Subsection 13(21) - Definitions

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) and had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

Prior to the acquisition by the taxpayer of the shares of another taxable Canadian corporation ("Topaz"), Topaz acquired from its then parent ("Darwai") an apartment building having a fair market value lower than its cost amount to Darwai.

Nadon J. found on the evidence that Darwai had claimed, and Revenue Canada had allowed, the deduction of capital cost allowance on the apartment building. Accordingly, it followed that s. 85(5.1) applied to maintain the cost amount of the property to Topaz (with the result that Topaz, prior to its winding-up into the taxpayer, was able to claim a non-capital loss from an inventory write down of the apartment building).

The Quebec taxpayer leased various vehicles. It had possession and use of the trucks, it had assumed all risks, it had the option to purchase the vehicles, six months before the expiry of the lease, for an amount approximately equal to the fair market value of the remaining lease payments, and it was required to pay the "rent" even if the vehicles were destroyed or it no longer had the use of them. In finding that the taxpayer was not entitled to claim capital cost allowance in respect of the vehicles, Tremblay-Lamer J. found that the purchase options did not give the taxpayer any ownership of the vehicles and, therefore, they did not qualify as depreciable property. (In considering the eligibility of the taxpayer for investment tax credits, Tremblay-Lamer J. went on to find that because it was not obliged to exercise its options to purchase, it had not acquired the vehicles prior to the exercise of the option.)

A timber resource property constituted a depreciable property notwithstanding that the taxpayer had not claimed any capital cost allowance in respect of the property.

At the request of the taxpayer, the vendor of equipment purported to pass title in the equipment to the taxpayer in its 1979 taxation year. However, the equipment at that point was a "mass of metal" which was not yet suitable for the taxpayer's manufacturing operations. Accordingly, the taxpayer had not acquired a Class 29 asset in its 1979 taxation year:

"That which the taxpayer acquires must be the asset upon which it is permitted to deduct capital cost allowance and not mere components to go with that which has not yet been developed." (p. 6592)

The taxpayer did not acquire title to a roadpaver until after its taxation year-end of March 31, 1977 because the sale did not receive written approval of the vendor until April 11, 1977 (the sales order stated it was subject to the written acceptance of the Vendor), because the roadpaver was not delivered until May 25, 1977 (the contract specified that the roadpaver was to be shipped F.O.B. Saskatoon) and because the contract specified that property was not to pass until full payment was made, which did not occur until June 14, 1977 (an initial cheque having been given on March 30, 1977). In addition, since the taxpayer did not have possession or use of the machine until the delivery date, it had not acquired the incidents of title by year-end. Therefore, it had not "acquired" the roadpaver by year-end.

The taxpayer was at all times the owner of linefill even though the initial linefill purchased by it had been displaced by the shippers' oil. "[T]he linefill remains for all practical purposes the same product." The taxpayer accordingly was entitled to claim CCA on the linefill.

The taxpayer executed on December 29, 1971 conditional sale contracts with a dealer for the purchase of 10 Caterpillar tractors which were then at the manufacturer's premises in Peoria. Under the conditional sales agreements the taxpayer was obliged to insure the tractors against risks, thereby evidencing that risk of loss had passed to the taxpayer, and the taxpayer "had the right to use the tractors and could have taken delivery of the tractors at Peoria if it had had any use for them in that vicinity. It follows that all the incidents of ownership other than legal title reserved in the vendor ... such as possession, risk and the right to use the tractors" had been acquired by the taxpayer, and it was entitled to claim CCA in respect of the tractors for its year ended December 31, 1971. [C.R.: 13(21)(f)(i)]

Both the purchaser and vendor of an apartment building wished to close in December 1968. However, the trustee who held the registered title refused to deliver a conveyance of the land until January 24, 1969, after the vendor was sued on January 14, 1969 for damages. The sale closed on January 24, 1969 on precisely the terms that had been established on December 23, 1968 in the amended agreement of purchase and sale, with adjustments as of December 15, 1968. Mahoney, J. held that the action for damages did not constitute a repudiation of the old contract and its replacement by a new contract, and the purchaser was entitled to claim capital cost allowance on the property for his 1968 taxation year. [C.R: 54(c)]

The taxpayer acquired machinery by having a rental company make the purchase and then entering into various leasing agreements with the rental company containing an option to purchase the equipment for $1, for 5% of a relatively minor amount otherwise owing under the lease or for the balance owing under the lease. The total cost of the rentals excluding the interest and administrative fee components was equal to the market price of the machinery. Décary, J. held that the taxpayer had purchased the machinery at the inception of the leases, and accordingly was not entitled to deduct the rental payments as such. [C.R.: 212(1)(d); Ownership; 54(c)]

The taxpayer (who had an October 31 fiscal year end) followed a practice of purchasing a new fleet of cars from Ford to replace the fleet which it had acquired the previous year. The process of exchanging the cars was initiated and completed within the month of October but the intent of the parties was that title to the old fleet would remain with the taxpayer until November 15, at which point payment by Ford for the old fleet would be effected by way of set-off against the amount payable by the taxpayer for the new fleet.

