T-2263-72
The Queen (Plaintiff)
v.
Lagueux & Frères Inc. (now Maibec Industries
Inc.) (Defendant)
Trial Division, Décary J.—Montreal, May 21
and 28, 1974.
Income tax—Contracts by taxpayer for obtaining equip-
ment—Whether contract of sale or lease—Income Tax Act,
s. 137(1)—Quebec Civil Code, Art. 1013.
The taxpayer obtained its equipment under contracts with
companies renting equipment or finance companies purchas
ing equipment and entering into a contract with the taxpay
er. In either case, the contract called for payment by instal
ments of the purchase price with interest, administrative
costs and carrying charges; and granted an option to pur
chase for $1, once the amount owing had been paid. The
Minister assessed the taxpayer for the taxation years 1966
and 1967, on the basis that the contracts were contracts of
sale, not rental contracts. The Tax Review Board held that
the contracts were leases and disallowed the assessments.
The Crown appealed.
Held, allowing the appeal and restoring the assessments, it
was unnecessary to refer to section 137(1) of the Income
Tax Act to determine whether deduction of the costs
associated with the various contracts unduly or artificially
reduced the income of the defendant respondent. The nature
of a contract, when in doubt, must be arrived at by refer
ence to article 1013 of the Quebec Civil Code. Under the
contracts, the payments as a whole were made to purchase
the equipment; the total amount of payments during the
period of alleged rental was wholly deductible from the
purchase price, and corresponded exactly to the purchase
price plus interest payable, during the period of alleged
rental, on the balance of the purchase price. The contracts
were conditional sales, on a suspensive condition, and not
leases.
Thibault v. Auger [1950] S.C. 343; Gravel v. Massicotte
and Couillard (1932) 52 Que. K.B. 146; Carey v. Carey
(1912) 42 S.C. 471; and A.R. Williams Machinery &
Supply Co. Ltd. v. Morin [1933] S.C.R. 570,
considered.
INCOME tax appeal.
COUNSEL:
G. Drolet and A. Côté for plaintiff.
C. Desaulniers and M. Regnier for
defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Stikeman, Elliott and Co., Montreal, for
defendant.
The following is the English version of the
reasons for judgment delivered by
DÉCARY J.: This appeal relates to the years
1966 and 1967, when the Minister issued an
assessment under which he held that the con
tracts at issue are contracts of sale, not rental
contracts. The case was heard by the Tax
Review Board, which held that the said con
tracts were leases, and consequently the assess
ments were disallowed. Accordingly, the ques
tion before the Court is as to the nature of the
contracts in dispute.
In my opinion, such a question cannot be
answered without analyzing each of the con
tracts and arriving at a conclusion based on the
civil law.
Counsel for the defendant called one witness,
Mr. Sévère Théberge, the General Manager and
Secretary-Treasurer of defendant. The business
of defendant consisted in operating a sawmill,
and in doing so it relies for supplies on the firm
of Lagueux and Théberge. The shares in both
companies are held by the same persons. The
witness stated that the company used a contract
form headed "Lease", so they could be in a
more liquid financial position, since by this
means the investment was made on a monthly
basis, and the balance sheet showed no corre
sponding debt as such. The witness testified that
the company would approach a manufacturer of
heavy equipment, and then make arrangements
for a loan or rental company to buy the neces
sary equipment and rent it to defendant. All the
contracts at issue contained a purchase option
which could be exercised by defendant at a
nominal price, much below the market value of
the equipment at the time the option was exer
cised. The witness affirmed that the cost of the
equipment was the same whether it was bought
or leased, except that when monthly payments
were made, interest and administrative costs
were added on.
Counsel for the plaintiff called Mr. Michel
Philippon, defendant's comptroller. This witness
emphasized that the company's procedure for
obtaining possession of the equipment enabled
it to avoid showing the monthly payments to be
made on the balance sheet, and this was done
for banking purposes. This assertion seems to
lack force in view of the fact that these expendi
tures appeared on the profit and loss statement,
and the result of the operations, namely the
profit or loss, was shown on the balance sheet.
In my view, this was merely an accounting entry
made in the financial statements at one place or
another depending on whether the contract was
treated as a rental contract or a contract of sale.
The witness also testified that for insurance
purposes, when the purchase option was exer
cised the equipment was valued at an amount
corresponding to the market value at the time
the option was exercised. In cross-examination,
the witness admitted that defendant is a party to
other contracts the format of which differs from
those before the Court.
