Comments on Fiducie Sylvie Vallée v. Canada and Hewlett Packard Ltd. v. Canada (continued)

2. Comments on the Hewlett Packard case

2.1. "Acquisition" and "disposition": uniformity of application versus reference to the private law of the provinces

Before this decision was rendered, there were two conflicting lines of authority in the Federal Court of Appeal in relation to the concepts of "Acquisition" and "disposition". They concerned the application of federal enactments and references to the private law of all of the provinces in Canada. In the above-mentioned decision, the Federal Court of Appeal appeared to take a position favouring the first thesis but did not end the debate, however.

According to the first view, the concepts of "Acquisition" and "disposition" should be interpreted uniformly throughout the country; this is what the author calls the thesis of dissociation of a federal enactment from the private law of the provinces.^[1] In Construction Bérou ^[2] , Létourneau and Desjardins JJ. preferred this thesis, while Noël J. (dissenting) seemed to advocate the other thesis, that of complementarity. In view of the importance of this decision for the understanding of both legal positions, a brief reminder of the facts and arguments of the parties is in order.

2.2. Return to Construction Bérou

In 1982, Construction Bérou inc. signed leasing contracts for six new trucks and two used trucks intended to be used in its business. On its income tax return, Construction Bérou inc. took the position that it had acquired the property for purposes of the capital cost allowance (the "CCA"), the investment tax credit (the "ITC") and the deduction of interest. The Minister of National Revenue reassessed and refused to grant the tax treatment claimed on the basis that Construction Bérou inc. had not acquired the property but had instead leased it; when the reassessment was issued, a lease expense was all that was allowed. Construction Bérou inc. appealed from this decision to the Tax Court of Canada, which decided that the company had acquired the property for purposes of the ITC and the deductibility of interest, but not the CCA.

In the Trial Division of the Federal Court, Tremblay-Lamer J. overturned the decision of the Tax Court of Canada and confirmed the reassessment on the basis that Construction Bérou inc. had not acquired the property for the CCA (para. 13(21)(b) I.T.A.), the ITC (para. 127(10.1)(d) I.T.A.), or for the deductibility of interest (subpara. 20(1)(c)(ii) I.T.A.).

At the Federal Court of Appeal, the question was debated as to whether the term "acquired", used in the three provisions at issue, was to be interpreted according to the property law of Quebec or according to a meaning specific to the I.T.A.

Létourneau J. went back to MNR v. Wardean Drilling ^[3] and Olympia and York Developments Ltd. v. The Queen^[4] to find a correlation between the concepts of acquisition and disposition and that for purposes of the CCA, disposition or acquisition of property for purposes of the capital cost allowance exists under the Act "where the normal incidents of title such as possession, use and risk are transferred."^[5] Létourneau and Desjardins JJ., although on different grounds, were both of the opinion that the federal legislation should be applied uniformly across the country. Létourneau J. expressed the thesis of the dissociation of the concepts of acquisition and disposition and the justification for the application of these common law tests to Quebec as follows:

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.^[6]

Noël J. was, instead, of the opinion that the disputed concepts — acquisition and disposition — had to be interpreted in the light of the provincial private law and, consequently, in the light of the civil law where the enactment's province of application is Quebec. He reviewed the previous case law, which is divided on this issue. He concluded that the word "acquired" refers to ownership:

It appears from this review of the case law that to the extent that Olympia and York authorized the courts to ignore the effects of Quebec law in cases arising in Quebec, it has not been followed. Only Judge Tremblay relied on this decision in Bédard Auto Ltée as a basis for concluding that a sale had occurred for tax purposes, even though the contrary result arose underthe civil law. He subsequently adhered to the civil law in Goulet. In my view, the trial judge and the Tax Court judges before her were right to ignore Olympia and York, since the Act does not cast aside private law. The word "acquired" contained in each of the provisions in issue must be understood in its ordinary sense that is as referring to the acquisition of ownership of property, and in the absence of some indication to the contrary, ownership of property cannot be acquired otherwise than in accordance with the applicable private law.^[7]

Consequently, he cast aside the reference to the concept of beneficial ownership to determine the time of acquisition of property. He underscored the importance given in civil law and in common law to contractual intent and noted that the parties had considered the issue of ownership of the property. Basing himself on the civil law, he concluded that, as long as the title of ownership of the property had not been transferred, it could not have been the subject of a disposition and corresponding acquisition:

Here, the parties considered the question of ownership of the property and agreed that ownership would remain with the finance companies until the time agreed upon for the exercise of the option, and that [TRANSLATION] "title and right of ownership" would be transferred to the appellant at that time, provided it chose to exercise the option and pay the option price. In so far as the effect of a contract is a function of the intent of the parties, I do not see how ownership of property ("legal" or "beneficial" from a common law perspective) could have been transferred to the appellant before the option was exercised.^[8]

This opinion, although issued in a dissenting judgment, is shared by a number of authors, including Professors David Duff and Marie-Pierre Allard who, in the context of analysing issues concerning Canadian bijuralism, dealt with the question of the complementarity or dissociation of these concepts.^[9]

2.3. Hewlett Packard

Noël J., who had advocated the thesis of complementarity in Construction Bérou, seems to favour the uniformity of treatment thesis in Hewlett Packard. Once again, this is a case where the court had to determine whether a taxpayer had disposed of property for purposes of section 13 I.T.A., preventing it from claiming the CCA for the property.

