Hickman Motors Ltd. v. Canada

Hickman Motors Ltd. v. Canada
Collection
Supreme Court Judgments
Date
1997-06-26
Report
[1997] 2 SCR 336
Case number
24994
Judges
La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Federal Court of Appeal
Subjects
Taxation
Notes
SCC Case Information: 24994
Decision Content
Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336
Hickman Motors Limited Appellant
v.
Her Majesty The Queen Respondent
Indexed as: Hickman Motors Ltd. v. Canada
File No.: 24994.
1996: October 30; 1997: June 26.
Present: La Forest, L’Heureux‑Dubé, Sopinka, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the federal court of appeal
Income tax ‑‑ Deductions ‑‑ Capital cost allowance ‑‑ Assets of subsidiary company transferred to parent company on winding-up at year’s end ‑‑ Parent company holding assets and receiving revenue from them for five days ‑‑ Assets then transferred to new company ‑‑ Whether s. 88 winding‑up provisions deeming flow through acquisition by parent company at capital cost creating rights for parent ‑‑ Whether parent company can deduct capital cost allowance for assets transferred from subsidiary ‑‑ Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 20(1), 88 ‑‑ Income Tax Regulations, C.R.C., c. 945, ss. 1102(1), (14).
Hickman Motors Ltd., a company in the car‑sales business, acquired all the assets of its subsidiary, Hickman Equipment Ltd. pursuant to the voluntary liquidation and winding-up of Hickman Equipment in late 1984. Among these assets were certain items of depreciable property used in the subsidiary’s heavy equipment leasing business. Hickman Motors owned the assets from December 28, 1984 to January 2, 1985. On January 2, 1985, it sold the assets to a related corporation, Hickman Equipment (1985) Ltd. In its 1984 tax return, Hickman Motors claimed the applicable capital cost allowance in respect of these heavy equipment assets. The Minister of National Revenue disallowed the claim on the ground that the assets had not been acquired by Hickman Motors for the purpose of producing income.
At issue are: (1) whether s. 88 of the Income Tax Act creates any rights for the appellant and, if so, what those rights are, and (2) whether the capital cost of the property acquired in the winding‑up of a subsidiary is applicable to the income from the parent’s business, within the meaning of s. 20(1)(a).
Held (Sopinka, Cory and Iacobucci JJ. dissenting): The appeal should be allowed.
Per La Forest, McLachlin and Major JJ.: To deduct the capital cost allowance at issue, the appellant first must have had a business source of income to which the assets related (s. 20(1) of the Income Tax Act). The appellant, since it carried on the business of leasing equipment, possessed the necessary business source of income to claim capital cost allowance. It was unnecessary to enter into the “sub‑source” issue.
The assets for which the capital cost allowance was claimed must be acquired for the purpose of producing income, so as to avoid the exclusion relating to assets for a non‑income producing purpose, such as pleasure or personal needs, established by Regulation 1102(1). Here, the appellant was deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14), which states that where property is acquired as the result of the winding-up of a Canadian corporation under s. 88(1) of the Act, and the property immediately before it was so acquired was property of a prescribed class, the property shall be deemed to be the property of that same prescribed class. Since the property was depreciable property in the hands of Hickman Equipment just prior to the winding-up, it is deemed to be acquired by the appellant as depreciable property ‑‑ i.e., for the purpose of gaining or producing income. So long as the appellant did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remained eligible for a capital cost allowance deduction. There was no evidence that this occurred. The fact that the assets produced revenue establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(c). The fact that the revenue was small or earned over a short period of time does not take it out of this category.
Per L’Heureux‑Dubé J.: Section 88(1) does not create any right for the parent company to claim a CCA deduction for property acquired from its subsidiary. That right is to be found in s. 20 of the Act. Where a parent acquires depreciable property from a subsidiary as a result of a wind‑up pursuant to s. 88(1), the deductibility of CCA is not automatic: the parent must satisfy the requirements of s. 20(1)(a), that is, the property must be held by the parent for the purpose of producing income from the parent’s business.
“Income from a business” includes “income from an undertaking of any kind whatever except an office or employment”, as distinguished from another source which would be excluded from the s. 248(1) definition. Here, the income is corporate, so the presumption that income is sourced from business applies. No evidence rebutting this presumption was before the courts. The issue of "income from property" does not arise in this case.
