Date: 19990903
Docket: 98-570-IT-G
BETWEEN:
L & K FARMS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Prince Albert, Saskatchewan on August 11, 1999. Lloyd Taylor, Secretary of the Appellant ("L & K"), David Cook, President of Farm World Equipment Ltd. ("Farm World") of Kinistino, Saskatchewan and William Litchfield, P.Eng., Logistics Manager of New Holland Canada of Winnipeg, Manitoba testified for the Appellant. The Respondent read in portions of its Examination for Discovery of Lloyd Taylor as its only evidence in chief.
[2] The issues in dispute are outlined in paragraphs 8 to 10 inclusive of the Reply to the Notice of Appeal, which read:
8. By Notice of Reassessment dated May 12, 1997, for the Appellant's 1993 taxation year, the Minister, in reassessing the Appellant's return, inter alia:
i) Disallowed an Investment Tax Credit in the amount of $17,570.00 on property or expenditures having a capital cost of $175,700.00;
ii) In accordance with the attached Schedule "A", revised the Appellant's 1993 Capital Cost Allowance Schedule by:
a) disallowing the Appellant's addition in relation to the Farm Machinery (subsequently allowed in the Appellant's 1994 taxation year); and
b) increasing the amount of recapture of depreciation by the amount of $175,454.00.
iii) Assessed arrears interest pursuant to subsection 161(1) of the Income Tax Act (the "Act") in the amount of $22,555.82.
9. In so reassessing the Appellant, the Minister made the following assumptions of fact:
a) The facts admitted above;
b) The Appellant is a corporation incorporated pursuant to the laws of the Province of Saskatchewan and is engaged in a farming operation near Melfort, Saskatchewan;
c) The Appellant's taxation year ends on December 31st;
d) Lloyd James Taylor and Mary Jean Taylor are the sole directors and shareholders of the Appellant;
e) On November 4, 1993, Lloyd Taylor entered into a "Contract for the Sale of a New Farm Implement – Form A" (the "Contract") with Farm World for the purchase of the Farm Machinery;
f) The Farm Machinery was to be delivered, according to the Contract, by December 31, 1993;
g) Farm World is a dealership handling new and used farm equipment in the Province of Saskatchewan;
h) Farm World ordered the Farm Machinery on November 4, 1993 from the manufacturer, Ford New Holland Canada Ltd.;
i) The manufacture of the Farm Machinery was completed on February 7, 1994;
j) The Farm Machinery was shipped from the manufacturer to Farm World on February 14, 1994;
k) The Farm Machinery was delivered to the Appellant on April 15, 1994;
l) The retail date for warranty purposes was recorded by the manufacturer as March 18, 1994;
m) As part of the consideration for the sale, the Appellant traded in a John Deere 8960 tractor (the "Trade-in");
n) The Trade-in was received by Farm World on November 30, 1993;
o) The balance owing under the Contract was $18,000.00 which was paid by the Appellant by a cheque dated December 31, 1993;
p) In the 1993 taxation year, the Appellant did not acquire, obtain title to nor have all of the incidents of ownership such as possession, use and risk of the Farm Machinery;
q) The Farm Machinery was not in existence, produced, nor in a deliverable state as at December 31st, 1993; and
r) In reporting income for its 1993 taxation year the Appellant:
i) claimed Investment Tax Credits in the amount of $17,570.00 to which it was not entitled; and
ii) under-reported the amount of recapture of depreciation by $175,454.00.
B. ISSUES TO BE DECIDED
10. The issues are:
a) Whether the Appellant was entitled to claim an Investment Tax Credit of $17,570.00 in its 1993 taxation year in respect of the Farm Machinery;
b) Whether the Appellant under-reported the amount of recapture of depreciation by $175,454.00 in its 1993 taxation year; and
c) Whether the Appellant disposed of the Trade-in in its 1993 taxation year; and
d) Whether the Minister properly assessed interest pursuant to subsection 161(1) of the Act, for the Appellant's 1993 taxation year.
[3] The Respondent filed a Request to Admit, to which the Appellant admitted facts 1 to 11 and 14 inclusive. They read:
1. On November 4, 1993, Lloyd Taylor, on behalf of the Appellant, entered into a "Contract for the Sale of a New Farm Implement – Form A" (the "Contract"), which is Document #3 in this Request to Admit, with Farm World Equipment Ltd. ("Farm World") for the purchase of a 1994 Model 9880 Ford Tractor, serial number D100035, (the "Farm Machinery").
