Tax Court of Canada Judgments

Docket: 2000-5058(IT)G

BETWEEN:

HEWLETT PACKARD (CANADA) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeals heard on March 17, 18, 21, 2003 at Toronto, Ontario

Before: The Honourable Justice J.E. Hershfield
Appearances:
Counsel for the Appellant:	Richard B. Thomas, Michael Friedman
Counsel for the Respondent:	Jag Gill, Q.C., David W. Chodikoff, Carol Calabrese

____________________________________________________________________

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1995, 1996 and 1997 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 16th day of October 2003.

"J.E. Hershfield"

Hershfield, J.

Citation: 2003TCC386

Date: 20031016

Docket: 2000-5058(IT)G

BETWEEN:

HEWLETT PACKARD (CANADA) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Hershfield, J.T.C.C.

[1]      The Appellant, Hewlett Packard (Canada) Ltd., ("HP") has appealed reassessments of its 1995, 1996 and 1997 taxation years in respect of which the Minister of National Revenue (the "Minister") disallowed a portion of the capital cost allowance ("CCA") claimed by the Appellant for each such year.

[2]      The Minister's basis for the reassessments was that the undepreciated capital cost ("UCC") of the Appellant's Class 10 asset pool was lower in each of the subject years than reported by the Appellant because, in the Minister's view, certain vehicles included in the pool at the end of each year had been disposed of before the end of that year.

[3]      Each of the fiscal years in question ended on October 31. Each year in October the Appellant has historically purchased a fleet of vehicles from Ford Motor Company of Canada ("Ford") for use by the Appellant's employees to replace the fleet acquired in October of the preceding year. The purchase of a new fleet in October (the replacement fleet) results in an addition to the UCC of its Class 10 asset pool in the year of the purchase. Such addition is not in issue.

[4]      The Appellant maintains that the fleet of vehicles being replaced (the old fleet) was not disposed of until November of each year. There is no question that the old fleet is repurchased by Ford each year. The repurchase of an old fleet by Ford is included in the contract of sale of that fleet to the Appellant.

[5]      The issue is whether the old fleet is, as maintained by the Appellant, disposed of in November of each year or, as maintained by the Respondent, in October. If the sale of the old fleet by the Appellant is in November the reduction in the UCC of its Class 10 asset pool does not occur until the fiscal year after the replacement fleet is added to the pool. If the sale of the old fleet by the Appellant is in October the reduction in the UCC of its Class 10 asset pool occurs in the same fiscal year as the replacement fleet is added to the pool. The Appellant has filed on the former basis. The Respondent has reassessed on the latter basis and has reduced the Appellant's CCA claims accordingly. The only issue then in these appeals is when the fleet of vehicles being replaced each year was disposed of. If the vehicles were disposed of in November of each year, the appeals will be allowed and if the dispositions occurred in October the appeals will be disallowed.

[6]      Before examining the issue raised in these appeals, I note that the Appellant's fleet replacement program permitted a doubling up of its CCA claims in the first year it was employed. That is, two fleets were included in the UCC of HP's Class 10 asset pool in that year and none were taken out. Each year thereafter, including in the subject years, one fleet was added to the pool and one was removed. If the Minister's assessment is upheld, the doubling up effect will end in HP's 1995 fiscal year since, in that year, there will be a double reduction in the UCC of the Appellant's Class 10 asset pool given that it had already reduced the pool for that year by dispositions in November of 1994 and under the reassessment it would be required to reduce the pool, again for that fiscal year, by dispositions in October 1995. That is, there would be one fleet added to and two fleets removed from the UCC pool in the Appellant's 1995 fiscal period. That would leave one fleet in the pool to be depreciated each year since each year thereafter (e.g. in 1996 and 1997) one fleet is added to the pool and one fleet is withdrawn from the pool.

[7]      The Respondent relies on subsection 13(7) of the Income Tax Act ("the Act") which deems depreciable property to be disposed of when there is a change of use. The Respondent argues that the old fleet was no longer in use in the Appellant's business in October of each year given that the replacement fleet had arrived in October, was in use in October and had fully replaced the old fleet in October. The Respondent also argues in the alternative that there is a "disposition of property", namely the old fleet, in October of each year as that term was defined in subsection 13(21) of the Act as it read in respect of the subject years and that, applying ordinary legal principles including those of various provincial Sale of Goods Acts, the vehicles being replaced were at law disposed of in October of each year.

[8]      The Appellant denies that there has been a change of use and asserts that under ordinary legal principles and more particularly under governing provisions of the relevant Sale of Goods Acts, the vehicles being replaced were disposed of by the Appellant in November of each year. The Appellant's position is that a "disposition" under the Act is governed by such principles and provisions which, on the facts of the case at bar, would give effect to the intentions of the parties which was that the property in the old fleet was to pass to Ford in November of each year.

[9]      At the outset I would remark that this is not a case that requires analysis or commentary on the tax avoidance (savings) achieved under the regime sought by HP to be in effect. It is open to all taxpayers to buy and sell depreciable property and take CCA in accordance with the provisions of the Act. That some deferral might be achieved by careful timing of dispositions and acquisitions is a simple result of the application of the provisions of the Act. There is no dispute in this case as to the application of this aspect of the Act. I am required only to make a determination as to when a sale has occurred or if there has been a change of use.

[10]     The HP fleet consists of up to 750 vehicles used each year by HP employees across Canada. The vehicles are used in the course of employment although personal use is allowed with resultant taxable benefits recognized. Eligible drivers had a specific vehicle assigned to them for their exclusive use throughout the year. Each eligible driver would pick up a replacement vehicle and drop off the old vehicle after which Ford would take possession of the old vehicles. This, almost without exception, was done in October of each year. Even this briefest description of the program is sufficient to illustrate the Respondent's main contention. How can an employee have the use of two vehicles for use in the performance of employment duties when only one is actually being put to that use or even available for that use after the exchange? It is argued that paragraph 13(7)(a) of the Act deems a disposition to have occurred in October due to this change of use. Paragraph 13(7)(a) reads as follows:

13(7) Subject to subsection 70(13), for the purposes of paragraphs 8(1)(j) and (p), this section, section 20 and any regulations made for the purpose of paragraph 20(1)(a),

(a)         where a taxpayer, having acquired property for the purpose of gaining or producing income, has begun at a later time to use it for some other purpose, the taxpayer shall be deemed to have disposed of it at that later time for proceeds of disposition equal to its fair market value at that time and to have reacquired it immediately thereafter at a cost equal to that fair market value;

[11]     If there is not a change in use, the Respondent argues that the incidence of ownership in respect of the old fleet passed to Ford in October of each year and that the contractual provisions governing the fleet exchanges entitled Ford to "proceeds of disposition" from a "disposition of property" in respect of the old fleet in October of each year. The argument is bolstered by the invoicing regime which the Respondent suggests supports such finding. The definition of "disposition of property" in subsection 13(21) of the Act at all relevant times read as follows:

"disposition of property" includes any transaction or event entitling a taxpayer to proceeds of disposition of property.;

and "proceeds of disposition" was at all relevant times defined in that subsection as follows:

"proceeds of disposition" of property includes

(a)                the sale price of property that has been sold,

(b)                compensation for property unlawfully taken,

(c)                 compensation for property destroyed ...

(d)                compensation for property taken under statutory authority ...

(e)                 compensation for property injuriously affected ...

(f)                  compensation for property damaged ...

(g)                an amount ... (relating to mortgage assumptions); and

(h)                any amount included because of section 79 ...

As I will note later in these Reasons, this list of inclusions expands, for the purposes of section 13, the meaning of proceeds of disposition beyond what otherwise would be included applying settled commercial legal principles. What is to be regarded as a disposition of property for the purposes of this section is therefore correspondingly expanded.

[12]     While the foregoing brief description of the Appellant's fleet program is sufficient to highlight the Respondent's arguments, it does not do justice to the actual mechanics of the fleet exchange; nor does it respond to the Appellant's position that intention alone governs when property is transferred to a buyer as provided in the relevant provisions of the Sale of Goods Acts governing the subject transactions. It is necessary then to put some flesh on this skeletal description of the Respondent's case.