Where two or more business sources exist, the relevant business source must be identified and the income from each individual source computed separately. The appellant adduced clear, uncontradicted evidence that from December 29, 1984, to January 2, 1985, only one integrated business of sales, servicing, leasing and rental of cars and trucks, and of construction, forestry and rock‑drilling equipment existed. It complied with the definition of “business” in s. 248(1).
The evidence, viewed as a whole, shows that the appellant has discharged its burden of proving that it did in fact actively carry on the equipment‑related business. Both courts below drew improper inferences from the established facts, asked the wrong questions and incorrectly applied the law. An appeal court can accordingly look at the facts as they appear on the record and assess them through the appropriate law.
If an item of property produces income, then its purpose is indeed to produce income. The test is as follows. Does the property produce income? In the affirmative, the deduction is allowable. Where the property does not produce income, was it acquired for the purpose of producing income? This is determined by an objective evaluation of the specific facts and circumstances of each case in relation to appropriate jurisprudence, having regard to whether the taxpayer acted in accordance with reasonably acceptable principles of commerce and business practices. In the affirmative, the deduction is allowable. In the negative, the deduction is not allowable.
The appellant adduced clear, uncontradicted evidence that the property produced revenue. The CCA deduction was allowable because the requirements of Regulation 1102(1)(c) were met. Therefore it was not necessary to conduct the second part of the test dealing with the objective purpose.
The test for determining the purpose of producing income is not similar to the test for determining the question of whether a business has a reasonable expectation of profit. They differ in terms of their general thrust. The “reasonable expectation of profit” test is principally directed at differentiating between a business and a personal pursuit such as a hobby, etc., whereas the “purpose of producing income” test presupposes a business and is directed at determining whether an asset is appropriately used in the business. The “reasonable expectation of profit” criteria cannot be mechanically transferred into the “purpose of producing income” requirement in Regulation 1102(1)(c) for CCA purposes.
Under Regulation 1102(1)(c), the property does not have to produce revenue during a specified minimum period: where revenue is produced, it is sufficient that it be produced during a time period of any duration.
Whether the income produced by an item of property is material or immaterial, in relation to the taxpayer’s other income, is irrelevant to the application of Regulation 1102(1)(c). Under Regulation 1102(1)(c), where the revenue produced by an item of property is immaterial in relation to the overall business income, the taxpayer is not required to show this specific item of property separately in the financial statements. The appellant’s cost/benefit decision with respect to materiality was not unreasonable. Since the Act does not require that revenue be shown in financial statements, and absent any issue of credibility, the evidence adduced by the appellant was sufficient.
If the revenue is unreasonably low in relation to the value of the revenue‑generating property, the property is deemed not to produce income, and the second part of the “purpose of producing income” test, dealing with the objective purpose, is to be applied. The revenue produced by Equipment’s property was not unreasonably low in relation to that property’s value.
The appellant’s initial onus of proof is met where a prima facie case is made out. The onus shifts to the Minister to rebut the prima facie case made out by the taxpayer and to prove the assumptions. The appellant adduced clear, unchallenged and uncontradicted evidence. The respondent adduced no evidence whatsoever. Where the onus has shifted to the Minister and the Minister has adduced no evidence whatsoever, the taxpayer is entitled to succeed.
Per Sopinka, Cory and Iacobucci JJ. (dissenting): The capital cost allowance claimed was not applicable to a business source of income as required by s. 20(1).
Section 88(1) creates no right in a taxpayer to claim capital cost allowance. In the event of a transfer of property between related corporations, s. 88(1) permits a “flow‑through” of both the property’s cost amount and its undepreciated capital cost. While s. 88(1) does fix the undepreciated capital cost of the property at a certain level, nothing in the section gives the parent corporation the right to depreciate the property further. Section 88(1) in and of itself creates no rights to a tax deduction. Any right to claim capital cost allowance must be based in s. 20(1).
The relevant business source therefore must be identified and the capital cost shown to be wholly applicable to it. The taxpayer must compute income or loss separately from each individual business. On this point, the Act is clear. The capital cost allowance must be shown to be generally applicable to a particular business and not just to “business”, generally speaking.
Here, the appellant’s car and truck business was one potential business source. The existence of another business, the heavy equipment leasing business, was disputed by the Crown. The trial judge found that the appellant did not continue to operate the business previously run by Equipment. The Federal Court of Appeal reinforced this finding. Thus, the courts below made concurrent findings of fact which should not be interfered with absent palpable error or fundamental error of law. Not only did the trial judge commit no such palpable error, his finding on this point is strongly supported by the evidence.