Noël J.A. found that for purposes of the Act there is no "disposition" (and no acquisition) unless there is a change in the beneficial ownership of the subject property. With respect to a sale transaction, Parliament had specified in s. 13(21)(a) the entitlement which gives rise to a disposition, namely, to the sale price; and the terms "sale price of property that has been sold" are presumed to bear their legal meaning. Accordingly, the old fleet had not been disposed of at year end.

In connection with the sale of the taxpayer's business to an arm's length corporation, it was agreed that refillable cylinders would be rented by the taxpayer to the purchaser at, what was found on the evidence to be, a market rate of rent, and that over the subsequent five years, 1/5 of the cylinders would be purchased each year by the purchaser for a stipulated amount.

In accepting the form of the rental agreement, and rejecting the position of the Crown that the taxpayer had disposed of the cylinders on the date of entering into the sale agreement, Reed, J. indicated that the jurisprudence only found there to be a disposition or acquisition of depreciable property, in circumstances where title had not passed, where all the incidents of title had passed except those retained for the purpose of securing payment of the balance of the purchase price. Here, it was the evident intention of the parties that there be an agreement for the rental of the cylinders until such time as they were purchased, and that there is no question of property in the cylinders being retained as security for payment of the purchase price.

A manufacturer and distributor of softdrinks entered into agreements with shopkeepers under which: coolers were "sold" to the shopkeepers for $2, $1 of which was payable at the time of execution of the agreement, and the remaining $1 at the end of the seven-year term; title vested in the taxpayer until the second instalment was paid; and the taxpayer had the right to retake possession in the event that the shopkeeper fail to comply with any of several conditions including a requirement that the coolers be used exclusively for beverages of the taxpayer. Martin J. held that there was no disposition of the coolers until the expiration of the seven-year term in light of the limitations placed on the user of the coolers by the shopkeepers, the right of the taxpayer to retake possession in certain events, and the responsibility of the taxpayer for loss or repairs during the seven-year term.

Abandoned gas mains continued to be owned by the taxpayer and thus could not be said to have been "disposed of" by it. It thus could continue to claim capital cost allowance with respect to them.

It was held that since the taxpayer, by executing an agreement respecting the ultimate sale by it of apartment buildings, had "completely divested itself of all of the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title," the taxpayer had thereby disposed of the buildings.

"Demolition of a building does not in ordinary parlance or arrangements produce an entitlement in the owner to proceeds of disposition where the demolition is carried out by the owner".

The taxpayer sold the assets of a timber operation (including a timber licence) for a cash purchase price of $169 million, but with the purchase price subject to a corresponding adjustment if a final determination of the value of the obligation of the purchaser to reforest the purchased property (which was an obligation which the province required the purchaser to assume on every such sale) was ultimately determined to be more or less than $11 million. Pursuant to this price adjustment clause, the auditors provided a reforestation statement indicating that in their view, the reforestation liability was approximately $11.2 million, so that cash portion of the purchase price was required to be adjusted by $0.2 million.

The Minister argued that the assumption of these obligations by the purchaser was part of the consideration paid. In agreeing instead with the taxpayer's position that the obligations were intrinsic to the forest tenure being sold, Rothstein J likened the reforestation obligations to "property that is in need of repair" (para. 28), and stated (at paras. 31-32):

The effect of Alberta's scheme is to embed the reforestation obligations into the forest tenure, such that the obligations cannot be severed from the property itself. As such, the reforestation obligations are simply a future cost tied to the tenure that depresses the value of the tenure. ... Under no circumstances could DMI have received [the unencumbered value] for the forest tenure.

This distinguishes the reforestation obligations tied to a forest tenure from a mortgage, which does not affect the value of the property it encumbers.

Rothstein J found (at para. 45) that although the parties had determined the value of the reforestation obligations:

Any amount that the parties assigned to the reforestation obligations in the sale agreement was simply a factor in determining the fair market value of the forest tenures....