[13]     The Appellant called two witnesses. The first witness was David Ogilvie who was employed by HP as fleet manager since 1976. Throughout the subject years he was responsible for all aspects of HP's fleet of vehicles including negotiating the purchase and sale of the fleets and the maintenance and operation of the vehicles comprising the fleets. I accept that he would be the person most knowledgeable in relation to HP's fleet program. The second witness called was Thomas R. Nixon. Mr. Nixon is a national accounts manager for Ford of Canada. He has held such position for the last 10 years. He is responsible for selling vehicles to and servicing 75 large corporate clients including HP. His job is to sell or lease as many vehicles to his clients as possible. HP's entire fleet in each of the subject years consisted of Ford vehicles acquired and disposed of pursuant to agreements and arrangements worked out between Mr. Nixon, on behalf of Ford, and Mr. Ogilvie on behalf of HP. I accept that Mr. Nixon would be the person most knowledgeable in relation to Ford's participation in HP's fleet program.

[14]     The evidence given at trial consisted of testimony concerning written agreements of sale and details of the exchange routines employed in giving effect to the agreements. As one might guess, neither the agreements nor the routines adhere to a regime that gives a clear answer to the questions posed in these appeals.

[15]     There are three written agreements covering the subject years. One agreement, made in 1993, covers both 1994 and 1995 model years. The old fleet sales in October/November 1995 were covered by the 1993 agreement. Another agreement made in June 1995 covered the next three model years, namely the 1996, 1997 and 1998 model years. That agreement was followed by a third agreement in April 1997 to ostensibly (on its face) cover model years 1996 through 1999 inclusive creating an overlap in terms of documentation governing the transactions that are the subject of these appeals. The June '95 agreement on its face covers the purchase of the 1996 and 1997 model year vehicles in October 1995 and October 1996 respectively and the sale of those vehicles in October/November 1996 and October/November 1997 respectively. The April '97 agreement seems to affect the October/November 1997 disposition of 1997 model year vehicles acquired in October 1996 under the June '95 agreement and disposed of under that agreement as well. This overlap is made more confusing as the April '97 agreement adjusted the purchase and repurchase prices for the 1997 model year vehicles in HP's favour even though the purchase of 1997 model year vehicles had closed in October of 1996. That after the fact accommodations seem to have been made does not seem to me to change the legal effect of completed transactions or the terms on which they were completed. In any event, such changes to the agreements do not ultimately seem relevant except to support the position that the "trade-in" language used in the April '97 agreement applied to the vehicle exchanges in both 1996 and 1997. I mention the confusion primarily to illustrate the muddy water in which HP has placed itself in respect of a third party construction of its fleet exchange program. Still, I will describe each agreement and related documentary evidence:

(a)       In all agreements all purchased vehicles are identified by model code. The number of particular models to be acquired is specified as is the price based on standard equipment as set out;

          (b)      Paragraph 2.3 of the 1993 agreement provides as follows:

2.3 Recognizing the financial importance to Hewlett-Packard (Canada) Ltd. of timely vehicle delivery, it is the intent of Ford that all vehicles will be delivered via local dealers after October 1st but prior to October 31st of each calendar year. Ford will closely monitor Hewlett-Packard (Canada) Ltd.'s order and will use its best effort to ensure early build in the model year to achieve delivery during the month of October.

          (c)      Paragraph 2.2 of the June '95 agreement provides as follows:

2.2      It is the intent of Ford that all vehicles will be delivered via local dealers after October 1st but prior to October 31st of each calendar year. Should production complications cause unacceptable delivery delays to Hewlett-Packard, Ford agrees to supply 686 mutually agreed upon new Ford vehicles ("Replacement Vehicles") to Hewlett-Packard by October 31st of each applicable year. The Replacement Vehicles would be "agreement" equipped . . .

(d)              Paragraph 2.2 of the April '97 agreement is substantially the same as paragraph 2.2 of the June '95 agreement although the opening sentence reads as follows:

All vehicles will be delivered via local dealers between October 1st and October 31st of each calendar year.

(e)       The first two agreements require payment for the replacement fleet by the 15th day of the month following delivery. The April '97 agreement is silent on the payment due date but invoices for the sale of 1998 model year vehicles to HP in October of 1997 showed a payment due date of November 15, 1997;

(f)       All agreements credit old fleet purchases at a fixed dollar amount per model. The April '97 agreement refers to the credit as a trade-in value while the earlier agreements refer to the credit as the repurchase price. In all cases there is a schedule of fixed monthly depreciation amounts for each model for each year. The first two agreements have a repurchase price which calculates to be the price HP paid less 13 times the fixed monthly depreciation amounts. Similarly the April '97 agreement has trade-in values which calculate to be the price HP paid less 13 times the monthly depreciation amount.[1] Notwithstanding that these calculations demonstrate that 13 months' depreciation were actually used in pricing the repurchases, the first two agreements expressly refer to depreciation being based on 12 months. Both Mr. Ogilvie and Mr. Nixon testified that the reference to 12 months was a typographical error. The calculations themselves and the invoices introduced at trial both corroborate that the depreciation used in pricing repurchases or valuing trade-ins was in fact 13 months and I accept that that was the intention of the parties;

(g)      The April '97 agreement expressly provides that billings for the replacement fleet are reduced by the trade-in values of the old fleet. Single invoices dated October 31 1997, showing both purchases and trade-ins, were issued by Ford for each province in respect of the October 1997 fleet exchange (i.e. 1998 model year vehicles replacing the 1997 model year vehicles). Payment due date was November 15th. Neither the 1993 agreement nor the June 1995 agreement expressly provide for net billing however the invoices for each province for the October 1996 fleet exchange (i.e. 1997 model year vehicles replacing 1996 model year vehicles) dated November 1st, 1996 credited "trade-ins" against the amount due.[2] The payment due date was November 15th^.. In both the 1996 and 1997 fleet exchanges GST and provincial sales taxes were effectively charged on the invoice price net of trade-ins. This practice was not followed in respect of the October 1995 fleet exchange (1996 model year vehicles replacing 1995 model year vehicles). Indeed, separate invoices were prepared in respect of this exchange covered by the 1993 agreement. That is, an invoice dated October 31, 1995 was prepared in respect of purchases for each province and separate invoices dated November 1, 1995 were prepared for the repurchase credits. The payment due date and the credit date in respect of the October 1995 fleet exchange is shown on both invoices as November 16, 1995;

(h)      All agreements set out similar "clean car" repurchase/trade-in conditions including an excess mileage charge in respect of Ford's repurchase of the old fleet. The charge set out in the 1993 agreement was five cents per kilometre for vehicles returned with greater than 58,000 kilometres. The charge set out in the later agreements was three cents for each kilometre over 50,000. There were occasional vehicles exchanged amongst employees to ensure excess mileage charges would not be assessed and, on the evidence, no such charges were ever payable;

(i)       All agreements permit employee sales. That is, HP employees were entitled to acquire old fleet vehicles being returned to Ford. The first two agreements provide that Ford will repurchase all models less those purchased by HP employees. The evidence at the trial, however, was that Ford repurchased these employee acquired vehicles from HP and then resold them to employees who had elected to acquire an old fleet vehicle. Other language in the agreements to the effect that old fleet vehicles would be made available to HP employees at depreciated costs with a handling charge payable to Ford tend to support that the intention of the parties was that Ford would repurchase employee acquired vehicles. As well, separate credit invoices for employee purchased vehicles were issued by Ford to HP. Further, HP received under each agreement an extra $500.00 from Ford for each employee acquired vehicle to recognize Ford's savings in having fewer vehicles to resell at auction. I accept then that Ford acquired employee purchased vehicles from HP (as it did all other old fleet vehicles) and resold them to HP employees and that it was not simply HP's agent in respect of such purchases and sales;

(j)       HP was allowed to perform minor warranty repairs at their own service locations in Montreal and Toronto;

(k)      The April '97 agreement provides for the early repurchase of up to 12 vehicles per year. The repurchase price would be depreciated on the actual time in service using the same monthly depreciation amount as used for October/November purchases. This supports Mr. Nixon's testimony that the depreciation rate was determined on a monthly basis and not on a term basis divided by the number of months required to confirm a disposition at the expiry of 13 months.

