that those assets will also produce income from business in the hands of the parent. With respect, I do not agree with this reading of the Act. Nothing in either s. 88(1) or s. 20(1) or in any other provision supports such a conclusion.
161 I have addressed my comments chiefly to the reasons of L’Heureux-Dubé J. because they are more specific and extensive. However, my colleague, McLachlin J. adopts in substance much of the reasoning of L’Heureux-Dubé J., and to that extent, I would also respectfully disagree with her reasons.
6. Conclusion
162 For all of the foregoing reasons, I would dismiss this appeal with costs.
Appeal allowed, Sopinka, Cory and Iacobucci JJ. dissenting.
Solicitors for the appellant: Chalker, Green & Rowe, St. John’s.
Solicitor for the respondent: The Attorney General of Canada, Ottawa.
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