First, there is no evidence that the appellant ever received any income from the assets. Second, even if the appellant did receive such income, that income cannot be characterized as income from business. Unless the taxpayer actually uses the asset as part of a process that combines labour and capital, any income earned therefrom does not qualify as income from a business, but rather falls into the category of income from property. Here, the appellant did nothing at all with the Equipment assets. It simply assumed ownership of the property and, allegedly, passively received income from the outstanding leases. Therefore, with regard to the alleged heavy equipment leasing business, the evidence does not establish that the appellant engaged in the kind of economic activity which constitutes a business for the purposes of the Income Tax Act.
The evidence also does not show that the appellant used the heavy equipment assets in its automobile business. Accordingly, it cannot deduct capital cost allowance in respect of those assets from the income earned from its car and truck dealership.
Section 88(1) does not create any right to claim capital cost allowance. Rather, it displaces the normal rules applying to the disposition of property turning the transfer from subsidiary to parent into a tax‑free transaction. It does not fix the character of the transferred property immutably or the nature of the income produced by that property. The nature of the income produced from the property may change following a s. 88(1) rollover. The transferred property may produce income from business in the hands of the subsidiary and income from property in the hands of the parent.
Cases Cited
By McLachlin J.
Referred to: Clapham v. M.N.R., 70 D.T.C. 1012; Bolus‑Revelas‑Bolus Ltd. v. M.N.R., 71 D.T.C. 5153; Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536.
By L’Heureux‑Dubé J.
Distinguished: R. v. Mara Properties Ltd., [1996] 2 S.C.R. 161; referred to: Moldowan v. The Queen, [1978] 1 S.C.R. 480; Lessard v. Paquin, [1975] 1 S.C.R. 665; 2747‑3174 Québec Inc. v. Quebec (Régie des permis d’alcool), [1996] 3 S.C.R. 919; Canadian Marconi v. R., [1986] 2 S.C.R. 522; Smith v. Anderson (1879), 15 Ch. D. 247; Carland (Niagara) Ltd. v. M.N.R., 64 D.T.C. 139; Attridge v. The Queen, 91 D.T.C. 5161; Bay Centre Apartments Ltd. v. M.N.R., 81 D.T.C. 489; Gloucester Railway Carriage and Wagon Co. v. Comrs. Inland Revenue (1923), 129 L.T. 691, aff’d (1924), 40 T.L.R. 435; Anderson Logging Co. v. The King, [1925] S.C.R. 45; Bolus‑Revelas‑Bolus Ltd. v. M.N.R., 71 D.T.C. 5153; Royal Trust Co. v. M.N.R., 57 D.T.C. 1055; Ghali v. Canada (Minister of Transport), [1996] F.C.J. No. 1404 (QL); Mark Resources Inc. v. The Queen, 93 D.T.C. 1004; Bellingham v. Canada, [1996] 1 F.C. 613; Canada v. McLaren, [1991] 1 F.C. 468; The Queen v. Vancouver Art Metal Works Ltd., 93 D.T.C. 5116; Docherty v. M.N.R., 91 D.T.C. 537; Vander Nurseries Inc. v. The Queen, 95 D.T.C. 91; Mountwest Steel Ltd. v. The Queen (1994), 2 G.T.C. 1087; Uphill Holdings Ltd. v. M.N.R., 93 D.T.C. 148; M.N.R. v. Wardean Drilling Ltd., 69 D.T.C. 5194; M.N.R. v. Société Coopérative Agricole de la Vallée d’Yamaska, 57 D.T.C. 1078; Weinberger v. M.N.R., 64 D.T.C. 5060; Naka v. The Queen, 95 D.T.C. 407; Page v. The Queen, 95 D.T.C. 373; Clapham v. M.N.R., 70 D.T.C. 1012; Dobieco Ltd. v. Minister of National Revenue, [1966] S.C.R. 95; Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102; Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098; Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359; First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337; Kamin v. M.N.R., 93 D.T.C. 62; Goodwin v. M.N.R., 82 D.T.C. 1679; MacIsaac v. M.N.R., 74 D.T.C. 6380; Zink v. M.N.R., 87 D.T.C. 652; Magilb Development Corp. v. The Queen, 87 D.T.C. 5012; Waxstein v. M.N.R., 80 D.T.C. 1348; Roselawn Investments Ltd. v. M.N.R., 80 D.T.C. 1271; Gelber v. M.N.R., 91 D.T.C. 1030.