[16]     It is also important to point out what is absent from all three agreements. None expressly specifies a title or legal ownership transfer date of the old fleet to Ford. There is express language as to delivery dates for the replacement fleet but the agreement is silent on the delivery date and the legal transfer date in respect of the repurchase/trade-in of the old fleet. Points of delivery of the old fleet are not specified. There is no express language that addresses the passage of risk notwithstanding, in respect of the repurchase/trade-in of an old fleet, that the exchange routine puts possession of the old fleet with Ford prior to the date the Appellant asserts as the legal transfer date of the vehicles comprising the old fleet. These gaps and questions require looking beyond the written agreements.

[17]     I will turn now to the evidence concerning the procedures for delivering and returning vehicles. Two different procedures were used: one for Toronto and Montreal and another for the rest of Canada. There was also a different procedure for employee acquired vehicles, however I have not found such procedure material in my consideration of these appeals so I will not comment further on it.

[18]     In both Toronto and Montreal, HP had a maintenance garage to service fleet vehicles picked up and returned at these cities. These garages and adjacent areas offered some parking space to accommodate replacement and old vehicles but given the large number of vehicles being exchanged in October of each year storage was a problem. Accordingly, the return of old vehicles was not so much timed to co-ordinate with the delivery of replacement vehicles when Ford was ready to ship but was to a large extent governed by HP's ability to accommodate the exchange given limited parking space. Old vehicles dropped off at the Toronto and Montreal garages could not be left there. The arrangement was that HP would call the auctioneer that Ford used to resell the repurchased old fleet vehicles, when there were sufficient old fleet vehicles to warrant or require a pick-up. The auctioneer would deliver the old fleet vehicles to its yard awaiting instructions from Ford. With relatively minor exception, Ford was in possession of old fleet vehicles returned to the Montreal and Toronto garages before the end of October each year. I note at this point that Mr. Ogilvie testified there were many exceptions each year (perhaps as many as 25 to 30 vehicles a year in each of Montreal and Toronto that were not picked up until after the end of October each year). I do not give much weight to this testimony except to acknowledge that there may well have been some exceptions accommodated by Ford which was, by all other accounts, to have the property available to it for its use by November 1st each year.[3] To the extent that there were late deliveries, that is deliveries after October 31st to Ford in any year, they were clearly indulgences that Ford allowed and would not be relevant in respect of the issue as to when title in the old fleet vehicles passed. Accordingly, I think that it is fair to say that the old fleet vehicles were, by the end of October, virtually all stored at the yards of the auctioneer. Further, there is no question in my view that the auctioneer was holding the vehicles for Ford. Ford retained the auctioneer on its behalf to sell the repurchased vehicles. Ford retained the auctioneer to pick up the repurchased vehicles at the HP garages. The auctioneer picked up the vehicles in October and parked them at the auction lot until Ford instructed the auctioneer to sell the vehicles which did not occur until November each year. Ford was not HP's agent in the retention of the auctioneer. It seems clear then that both the place of delivery of the replacement fleet to HP and the place of delivery of the old fleet vehicles to Ford was HP's garage. This is not determinative of whether title has passed to Ford in respect of the old fleet. Rather, it just begs the question as to whether or not delivery (and possession) is being made in advance of the date of title passing. What is established is that possession of the old fleet vehicles, but not necessarily ownership, passed to Ford in October in each year.

[19]     Prior to the transfer of possession I note that returned old fleet vehicles were received at HP garages, cleaned out and inspected by HP maintenance staff in the course of the exchange by the employee who picked up a replacement vehicle. HP used stickers to identify vehicles in use. Once a vehicle was returned, the stickers were removed. The stickers were a part of HP's tracking procedure but it was abandoned in favour of serial numbers. As to the inspection of the returned vehicles I note, as referred to above, that the agreements provided that the repurchases/trade-ins of the old fleet vehicles by Ford were subject to the returned vehicles meeting clean car criteria set out in those agreements. In the case of vehicles returned at the Montreal and Toronto garages, HP would inspect the old fleet vehicles and ensure they were in suitable condition prior to arranging their pick up in October of each year. When the auctioneer was called, the vehicles were expected to meet the clean car criteria. The auctioneer would then inspect the vehicles on Ford's behalf and in the exceptional case where there was an issue, HP would make arrangements for any work to be done to meet the clean car criteria so that they would be approved for pick-up. No vehicles were rejected as a result of the clean car criteria.[4] Given my finding that virtually all of the old fleet vehicles were picked up by Ford by the end of October each year, it follows that there were no conditions to completing the purchase and sale of virtually all of the old fleet vehicles by the end of October each year.

[20]     The evidence as to who bares the risk in respect of the old fleet once vehicles leave HP's garage is somewhat muddy. While HP maintained liability insurance as required by provincial legislation, it self-insured in respect of damage to the fleet. No attention seems to have been paid, by HP at least, as to who would be at risk once the old fleet left HP's garage, even if it was still the owner of the old fleet as it asserts. The issue of having liability coverage while owner of up to 1,500 vehicles for even a short period was apparently not considered, at least to the knowledge of Mr. Ogilvie or HP's counsel. As to liability for damage to old fleet vehicles while owned by HP but not in its possession, the issue once again, was apparently not considered by HP. The bailment assumed by Ford (which would exist if title did not pass on delivery), the vehicles being off road and HP being self-insured may all have resulted in no consideration being given to the question of risk once the vehicle exchange commenced each year. Similarly, Ford would seem to have little interest in where the risk lay in these circumstances although unlike Mr. Ogilvie, Mr. Nixon testified with some conviction that Ford was at risk and would have insurance coverage as of November 1st of each year. Such conviction, of course, flows from Mr. Nixon's view that ownership did not pass until November 1st of each year. Since risk follows ownership he would be right if his premise was right. It would also follow that if the old vehicles were destroyed before November 1st in a given year while with the auctioneer, Ford would, according to Mr. Nixon's view, hold HP accountable for lost trade-in/repurchase value to the extent such loss could not be mitigated by action against the auctioneer (say in the case of damage due to an act of God). However, since these events are hypothetical and were not contemplated, it seems to me that it was too easy, in the course of the hearing, for Mr. Nixon to testify with conviction as to who would be responsible to cover a loss in any given situation. While I might thereby exercise some caution in giving his testimony too much weight on this point, it does follow his testimony in respect of his understanding of the intended transfer date of the old fleet in each year and that does carry weight.

[21]     I will now turn to the procedure employed at locations other than Montreal and Toronto. In these cases HP employees would deliver the old fleet vehicles to a designated Ford dealership. Again, I would say that this occurred in virtually all cases in October when the employee was advised that the dealership had the replacement vehicle ready for pick-up. The old vehicle would be cleaned out. HP stickers used to identify vehicles in use were removed. There would be an exchange of keys. The vehicle inspection would be done by the dealer at the dealership. HP addressed the clean car criteria prior to such inspection being completed. Again, no vehicles were rejected as a result of the clean car criteria. Upon having the vehicles ready in October for delivery at the price fixed under the agreements, there were no conditions to completing the purchase and sale of the old fleet vehicles.

[22]     There is no better evidence as to the passage of risk when the old fleet vehicles were dropped off at Ford dealerships than given in respect of the old fleet vehicles picked up at the Montreal and Toronto garages. I see no difference between a Ford dealership taking possession of the old fleet vehicles and Ford's auctioneer taking possession of the old fleet vehicles. In both cases Ford has taken possession of the vehicles but that does not in itself resolve the question as to whose vehicles they are.

