INCOME TAX |
Income Calculation |
Capital Cost Allowance |
CIT Financial Ltd. v. Canada
A-455-03
2004 FCA 201, Sexton J.A.
20/5/04
8 pp.
Appeal from Tax Court's determination of fair market value (FMV) of certain software acquired by Commcorp Financial Services Inc. (Commcorp), predecessor to appellant, in sale-leaseback arrangement (2003 DTC 1138)--Tax Court determination of FMV of software approximately $20 million lower than amount claimed by appellant--Normally, for purposes of determining capital cost allowance (CCA), "cost" of property is amount paid to acquire it--But since Commcorp acquired property in non-arm's-length transaction, Income Tax Act, s. 69(1)(a) applies to limit capital cost of software to FMV--Tax Court rejecting both expert reports submitted by appellant in support of $33 million FMV--Tax Court used replacement cost method to value software--Appellant submitting cash or earnings method more appropriate--Tax Court did not err in determining present value of income generated by lease not reflecting FMV of software herein--Tax Court clearly aware software subject to lease at time Commcorp acquired it, and that lease legally effective transaction and not sham--Nevertheless, Tax Court correctly determined Income Tax Act required determination of FMV of software and not lease--While in some circumstances lease income may be useful proxy for determining value of underlying asset subject to lease, Tax Court entitled to conclude not appropriate herein--Determination of FMV question of fact--Tax Court entitled to arrive at own opinion as to value--Lease income not reflecting FMV of software because parties had predetermined amount of lease payments based on first expert report regarding FMV, which Tax Court found approximately $20 million too high--Since value of lease completely dependent upon flawed value in that report, to extent report over-valued software, value of lease income also not providing accurate picture of software's value-- Accordingly, Tax Court appropriately rejected cash flow method used in second expert report--Tax Court considered reports of experts, accepted parts thereof, rejected others-- Reasoning in arriving at FMV based on replacement cost method sound--Appeal dismissed--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 69(1)(a).