By Iacobucci J. (dissenting)
Moldowan v. The Queen, [1978] 1 S.C.R. 480; C.B.A. Engineering Ltd. v. M.N.R., [1971] C.T.C. 504; Poulin v. The Queen, 94 D.T.C. 1674; Vincent v. Minister of National Revenue, [1965] 2 Ex. C.R. 117; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727.
Statutes and Regulations Cited
Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 3(a), 4(1)(a), 9(1), 13(7)(a), 18(1)(a), (b), (h), 20(1)(a), 31, 85(5.1) [ad. S.C. 1980‑81‑82‑83, c. 140, s. 50(2)] (a) [ad. idem], (e) [ad. idem], 88(1) [rep. & sub. S.C. 1980‑81‑82‑83, c. 48, s. 48(1)], (a)(iii) [rep. & sub. S.C. 1974‑75‑76, c. 26, s. 52], (c) [rep. & sub. S.C. 1977‑78, c. 1, s. 43(3)], (e), (1.1) [rep. & sub. S.C. 1984, c. 1, s. 39(4)], (e) [ad. idem], 172(2), 248(1) [am. S.C. 1984, c. 1, s. 104(1)].
Income Tax Regulations, C.R.C., c. 945, ss. 107(1), 1100(1)(a)(xvi), 1102(1)(c), (14).
Authors Cited
Arnold, Brian J., Tim Edgar and Jinyan Li, eds. Materials on Canadian Income Tax, 10th ed. Toronto: Carswell, 1993.
Beechy, Thomas H. Canadian Advanced Financial Accounting, 2nd ed. Toronto: Holt, Rinehart and Winston of Canada, 1990.
Bennion, F. A. R. Statutory Interpretation: A Code, 2nd ed. London: Butterworths, 1992.
Canada. Department of Finance. A Corporate Loss Transfer System for Canada. Michael Wilson, Budget Papers, Budget Speech, May 1985. Ottawa: Department of Finance, 1985.
Canadian Institute of Chartered Accountants. CICA Handbook, vol. 1. Toronto: Canadian Institute of Chartered Accountants, 1969 (loose‑leaf).
Chasteen, Lanny G., et al. Intermediate Accounting, 1st Canadian ed. Toronto: McGraw-Hill Ryerson, 1992
Couzin, Robert. “Current Tax Provisions Relating to Deductibility and Transfer of Losses”, in Policy Options for the Treatment of Tax Losses in Canada. Toronto: Clarkson Gordon Foundation, 1991, p. 3:3.
Driedger on the Construction of Statutes, 3rd ed. By Ruth Sullivan. Toronto: Butterworths, 1994.
Durnford, John. “The Distinction Between Income from Business and Income from Property, and the Concept of Carrying On Business” (1991), 39 Can. Tax J. 1131.
Harris, Edwin C. Canadian Income Taxation, 4th ed. Toronto: Butterworths, 1986.
Hogg, Peter W., and Joanne E. Magee. Principles of Canadian Income Tax Law. Scarborough: Carswell, 1995.
Kerans, Roger P. Standards of Review Employed by Appellate Courts. Edmonton: Juriliber, 1994.
Krishna, Vern. The Fundamentals of Canadian Income Tax, 5th ed. Scarborough: Carswell, 1995.
Owen, John R. “The Reasonable Expectation of Profit Test: Is There a Better Approach?” (1996), 44 Can. Tax J. 979.
APPEAL from a judgment of the Federal Court of Appeal (1995), 95 D.T.C. 5575, [1995] 2 C.T.C. 320, 185 N.R. 231, dismissing an appeal from a judgment of Joyal J., [1993] 1 F.C. 622, (1993), 59 F.T.R. 139, 93 D.T.C. 5040, [1993] 1 C.T.C. 36, dismissing an appeal of tax assessments. Appeal allowed, Sopinka, Cory and Iacobucci JJ. dissenting.
James R. Chalker, for the appellant.
Roger Taylor and André LeBlanc, for the respondent.
//McLachlin J.//
The judgment of La Forest, McLachlin and Major JJ. was delivered by
1 McLachlin J. -- While I concur in the general approach and the conclusion of Justice L’Heureux-Dubé, I prefer to decide the appeal on somewhat narrower grounds.