[23]     In answering the question as to whether or not there has been a transfer of the old fleet vehicles to Ford prior to November 1st in each year, the Appellant puts emphasis on the vehicle registration procedure adopted for all old fleet vehicles no matter where returned. Subject to provincial law, all original vehicle registration papers were kept by Mr. Ogilvie. Subject to provincial law, employees only carried copies of the vehicle registration papers in their respective vehicles. When a vehicle was returned for exchange with a replacement vehicle, the copy of the registration papers for the old vehicle was surrendered. Original registration papers not already with Mr. Ogilvie were turned over to him so that Mr. Ogilvie was able to turn over all the original registration papers to Ford at the end of the day of October 31 of each year.[5] Both Mr. Ogilvie and Mr. Nixon testified that this routine was followed regularly each year. They did this on the clear understanding between them that it was a necessary procedure to ensure the income tax treatment HP required. Mr. Nixon was happy to comply. He had to keep HP happy. Mr. Ogilvie adhered to the practice as it was very important to HP. The surrender of the registration papers at the end of the day on October 31 each year was understood by Mr. Ogilvie and Mr. Nixon not to be a transfer of legal ownership of the old fleet on October 31 but was understood by them as a means of ensuring that no vehicle registration changes would or could be made until the following day, namely, in November. Mr. Nixon testified that the process of Ford disposing of the old fleet for its own account did not and could not start until November. Mr. Nixon testified that Ford was not the owner of the vehicles until November and he accepted the registration papers at the end of the day on October 31st each year on that basis. I accept that this was the intention of the parties. It is uncontradicted and credible. Its credibility is re-enforced by the need recognized by both witnesses for the transfer to occur after October 31 for tax purposes. That motive does not diminish the credibility of the testimony. Indeed it enhances it. None of the factors that might cloud the question of when title to the old fleet vehicle passes necessarily contradict the testimony of the witnesses and conduct of the parties as to the intended transfer date. Given the reason for it, the intended transfer date is self-evident. Based on Mr. Nixon's testimony as a whole, I see no room for Ford to argue, even if it served its interests to do so, that it took title before November 1 of each year. However when title transfers, even when it follows the intended time for property to pass, may not be the end of the matter for the purposes of section 13 of the Act.

[24]     While my comments are leading quickly to an analysis of the role of "intent" in determining the disposition date for the purpose of these appeals, there is one other aspect of the facts that I wish to expound on before proceeding to the arguments and analysis. That is the import of fixing the repurchase price and trade-in value of the old fleet vehicles at cost less 13 months' depreciation. Mr. Nixon testified that the depreciation factor used in calculating the repurchase price/trade-in value of old fleet vehicles was calculated at a fixed monthly depreciation rate for each month or any part of a month that the vehicles were owned by HP. A new vehicle delivered to HP in October, say of 1995, would suffer its first month's depreciation in October of 1995 even if HP had use of the vehicle for less than a full month. Twelve months' use then ends in September of 1996. The 13th month is October 1996. If that vehicle (when it becomes part of the old fleet) is used or available for use for any part of November 1996 then, according to Mr. Nixon's testimony, I would understand that 14 months of depreciation should have been taken in respect of November 1996. Putting Mr. Nixon's position on the head of a pin, I would say that the old fleet was then acquired by Ford at midnight October 31st, 1996. I make note of this to draw attention to the definition of "UCC" in subsection 13(21) of the Act. The UCC of a class of depreciable property is the pool on which CCA is claimed each year and it is reduced by a number of amounts referred to in a formula in the definition of "UCC". One such amount, "F", is "the total of all amounts each of which is an amount in respect of a disposition before that time of property - and is the lesser of (a) the proceeds of disposition of the property - and (b) the capital cost to the taxpayer of the property" (emphasis added). Since CCA is taken on the UCC of the class at the end of the year,[6] the relevant UCC is the UCC otherwise determined less proceeds of disposition before the end of the year.[7] This confirms that a midnight sale at year-end does not reduce the UCC of a depreciable class of assets until the next fiscal year; i.e. a midnight sale at year-end does not reduce the CCA available in respect of a class of depreciable property in which the asset disposed of was included. I will refer to this definition of "UCC" again in these Reasons.

Respondent's Position Considered[8]

[25]     The Respondent draws the following conclusions from the evidence to support its position that there has been a change in use:

·         The vehicles were used by the Appellant for business purposes;

·         The use of the vehicles was only through the employees of the Appellant;

·         After the exchange of the Old Vehicles for the New Vehicles, the employees used the New Vehicles for business purposes;

·         After the exchange of the Old Vehicles for the New Vehicles, the employees did not use the Old Vehicles for business purposes;

·         After the exchange of the Old Vehicles for the New Vehicles, the Old Vehicles were no longer used by the Appellant in its business.

I agree that the evidence clearly establishes and warrants the first four of these conclusions.

[26]     As to the passing of property, the Respondent relies on the following aspects of the agreements to support a finding that the property in the old fleet was to pass to Ford prior to November 1st:

·         The purchase of the New Vehicles and trade-in/repurchase of the Old Vehicles was governed by a single agreement.

I think there is some confusion on this point as commented on in paragraph 15 of these Reasons although, in general terms, I would agree that each agreement speaking to the purchase of a replacement fleet of vehicles, speaks in the same agreement to the trade-in/repurchase of that same fleet of vehicles in October/November of the year following the purchase.

·         The New Vehicles were to be delivered by Ford to the Appellant between October 1st and October 31st each year;

·         The terms of the agreements do not explicitly set out the date on which Old Vehicles were to be delivered to Ford.

I have noted as well that the agreements do not set out the date on which ownership passes.

·         Ford was obligated to accept the Old Vehicles for trade-in/repurchase if they met the "clean car criteria" and the price was predetermined; accordingly, the agreements provide for sale on approval.

While I agree that the obligation existed once the clean car criteria was met and that the price was determined at that time, the effect of that finding remains open to analysis.

·         In the Vehicle Purchase Agreement for 1997-1999 it is explicit that the Old Vehicles would be accepted as trade-ins on account of the New Vehicle purchases.

This is the case in respect of the agreement that I have referred to as the April '97 agreement. As noted in paragraph 15 of these Reasons, the April '97 agreement amended the June 1995 agreement. The amendment adjusted the "trade-in" price of the 1997 model year vehicles re-acquired by Ford in October of 1996. That is, to the extent "trade-in" terminology matters, I would suggest that both the 1996 and 1997 fleets were contractually acquired by Ford as "trade-ins".

[27]     As to the conduct of the parties, the Respondent relies on the following evidence to support a finding that the property in the old fleet was to pass to Ford prior to November 1st in each year:

·         The exchange of the Old Vehicles for the New Vehicles happened in October.

This implies that Ford has more than possession of the old fleet vehicles at the time of the exchange which is to draw a conclusion on the question at issue.

·         The process of the exchange of the Old Vehicles for the New Vehicles was considered to be a "car flip";

·         In Toronto and Montreal, the Old Vehicles were accepted by the auctioneer and removed from the Appellant's parking lot if they met the "clean car criteria"; the Old Vehicles were not removed if the "clean car criteria" was not satisfied.

The evidence I have accepted is that no vehicles were rejected as a result of the clean car criteria.

·         Outside Toronto and Montreal, the Old Vehicles were accepted by Ford dealerships if they met the "clean car criteria"; the Old Vehicles were not accepted if the "clean car criteria" was not satisfied.

The evidence I have accepted is that no vehicles were rejected as a result of the clean car criteria.

·         The "clean car criteria" was satisfied with respect to the majority of the Old Vehicles by the end of October.

The evidence I have accepted is that no vehicles failed to meet the clean car criteria.

·         Ford or its agent, the auctioneer, had possession of the majority of the Old Vehicles prior to October 31st.

I am satisfied on the evidence I have accepted that Ford was in possession of virtually all the old fleet vehicles by October 31 each year.

·         The Appellant's employees had no contact with the Old Vehicles after they were in the possession of Ford (with the exception of one Old Vehicle for which special arrangements were made);

·         Ford paid to transport the Old Vehicles to the auctioneer;

·         The auctioneer was paid a commission by Ford;

·         The vehicle registrations for the Old Vehicles were given to Ford late in the day on October 31st each year;

·         The invoices from Ford for the purchases of the New Vehicles in the 1996 and 1997 taxation years reflected total billings at the prices of the New Vehicles outlined in the agreement less the value of the trade-ins;

·         The invoices in the 1997 taxation year were dated October 31, 1997;

·         Only one cheque was issued to Ford by the Appellant for the net amount of the New Vehicles less the trade-ins and employee sales.

