Cases
CAE Inc. v. The Queen, 2013 DTC 5084 [at 5944], 2013 FCA 92
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).
General Construction Co. Ltd. v. MNR, 59 DTC 1169, [1959] CTC 300, [1959] S.C.R. 729
A construction company ("Mannix") had formed a joint venture (the "first joint venture") with two other arm's length companies to contruct a portion of a pipeline, with Mannix having an undivided 40% interest in the first joint venture. Mannix then entered into a second joint venture agreement with the taxpayer (which carried on an earth moving business) and another company under which the taxpayer acquired a 15% interest in Mannix's 40% interest in the first joint venture in consideration for its agreement to make cash payments. Mannix rented machinery and equipment to the first joint venture.
It was agreed, close to the conclusion of the first joint venture, that Mannix would acquire the interest of the taxpayer in that venture, thereby taking over the taxpayer's interest in the machinery and equipment, and that Mannix would pay to the taxpayer the taxpayer's total capital contributions to the second joint venture net of distributions made to date, plus an additional sum of $90,000.
The sum of $90,000 was found by Martland J. to be a taxable profit to the taxpayer given that: the taxpayer had entered into the second joint venture with a view to recouping its investment and making a profit at the conclusion of that venture; the $90,000 represented an estimate of the profit which the taxpayer would have become entitled to receive upon a winding-up of the joint venture; and it was not the intention of the taxpayer to sell, or of Mannix to buy, an interest in a going concern.
Canadian Kodak Sales Ltd. v. MNR, 54 DTC 1194 (Ex Ct)
The taxpayer, whose business was to purchase photographic equipment from affiliates and sell them to customers, in 1940 acquired the business of another affiliate, which consisted of leasing out "recordaks" (i.e., machines which took reduced photographs and microfilms of documents) to customers for all of the economic life of the recordaks. In 1951, the taxpayer informed its customers that they now could purchase the leased recordaks, and in 1951 and 1952, 40% and 5%, respectively, of the customers did so.
The resulting gains were taxable. The recordak division was part of the taxpayer's business of exploiting photographic equipment and, once the decision was made to sell recordaks, their sale occurred in the ordinary course of that business.
See Also
Klemen v. The Queen, 2014 DTC 1170 [at 3613], 2014 TCC 244
The taxpayer directly or through corporations acquired equipment to refurbish and rent to junior oil companies. He reported a capital gain on his transfer of equipment to a corporation ("CHL"), which was wholly-owned by him through a holding company, in exchange for a $135,000 credit to his "shareholder" loan account. The transferred equipment previously had been provided by him for use by CHL free of charge.
In finding that the taxpayer's gain was on capital account, Hogan J stated (at para. 38):
[T]he Equipment was used by the Appellant in his various business ventures over a very long period of time. It was acquired at the beginning in the 1980s and then sold to CHL in 2004 and 2005. There is no evidence to show that the Appellant sold similar equipment in earlier taxation periods. The Appellant did allow CHL and other corporations that he held an interest in to use the Equipment in their business ventures. There is no evidence to show that the Appellant modified or altered the equipment for the purpose of realizing a higher price.
Edwards v. Bairstow & Harrison, [1955] 36 TC 207 (HL)
The taxpayers who were a director of a leather manufacturing company and an employee of a spinning firm, purchased a complete cotton spinning plant with a view to selling it as quickly as possible at a profit but, in the event, disposed of the plant piecemeal over the following two years at a gain.
In finding that the transaction was on income account as an adventure in the nature of trade, Lord Radcliffe noted that they had no intention of using the machinery as an income-producing asset, or of buying it to consume it or for the pleasure of enjoyment. It was not relevant that the plant was not advertised for sale (why should they do so if the sale of the plant could be achieved without advertising); even if no "work had been done on the maturing the asset to be sold", there was "no reason why a dealer should do more work in making his plant saleable than the purposes of sale required"; and even if the taxpayers did not have any special skill which placed them in an advantageous position for the purposes of the transaction, "the members of a commercial community do not need much instruction in the principles and possibility of dealing and ... given the opportunity, the existence or non-existence of special skill is of no significance whatever" (p. 230).
Gloucester Railway Carriage and Wagon Co., Ltd., [1925] AC 469 (HL)
The taxpayer manufactured railway wagons, which it sold outright (outright or under hire purchase agreements) as well as letting out wagons on simple hire (i.e., no purchase options). After the First World War there was a great scarcity of wagons and the taxpayer decided to sell all the wagons which were being hired out. In confirming that the gain on this sale was a taxable profit, Lord Dunedin stated (at pp. 474-475):
...there was here one business. A wagon is none the less sold as an incident of the business of buying and selling because in the meantime before sold it has been utilized by being hired out.
Articles
Carl MacArthur, "Is the Sale of Depreciable Property Capital or Income in Canada?", Tax Notes International, 14 May 2012 (an abridged version of this article appears as "CAE Inc.: Depreciable Property or Inventory?", Canadian Tax Highlights, Vol 20, No. 3, March 2012, p. 6)
The conversion of depreciable property to inventory before a disposition thereof is not contemplated under the Act's CCA scheme, and could give rise to anomalies.