2. Farm World ordered the machinery on November 4, 1993 from the manufacturer, Ford New Holland Ltd. ("Ford").
3. The manufacture of the Farm Machinery was completed by Ford not sooner than February 7, 1994. The date of manufacture is evidenced by the Ford computer printout which is Document #10 in this Request to Admit.
4. The Farm Machinery was shipped from Ford to Farm World on or about February 14, 1994. The Bill of Lading evidencing such shipment is Document #6 in this Request to Admit.
5. The Farm Machinery was received by Farm World on February 15, 1994, as evidenced by the Farm World Receiving Report, which is Document #7 in this Request to Admit.
6. The Farm Machinery was delivered to the Appellant by Farm World on April 15, 1994, which is evidenced by Document #4 in this Request to Admit.
7. The retail date of the Farm Machinery for warranty purposes was recorded by Ford as March 18, 1994. This retail date is evidenced by the Ford computer printout which is Document #11 in this Request to Admit.
8. The purchase price of the Farm Machinery was $175,700.00.
9. As part of the consideration for the sale, the Appellant traded in to Farm World a John Deere 8960 tractor (the "Trade-in") valued at $157,700.00.
10. The remaining $18,000.00 owing under the Contract to Farm World was paid by the Appellant to Farm World by cheque dated December 31, 1993.
11. The Trade-in was delivered to Farm World on November 30, 1993, as evidenced by the Farm World Receiving Report, which is Document #5 in this Request to Admit.
...
14. The invoice amount for the Farm Machinery was billed by Ford to Ford Credit on February 16, 1994. The Invoice/Pay-off Advice evidencing such billing is Document #8 in this Request to Admit.
During the hearing the Appellant was allowed to withdraw the admission given to #3 of the Request to Admit, and paragraph #2 of Document 10. Instead, the Court accepts the evidence of Mr. Litchfield that L & K's Ford New Holland tractor which is the subject matter of this appeal, being Serial #D-100035, was serial numbered, completely manufactured, operating, ready to ship and signed off for shipment at its premises in Winnipeg on December 23, 1993. (Thus, assumption (q) is wrong). Then D-100035 was stored outside in New Holland's yard at Winnipeg until it was shipped to Farm World on February 14, 1994.
[4] On the evidence D-100035 was received by Farm World on February 15, 1994. Farm World shipped it to L & K on April 15, 1994 (Exhibit R-1, Tab 4).
[5] Assumptions 9(b), (c), (d), (e), (f), (g), (h), (j), (k), (l), (m), (n) and (o) are true or were not refuted by the evidence.
[6] Mr. Taylor testified that the serial number was not filled in on Form A when the parties signed on November 4, 1993. However, it is on the executed Form A copy in Exhibit A-1, Tab 1. Mr. Cook testified that he kept a running sheet of production of the model purchased by L & K. This sheet was seized by Revenue Canada, along with many boxes of other documents. After a number of court applications by Farm World, Revenue Canada was ordered to return Farm World's documents. Mr. Cook has searched diligently for his running record of New Holland's production and has been unable to find it. It was based on Mr. Cook's weekly or half-weekly telephone conversations with New Holland. This testimony of Mr. Cook is believed because, of approximately 53 units of this 1994 New Holland model in this production run, 12 were for Farm World (Exhibit A-6). In further substantiation of this, both Mr. Taylor and Mr. Cook believed that L & K's tractor was in Farm World's yard on December 29, 1993 when Mr. Taylor attended a show of the new tractor model in Farm World's shop. It was too cold for either of them to go out in the yard and check the units in the yard.
[7] The cold was the reason given by all of the witnesses as to why New Holland, Farm World and L & K did not want the new tractor started or moved. Start-up or operation after shut-down during intense cold can damage the engine and tractor severely. In addition, both New Holland and Farm World shut down over the Christmas holiday.
[8] The serial number of L & K's tractor is in the copies of both the Appellant's and Respondent's exhibits of the Form A contract (Exhibit A-1, Document 1) and (Exhibit R-1, Tab 3). Both have Farm World's stock number written on them, as confirmed by Exhibit R-1, Tabs 7 and 4. Form A was seized by Revenue Canada from Farm World. It was also the copy which Mr. Cook had when he was phoning New Holland in December, 1993 concerning the production run of D-100035.