This is the case (one cheque issued by Ford) even in respect of the 1995 exchanges where separate invoices were prepared for the purchase amount and the repurchase credit amount. (Tab 16 of the Joint Book of Documents)

[28]     Further, the Respondent asserts that HP not needing the old fleet in October, having purchased and received delivery of the new fleet to replace the old fleet, suggests that the old fleet was to pass to Ford prior to November 1st of each year. That an asset is available to be passed to a buyer by virtue of its redundancy to the vendor might be a factor to consider in determining when title passes absent more determinative factors, but it is only one of a number of factors. However, there is actual delivery and entitlement to payment that go further in this case to enhance the argument that the old fleet was to pass to Ford prior to November each year. On the other hand, if intentions govern and the intention to pass property in the old fleet to Ford is after October each year, such other factors will fall into line. That is, they will be recast in a way so as to be consistent with that intention. Possession, for example, will be recast as bailment. Ultimately nothing is necessarily suggestive of one conclusion or another until the underlying issue is resolved.

[29]     The Respondent has referred me to a number of cases on which it relies. While I find only one such case helpful, I will provide a brief commentary on a number of them.

[30]     As to the change in use argument, the Respondent cites Glaxo Welcome Inc. v. The Queen;[9] Dowbiggin v. M.N.R.;[10] Derlago v. The Queen;[11] Bolus-Revelas-Bolus Limited v. M.N.R.[12] and Hughes v. M.N.R.[13] The following are my observations in respect of these cases:

·         Glaxo was not a change in use case. It stands for the proposition that acquisition for and owned for a purpose is not the same as used for a purpose. "Use" for a purpose requires employment of a particular property for that purpose. The Respondent would argue that the old vehicles were, after the exchange in October of each year, not employed for the purpose for which they were acquired or owned. This case and argument does not address a transitional situation where an asset acquired and used for a business purpose is being sold in the normal course of operating that very business. Further, this case and such argument does not address the wording of the section in question in these appeals. For there to be a disposition under paragraph 13(7)(a), the Appellant must commence to use property acquired to gain and produce income for some other purpose. The transition requires identification of another purpose which raises issues not dealt with in this case.

·         Dowbiggin underlines the fundamental requirement for claiming CCA which is that a property be used for gaining or producing income. The case confirms that where the business ends, the property formerly used in that business can no longer be put to that use. The case, however, does rely on paragraph 20(6)(a) of the Act as it then read (1962). That paragraph is virtually the same as paragraph 13(7)(a) as it read in the subject years. This suggests that in the context of the present Act, it is not necessary in determining a change of use to find another use to which property formerly used to gain or produce income has been put - i.e. cessation of the business, or withdrawal of the asset from the business, may be sufficient. However the appeal at bar is not a case involving the cessation of a business and drawing general principles from a case such as Dowbiggin is not helpful in my view in respect of dealing with the facts of the case at hand.

·         In Derlago the deemed disposition rules in section 45 of the Act were applied. In that case the taxpayer commenced to use a former rental property as his retirement residence. In that case a use other than an income producing use was identified. That is not the case in the appeals at bar.

·         In Bolus-Revelas-Bolus two amusement park rides were acquired, dismantled and put in storage. It was found that there was no business to which the rides related. This case offers no assistance in respect of the issues in the case at bar.

·         The Hughes case deals with the meaning of "commence" to use a property for a purpose other than to gain or produce income and is helpful. The case involved a rental property converted to condominium units to facilitate resale. The construction given the verb "commence" is that it required determination of when the taxpayer first deviated from the original intent to use the property to gain or produce income. On this question, D.E. Taylor, then of the Tax Review Board, said:

. . . It is not incumbent upon the Minister, in a matter of this nature, to establish the precise characteristics of "some other purpose" which may be perceived in the actions of a taxpayer who "has commenced to use" a property in a manner which appears inconsistent with the original "purpose of gaining or producing income" therefrom. It is for the taxpayer to establish that the action is consistent with the original intent, and failing to do so leaves him at serious risk of the conclusion that there was "some other purpose";

A finding that the actions of the Appellant in the case at bar, in relation to the vehicle exchange regime employed by it, are consistent with the original income earning purpose would be sufficient reason then to conclude that the old fleet of vehicles has not been put to some other purpose. I think such finding is justified in the case at bar.

[31]     As to the passing of title argument, the Respondent cites Jerome v. Clement Motor Sales Ltd.[14], R. v. Zwicker[15] and Browning Harvey Limited v. The Queen.[16] The following are my observations in respect of these cases:

·         Clement Motor Sales dealt with a contract for the sale of goods involving an exchange of vehicles. The plaintiff acquired a vehicle and as part of the consideration the defendant accepted a trade-in of two vehicles. The consideration was paid, transfer papers on the trade-ins were signed and the motor vehicle permits of the trade-ins were surrendered although one of the trade-in vehicles was kept in the possession of the plaintiff for use until delivery of the acquired vehicle. The acquired vehicle needed repairs and the defendant agreed to complete the repairs before delivery (at no cost). The repairs were completed but for one minor item when a fire at the defendant's premises damaged the acquired vehicle.

The issue in this case was whether the property had passed to the plaintiff. The provisions of the Sale of Goods Act of Ontario were relied on. The provisions of that Act seem similar to the provisions of present day legislation adopted by all provinces (other than Quebec). First, there is the provision that property passes when the parties intend it to pass and then, to ascertain intention, regard is to be given to the terms of the contract, the conduct of the parties and the circumstances of the case and then, subject to a different intention being apparent, there are guiding principles (rules or guidelines) set out to ascertain intention. The majority of the Ontario Court of Appeal resorted to the guidelines finding that there was no clear evidence of intent as to when property in the acquired vehicle passed (in spite of a provision in the written agreement of purchase and sale as to when property passed). The majority decision of the Court was that the vehicle purchased was not in a deliverable state at the time of the fire even though only one minor repair was yet to be completed and the Court relying on the guidelines found that title had not passed. The majority rejected the argument that the terms of the contract, the conduct of the parties and the surrounding circumstances dictated a finding of intention that the property had passed at the time the trade-in was agreed to and acted upon. The burden of proof to find a different intention than that established under the guidelines was on the party alleging it. Only if the real intention (not reflected by the application of the guideline) has been manifested will the guidelines be subordinated and not applicable.[17] This is to say that a manifest or self-evident intent is in itself determinative as to when property passes.

The majority found that even though the purchase price had been paid and transfer documents completed, the intention to pass title before the vehicle was in a deliverable state could not be found. I note that there is a strong dissent in this case and that, in my view, the case is most readily rationalized on the basis that the majority was of the view that the undertaking to repair the acquired vehicle was a condition precedent to the purchase. It applied the guidelines to get to that result and ignored terms of the agreement and circumstances and conduct that would suggest the property passed when ownership papers were transferred and consideration was paid. It ignored these indices of intention on the basis that such factors are only overriding when there is no compelling basis to ignore them. A compelling basis to ignore them would be where a contrary intention can be found (such as an intended condition precedent to passing title as the majority in that case found or, as I have suggested, where a self-evident intent can be found). The objective is to find the real intention. Such real intention might be the asserted intentions if the assertions are manifestly clear (self-evident) and credible.

This case then is most helpful to the Appellant if I conclude in the case at bar that there is a self-evident intention that property in the old fleet of vehicles was intended to pass after October 31st each year provided I conclude as well that intentions govern when property passes for the purposes of section 13 of the Act. Giving complete governance to intentions alone in an income tax context seems to me to be a premise that requires considerable scrutiny.

