Date: 20000915
Docket: 98-813-IT-G
BETWEEN:
BOIS DAAQUAM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Tardif, J.T.C.C.
[1] The respondent denied the appellant an investment tax credit for the 1993 taxation year following the purchase of an excavator.
[2] The appellant was and still is a company carrying on forestry and wood processing activities. Its main business is sawing and selling processed wood. To ensure its supply of raw material, the appellant purchased cutting rights and woodlots; for cutting the timber, it hired workers and used specialized equipment.
[3] The wood was processed solely at one of the appellant's two sawmills in St-Just-de-Bretennières in the county of Montmagny in the province of Quebec, Canada.
[4] The appellant's sawmills and headquarters are located in Canada just a thousand or so feet from the border between Canada and the United States of America. Because of its geographic location, the company did a considerable amount of cutting on American soil, especially at the end of the 1980s.
[5] Since the company sold a large part of its output of processed wood in the United States, it purchased substantial quantities of wood (raw material) there. This reduced its transportation costs, since the trucks were used to transport both the raw material and the processed wood.
[6] The processed wood was mainly fir and spruce from both Quebec and the United States. Generally speaking, the operating costs associated with timber cutting were higher in the United States than in Quebec because cutting rights were more expensive there. On the other hand, businesses were subject to no reforestation requirement in the United States.
[7] In 1993, the appellant held cutting rights on an immense area in the United States which had been estimated to contain about 800 million feet of timber at the time the rights were purchased in 1987. It had obtained those cutting rights from a company of which it was co-owner with the Kruger company, the latter being interested in the chips produced by the appellant's sawing operations.
[8] At that time, despite the intensity and extensiveness of its operations, Bois Daaquam Inc. was not very profitable; the financial statements showed losses or a very small profit on sales of several tens of millions of dollars.
[9] To make operations more profitable and efficient, a decision was made to purchase an excavator, a machine that was more efficient, flexible and useful in view of the various constraints associated with logging operations and environmental safety.
[10] The appellant argued that, at the time the excavator was acquired in July 1993 (Exhibit A-1), it firmly intended to use it primarily on Canadian soil. That intention resulted largely from the fact that timber-cutting operations on American soil were bound to decrease considerably given that the quantities of timber that could be cut on its immense piece of land had been greatly overestimated. According to the evidence, the initial estimates had failed to consider a number of constraints that prevented access or made access prohibitively expensive and this rendered certain places inaccessible.
[11] Claude Girard, in his capacity as controller, stated that the company knew when the excavator was acquired that the quality of the timber available on American soil was much lower than initially anticipated.
[12] That meant that the company had to review and re-evaluate its planning with respect to timber cutting. After all the appropriate factors were assessed, it was agreed that cutting operations would thereafter be focused more on Quebec, to the detriment of cutting operations in the United States. One of the factors weighing in favour of that change of focus was the fact that cutting rights were more expensive in the United States than in Quebec.
[13] Mr. Girard said that, since the excavator was purchased primarily to be used for timber-cutting work in forests, there was no doubt at that time that it would be used primarily in Canada, especially since the environmental requirements were stricter and more numerous in Canada.
[14] In actual fact, the excavator was used mainly in the United States after it was acquired. It was operated by a Canadian and insured and registered in Quebec; it was also repaired and maintained in Quebec. The excavator was also used to perform several jobs on Canadian soil during the months following its acquisition.
[15] The evidence showed that it was a machine with a useful life of more than 25 years.
[16] The excavator was used to build roads that provided access and allowed the cut timber to be brought out. It was so used in particular on American soil during the first few years after it was acquired.
[17] On Canadian soil, the excavator was used mainly for maintenance work around either of the sawmills and to load and unload trucks; for that type of operation, the bucket was replaced by lifting tongs. According to witness Donald Cloutier, the excavator was also used to clean ditches around either of the sawmills.
[18] The performance of such maintenance and cleaning work around the sawmills prompted the respondent to say that there was reason to question whether the excavator was qualified property.
[19] In this regard, it is my view that that work had no disqualifying effect with respect to the role or use of the property in question, since, although the work may not have been directly related to logging operations, it was incidental, necessary, useful, indeed essential to the efficient operation of the logging business.
[20] The tax credit that gave rise to these proceedings is provided for by the following provisions of the federal Income Tax Act ("the Act"):
127(9)
. . .
"qualified property" of a taxpayer means property (other than an approved project property or a certified property) that is
. . .
(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,
. . .
(c) to be used by him in Canada primarily for the purpose of
. . .
(ix) logging,
. . .