2 In order to deduct the capital cost allowance at issue, (1) Hickman Motors Ltd. must have had a business source of income to which the assets related (s. 20(1) of the Income Tax Act, S.C. 1970-71-72, c. 63); and (2) the assets must have been acquired for the purpose of producing income (Income Tax Regulations, C.R.C., c. 945, Regulation 1102(1)(c)).
3 On the first question, I agree with L’Heureux-Dubé J. that the evidence establishes that Hickman Motors Ltd. carried on the business of leasing equipment and hence possessed a business source of income related to the assets for which capital cost allowance was claimed. This established, it is unnecessary to enter on the “sub-source” issue.
4 The second question is whether the assets for which the capital cost allowance was claimed were acquired for the purpose of producing income, so as to avoid the exclusion established by Regulation 1102(1). The exclusion is aimed at ensuring that the asset for which the deduction is claimed is an asset associated with income production as distinguished from an asset acquired for a non-income producing purpose, such as pleasure or personal needs.
5 In this case, Hickman Motors Ltd. is deemed to have acquired the assets for the purpose of gaining or producing income under Regulation 1102(14), which states that where property is acquired as the result of the winding-up of a Canadian corporation under s. 88(1) of the Act, and the property, immediately before it was so acquired, was property of a prescribed class, the property shall be deemed to be the property of that same prescribed class. Since the property was depreciable property in the hands of Hickman Equipment just prior to the winding-up, it is deemed to be acquired by Hickman Motors Ltd. as depreciable property-- i.e., for the purpose of gaining or producing income.
6 So long as Hickman Motors Ltd. did not commence to use the property for some purpose other than the production of income (s. 13(7)(a)), the property remains eligible for a capital cost allowance deduction. There is no evidence that this occurred.
7 The fact that the assets produced revenue, as the reasons of L’Heureux-Dubé J. demonstrate, establishes that they continued to be used for the purpose of producing income, avoiding the effect of s. 13(7)(a) and the exclusion under Regulation 1102(1)(c). The fact that the revenue was small or earned over a short period of time does not take them out of this category. We need not decide whether a different result might flow if the evidence viewed as a whole showed that the assets possessed a non-revenue function: see Clapham v. M.N.R., 70 D.T.C. 1012 (T.A.B.); Bolus-Revelas-Bolus Ltd. v. M.N.R., 71 D.T.C. 5153 (Ex. Ct.). Nor is the case of assets held for such a short period of time that the revenue produced was too small to calculate (e.g., the case of the instantaneous or same day rollover) before us. Here the assets served only one function, to produce income. That Hickman Motors may have intended to retransfer the assets to Hickman Equipment (1985) Ltd. is of no moment. The evidence admits of only one conclusion: that the assets were business assets associated with the production of income.
8 The fact that the directors of the taxpayer may have intended to obtain a tax saving by acquiring the asset is irrelevant. It is a fundamental principle of tax law that “[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”: Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.), at p. 19, per Lord Tomlin. As Wilson J. put it in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 540, “[a] transaction may be effectual and not in any sense a sham (as in this case) but may have no business purpose other than the tax purpose”.
Conclusion
9 I would allow the appeal and allow the claimed deduction, with costs throughout to the appellant.
//L’Heureux-Dubé J.//
The following are the reasons delivered by
L’Heureux-Dubé J. --
I. Introduction
10 This appeal involves a fact-driven technical question of income taxation. The narrow issue is whether the appellant can claim Capital Cost Allowance (CCA) from a specific business it operated for a period of five days. This depends upon proper application of the “purpose of . . . producing income” requirement set out in s. 1102(1)(c) of the Income Tax Regulations, C.R.C., c. 945, read together with the phrases “from a business or property” and “applicable to that source” in s. 20(1) of the Income Tax Act, S.C. 1970-71-72, c. 63 (ITA), in the factual context of this appeal. In my opinion, the CCA deduction is allowable.
II. Background
A. Factual Context
11 The appellant Hickman Motors Ltd. (Hickman Motors) is a General Motors automobile and truck distributor in St. John’s, Newfoundland. It is a member of a group of associated companies held by Hickman Holdings Ltd. (Hickman Holdings), which is controlled by brothers Albert Hickman and Howard Hickman. In 1980, Hickman Holdings owned A. E. Hickman Ltd. (AEH). AEH, at that point, was itself acting as a holding company: it held the shares of Hickman Motors, Atlanta Insurance Ltd., Verdun Sales Ltd. and Hickman Equipment Ltd. (Equipment). AEH also had a number of operating divisions in different business areas, operating out of Cornerbrook, Fortune and Grand Falls, Newfoundland. Equipment was in the business of construction equipment. It had four franchises: John Deere for construction equipment such as backhoes and bulldozers, Tree Farmer for forestry equipment, Ingersoll-Rand for rock-drilling equipment and P&H Ltd. for crane operations. At one point in the mid-1970s, Equipment operated as a division of AEH, rather than as a separate corporation set up as a subsidiary of AEH.