·         In Zwicker, the Ontario Court of Appeal held that "owner" for the purposes of subsection 2(1) of the Compulsory Automobile Insurance Act was not limited to the registered owner but included the common law owner. While this case seems narrow, I would agree that the transfer of registered ownership (as demonstrated as well in Clement Motor Sales), is not determinative of when property passes. In effect, common law recognizes that legal ownership in some instances is a mere bare trusteeship giving the legal owner none of the incidence of ownership except custody for the benefit of and at the direction of the owner. I should note, however, that the Respondent has not expressly argued that beneficial ownership was transferred before November 1st each year but rather has argued only that the transfer of legal ownership on November 1st (if I accept that premise) is not a bar to my finding that property has nonetheless passed prior to November 1st each year. I agree with the argument but I suggest that it implicitly requires that I make a finding that a transfer of beneficial ownership has preceded in this case the transfer of legal or registered ownership. Determination of that issue may only take us back to intention as dictated by commercial law principles - common law and statutory.

·         In Browning it is recognized that property in goods may transfer prior to transfer of title. As in Zwicker, this principle in theory at least assists the Respondent in its attempt to diminish the significance of the old fleet vehicle registrations being held back so as to ensure legal ownership would not pass until November 1st of each year. As stated in respect of Zwicker, the issue becomes one of determining whether beneficial ownership has passed which, in turn, takes us back to the determination of intention of the parties. The Browning decision does not consider the impact of sale of goods legislation on this question although Kempo, J. does at page 168 seem to ultimately base her decision on her finding of the intention of the parties. This recognizes that whether by virtue of sale of goods legislation or by operation of common law, intention as to when property passes is most relevant.

The more interesting aspect of this case, however, is that it addresses the application of the definitions of "disposition of property" and "proceeds of disposition" in subsection 13(21). In Browning there were seven payment instalments required over seven years. The Court found that there were conditions to be met to enforce ongoing payment obligations. As such, there was no entitlement to the full proceeds. The case might have ended there but Kempo, J. went on to consider when the property would pass irrespective of the issue of entitlement to enforce the payment obligation. As stated, in addressing this question, Kempo, J. did not apply sale of goods legislation. Presumably, the question of the application of sale of goods legislation was not put to the Court. In any event, applying general principles dealing with the incidence of ownership, the Court found that the property in question had not passed. The normal incidence of title, namely possession, use and risk had to be examined on the facts of the case. On the facts, Kempo, J. relied on jurisprudence that confirmed that possession would not speak to title passing where all attributes of ownership were not transferred. The owner is the person that retains, exclusive of the rights of the person in possession, any right to use the property to advantage. Taking the appeals at bar to this test would arguably support the Appellant's position. Mr. Nixon's testimony confirms that HP had bought and paid for the absolute ownership right until the end of October of each year. Allowing Ford to take possession of the old fleet vehicles served HP's interests and was taken advantage of by Ford by storing the vehicles so put in its possession at a place where they would be resold when the property passed to it. Ford could not put the vehicles to any other use until November 1st. Ford's absolute right to keep possession of the vehicles for its use commenced November 1st each year. That is not to say that its right to compel HP to complete the subject repurchases/trade-ins did not exist prior to November 1st. At the latest that right existed immediately after the October 31st meeting between Ogilvie and Nixon which, at the latest, was when HP had an absolute entitlement to payment regardless of when the payment due date was agreed to be and Ford had an absolute right to the vehicles regardless that the exercise of that right was agreed to be one day later.

[32]     Lastly, the Respondent cited two cases on intention: Buffone v. The Queen[18] and Paquette v. Chubb et al.[19] In Buffone Kempo, J. remarked at page 1488 that:

   Oral testimony was advanced by the Appellant and by his wife, both of whom in my opinion were forthright and credible. However, the direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction or series of transactions is not determinative of the existence of the stated intention. Generally speaking the intention is to be ascertained from the entire course of conduct and relevant circumstances and the inferences flowing therefrom: Racine et al. v. M.N.R., 65 DTC 5098 (Ex. Ct.).

[33]     The Paquette case deals with the question of what constitutes corroboration of a witness's testimony.

[34]     I do not find these cases on intention helpful as they beg the question as to the need for independent and disinterested corroborative evidence. Consider as an example that "X's" stated intention was to buy a vehicle before the end of the month to take advantage of a $2,000.00 manufacturer's rebate. The sales person has confirmed this intention. Finding that the intended purchase date was before the end of the month should require no more corroboration as to the intent than confirming the existence of the rebate program and having the credible testimony of the parties even though both may not be "disinterested" persons. The buyer "X" wanting the rebate is not disinterested and the seller, perhaps wanting a commission, may not be disinterested. Still, an intention so manifestly clear (self-evident) supported by credible testimony cannot be cast aside by reason of being uncorroborated by disinterested evidence. Similarly, conduct and circumstances that might indicate a different apparent intention than that asserted will not prevail over the asserted intention where it is manifestly clear that the asserted intention is the real intention. As I noted above, in my view, even an objectively observed apparent intention manifested by certain aspects of the conduct of the parties, is subordinate to a mutually recognized, self-evident and credibly asserted intention. Put another way, one only looks for disinterested corroboration of an asserted intention, in the form of manifestations of it or otherwise, where it is not self-evident and credible that the asserted intention is the real intention.

Appellant's Position Considered

[35]     The Appellant simply denies that there has been a change of use of the old fleet vehicles and on the question of the passing of property, it asserts that the provisions of the various Sale of Goods Acts govern to the exclusion of all else and that such Acts do not require consideration of conduct or circumstances or terms of the agreements where the intention of the parties is, in effect, irrefutable. The Appellant also asserts that the conduct of the parties and the surrounding circumstances do not in any event dictate a different result than the result dictated by the expressed intention of the parties as to when title passes.

[36]     On the issue of change of use the Appellant cited the following cases:

          Edmund Peachey Ltd. v. The Queen, 79 DTC 5064 (F.C.A.);

Duthie Estate v. The Queen, 95 DTC 5376 (F.C.T.D.);

The Queen v. Dorchester Drummond Corp. Ltd.,

79 DTC 5163 (F.C.T.D.);

Meredith v. The Queen, 75 DTC 5412 (F.C.T.D.);

Roos et al. v. The Queen, 94 DTC 1094 (T.C.C.);

Duthie Estate v. M.N.R., 92 DTC 1043 (T.C.C.);

Colby v. M.N.R., 91 DTC 1237 (T.C.C.);

Cantor et al. v. M.N.R., 85 DTC 79 (T.C.C.);

Woods v. M.N.R., 78 DTC 1576 (T.R.B.).

[37]     These cases deal primarily with real estate holdings where use of lands as capital or inventory had been put at issue. In these cases the intention of the taxpayer as to the use of the lands was to be determined for the purposes of deemed disposition rules under section 45 of the Act that deem a disposition to occur where there has been a change of use to or from a use for the purpose of gaining or producing income. The cases cited deal with distinct alternative classifications of an asset under consideration (as between capital property and inventory) so that the characteristics of each classification can be assessed and weighed at points in time to determine if and when a change in use of it has occurred. In the case at bar the Respondent does not take the position that the old fleet has been converted to inventory prior to November in each year. Nor is it the Respondent's position that the old fleet has been converted to personal use property prior to the end of November each year. The Respondent simply says that the old fleet having been replaced is no longer used for the purpose of gaining or producing income. I assume the Respondent would add that the intention of the Appellant, once the replacement fleet has been put in use, was not the resale of the old fleet in the ordinary course of its ongoing business but was, as expressly admitted by the Appellant, held for a tax advantage. On the other hand, that the transfer date is selected for tax purposes does not necessarily suggest that that transfer date does not, coincidently, allow for the reasonable recycling of a redundant depreciable asset in the ordinary course of an ongoing business.

[38]     Drawing from the Appellant's cases on changes of use I make the following further observations. There must be clear, unequivocal positive acts to change a use.[20] Engaging in a vehicle exchange program while managing the tax impact of such program does not in my view constitute a clear, unequivocal, positive act demonstrating that there has been a change in use or that a use has commenced for a non-income producing purpose. Taking property out of use should not be a sufficient reason by itself to find that it is no longer part of the income earning process until a positive act putting the property to a different use has commenced.