2.3.1. The facts

Hewlett Packard (Canada) Ltd. ("HP") had a fleet of Ford cars for 1995, 1996 and 1997. Every year in October, HP purchased a fleet of new Ford cars to replace those purchased the preceding year. The process of replacing the cars was carried out in October so that the old cars ceased being used and the new ones began to be used before October 31 in each year (date of the end of the financial year). With the parties' agreement, it was only after October 31 that the transfer of ownership of HP's old cars was made to Ford, although Ford retook possession of most of the cars before October 31. Finally, it should be noted that the used cars did not appear on Ford's inventory until November 1 of each year.

Thanks to this mechanism of purchasing new cars and redeeming used cars on different dates, HP claimed CCA for the old and the new fleet for the 1995 taxation year and similarly in the following years. The Minister disallowed the CCA claimed on the old fleet on the basis that, since the cars had been the subject of a change in use, the deemed disposition under paragraph 13(7)(a) I.T.A. applied although HP had remained the owner until the end of the financial year. HP challenged this decision.

2.3.2. Decisions of the Tax Court of Canada and the Federal Court of Appeal

At trial, Hershfield J. found that the old cars had not undergone a change of use by reason of the fact that they had been stored while waiting for the titles of ownership to be transferred and for the cars be sold (by auction or otherwise). As for the effective date of the transfer, the judge was of the opinion that the intent of the parties was determinative; he based these conclusions on the provisions of the Ontario Sale of Goods Act.^[10] The trial judge was of the opinion that there is a "disposition" for purposes of the I.T.A. where the ownership of the goods is transferred from the vendor to the purchaser, (i.e., when the property passes). However, if the vendor is entitled to the "proceeds of disposition" before the ownership is transferred to the buyer, within the meaning of the provincial private law, the judge was of the opinion that there would then be a "disposition". Having found that HP was entitled to the proceeds of disposition before the end of the financial year, it was his opinion that the disposition took place at that time and not on the transfer of the ownership —within the meaning of the provincial private law — of the cars to Ford.

The decision was appealed to the Federal Court of Appeal where the following issues were debated:

In a unanimous judgement, per Noël J., Sexton and Evans JJ. concurring, the Federal Court of Appeal quickly decided the first issue. For there to be a change of use, a property must be used for another purpose. Ceasing to use a property while waiting to sell it in the context of the business does not amount to a change of use.

Noël J. then analysed the second issue and reviewed the earlier decisions, beginning with Wardean Drilling in which Cattanach J., basing himself on an Alberta statute, had formulated what is called the "classic test of acquisition." According to Noël J., the classic test is nothing more or less than a statement of the rule whereby the ownership is transferred according to the Alberta Sale of Goods Act; the transfer of ownership occurs either when legal title passes or, if title of ownership is reserved, when the beneficial ownership is conveyed. Noël J. noted that the classic test corresponds to the rule for the transfer of ownership that applies in all common law provinces.^[11] He noted that that decision has been followed in tax cases concerning transactions governed by the applicable law of the common law provinces. He stressed that, since 1972, the I.T.A. has recognized the distinction between legal ownership and beneficial ownership and that it provides that there is a disposition only when the beneficial ownership changes. In his opinion, the I.T.A. follows the common law rules in the matter.

Noël J. recognized that the definition of "disposition"^[12] is drafted in a way that leaves open the category of transactions referred to. In the specific case of a sale, however, it is his opinion that, in paragraph 13(21)(a) I.T.A., Parliament said that the proceeds of disposition are "the sale price of property that has been sold" and that, where the definition of "disposition" refers to "any transaction or event entitling a taxpayer to proceeds of disposition of a property", there is no doubt that it is referring to the legal concept of sale. Still according to the Federal Court of Appeal, this reasoning has the advantage of respecting the intent of Parliament, which wanted to ensure, in the case of a sale, that the time of the "disposition" corresponded to the time of the "Acquisition".

The Federal Court of Appeal accordingly overturned the trial judgment where it had been decided that, in the case of a sale, there could be a disposition for purposes of the I.T.A. before the title had been conveyed within the meaning of the private law of the common law provinces.

Finally, Noël J. tackled the issue of car exchanges governed by the law of the province of Quebec. He noted that, in the same way as in common law, in civil law the intention of the parties is crucial to determining the time of transfer of ownership of property. Moreover, the rules for sales under the Civil Code of Québec lead to a result identical to that of the common law provinces, that is, the old cars remain the property of HP until a date after the end of its financial year.

[58] This leaves us with the car exchanges governed by the law of the province of Quebec on which the Tax Court Judge did not pronounce. He did, however, hint that HP may not have remained the owner of the old fleet when regard is had to article 1708 of the Civil Code of Quebec […]:

[61] Applying the relevant provisions of the Civil Code of Quebec in light of the findings made by the Tax Court Judge, it seems clear that the old fleet also remained the property of HP on October 31 of each year under Quebec law.