12 The Hickman name is well-known in Newfoundland. The business started in 1905, and until now the Hickmans have been proud to have honoured their commitments and met all their responsibilities to other people. Beginning in the early 1980s, the Hickman Group began to experience dramatic change, serious financial losses, and difficulties with its creditors and its bankers. The consolidated financial statements of AEH showed a profit, but the non-consolidated ones showed significant losses. Equipment lost $1.8 million in 1981, and $122,000 in 1984. These losses were described by the appellant’s witness as “pretty significant operating losses . . . frightening losses” that had the potential of making Equipment go bankrupt.
13 The Group strived to ensure that this bankruptcy would not occur because it would have had a spill-over effect on Hickman Motors and AEH. As a condition for the operating line of credit for Equipment, the Canadian Imperial Bank of Commerce (CIBC) had guarantees from most of the Group’s subsidiary companies. In the event of Equipment’s going bankrupt, the income streams of all the companies in the Group would have been impacted because both Hickman Motors and AEH could have been called to honour the bank guarantees. Also, John Deere required the guarantee of AEH as a condition of Equipment’s having the John Deere franchise. There would have been a tremendous loss of customer confidence in the business of Hickman Motors as the Hickman name was involved in three of the businesses. In 1982-83, it was decided to remove both Hickman Motors and Equipment as subsidiaries of AEH, thus allowing it to focus on its building supply operation.
14 On November 30, 1984, the Hickman Group’s auditing firm presented a “package proposal” to get financing from CIBC. This involved a corporate reorganization which occurred as follows. On December 14, 1984, the appellant Hickman Motors acquired all the shares of Equipment. On December 28, 1984, Equipment was voluntarily liquidated and wound up into its parent Hickman Motors. Its assets, including non-capital losses in the amount of $876,859 and depreciable property with an undepreciated capital cost of $5,196,422, became the property of the appellant. On January 2, 1985, those same assets, net of the liabilities of Equipment, were sold to the appellant’s newly created and wholly owned subsidiary, Hickman Equipment (1985) Ltd. (Equipment 85). In its 1984 tax return, the appellant claimed a capital cost allowance of $2,029,942 in respect of the assets it had received from Equipment on the winding-up, which was disallowed by the Minister of National Revenue.
B. Issues
15 The only issues to be resolved are the following:
1. Does s. 88 ITA create any rights for the appellant; if so, what are they?
2. Is the capital cost of the assets acquired in the winding-up applicable to the income from the appellant’s business, within the meaning of s. 20(1)(a) ITA?
By consent the parties withdrew all the other issues that were raised in the courts below.
C. Judgments Appealed From
16 As regards the s. 88 issue, both the Trial Division, [1993] 1 F.C. 622, and the Federal Court of Appeal, 95 D.T.C. 5575, held that, in themselves, the s. 88 provisions do not create a right to deduct CCA.
17 As regards the s. 20 issue, both judgments focused on the taxpayer’s “intention to earn income” from the equipment-related items of property. The Trial Division found, at p. 633, that the appellant never intended to carry on the business of a heavy equipment dealer:
. . . it is difficult to see how the assets . . . were used in the business of the plaintiff to produce income. . . . The mere fact that these assets were available for leasing does not . . . affect the real purpose of the acquisition. I should find that the short turnover period of some four days is a pretty clear indication that there was neither an intention nor, for practical purposes, any more than a notional attempt to earn income from the assets acquired on the winding-up. [Emphasis added.]
18 The Federal Court of Appeal, at p. 5579, substantially applied the “reasonable expectation of profit” test set forth by this Court in Moldowan v. The Queen, [1978] 1 S.C.R. 480, and inferred that,
[w]hile I would not wish to be taken as suggesting that there is any temporal requirement to a taxpayer’s holding of property for the purposes of earning income, the fact that this taxpayer held the property here in issue only over the period of a long holiday week-end is surely indicative of the fact that it had no intention of actually earning income from the property. [Emphasis added.]
