[2013] 3 F.C.R. D-5
Income Tax
Income Calculation
Income or Capital Gain
Appeal, cross-appeal from Tax Court of Canada (T.C.C.) decision (2011 TCC 354) allowing in part appellant’s appeal from assessments made for appellant’s 2000, 2001, 2002 taxation years—Dispute concerning tax treatment resulting from use, sale of aircraft cabin simulators in course of appellant’s business—Appellant arguing that gain from sale of simulators capital in nature, that consideration should have been given to fact sales part of financing operation; respondent cross-appealing on ground simulators that gave rise to capital cost allowance claimed not depreciable property since held for sale—Appellant’s business involving manufacture of aircraft cabin simulators, principally for sale but also offered on short- or long-term lease—Entering into sale-leaseback arrangements with financial institutions as part of financing arrangement—T.C.C. finding that sale of simulators giving rise to income; that even though financing constituting purpose of sales, not changing nature of gain made; that if sales having been made to airline, resulting gains would constitute income—On issue of capital cost allowance, T.C.C. establishing that nature of property (assets) may change with use from one year to another; that Friesen v. Canada, [1995] 3 S.C.R. 103 establishing that property constituting inventory during year of sale cannot be treated differently in other year no longer good law—Whether T.C.C. correctly finding that amounts at issue constituting income; that appellant nevertheless entitled to capital cost allowances regarding some simulators for years preceding year of sale since simulators used to earn income—Nature of appellant’s business, use made of simulators before sale-leaseback arrangements entered into having to be considered—Nature of property determining resulting tax treatment—T.C.C.’s conclusion that appellant realizing profit in same manner as when selling simulator to airline could not be reached had analysis been more focussed, conducted from perspective of appellant’s business, as required—By doing so, T.C.C. would have been bound to conclude that sale-leaseback contracts constituting appellant’s long-term assets capable of generating rental/service income for some twenty years—Sale-leaseback transactions thus not part of appellant’s trading operations—Therefore, appellant’s resulting gain on account of capital—While T.C.C. adopting correct approach in concluding that appellant entitled to capital cost allowance claimed, reasoning to give effect thereto flawed—Contrary to T.C.C.’s statement, Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 not contemplating that property can be depreciable property, inventory at once—Only two classes of property existing under Act (capital property, property held for sale)—While T.C.C. wanting to give effect to change in use of some simulators, no need to create new class of property or repudiate Friesen to take into account changing use of simulators—Act, ss. 13(7), 45(1) would have allowed T.C.C. to give effect to change in use identified thereby—Reading allowing for application of Act, ss. 13(7), 45(1) with respect to both personal use, income producing property in order—Purpose thereof to recognize changes in use of property having effect of altering applicable tax regime—As for appellant’s entitlement to capital cost allowance, T.C.C. wrong to disregard existence of airlines’ options to purchase—Property put up for sale in course of business carried on for that purpose no less for sale because circumstances making sale unlikely—Fact that simulators at issue used simultaneously to earn income not altering result—Therefore, appellant not entitled to claimed depreciation regarding two of simulators at issue—Appeal allowed, cross-appeal allowed in part.
C.A.E. Inc. v. Canada (A-299-11, 2013 FCA 92, Noël J.A., judgment dated April 17, 2013, 37 pp.)