All's well that usually ends well, but Noël J. made the following remarks in obiter:

[62] That being said, I am bound to point out that, even if the application of the Civil Code of Quebec gave rise to a result different from that obtained in the common law provinces, this Court has held that, for the sake of uniformity, the common law approach should prevail even in Quebec (Construction Bérou Inc. v. The Queen, 99 DTC 5869 per Létourneau J.A. at paragraph 14, per Desjardins J.A. at paragraphs 6 and 14). It is common ground that, pursuant to this approach, the old fleet remained the property of HP at the close of each year.

2.4. Conclusion

In view of the conclusion that the application of the civil law would lead to the same result, what is the justification for this statement? What message is the Federal Court of Appeal trying to deliver? Is it an invitation for the issue to be debated before the Supreme Court of Canada? It is to be hoped that section 8.1 of the Interpretation Act will be raised in the next cases that deal with these concepts. A choice must be made between the two interpretations. Either the concepts of "Acquisition" and "disposition" are interpreted in the light of the private law of the provinces, in which case the law of all Canada's provinces, including Quebec, will have to be applied in a suppletive manner to complete the federal legislation. Or, a "law" provides otherwise and does not permit a reference to provincial private law. In this case, it would be very useful if the courts made it clear whether they think that the tax case law concerning these two concepts, rendered before the enactment of section 8.1 of the Interpretation Act, is such a "law" or if the uniform application of a federal tax enactment is such a law that justifies disregarding, not the private law of all of the Canadian provinces, but only the civil law rules of the province of Quebec in the matter.^[13]

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Footnotes

• ^[1]   The question arises of whether it is really possible to talk about dissociation where the courts adopt an interpretation that refers to the private law of the common law provinces but sets aside the civil law rules of Quebec in the name of uniform application of federal enactments. It might be more accurate in such a case to speak of partial or sectoral dissociation. However, the term will be used without qualification in this paper.

• ^[2]   99 D.T.C. 5841 ("Construction Bérou").

• ^[3]   [1969] 2 Ex. Ct.166 ("Wardean Drilling").

• ^[4]   [1981] 1 F.C. 691.

• ^[5]   Construction Bérou, supra note 27 at 5844.

• ^[6]   Ibid.

• ^[7]   Ibid. at 5864 [Notes omitted].

• ^[8]   Ibid. at 5866 [Notes omitted].

• ^[9]   David Duff, "The Federal Income Tax Act and Private Law in Canada: Complementarity, Dissociation and Bijuralism" (2003), 51:1 Canadian Tax Journal, 1-63; 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 of Canada, Montreal, 2002, 2:1-138, at 2:97-100.

• ^[10]   R.S.O. 1990, c. S.1.

• ^[11]   As an example, the first part of this "classic test" appears in the Ontario Sale of Goods Act, in section 18: "(1)Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.(2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case." Likewise, subsection 19(1) provides that, unless a different intention appears, "Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment or the time of delivery or both is postponed." However, the second part of the "classic test" stated by Noël J. is only an obiter of Cattanach J., which the courts have unfortunately repeated too often without careful analysis. See, inter alia, the following cases cited at paragraph 41 of the decision: The Queen v. Henuset Bros. Ltd. No. 1, 77 D.T.C. 5169 (F.C.); Kirch Construction Ltd. v. The Queen, 88 D.T.C. 6503 (F.C.); Borstad Welding Supplies v. The Queen, 93 D.T.C. 5457 (F.C.); The Queen v. Browning Harvey Ltd., [1990] 1 C.T.C. 161 (F.C.).

• ^[12]   During the years at issue, the definition of "disposition" was contained in section 54 I.T.A. but it now appears in subs. 248(1) I.T.A. However, paragraph (a) remains unchanged and still reads as follows: "(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property […]." The rule in paragraph (e) is phrased slightly differently: "(e) any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property, except where the transfer is from […]."

• ^[13]   Concerning the debate about whether the earlier case law amounts to "law" for purposes of section 8.1 of the Interpretation Act, the author shares the opinion of Professor Aline Grenon who advocates making a value judgment on any judicial precedent prior to the enactment of sections 8.1 and 8.2 of the Interpretation Act that would discard those where the bijural nature of a provision had not been taken into consideration when it should have been. See Aline Grenon, "The Interpretation of Bijural or Harmonized Federal Legislation: Schreiber v. Canada (A.G.)" [forthcoming]:

  "For the purpose of determining whether or not the federal enactment to be interpreted was intended, by necessary implication, to have uniform application throughout the country and that it was accordingly to be disassociated from private law, judicial precedents rendered prior to 2001 could not be applied automatically. These precedents would have to be reviewed in light of sections 8.1 and 8.2 to ensure that they had taken into consideration the bijural nature of the enactment. It is likely that many would be discarded precisely because they had failed to do so. In short, courts could not rely blindly on judicial precedents to conclude that an enactment, by necessary implication, was intended to have uniform application."