Canada v. Pardee Equipment Ltd.
A-423-97
McDonald J.A.
22/12/98
18 pp.
Issue whether company such as respondent Pardee Equipment Ltd. may claim inventory allowance deductions under Act, s. 20(1)(gg) for goods, title of which held by another company, while many other incidents of ownership vested in taxpayer-Respondent in business of selling, servicing and renting "John Deere" heavy industrial equipment in several locations in Alberta-Dealer agreements with Deere Canada establish respondent authorized dealer of John Deere equipment and contain terms and conditions which govern relationship-Agreements describing equipment as consigned goods and stipulate that Deere Canada retains title to consigned goods and that dealer will hold equipment as property of company until sold or leased on behalf of Deere Canada-Proceeds of sale of consigned goods designated as property of Deere Canada-Other "sold goods" sent to dealer on basis title to, ownership and right to possession transferred to dealer immediately upon receipt of payment-Inventory allowance deductions herein only claimed in respect of consigned goods-In December 1990, respondent commenced action seeking inventory allowance deductions for each of its 1983 to 1986 taxation years and investment tax credits for its 1983 to 1987 taxation years-Both actions allowed by Trial Judge-Trial Judge held, in spite of wording of dealer agreements, relationship between Deere Canada and respondent not properly characterized as consignment-Found transactions involving consigned goods properly characterized as sales subject to secured interest held by Deere Canada until purchase price fully paid-Found control exercised by Deere Canada over equipment more consistent with that of secured creditor than that of owner on basis that pieces of equipment in question could not be returned to Deere Canada and although equipment could be transferred between dealers, such transfers not cost neutral to respondent and required consent of other dealer-Trial Judge distinguished instant case from decision of this Court in Canada v. Dresden Farm Equipment Ltd., [1989] 1 C.T.C. 99 (F.C.A.)-Finally, on facts of this case, Trial Judge found treating equipment as inventory of respondent consistent with ordinary accounting and business practices because risks and rewards associated with ownership primarily vested in respondent and not Deere Canada-Accordingly, Trial Judge found respondent "held" machines for sale within Act, s. 20(1)(gg) and entitled to inventory allowance deductions, and investment tax credits under Act, s. 127 for 1983 to 1987 taxation years-Revenue Canada initiated present appeal-Appeal allowed-Four preconditions must be satisfied before inventory allowance deduction can be claimed under Act, s. 20(1)(gg): (1) allowance must be claimed on cost amount of property at beginning of each taxation year; (2) property must be tangible property other than real estate or interest therein; (3) property must have been described in taxpayer's inventory; and (4) property must have been for sale in ordinary course of taxpayer's business-Only last two criteria in issue herein-Consignment relationship examined-Dealer assignments herein vest title to equipment in Deere Canada until equipment sold or leased to third party-Respondent responsible for paying full wholesale price to Deere Canada regardless of price at which equipment sold-Proceeds from sale or lease considered property of Deere Canada-No express right to return equipment to Deere Canada, but Deere Canada may direct dealer to ship equipment to any destination-Respondent may transfer goods to other dealers with permission of Deere Canada-Deere Canada performs periodic inspections of its dealer sites and each dealer required to account for location of all equipment received on consignment-Fact respondent has no express right of return over equipment not determinative-Carry-over deposit payments more properly characterized as refundable deposits which serve as incentive to dealer to sell goods-Respondent's argument terms and conditions of agreement indicating consignment relationship to be recast in light of ordinary commercial accounting and business practice cannot succeed-Terms of dealer agreement clearly indicate parties intended to enter into consignment relationship-Argument agreement not what appears to be could only be accepted if indeed totally impossible to understand and adapt rights and obligations actually flowing from contract with what parties intended them to be: Sask. Wheat Pool v. R., [1985] 3 W.W.R. 385 (F.C.A.)-No ambiguity in terms of dealer agreement-Clearly, equipment held on consignment-Respondent intended to obtain, and did obtain, benefit of consignment agreement, namely interest-free financing of its business as industrial equipment dealer-Cannot be allowed now to seek to recast agreement as providing sufficient ownership interest in equipment for additional tax benefits-From examination of dealer agreements as whole and conduct of parties, relationship more properly characterized as consignment-Title never vested in respondent, but passed directly to retail purchaser or lessor through respondent as agent for Deere Canada-No cost amount as machines not purchased by respondent from Deere Canada-As respondent did not own equipment in question and not entitled to inventory allowance deductions under Act, s. 20(1)(gg), follows that respondent not entitled to investment tax credits claimed under Act, s. 127-Taxpayer must own equipment before investment tax credit can be claimed-Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(gg) (as am. by S.C. 1977-78, c. 1, s. 14; 1986, c. 6, s. 13), 127 (as am. by S.C. 1984, c. 1, s. 72; 1988, c. 1, s. 14).