THE HARMONIZATION OF TAX LEGISLATION ANALYSIS OF THE CONCEPT OF "ACQUISITION" IN THE CASE LAW
Martin Lamoureux,
Legislative Council, M. Fisc., M.B.A.
Department of Justice, Canada
INTRODUCTION[1]
This Chronique deals with the concept of "acquisition" in the Income Tax Act.[2] The main decisions of the courts that have dealt with this concept will be surveyed.
The analysis begins by recalling the contexts in which the concept of "acquisition" is employed. Following that is an analysis of the definition the courts have given this concept in applying the Act. Subsequently, and collaterally, decisions rendered prior to the enactment of section 8.1 of the interpretation Act[3] will be considered in the light of the new section in order to determine whether those decisions are consistent with the scheme of this recent legislative provision.
I. The problem in the context of the application of the I.T.A.
The I.T.A. refers to a number of private law terms or concepts. Although some of these terms are given definitions in the I.T.A. – in subsection 248 (1) I.T.A. or in other provisions in the Act – a number of others are not defined, or are defined only in part. For example, there is no definition in the I.T.A. of the concept of "acquisition", whereas "disposition" exemplifies a concept that is defined in the I.T.A. but refers to private law notions.[4] However, as will be seen below, it is not certain that the word "acquisition", as used in the I.T.A., refers to the private law of the provinces; it may be that the concept of "acquisition" has its own meaning for the purposes of the application of the I.T.A. Because the concept of "acquisition" is not defined in the I.T.A., the courts have had to interpret this term.
The word "acquisition" is used in the I.T.A. mainly in two contexts: to determine the exact time at which control of a corporation has been acquired[5] and the time at which the tax consequences are triggered for the purchaser on the transfer of a property.[6] This analysis will be limited to the latter context.
II. The case law on the concept of "acquisition"
This section will present an overview of the leading decisions, first, from the common law provinces that deal with the interpretation of the concept of "acquisition" where the term is used in relation to the transfer of property, and, second, where the suppletive private law was the civil law.
A) Taxation case law where the cause of action arose in provinces other than Quebec
The common law differs from the civil law by its internal logic. In common law, formal logic and the deductive method are not always strictly followed, and the judge may consider other imperatives in reaching a decision. The comparison between the decisions in MNR v. Wardean Drilling Ltd.[7] and Kowdrysh v. Canada,[8] which will be analysed below, is intended in the first place as a demonstration of the inductive application of the common law and, in the second place, reflects the rule of interpretation that a term or a phrase is to be interpreted in terms of its context and that the term or phrase may have a different meaning depending on the provision in which it is used.
i) MNR v. Wardean Drilling Ltd.
Wardean Drilling, decided by the Exchequer Court, is a leading decision that established the tests for determining whether a party has "acquired" a property in a transaction involving the transfer of the property. In that case, the taxpayer claimed, for the purposes of the capital cost allowance, that it had acquired certain equipment. The issue in the case, which involved an instalment sale, was whether the equipment had been "acquired" by the purchaser. According to Cattanach J., the purchaser "acquired" the property when title had passed to it or when the normal incidents of ownership had been transferred to it. Cattanach J. referred in this respect to the normal incidents of title, which are possession, use and risk.[9]
At this stage of the analysis, it is interesting to note that Cattanach J. developed a two-part test: first, it must be determined whether the purchaser has become the legal owner of the property. Second, it must be asked whether the purchaser has at least obtained possession, use and risk. If the answer to either inquiry is yes, the purchaser will be considered the "acquirer" within the meaning of the provisions relating to the capital cost allowance.[10] Surprisingly, however, Cattanach J. did not provide the sources that he had relied on to develop the second branch of the test. Was it the common law or his perception of the application of the concept for the purposes of the Act? Furthermore, since it was clear that the purchaser did not have the normal incidents of title, one may wonder what prompted Cattanach J. to formulate the second branch of the test, which, particularly in Quebec, was the source of much controversy regarding the interpretation to be given to the word "acquisition".