I will deal in greater detail with specific parts of these judgments in the appropriate sections infra.
D. Positions of the Parties Before This Court
19 The appellant claims that the scheme of the ITA as a whole should apply in the case of related groups to permit the transfer of accumulated pools of undeducted expenses, loss carry overs, or tax credits: Michael Wilson, A Corporate Loss Transfer System for Canada, Department of Finance Budget Papers, Budget Speech, Canada, May 1985, at p. 3:
In the Canadian corporate income tax system, each corporation is taxed as a separate entity. This can lead to situations in which one corporation in a commonly-owned group has tax losses or unused deductions or tax credits while other corporations in the group face tax liabilities. If the businesses within the separate corporations were instead operated as divisions within a single corporation, the unused losses, deductions or credits from one line of business could generally be used to reduce the amount of corporate tax payable on income from another.
. . .
The corporate tax system in the United States provides for tax consolidation. The United Kingdom has a system of loss transfers. Many other countries also have systems to provide for the transfer of losses, deductions or tax credits. [Emphasis added.]
20 One of the reasons why Canada has not been able to achieve a more liberal system of corporate group taxation is the two-tier federal-provincial income tax system: Robert Couzin, “Current Tax Provisions Relating to Deductibility and Transfer of Losses”, in Policy Options for the Treatment of Tax Losses in Canada (1991), p. 3:3, at p. 3:12.
21 According to the respondent, the party who should be taking CCA is Equipment 85, not the appellant Hickman Motors. In the respondent’s opinion, the interposition for a few days of Hickman Motors in the transfer of the assets from Equipment to Equipment 85 should not make any difference, and the CCA deductions could be taken by Equipment 85 in subsequent years. However, during the oral hearing before us, counsel for the respondent conceded that it is always possible that the deduction might end up being lost forever.
22 The respondent relies quite heavily on the findings and inferences of fact made by the trial judge, and confirmed by the Court of Appeal. The respondent argues that the courts below made no palpable and overriding error in their findings. That deference argument was strongly emphasized both in the respondent’s brief and in argument before us. It is quite clear that the respondent advocates a formalistic application of the principle of appellate deference to trial-level findings of fact. Accordingly, before addressing the substantive legal issues, it is necessary to review this principle briefly.
III. Trial-Level Findings of Fact
23 Counsel for the appellant pointed out in oral argument that some of the trial-level factual findings were wrong. The uncontradicted evidence shows that Hickman Motors held the assets during five days, not four days as found by the trial judge at p. 633. Also, counsel pointed out that Hickman Motors’ leasing revenue was not 1.9%, as the trial judge found, but $1.9 million, which in reality makes 2.5% of the total revenue. It is noteworthy that in addition to these factual errors, the trial judge stated at least four times during the hearing that he was “overwhelmed” or “confused”, which is quite understandable given the complexity of the case. I consider that the appellant is right about the above errors, although they do not affect the substance of the decision. Except for these errors, I wish to emphasize that I take the facts as found by the trial judge, and confirmed by the Court of Appeal, as they appear in the record. However, we ought to look at those facts through the prism of the appropriate law.
24 A reviewable error of law exists where there has been a mistake of law, such as addressing the wrong question, applying the wrong principle, failing to apply or incorrectly applying a legal principle, or drawing an improper inference from established facts. In the case at bar, both courts below drew improper inferences from the established facts, asked the wrong questions and incorrectly applied the law.
25 It is to be noted at the outset that in the present case, the credibility or reliability of witnesses is not an issue. There was only one witness for the appellant and the respondent called no witnesses. Neither the Trial Division nor the Court of Appeal raised any issue of credibility. Where credibility is not in question, an appeal court is in as good a position to evaluate the evidence as the trial judge: Lessard v. Paquin, [1975] 1 S.C.R. 665, at pp. 673-75. Accordingly, in my view, our Court is in as good a position as the Trial Division to evaluate the evidence in the record, should the need arise.
26 The following statement by Roger P. Kerans, a Justice of the Alberta Court of Appeal, aptly describes the appropriate relief in the present case (Standards of Review Employed by Appellate Courts (1994), at p. 203):
Often, the error of the first tribunal was about a question of law. In that case, its findings of fact remain undisturbed. Usually, the reviewing court will, in such a case, refuse to order a new trial. It will instead vary the conclusion, or affirm the conclusion, after applying the correct view of the law to the facts found by the first tribunal. [Emphasis added.]