In finding that the proceeds of disposition for the sale by the taxpayer, following its default to the mortgagee, of its property pursuant to a "Rice Order" of the Alberta Court of Queens Bench was the court-determined sale price of $49,000, Linden J.A. stated (at p. 6575) that determining the proceeds" pursuant to s. 79(c) rather than s. 13(21)(d)(i):

"would not be consistent with the commercial reality of the situation. Normally, the Income Tax Act taxes someone on the basis of what has actually been received, not on the basis of some theoretical formula. The situations meant to be covered by paragraph 79(c) are acquisitions by the lenders in a context where no fixed price is paid, and where it might taken some time to ascertain the true value of what has been disposed of."

A lump sum of U.S. $6 million which the taxpayer received from a U.S. supplier in settlement of a claim for loss of profits and unrecovered costs resulting from the failure of a waste oil reprocessing plant to perform as promised did not constitute a non-taxable windfall, and instead constituted a taxable receipt and proceeds of disposition of depreciable property, in the proportions assessed by the Minister.

In rejecting an argument that recapture of depreciation should be reduced to reflect the fair market value of debentures received in consideration for the depreciable property being lower than their principal amount, Pigeon J. noted that s. 20(5)(c) of the pre-1972 Act deemed proceeds of disposition of the property to include the sale price, which was equal to the principal amount of the debentures.

The taxpayer disposed of depreciable property to a corporation controlled by him in consideration for the assumption of a mortgage and the issuance of common shares having a stipulated value that was substantially less than the amount for which they were sold shortly thereafter by the taxpayer. The proceeds of disposition of the depreciable property were found to approximate the fair market value of the property, as established by the subsequent transaction, rather than being based on the stipulated consideration.

The compensation referred to in what now is s. 13(21)(d)(iii) is an amount received or receivable from a third person who has damaged, destroyed, taken or injuriously affected the taxpayer's property. The taxpayer did not receive "compensation" for its building after agreeing to sell its premises "clear of all buildings".

Although the taxpayer had not made proof of loss by the end of the taxation year in which its property was destroyed by fire, by that time one of the insurance companies had admitted liability and had made an offer to pay the full amount of the coverage. That amount accordingly became payable in that taxation year.

A lump sum which the taxpayer received in settlement of an action it brought because a "quench and temper" pipe treatment system that had been installed at its pipe manufacturing plant did not perform to specifications, was an exempt receipt rather than proceeds of disposition of depreciable property. There was no disposition of depreciable property on general principles (as the taxpayer did not abandon or transfer its assets), nor was there "compensation for property injuriously affected" under paragraph (e) of the definition of "proceeds of disposition" given that this phrase referred only to consequential damage to other property where expropriation of a particular property had occurred. The lump sum also was not proceeds of disposition under (f) of the definition as no property of the taxpayer had been damaged.

A perpetual tree farm licence of the taxpayer was replaced by a 25-year licence as required by a new statutory regime. Shortly thereafter, the taxpayer disposed of the replacement licence.

Sharlow J.A. declined to follow an obiter dictum in the Kettle River case that suggested that in determining whether a timber cutting right is an "original right" for purposes of (b) of the definition of timber resource property, the conditions imposed by subparagraph (a)(ii) were retained, i.e., in this context, the original right must have been renewable rather than perpetual. Accordingly, the replacement licence of the taxpayer qualified as a timber resource property.

Rights of B.C. timber operators to cut timber in designated areas up to an allowable limit which they acquired well before 1974 nonetheless constituted timber resource properties because those rights were renewed after May 6, 1974. Accordingly, proceeds of disposition referrable to those rights were required to be taken into account under s. 13(1). Hugessen J.A. affirmed the finding of Strayer J. that the allowable annual cut or quota was not a right or interest that was distinct from the timber licences held by the operators, and further held that the effect of the parenthetical exclusion in s. 13(21)(d.1)(i)(A) for an acquisiton in the manner referred to in subparagraph s. 13(21)(d.1)(ii) indicated that an extension or renewal constituted an "acquisition" and that an original right for purposes of s. 13(21)(d.1)(ii) could be acquired before May 7, 1974.

In December 1991 the taxpayers (who were Canadian residents) acquired most of the partnership interests in a U.S. partnership ("Klink") that had been formed approximately 12 years earlier and whose principal asset, in December 1991, was an IBM mainframe computer which originally had cost U.S.$3.7 million but which had a current fair market value of $5,000. Klink then transferred the computer to a recently-formed British Columbia limited partnership in consideration for a partnership interest therein.

After stating (at para. 44) that the object and spirt of the recapture and terminal loss provisions "is to provide for the recognition of money spent to acquire qualifying assets to the extent that they are consumed in the income earning process," Noël J.A. found (at para. 50 that:

"The only cost which the Act provides for in the present fact situation is the original or full cost, and I do not believe that I could read into the Act the type of modification incorporated by the 1994 addition of paragraph 96(8) to alter this result without infringing on the role of Parliament."