It should also be emphasized that Cattanach J. resorted to the suppletive law of Alberta in order to determine, according to the first part of the test, whether the purchaser had obtained the title of ownership of the property. To establish the time at which the title of ownership of the property (in this case, a drill) had been acquired by the purchaser, he based himself on the Alberta Sale of Goods Act: [11]
Sections 20 and 21 of the Alberta Sale of Goods Act (chapter 295, R.S.A. 1955) outline the time of transfer of property in goods and rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.[12] (Emphasis added)
The important point to retain from this last statement is that Cattanach J. explicitly used the applicable private law – the statutory law of Alberta – only with regard to the first branch of the test. As mentioned above, Cattanach J. did not apply the second branch of the test, simply because the equipment in Wardean was not transferred to the purchaser before the end of the year at issue. Thus, it is unclear whether the transfer of the normal incidents of ownership test, i.e., the second branch, is one that Cattanach J. designed exclusively for purposes of the relevant provisions of the I.T.A. or whether the test instead originates in the common law[13] or the statute law of Alberta.
It may be noted that a number of decisions followed Cattanach J.'s interpretation of the concept of the "acquisition" of a property, taking into consideration not just the transfer of legal title, but questioning whether the taxpayer had otherwise "acquired" the property by holding possession, use and risk.[14]
ii) Kowdrysh v. Canada
While the Wardean Drilling decision appears to represent the views of the majority with respect to the legal application of the concept of "acquisition" for the purposes of the I.T.A., Kowdrysh is an exception. The case also brings out the ambiguity inherent in the application of the concept of "acquisition". In Kowdrysh, a farmer appealed to the Federal Court of Appeal for recognition that he had "acquired" an air seeder for the purposes of the investment tax credit, even before it was delivered and without his having "acquired" title to the property. If the test developed by Cattanach J. in Wardean Drilling had been applied to the fact situation at issue, the farmer would have been denied the investment tax credit[15] because he did not have the normal incidents of title to the property and did not possess title to the property. Létourneau J. refused to apply the test developed in Wardean Drilling on the grounds that, if this test were applied to the facts of the case, the tax policy underlying the legislative provision would have been distorted. He therefore gave a specific meaning to the term "acquired" in the specific context of the investment tax credit. In that regard, he said:
In my view, in the context of this temporary investment tax credit, especially in the farming industry where substantial investments are made with respect to costly, large, sophisticated and specialized equipment which requires a considerable amount of time for production, verification, approbation, transportation and delivery, the term 'acquired' and the time of 'acquisition' take a different meaning and connotation. With respect, I believe that, for the purpose of this special temporary tax credit program, farming equipment was acquired when the equipment in an ascertained form was purchased by means of a binding and enforceable contract.
I am comforted in this view by the fact that Parliament, in enacting subsection127 (9), waived the requirement of delivery with the ensuing possession and use.[16] (Emphasis added)
Thus, it appears that Létourneau J.A. gave a meaning different from that used in Wardean Drilling to the concept of "acquisition", one that was based on the specific context. The next section will discuss the application the courts have given to this concept in decisions from the province of Quebec.
B) Taxation case law where the cause of action arose in Quebec
i) Construction Bérou Inc. v. The Queen
Construction Bérou is the most recent decision that discusses the issue of "acquisition" of a property in the context of a leasing transaction. The court had to decide whether the lessee had the right, first, to deduct from its business income the depreciation claimed for the property comprising the subject-matter of the lease, second, to claim the investment tax credit for the property in question; and, third, to deduct the interest incurred in relation to the lease contract.
Briefly, the facts in Bérou were as follows. In preparing its income tax return for the 1982 taxation year, the corporation, resident in Quebec, considered that it had made the "acquisition" by lease of a number of trucks during the year. It accordingly claimed, in respect of the property, capital cost allowance,[17] investment tax credits[18] and interest deductions.[19]
A majority of the court decided that the two-branch test developed in Wardean Drilling applied and that Bérou had "acquired" the property within the meaning of the I.T.A. when the leasing transaction took place because the company had acquired the use, possession and risk. In addition, the majority judges equated Bérou, the lessee with the beneficial owner (propriétaire effectif).[20] Létourneau J., based his opinion, inter alia, on the horizontal equity tax policy in order to give the concept of "acquisition" a uniform meaning.[21]
It is important to examine the reasoning of the two majority judges of the Federal Court of Appeal with respect to the concept of "acquisition". Létourneau J. seems to have equated the second branch of Cattanach J.'s test with the common law concept of beneficial ownership, as the following excerpt demonstrates:
In other words, there was an acquisition of property within the meaning of paragraph 13(21)(b) of the Act when the person obtaining it held either legal ownership or beneficial ownership.