[9] The question is when serial number D-100035, in law, became part of Form A as between Farm World and L & K. L & K ordered a special tractor powered by a Cummins Diesel engine, which was L & K's choice. Their Form A contract specified delivery by December 31, 1993. L & K signed the Form A knowing that the space for the serial number was blank and that the correct serial number would be determined by Farm World. Thus L & K cannot, and does not, deny that the serial number inserted by Farm World is accepted. L & K intended to be bound to the serial number Farm World was to insert.
[10] Similarly Farm World is the only one which could have, and thus did, insert the serial number into the Form A contract. By doing so, it agreed to deliver that tractor to L & K by December 31, 1993. It is an admission by Farm World that it has set that very tractor, serial number D-100035, aside for delivery to the Appellant by December 31, 1993. The testimony of both Mr. Cook and Mr. Taylor, which is accepted, is that on December 29, 1993, when Mr. Taylor attended Farm World's dealership showing of this new model of tractor in its shop, they both believed that L & K's new tractor was sitting outside in the cold in Farm World's yard among other new tractors and equipment ready for sale or delivery. Mr. Taylor's belief had to have been based upon a representation by one of Farm World's staff. Neither one checked the serial number because it was too cold to go outside.
[11] This fact coupled with Mr. Cook's testimony that he was telephoning New Holland about twice a week respecting its production run of this model establishes to the Court that Farm World knew that D-100035 was completed and ready for Farm World before December 29, 1993 and that Farm World inserted serial number D-100035 into its copy of L & K's Form A before December 29, 1993. Even if serial number D-100035 was not inserted into L & K's copy of Form A on December 29, 1993, the goods then passed to L & K. As was stated in Benjamin's Sale of Goods, 3rd Ed. (1987) Sweet and Maxwell at paragraph 462:
"Passing of property. The principle of estoppel referred to above must be distinguished from a closely related principle of estoppel by which the seller of unascertained goods may be precluded from denying that the property in the goods sold has passed to the buyer or to his sub-purchaser. It was thus described by Cotton L.J. in Simm v. Anglo-American Telegraph Co. "If an action is brought upon the ground that the property in goods has passed to the vendor of the plaintiff [sub-purchaser], and if that question depends upon whether a particular parcel of goods has been set apart and appropriated to the contract between the vendor of the plaintiff and his defendant, an admission by the defendant, the owner of the goods, that there has been a setting apart of the goods, would be effectual as against him to pass the property in the goods to the plaintiff's vendor; as against the plaintiff who has paid for the goods, the defendant is estopped from denying that the goods have been set apart, and the plaintiff is entitled to rely upon the admission of the defendant which if true would have given the plaintiff a good title to the goods."
There is collateral Canadian law relating to this principle contained in Owen Sound Public Library Board v. Mial Developments Ltd. (1979) 102 D.L.R. 685 (Ont. C.A.), and in NEC Corp v. Steintron International Electronics Ltd. [1985] BCJ No. 611.
[12] The insertion of serial number D-100035 coupled with Farm World's advice to Mr. Taylor on December 29, 1993, that L & K's tractor was in Farm World's yard on that date estop Farm World from denying that D-100035 had been set apart for L & K before December 31, 1993 and that L & K had title to it. D-100035 is the tractor which was delivered to and accepted by L & K.
[13] On the basis of the foregoing property in D-100035 passed to L & K on December 29, 1993. Revenue Canada is bound by the contractual relation of Farm World and L & K respecting D-100035.
[14] Similarly, consideration passed on completion of the contract of sale between L & K and Farm World . Thus, L & K transferred the property of its trade-in to Farm World in 1993.
[15] For this reason, the appeal is allowed. Therefore:
(a) The Appellant was entitled to claim an Investment Tax Credit of $17,570 in its 1993 taxation year in respect of the farm machinery;
(b) The Appellant did not under-report the amount of recapture of depreciation by $175,454 in its 1993 taxation year;
(c) The Appellant disposed of the trade-in in its 1993 taxation year; and
(d) This court has no jurisdiction with respect to the matter of assessed interest pursuant to subsection 161(1) of the Income Tax Act.
[15] The Appellant is awarded party and party costs.
Signed at Ottawa, Canada, this 3rd day of September 1999.
"D.W. Beaubier"
J.T.C.C.