Following an amendment to the Forest Act (British Columbia) which gave holders of existing timber rights and privileges the entitlement to replace their existing rights with new timber licences governed by the new provisions of that Act, the taxpayer exercised this right of replacement to obtain replacement licences that covered identical areas subject to the terms of the same tree farming licence. In rejecting a submission of the taxpayer that it had given up previously-granted licences to obtain the newer licences, thereby establishing a cost for the replacement licences equal to the value of what it had exchanged, Desjardins JA stated (at p. 6442) that the taxpayer:

"has not given up anything to get the replacement licences. Sections 20 and 33 of the Forest Act make it clear that the original licences were made to expire by statute and require that the replacement licences be issued automatically."

The taxpayer entered into contracts for the leasing to it by finance companies of dump trucks which had a term of 65 months, required it to indemnify the finance companies (which were stated to retain the right of ownership) for any loss resulting from operation of the trucks, provided that the taxpayer could exercise a purchase option in the 60th month at a price slightly less than the total of the outstanding payments for the remaining five months, provided that the taxpayer continued to owe the monthly payment even if it ceased to use the property for any reason including destruction by Act of God, and provided that the taxpayer could not sell or sublet the truck without the consent of the finance companies or use them outside North America.

The majority found that subsection 248(3) was intended to treat beneficial ownership of property in the same way as various forms of ownership recognized in the civil law of Quebec, intimated that Interpretation Bulletin IT-233R, para. 3, described circumstances in which the lessee was the beneficial owner of property and found that the taxpayer in this case had acquired beneficial ownership of the trucks at the inception of the lease given that it had acquired the three incidents of ownership (possession, use and risk). Accordingly, it was entitled to claim capital cost allowance and treat a portion of the lease payments as interest expense.

The taxpayers, who were members of a joint venture, did not capitalize interest costs incurred during the construction of a grain elevator under s. 21, because they wished to avoid the prohibition in s. 127(11.2) against including such capitalized interest in the capital cost for investment tax credit purposes, and instead took the position that they were entitled to capitalize the interest on the authority of the Sherritt Gordon case, which was decided shortly before the introduction of what now is s. 21. Rothstein J.A. stated (at para. 17) that:

The rule in Sherritt Gordon cannot stand together with section 21. This Court cannot eliminate the option provided by Parliament to taxpayers under section 21 by reference to prior jurisprudence.

He went on to indicate (at para. 18) that he had "no difficulty with a proposition that in circumstances not contemplated by section 21 or other statutory provisions [e.g., situations where the interest would not qualify for deduction under ss.20(1)(c), (d) or (e)], interest may be capitalized according to GAAP."

Timber quotas which the taxpayers were deemed to have acquired after 1974 by virtue of their renewal of such rights after 1974 had a capital cost equal only to any amounts expended in acquiring those properties, rather than the market value of the quotas at the time of their renewal. Although it was correct to view the cost of an asset to a taxpayer as what he has given up to get it, when the taxpayers renewed their licences they did not give anything up but instead were exercising and enjoying their rights of renewal which they already had.

Ten percent of all payments due to contractors by the taxpayer for various capital improvements were not payable by it until the contracts have been substantially completed to the satisfaction of the supervising engineer, and all the claims of sub-contractors and employees have been met by the contractors. Because the taxpayer's "liability to pay the holdbacks to its contractors was merely contingent since it was dependent for its existence upon uncertain future event, namely, the acceptance of the work by the engineer" (p. 6173), the taxpayer was not entitled to include the amount of the holdbacks in the determination of the undepreciated capital cost of the properties for the year.

In December 1970 the taxpayer contributed $500 to become a limited partner in a partnership which operated an apartment building. For its 1970 year the partnership had revenues of $51,700 and expenses of $102,571, including CCA of $53,761, and a business loss of $7,267 was allocated to the taxpayer. The general partner reserved the right to purchase the taxpayer's shares on January 1, 1973 for $100.

The Minister's reassessment, in which the taxpayer's CCA claim was limited to an allowance based on his capital contribution of $500, was affirmed by Joyal J. "[T]here was no exposure to the plaintiff beyond the $500 capital contribution he made to the partnership."

In order to obtain a development permit to add a 72-room extension to its hotel, the taxpayer committed itself to either construct 27 additional parking stalls within 1/4 mile of the hotel, or pay the City of Edmonton $216,000. Since the payment "was clearly made either as a requirement of obtaining the building permit or as the price of the exclusive use or leasehold interest in the parking spaces promised by the City," and because the taxpayer's financial statements included the payment as part of the capital cost of the extension, the payment was part of the capital cost of a Class 3 asset, rather than an eligible capital expenditure.