[…]
There was thus a correlation between these two concepts (disposition and acquisition), since the seller of property who reserved legal title to it had the legal ownership of it and the purchaser became the beneficial owner.
In short, according to these two cases, disposition or acquisition of property for purposes of the capital cost allowance exists under the Act when the normal incidents of title such as possession, use and risk are transferred. I agree with this legal interpretation given for tax purposes to the word "acquired" contained in the definition of "depreciable property". For practical purposes this interpretation has the merit of recognizing, for tax legislation that applies throughout Canada, a business practice that has no boundaries and of avoiding the danger of becoming too embroiled in unnecessary, sectoral and above all sterile and inequitable legalism at a time when the trend in the civil law is to approximate more closely to the common law. In addition, it is significant that Parliament, which annually amends the Act inter alia to alter legislative provisions when they are so interpreted that they do not meet the objectives sought, has not thought it appropriate to overturn this thirty-year-old interpretation. Further, this interpretation is consistent with the legislative intent stated in subsection 248 (3) of the Act, which, as I have already mentioned, is intended to treat beneficial ownership of property in the same way as various forms of ownership recognized in the civil law of Quebec.[22]
Desjardins J. seems to share the opinion of her colleague, Létourneau J., that the second branch of Cattanach J.'s test refers to the concept of beneficial ownership. She bases her opinion on the fact that the effect of the interrelationship between paragraph 248 (3)(f) I.T.A. and the definition of "disposition" under the former section 54 I.T.A. (now subsection 248 (1) "disposition" I.T.A.) is to make the concept of "acquisition" as circumscribed by Wardean Drilling[23] applicable to Quebec. She says in that regard:
Having said that, in so far as the leasing contracts in the case at bar may be seen as contracts recognizing "beneficial ownership" like the contracts given as examples in s. 248 (3) of the Act, the beneficial ownership of the dump trucks was acquired by the appellant when the contracts were concluded in 1982. The fact that the leasing operation involves the sale by a manufacturer or distributor to a finance company of a thing selected by the customer for his own use and the lease of that thing by the finance company to the customer does not in any way alter the proposition just stated. Since the appellant had the possession and use of the dump trucks in addition to assuming the risk and obligations pertaining to them, it obtained "beneficial ownership" of that property in 1982.[24] (Emphasis added)
Note, however, that while Létourneau and Desjardins J.J. decided to apply the tests formulated in Wardean Drilling, Noël J. (dissenting) was of the opinion that it was instead necessary to resort to the Civil Code of Québec[25] in order to determine whether or not there had been "acquisition". In that regard, it should be emphasized that his approach favoured the complementarity of the private law of the provinces with respect to the application of the concept of "acquisition", unlike that of his two colleagues who appear to have given this concept a specific meaning for purposes of the tax provisions at issue.
ii) Terexcavation Antoine Grant Inc. v. The Queen[26]
The decision in Bérou was recently confirmed in Terexcavation. In that case, it had to be determined whether a tractor had been "acquired" within the meaning of the I.T.A. by the lessor in the context of a lease contract with an option to purchase and whether the lessor, if the occasion arose, could claim an investment tax credit.[27] Lamarre Proulx J. of the Tax Court of Canada drew a parallel between this fact situation and Bérou. She said that, in the case [Translation] "of leasing, the courts have agreed that it was a method of financing the purchase of a property that takes the form of a lease. In the instant case, the evidence […] showed that it is also the case of the appellant company."
[28] The
judge accordingly inferred that the contract was a method of financing in order to obtain a property and decided the case under the principles developed in Bérou, which originated in the Wardean Drilling decision. The following passage deserves particular attention:
[Translation]
I believe, first, that it is a mistake to see the dispute on the interpretation to be given to the word "acquired" as a debate between civil law and common law on the concept of property. In my opinion, Wardean interpreted the meaning of the word "acquired" in terms of tax legislation. This interpretation may or may not comply with the common law concept of ownership. That is not what is important. What matters is that this is an interpretation that was given in terms of the tax law and was accepted by the Minister, as shown by the above-mentioned Interpretation Bulletin.[29] (Emphasis added)
This decision seems to be in keeping with the idea that this is a tax law concept concerning which there is no need to resort to the private law of the provinces; the decision, therefore, supports the thesis that the concept of "acquisition" is, at least in Quebec, dissociated from the private law of the provinces.
iii) Further comments on Bérou, Kowdryshand Terexcavation
According to Bérou and Terexcavation, the concept of "acquisition" has a uniform meaning throughout Canada, at least with respect to the "acquisition" of a property for purposes of the capital cost allowance. According to these decisions, where the I.T.A. is to be applied in the province of Quebec, the term "acquisition" has a specific meaning that is dissociated[30] from the civil law.