[39]     In Cantor a rental property was converted to condominiums. There were substantial renovation and repair costs. The Minister assessed the property on the basis that there had been a change in use from a capital rental property to inventory when the decision was made to take these steps in order to dispose of the property. The Court held that steps taken to help ensure a more profitable resale of a capital asset does not constitute a change in use. The case was distinguishable from an earlier case where a subdivision undertaken with an obligation to add services had been found to be a change in use. The distinction, if you will, is that the latter constitutes a clear, unequivocal, positive act of a change in use whereas the former is consistent with reasonable steps taken in the liquidation of an asset. In the former case the basic use is not changed. There has been no commencement of a different use.

[40]     Other cases that the Appellant has cited include Will-Kare Paving & Contracting Limited v. Her Majesty the Queen,[21] Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc.,[22] Borstad Welding Supplies (1972) Limited v. Her Majesty the Queen,[23] Gold Line Transport Ltd. v. M.N.R.,[24] M.N.R. v. Wardean Drilling Limited,[25] Victory Hotels Ltd. v. M.N.R.,[26] and Argus Holdings Limited v. Her Majesty the Queen.[27] The following are my observations in respect of these cases:

·         In Borstad Welding Supplies counsel for the Minister agreed with the taxpayer that the determination of when title passed was governed by the Sale of Goods Act of Alberta. But the case goes on to suggest that that is not the end of the matter. That is, that the property did not pass in that case pursuant to the terms of the Sale of Goods Act was not the end of the matter. It still had to be determined whether a disposition had occurred because of the "second branch" (of law) developed in the jurisprudence which was whether the purchaser had acquired all of the incidence of legal title and that none remained with the vendor. This case then is an invitation to look beyond the relevant sale of goods legislation. On the other hand, the case concludes with the observation that most important was the fact that the parties did not intend that the property in question be sold on the day asserted by the Crown. As such, I do not find that case helpful in resolving the case at bar.

·         In Gold Line Transport the question of when property passes for the purposes of CCA was found to be governed by the provisions of the Sale of Goods Act of New Brunswick pertaining to when property in goods is transferred by a buyer under a contract of sale. While the case does not seem to rely on any one aspect of the applicable Sale of Goods Act it does seem to conclude that there was nothing in the evidence that contradicted the testimony of both parties as to the intended time for the passing of the property. That possession stayed with the vendor was not determinative as there was a finding that the goods were in a deliverable state at the time the contract of sale was entered into. Testimony as to when risk was intended to pass was accepted by the Court. Ultimately the case confirms that it is open for a court to rely on credibly asserted intentions on the question of when property passes.

·         In Wardean Drilling the Court accepted that the Alberta Sale of Goods Act applied to determine when property passed for the purposes of the Act.

·         In Victory Hotels the definition in the Act of "disposition of property" is considered. In that case the Court regarded the definition as being somewhat restrictive in the case of a property disposed of by means of a sale. I cannot agree with this conclusion. In my view the definition is expansive and is a direction by Parliament away from the confines of sale of goods provisions. Such provisions are not precluded in the Act from applying but they are not, for the purposes of section 13 of the Act, the only provisions governing whether or not there has been a disposition of property. The definitions list other circumstances that will also be regarded as dispositions for the purposes of section 13.

·         Will-Kare is a fairly recent Supreme Court of Canada decision. It dealt with the meaning of the word "sale" as used in the Act. It reasoned that Parliament had chosen to use language that imports relatively fine private law distinctions and that absent express direction that an interpretation be applied other than that ascribed by settled commercial law, it would not be appropriate to do so.[28] The Act does not operate in a vacuum, oblivious to a legal characterization of the broader commercial relationships it affects. It is not a commercial code in addition to a taxation statute.

All this can be taken from the Will-Kare decision but the context of that case is somewhat different and evidences two lines of authority on the question. The context is whether a plant acquired by Will-Kare was acquired primarily for the purpose of manufacturing or processing goods for sale or whether the purpose was for manufacturing or processing goods for use in Will-Kare's business. The view adopted by the courts including the majority of the Supreme Court of Canada was that the correct line of cases to apply were the ones that applied general common law and statutory principles of what constituted a sale. Three dissenting judges of the Supreme Court, however, took the view that in interpreting the Act one should not wander off to consider fine private law distinctions but should accept the plain meaning of words so as to permit, in that case, the manufacture of asphalt used in the construction of roads for customers, to be regarded as goods sold as opposed to goods used by the manufacturer in the course of its own business.

I would point out, in addition to the strong dissent in the Will-Kare case that would allow for looking beyond commercial law principles in determining what constitutes a "disposition" such as those prescribed in various Sale of Goods enactments, there is in the case at bar express direction in the Act as to what constitutes a disposition for the purposes of the subject provision of the Act. Such directive supports a construction of "disposition" that is not limited by such commercial law principles. That directive in the Act, as it read in the subject years, in the form of a definition of "disposition of property" should, as stated above, be read as expansive, not limiting. That is, it strikes me that Parliament has chosen to use language that incorporates both settled commercial law and, expansively, other prescribed rules that might not, under settled commercial law, result in a finding that a disposition has occurred. The Act means to draw more transactions into the net of dispositions covered by the subject provision of the Act than would be caught by settled commercial law principles.

·         Having noted the strong dissent in Will-Kare, I note that in Mattel the Supreme Court of Canada unanimously applied the Will-Kare decision and found that rather than creating a complex series of tests not strictly based on the settled legal meaning of words, it was preferable to rely on the common law and Sale of Goods enactments to describe whether royalties and licence fees were paid as a condition of the sale of goods for export to Canada in accordance with provisions of the Customs Act. This does not speak to the exception referred to in Will-Kare to the effect that settled commercial law principles cannot govern the construction and application of words in the Act in the face of an express directive in the Act to do otherwise. This leaves the question of whether or not in the case at bar the definition of "disposition of property" in subsection 13(21) applies in the case at bar so as to cause the UCC of HP's class 10 asset pool to be reduced each October by the proceeds of sale of old fleet vehicles.

·         Argus Holdings was referred to by the Appellant to support an argument that the reassessments have resulted in a gross distortion of the picture of the Appellant's income. Simply put, I do not believe this case has any application in the case at bar. Extensions of the principle in Canderel Limited v. The Queen[29] cannot be taken to regard termination of a double inclusion in the UCC of a class of depreciable assets as a distortion of income. Aside from the question of whether or not CCA claimed in any given case is a distortion of income in favour of taxpayers, it is remarkable to think that a person who has intentionally managed UCC pools to inflate the UCC of a class would complain about income distortion when a case is brought against it to the effect that its own mismanagement of its deferral scheme has resulted in the termination of the benefit.

Concluding Analysis

[41]     The Respondent's main argument is that there has been a change in use of the old fleet once the new fleet has been put in use. As suggested in these Reasons, it is unreasonable in my view to think that an asset being replaced is not still being used in the course of business where it is being held for the purposes of disposal. An asset used in a business that is regularly replaced cannot be said to have its use changed simply because it has ceased being used in the course of its replacement. A part of the business operation is to sell off such "circulating" depreciable assets. Provided that they are not put to any use other than being held for or in the course of resale, it cannot, in my view, be said that they are held for a purpose other than producing income notwithstanding that they are redundant after the replacement is complete. Taking such assets out of use is consistent with, indeed virtually essential to, the required liquidation of the asset. Liquidation of a circulating depreciable asset is consistent with the original income earning purpose for which it was used. There has been no commencement of another use when a redundant asset is held for sale.

[42]     The situation here is different perhaps to the extent there is an intentional stall in the disposition process. The intention of having a November 1st transfer date is to defer reduction in the UCC of the class, not to pursue the disposition as soon as possible. The disposition might have been effected by the end of October. The buyer, the price, the procedures and mechanics for a sale in October were all there. In this scenario can it be said that the property, namely the old fleet, was no longer being held for the purposes of gaining or producing income?