Amounts expended by the taxpayer to install new pipelines were additions to the capital cost of its depreciable assets notwithstanding that it was reimbursed in whole or in part by government or private sources. Walsh J quoted (at 6304, with approval) the statement of Lord Atkin in Corp. of Birmingham v. Barnes (1935), 19 T.C. 195, at 217 (HL):

What a man pays for construction or for the purchse of a work seems to me to be the cost to him; and that whether someone has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event promised or given the money which recoups him what he has spent.

It was virtually certain that, of the taxpayer's total cash investment of $38,333 for a share in a motion picture film, $30,000 would be returned to him in the form of rental income and that he would receive what, in effect, was interest on this $30,000 investment until such time as it was so repaid. It was held that notwithstanding that only $8,333 was thus truly at risk, the taxpayer could claim capital cost allowance in respect of his total outlay of $38,333.

Since the buildings on the property purchased by the taxpayer were of little value and were, in fact, an obstacle to redevelopment of the property, no capital cost was allocable to them.

Furthermore, since the only income from the property was an annual rental that was calculated solely on the basis of the valuation of the land without buildings, the buildings were not acquired for the purpose of producing income and capital cost allowance claims were therefore precluded on this ground as well.

A payment made by a prospective franchisee to procure the surrender of a prior franchise so that it could obtain a franchise, was a proper element of the capital cost of the franchise obtained.

Costs of cleaning up a site were part of the capital cost of an improvement to a building.

It was found that a partnership, of which the taxpayer was a limited partner, had acquired two films at "a grossly and artificially inflated amount which bore no relation whatsoever to the value of the [film] assets" and that neither the purchasing partnership nor the vendor expected the unpaid portion of the purchase price ever to be paid, notwithstanding that the unpaid portion was stated to be payable 11-1/2 years after the date of the purchase. Since any liability of the taxpayer to contribute to the payment of the unpaid portion was contingent on the films generating earnings, the capital cost of the taxpayer's film interest was limited to the amounts which he had actually paid.

A partnership purchased a film in an advanced state of production for a purchase price computed as the audited cost of production to the date of purchase, payable by way of a cash payment of $150,000, the balance (of $427,892) to be paid only out of profits generated by the film. Expert accountancy evidence indicated that an amount equal to the unpaid balance of the purchase price was properly includible in the capital cost of the film in the year of purchase only if the unpaid balance was a "real" liability rather than a contingent liability. It was held to be the latter since "it was a liability (from which the [partnership] purchasers admittedly could not unilaterally withdraw) to become subject to an obligation to pay the balance if, but only if, an event occurred which was by no means certain to occur [namely, the generation of profits]."

A syndicate in which the taxpayer had a 1/16 interest purchased an interest in a film for a cash amount plus an additional amount which was payable, at the earliest, 8 years later. There was no obligation to pay the unpaid balance when due, but if it failed to do so it would forfeit the cash payment and all rights to the film.

The capital cost of the film excluded the unpaid balance (and, for other reasons, the cash amount). "It is not even a true liability but rather a mere right to choose at some time in the future whether an undetermined amount will be paid or not and is therefore even more tenuous and nebulous than what is commonly considered a contingent liability."

The amount paid by the taxpayer for an option to acquire depreciable assets was included in the cost of those assets when the option was exercised.

Jackett C.J. stated (at p. 5032) before going on to find that cost of installing water heaters leased to customers were not capital expenditures, that the cost of installing heavy plant and equipment by a business in its factory would be a capital expenditure and that "in such a case the cost of the plant and the cost of the installation is a part of the cost of the factory or other work place as improved by the plant or equipment".

Before finding that the taxpayer had not "acquired" a drilling rig in its 1963 taxation year for purposes of the definition of "undepreciated capital cost" in s. 20(5)(e) of the pre-1972 Act, because under the Sale of Goods Act (Alberta), property in the drilling rig had not passed to the taxpayer until 1964, Cattanach J. stated (at p. 5198):

"... It is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements."

The cost to the taxpayer of a patent included the legal expenses incurred in obtaining the patent, the research-related costs of developing the taxpayer's invention prior to the application for the patent and amounts expended subsequent to the application (including costs of continued testing) attributable to satisfying the patent examiner that the patent had the utility necessary to support a patent.

It was noted, obiter, that "it may be argued that a negative amount could enter into the calculation ... under section 13(21)(f)(v) if the costs of the disposition of a property exceeded the proceeds of the sale of that property". [C.R.: 257]