Although the legal result of the two decisions is identical, the reasoning leading to this result is slightly different in each case. Lamarre-Proulx J. gave a particular meaning to the concept of "acquisition" where it is used in a tax context without having to refer to the concept of beneficial ownership. In other words, it may be inferred from the comments of Lamarre Proulx J. that the second branch of the Wardean Drilling test, even if it were considered to be an application of the common law, has a tax application in a specific context that transcends the private law of the provinces.[31] However, it emerges from the comments of Lamarre Proulx J. that she did not want to get into the debate about whether the test formulated by Cattanach J. came from the common law or not. Instead, she simply stressed that the Wardean Drilling test applied uniformly throughout the country in the same way as it was decided by the majority in Bérou.
As for Létourneau and Desjardins JJ., they saw explicit dissociation on the part of Parliament. According to them, the enactment of subsection 248 (3) I.T.A. made the common law concept of beneficial ownership applicable to Quebec and by the same token also made the second branch of Cattanach J.'s test in Wardean Drilling applicable to Quebec. It can be said that, until the enactment of section 8.1 of the Interpretation Act, this decision was the state of the law in Quebec in terms of the interpretation to be given to the second branch of the Wardean Drilling test.
Moreover, when the decision of Létourneau J. in Bérou is juxtaposed with his decision in Kowdrysh, the concept of "acquisition" when it is applied to a situation involving a transfer of property seems to have several meanings that are determined on the basis of the particular context. It is interesting to note that in Bérou, where the suppletive private law was the civil law, the courts decided to apply a test developed in a context where the suppletive law was the common law, whereas in Kowdrysh where the suppletive law was the common law, the same court refused to apply this test on the grounds that the meaning to be given to the term "acquired", for purposes of the application of the provision in question, was different because it was used in a very specific context (temporary tax credit for the acquisition of farm machinery).
However, as Lamarre-Proulx J. said in Terexcavation, there is perhaps no point in regarding the test formulated in Wardean Drilling in terms of the common law or the civil law. Lamarre Proulx J., it will be recalled, was of the opinion that the term "acquisition" was given an interpretation for tax purposes and it is this interpretation that must be accepted, regardless of whether the suppletive law is the common law or the civil law.
Footnotes
[1] The author wishes to thank all the members of the Tax Law Team of the Bijuralism and Drafting Support Services Group, Legislative Services Branch, Department of Justice of Canada, for their valuable comments and their collaboration in the revision of this Chronique. However, the opinions expressed in this paper are the sole responsibility of the author and are not necessarily those of the Department of Justice of Canada or those of the other members of the Tax Law Team.
[2] R.S.C. 1985, c. 1 (5th supp.) as am. (hereinafter "the I.T.A." or "the Act").
[3] R.S.C., c. I-21 (as am. by S.C. 2001, c. 4, s. 8.) (hereinafter "the Interpretation Act").
[4] S. 248(1) "disposition" I.T.A.
[5] For example, in ss. 256(7) and 256(9) I.T.A. and in para. 88(1)(c.6) I.T.A.
[6] For example: the deduction for depreciation under s. 13(21) I.T.A., the interest deduction in para. 20(1)(c) I.T.A., the investment tax credit in s. 127(5) I.T.A.
[7] 69 D.T.C. 5194 ("Wardean Drilling").
[8] [2002] F.C.J. No. 321 ("Kowdrysh").
[9] Loc. cit., note 7, at p. 5198 where Cattanach J. writes,
"in my opinion, the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk."
[10] Some authors believe that the second branch of the test applies only if the vendor has reserved title to the property. On this, see, inter alia, Marie-Pierre ALLARD,
"The retroactive effect of conditional obligations in tax law"
, in The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism, Collection of Studies in Tax Law, Association de planification fiscale et financière and Department of Justice Canada, 2002, 2:1 at 2:60.[11] R.S.A. 1955, c. 295.