[43]     I am not overly troubled by this line of inquiry. After the old fleet is returned they need to be readied for sale. That is, put in a suitable condition to be sold at the fixed repurchase price. There was an inspection process to confirm that all the vehicles in the old fleet met the clean car criteria and were in a suitable condition to be sold at the agreed repurchase price. Given that that was part of the necessary sale process together with the logistics of recycling so many vehicles, I am satisfied that allowing a few weeks for an exchange of between 650 and 750 vehicles is not unreasonable. While November 1st was targeted for tax purposes, on the facts of the case there was no unreasonable delay in the transfer of the old fleet. That is, the "stall", if any, was not material in terms of supporting a finding that the old fleet had been put to another use.

[44]     Further, as I said at the outset, there is nothing wrong with a taxpayer timing acquisitions and dispositions to best suit tax planning needs. If on December 15th I receive an offer to sell a property and I am agreeable to do so but accept the offer on condition that the transfer takes place on January 1st, am I subject to a change of use deemed disposition in December? Does a tax planning motive constitute an unequivocal positive act from which a conclusion can be drawn that a change of use has occurred? I think not. In my example, I may have a disposition for the purposes of section 13 in December if I have an absolute entitlement to payment in December but I have not commenced another use of the property simply by virtue of a tax motivated delay.

[45]     One last observation on the question of change in use in this case that might distinguish it from other cases (if such distinction is warranted) is the scope of the operation in this case. The fleet management, a large part of which is geared to keeping new vehicles on the road each year for its employees on the most economic terms, requires a full time fleet manager and adoption and implementation of a variety of procedures that are in this case a distinct part of the operation of HP's business. The original income earning purpose of acquiring the vehicles is contractually coupled with the sale. The complete package is managed in the course of HP's business. These factors support my finding that HP had not commenced use of the property in question for some purpose not consistent with the original use to which it was put. On the facts of the case at bar, I am satisfied that the recycling of the old fleet vehicles was part of the business operations of the Appellant. HP did not at any point commence to use its old fleet for any other purpose than the purpose for which it was originally acquired and used.

[46]     That takes me to the next question which is when was the effective transfer date of old fleet vehicles at law? I am satisfied that the provisions of the various Sale of Goods enactments that determine when property passes can apply to determine when property is disposed of for the purposes of section 13 of the Act.[30] Clear authority for this lies in the Supreme Court of Canada's decisions in Will-Kare and Mattel. If that were the end of the matter the Appellant's appeal would (subject to further consideration of the laws of Quebec) be allowed as I accept that intentions govern under provincial law and that the intention of the parties in the case at bar was that the property in the old fleet of vehicles was not to pass until November 1st each year. While there are a number of factors which could suggest that property in the old fleets passed each year in October, the intention of the parties to transfer ownership as of November 1st is, as I have discussed earlier in these Reasons, self-evident and credibly attested to. However, having determined when a sale occurs for provincial law purposes is not the end of the matter. Such determination is not sufficient for the purposes of determining whether there has been a disposition of property for the purposes of section 13 of the Act. For the purposes of that section there has been a disposition of old fleet vehicles in October of each of the subject years since for the purposes of that section there is also a disposition under the Act if and when there is an entitlement to the sale price of property sold. Pursuant to subsection 13(21) "a disposition of property" includes any transaction entitling a taxpayer to "proceeds of disposition" which includes an entitlement to the sale price of property sold. The facts of the case at bar leave no doubt in my view that HP was unconditionally entitled to enforce payment by the end of October each year of the purchase price of the old fleet vehicles being exchanged. Inspections were complete; vehicles were in a deliverable state; the price was fixed; and, possession had been transferred. Even the diligently followed arrangement to meet on October 31st each year to ensure registration and passage of legal title on November 1st, had the affect of absolutely and unconditionally crystalizing Ford's obligations to pay HP for the old fleet before the end of the day. In fact payment was practically speaking already made. The 1996 and 1997 exchanges were "trade-ins" effectively completed in October of each such year and invoiced that way at least in respect of the 1997 fleet exchange. Regardless, even recognizing the November 15th payment due date would not change the conclusion that the entitlement to be paid existed prior to the agreed payment due date. Even the definition of "UCC" in subsection 13(21) speaks to the reduction of the pool when there is a disposition (i.e. when there is an entitlement to proceeds), not when amounts are received or when they become due and payable. The question is only whether the entitlement to be paid is absolute regardless of the payment due date. In all years, the absolute, unconditionally enforceable entitlement to be paid for the old fleet vehicles existed by (before) the end of October each year. After the meeting between Mr. Ogilvie and Mr. Nixon on October 31st each year, I see no room to argue that HP's entitlement to sale proceeds was not absolute. Accordingly there has been a disposition of old fleet vehicles in October of each year for the purposes of section 13 and the subject appeals are dismissed on that basis.

[47]     While I have no reservations as to this conclusion, there are some further observations that need to be made. First, I note that that part of the definition of "UCC" that reduces the pool by the proceeds of disposition of property sold does not use the exact phrase "disposition of property". Rather, the exact reference in calculating the "F" amount in the calculation used in defining "UCC" is "a disposition before that time of property". Ordinarily one would not, in a tax statute, say that the phrase "disposition before that time of property" is a defined phrase where the Act expressly defines the phrase "disposition of property". However, in this case it seems to me we are looking for what the Supreme Court in Will-Kare referred to as an expressed direction to apply an interpretation beyond that ascribed by settled commercial law. I can draw no other conclusion in this case than Parliament, in defining "disposition of property" intended an express directive not to leave the timing of dispositions for CCA purposes solely to the expressed intentions (or even manifestly clear, self-evident and credibly attested to intentions) of the parties to an agreement of sale. The effect of the Act, in my view, is that a disposition occurs at the earlier of when determined pursuant to settled commercial law principles and when there is an absolute enforceable entitlement to be paid, however that might be determined having regard to conduct and circumstances surrounding the transaction.

[48]     The second observation that I would make is that arguably the definition of "proceeds of disposition" in referring to an entitlement to the sale price of property "sold" requires a finding that there be, applying settled commercial principles, a sale in the first place. Such construction would be to the effect that this part of the definition of "disposition of property" and "proceeds of disposition" say nothing more than what would be the case if these definitions did not embrace, as a disposition, an entitlement to the sale price of property. I do not believe that such inclusion in such definitions is there for greater certainty. In my view this provision is a clear attempt to define a particular state of affairs as constituting a disposition for the purposes of section 13. To find otherwise would be to find that the definition of proceeds of disposition should be read as saying that a disposition includes a disposition. Further, I note in the case at bar that there is no question that property has been "sold". That is the point. We know on October 31st of each year that the old fleet has been "sold" even though the asserted intention was that the property was not to pass until November 1st. The definition of "proceeds of disposition" does not refer to the sold date but rather only to the time entitlement to payment crystalizes absolutely notwithstanding when the property is to pass under other definitions of when a sale occurs.

[49]     I appreciate that it may seem curious that the affect of my decision is that there can be an absolute entitlement to proceeds of sale before a "sale" or a passing of property has occurred. While it may seem curious, it does not in my view evidence any error in reasoning. That the law will recognize the transfer date to be the date the parties intend, does not suggest that the parties cannot have, before that time, a binding enforceable contract to proceed which creates for the vendor an entitlement to proceeds of disposition at that earlier time. In such case, the earlier time is the time that there is a disposition for the purposes of section 13 of the Act.

[50]     Accordingly, the appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 16th day of October 2003.

"J.E. Hershfield"

Hershfield, J.

CITATION:

2003TCC386

COURT FILE NO.:

2000-5058(IT)G

STYLE OF CAUSE:

Hewlett Packard (Canada) Ltd. and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

March 17, 18, 21, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice J.E. Hershfield

DATE OF JUDGMENT:

October 16, 2003

APPEARANCES:

Counsel for the Appellant:

Richard B. Thomas, Michael Friedman

Counsel for the Respondent:

Jag Gill, Q.C., David W. Chodikoff, Carol Calabrese

COUNSEL OF RECORD:

For the Appellant:

Name:

Richard B. Thomas, Lisa T. Wong, Laura J. Stoddard

Firm:

McMillan Binch, Toronto, Ontario

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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