[21] Subparagraph 127(9)(c)(iii) of the Act sets out a test of intention. This is made very clear by the following decisions:
Dragon Construction Limited v. M.N.R., 89 DTC 464;
Setrakov Construction Ltd. v. M.N.R., 89 DTC 396;
Capilano International Inc. v. The Queen, 95 DTC 915.
[22] It is therefore necessary to assess the appellant's intention at the time it decided to acquire the excavator.
[23] The facts must be analysed so as to discover the intention that prevailed when the property was acquired. Trying to determine intention is a difficult exercise that only very rarely allows one to draw any absolute conclusion, especially since an informed business decision generally contemplates various alternatives that may affect or change the nature or focus of the initial intention.
[24] Moreover, economic reality is such that the decision makers and actors who form the intention preceding a decision must deal with changing or constantly evolving realities dictated by the speed of technological developments and by the modern economy.
[25] On this question of assessing intention, it is appropriate to recall the principle stated by the Supreme Court of Canada in Symes v. Canada, [1993] 4 S.C.R. 695 (at p. 736), a decision in which Iacobucci J. said the following:
. . .
As in other areas of law where purpose or intention behind actions is to be ascertained, it must not be supposed that in responding to this question, courts will be guided only by a taxpayer's statements, ex post facto or otherwise, as to the subjective purpose of a particular expenditure. Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all of the circumstances. . . . [Emphasis added.]
[26] In the case at bar, the evidence showed that, at the time the excavator was acquired, the projections and expectations for the American logging camp had to be lowered, thus requiring the appellant to redirect its cutting operations to other camps located mainly in Canada.
[27] Intention must also be assessed by looking at the useful life of the qualified property acquired. Some property, such as computer equipment, has a very short useful life and must be replaced regularly. However, other property, such as the excavator at the centre of these proceedings, is much more durable; the evidence showed that the excavator had a useful life of more than 20 years.
[28] Intention must, of course, be assessed before and at the time of the acquisition, but it is also helpful to consider what happened after the acquisition so as to confirm or disprove the alleged intention. As well, the analysis must concern a period that is also based on the useful life of the property for which the tax credit is being claimed.
[29] As for the "primarily" condition, there is no doubt in my mind that it concerns the nature of the operations or the business's field of activity and not the place of use. The Honourable Judge Mogan of this Court reached the same conclusion in Capilano International Inc. v. The Queen, 95 DTC 915, at page 919. The following extract is worth citing:
. . . On the evidence, I cannot conclude that the Sercel 368 was to be used primarily in Jordan even if the word "primarily" could be construed as modifying the place of use. In my opinion, however, the word "primarily" in paragraph 127(9)(c) modifies only the purpose for which the equipment was to be used; and that purpose was always exploring for petroleum or natural gas. . . . [Emphasis added.]
[30] If Parliament had wanted to have this concept or condition apply to the place of use, it would no doubt have worded the requirement as follows:
"to be used by him primarily in Canada".
[31] To obtain the credit, the appellant also had to prove on the balance of evidence that the excavator was used primarily for the purpose of logging. In this regard, although the respondent expressed some reservations following Mr. Cloutier's testimony, this aspect of the case was not discussed at length and it is my view that the weight of the evidence has shown in a satisfactory manner that the piece of equipment in question was used primarily for the purpose of logging.
[32] As for the fundamental issue of whether the appellant intended to use the qualified property in Canada, I think that the weight of the evidence shows that it did. Admittedly, the excavator was used on American soil after it was acquired, but its use was divided between Canada and the United States. Moreover, the excavator was regularly moved and used on Quebec soil.
[33] Even if my interpretation of the expression "in Canada primarily for the purpose of" were incorrect, I do not think that this would have any effect on the overall assessment, since, once again, the appropriate conclusion would be that the excavator was qualified property.
[34] The excavator was used on American soil for a short time if one considers the fact that it was durable property with a useful life of over 20 years. The evidence showed that the excavator's presence on American soil was dictated by special circumstances that had no effect on the intention that prevailed when it was acquired. I think that account must also be taken of the fact that the American logging camp was close to the appellant's place of business in Quebec and that the excavator was taken back there regularly for maintenance and repairs and also, above all, for the performance of important work.
[35] Accordingly, the appeal should be allowed with costs to the appellant.
Signed at Ottawa, Canada, this 15th day of September 2000.
"Alain Tardif"
J.T.C.C.
Translation certified true on this 29th day of November 2001.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-813(IT)G
BETWEEN:
BOIS DAAQUAM INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 23, 2000, at Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Stéphane Lalancette
Counsel for the Respondent: Martin Gentile
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1993 taxation year following the purchase of an excavator for $218,075 is allowed, with costs, and the assessment is referred back to the Canada Customs and Revenue Agency for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of September 2000.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 29th day of November 2001.
Erich Klein, Revisor