[12] Loc. cit., note 7, para. 27.
[13] As will be seen below, the Federal Court of Appeal in Construction Bérou inc. v. The Queen, 99 DTC 5868 (F.C.A.) (formerly Fortin & Moreau) (hereinafter "Bérou") seems to have interpreted the second branch of Cattanach J.'s test as referring to the common law concept of beneficial ownership. See also three decisions of the Tax Court of Canada: Big Comfy Corporation v. The Queen 2002 DTC 1729, Kinguk Trawl Inc. and Farocan Incorporated v. The Queen, 2002 DTC 1399 and Mimetix Pharmaceuticals Inc. v. The Queen (2001) DTC 1026.
[14] For example: The Queen v. Henuset Brothers Ltd. (No. 2), 77 D.T.C. 5169 (F.C.T.D.) and Gartry v. Canada, 94 D.T.C. 1947 (C.C.I.).
[15] S. 127(9) I.T.A.
[16] Loc. cit., note 8, paras. 13 and 14.
[17] S. 13(21) I.T.A. et al. 1100(1)(a) of the Income Tax Regulations, C.R.C., 1978, c.
945, as. am.
[18] S. 127(5) I.T.A.
[19] Para. 20(1)(c) I.T.A.
[20] Note that the phrase "beneficial ownership" should ideally, in French, be translated by "propriétaire bénéficiaire", according to the standardized terminology of the National Program for the Integration of Both Official Languages in the Administration of Justice (POLAJ). However, in the I.T.A., the term that translates the concept of beneficial ownership is "propriété effective" and, since this is the phrase used in the I.T.A. and for the sake of the uniformity of the text, the term "propriété effective" will be used for the purposes of this Chronique.
[21] Note that Décary J. in St-Hilaire v. Canada (Attorney General) [2001] 4 F.C. 289, at p. 315, refers to that aspect of the Federal Court of Appeal decision in Bérou:
"A judge who must interpret and apply a federal enactment in a dispute concerning civil rights in Quebec must know that as a general rule, and subject to what will be said later in regard to so-called public law statutes, the suppletive law is the civil law. This does not mean that no attempt should be made to harmonize the effects of federal statutes throughout the country wherever this is possible in the private law. (See: Canada v. Construction Bérou Inc. (1999), 99 DTC 5868 (F.C.A.); Biderman v. Canada, 2000 DTC 6149 (F.C.A.).) What it does mean is that asymmetry is the rule under the Constitution. It also means that, if there is harmonization, it may draw equally on both the civil law and the common law. This means instead that asymmetry is the rule under the Constitution. It also means that, if there is harmonization, it can just as well draw from the civil law as from the common law."
[22] Loc. cit., note 13, at paras. 9, 13 and 14.
[23] With due deference to the contrary opinion, the author finds it difficult to follow the reasoning of Létourneau and Desjardins JJ. regarding the application to that case of s. 248(3) I.T.A., as it read at the time. Despite the use of the term "including" ("notamment") in that section, it appears to the author that the structure of s. 248(3) I.T.A. at the time was to deem the beneficial ownership of a property only with respect to the person who was its full owner. However, since a leasing operation does not transfer full ownership to the lessor, it is difficult to imagine that this operation fell under s. 248(3) I.T.A., as it read at that time and that as a result the lessor (Bérou) was deemed to have the beneficial ownership of it.
[24] Loc. cit., note 13, s. 47.
[25] Civil Code of Québec, S.Q. 1991, c. 64 (the "C.C.Q.").
[26] [2002] T.C.J., No. 58 ("Terexcavation").
[27] Under ss. 127(5) I.T.A. and 127(9) I.T.A.
[28] Loc. cit., note 26, para. 39.
[29] Ibid., para. 35.
[30] The concept of dissociation may be defined as a derogation from the private law of the provinces by the Parliament of Canada when it legislates on a matter within its jurisdiction. For more details in that regard, see loc. cit., note 21, at p. 313.
[31] In this regard, a certain analogy can be seen with the Supreme Court of Canada's interpretation of the term "resident" in Thomson v. M.N.R., [1946] S.C.R. 209. In that case, the Supreme Court inferred that the term "resident" should be given its ordinary meaning rather than its common law technical meaning.
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