27 While accepting the findings of fact (after correcting the errors), if the courts below have misapplied the law to the facts, it is open to an appeal court to examine the “proper inferences to be drawn from the evidence”, by looking at the facts as they appear on the record and assessing them through the prism of the appropriate law, which is what I will now turn to.
IV. Analysis
1. Section 88
28 The provision at issue here reads as follows:
88. (1) Where a taxable Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound up after May 6, 1974 and not less than 90% of the issued shares of each class of the capital stock of the subsidiary were, immediately before the winding-up, owned by another taxable Canadian corporation (in this subsection referred to as the “parent”) and all of the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by persons with whom the parent was dealing at arm’s length, notwithstanding any other provision of this Act, the following rules apply:
(a) subject to paragraph (a.1), each property of the subsidiary that was distributed to the parent on the winding-up shall be deemed to have been disposed of by the subsidiary for proceeds equal to,
. . .
(iii) in the case of any other property, the cost amount to the subsidiary of the property immediately before the winding-up;
. . .
(c) the cost to the parent of each property of the subsidiary distributed to the parent on the winding-up shall be deemed to be the amount deemed by paragraph (a) to be the proceeds of disposition of the property. . . .
29 Hugessen J.A., speaking for the Federal Court of Appeal, came to the conclusion, at pp. 5577-78, that this provision creates no rights to any deductions at all:
While I am prepared, in general terms, to agree with the appellant’s characterization of the purpose and intent of subsection 88(1), I cannot agree that it gives rise to the results contended for. In and of itself, the subsection creates no rights to any deductions at all.
. . .
I conclude, accordingly, that section 88 does not create for the appellant an independent right to claim capital cost allowance on the property which it acquired on the winding-up of its subsidiary “Equipment”. Such a claim can only succeed if the appellant can demonstrate that it otherwise meets the requirements of the Act and Regulations.
30 I agree with this analysis of s. 88(1). The relevant parts of s. 88(1)(a)(iii) are the following:
88. (1) . . .
(a) . . . property . . . shall be deemed to have been disposed of by the subsidiary for proceeds equal to,
. . .
(iii) . . . the cost amount to the subsidiary. . . . [Emphasis added.]
31 The cost amount is defined in s. 248(1):
248. (1) . . .
“cost amount” to a taxpayer of any property at any time means. . . .
(a) where the property was depreciable property of the taxpayer of a prescribed class, that proportion of the undepreciated capital cost. . . . [Emphasis added.]
32 Section 88(1)(a)(iii) provides that the property disposed of by a subsidiary on winding-up is deemed to have been disposed of for proceeds equal to its undepreciated capital cost (UCC). This implies that there can be neither a recapture, nor a terminal loss, as far as the subsidiary is concerned. As far as the parent company is concerned, the relevant parts of s. 88(1)(c) are the following:
88. (1) . . .
(c) the cost to the parent . . . shall be deemed to be the amount deemed by paragraph (a). . . .
33 The property acquired from the subsidiary by the parent on winding-up is deemed to have been acquired at a cost equal to the above-stated amount, as determined pursuant to s. 88(1)(a)(iii), that is, the UCC. In other words, the whole transaction is deemed to have occurred at the UCC rather than some other value such as, for example, the laid-down acquisition cost or the fair market value.
34 It is appropriate to distinguish the instant case from R. v. Mara Properties Ltd., [1996] 2 S.C.R. 161. In so far as its interrelation with the present case is concerned, in my opinion Mara stands for the following proposition: upon winding-up, a subsidiary automatically distributes its assets to its parent pursuant to s. 88(1), and those assets should be grouped with the parent’s assets of the same character. Here, Equipment’s assets were distributed to the appellant and should be grouped with the parent’s assets of the same character. But that is not the issue here. The issue here is this: once the winding-up is done and the assets are distributed, what happens afterwards? Can the parent claim CCA on those assets? This issue is outside the scope of both Mara and s. 88 itself.
35 In my opinion, and I agree with both the trial judge and the Court of Appeal in this respect, s. 88(1) does not create any right for the parent company, in this case the appellant Hickman Motors, to claim a CCA deduction for property acquired from the subsidiary Hickman Equipment. If there is such a right, it is to be found in s. 20 ITA, which I will now discuss.
2. Section 20
36 Section 20(1)(a) and the Regulations must be read in conjunction, as is clearly stated in the provision:
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property,