Mr. Gagnon, a heavy equipment broker, was
called as a witness by plaintiff, and in my opin
ion the gist of his testimony was establishing
that the initial cost of a piece of equipment is
the same if the equipment is paid for in cash or
leased, but that the interest and administrative
costs are added to the initial cost when it is not
paid for in cash. Indeed, in a so-called "rental"
contract the person allegedly "renting" pays
interest and administrative costs for the use of
the equipment, since he has not paid the entire
purchase price. It was also established by the
witness that the market value of the equipment
at the time the option was exercised was always
higher than the amount payable at that time; and
it was shown that if the transaction concerned
an equipment rental company, and not a finance
company, the rental company was responsible
for maintaining the equipment.
We must now examine the contracts to which
defendant was a party.
The first contract, dated April 1, 1967, is
between defendant and Corporate Plan Leasing
Limited. It concerned two items, a truck and a
Lift Truck Plant [sic]. This contract is for a
period of thirty-six months, with a monthly pay
ment of $95.16, and $95.16 per annum at the
end of the contract, for the truck; on the Lift
Truck Plant a monthly payment of $286.71 was
required, and $286.71 per annum at the end of
the contract. On April 30, 1967, Corporate Plan
Leasing Limited gave defendant a purchase
option at a price equivalent to 5% of the bal
ance owed at the end of the contract period,
that is prior to renewal of the contract.
Defendant was to obtain "all permits, licences
and registration required for use of the equip
ment"; to pay all "fees, expenses, charges and
taxes"; obtain policies of insurance on the
equipment, and not sell the equipment without
the prior consent of Corporate Plan Leasing
Limited.
It was established that the total cost of the
alleged rental, if interest and administrative
costs are deducted, was equivalent to the
market price, and that when the option was
exercised the market value of the equipment
was greater than the nominal amount paid by
defendant.
The second contract relates to a barker and a
roller conveyor, and other accessory equipment
used in operating the said roller. This contract
was for sixty months, with a monthly payment
of $625, making a total amount of $37,500. It
was concluded with the Industrial Acceptance
Corporation Limited, and dated September 28,
1966. Among its other aspects the contract pro
vides that any conversion, as well as all main
tenance, repairs or replacement, shall be done at
defendant's expense. In addition, the cost of all
licences shall be assumed by defendant.
Clause 23 of the said contract should be cited
in part:
23. To the extent not prohibited by law, the lessee waives all
rights, benefits and protection conferred by section 19 of
the Conditional Sales Act, Revised Statutes of Alberta, and
agrees that the provisions of The Limitation of Civil Rights
Act, Revised Statutes of Saskatchewan, as amended, do not
apply to this lease or to any contract or instrument renewing
or extending, or which is subordinated to, this lease, or to
the rights, powers or remedies of the lessor, his assigns or
any other person under the terms of this lease, or under the
terms of any contract or instrument renewing or extending,
or subordinated to, this lease.
It may be noted that on the first page of this
contract Industrial Acceptance Corporation
Limited is described as the lessor, and further
on in the same contract, in a paragraph titled
"Sale, Transfer and Warranty", that:
The lessor by these presents, sells, transfers and conveys
to Industrial Acceptance Corporation Limited (hereinafter
referred to as the "Corporation") all its rights, title and
interest to and in the preceding lease, covering the leasing of
the equipment therein described, and all rental and other
sums now and subsequently payable by the lessee therein
named, and all rights and remedies of the lessor relating
thereto, and the lessor further sells, transfers and conveys to
the Corporation the equipment therein described, subject to
the rights of the said lessee as stipulated in the said lease.
I do not see how, if Industrial Acceptance
Corporation Limited is the lessor, it can convey
its rights to itself. This to my mind indicates that
Industrial Acceptance Corporation Limited is
the creditor of defendant for the sale of the
equipment described.
On October 20, 1966, Industrial Acceptance
Corporation Limited advised defendant that the
equipment could be purchased for $1.00 when
the contract expired. It should be noted in con
nection with this purchase option that the sum
of $37,500 had to be paid before the option
could be exercised by defendant.
The sum of $37,500 was the market value of
this equipment at the date of the contract; the
amount of $1.00, payable on exercising the
option, is less than the market value of the
equipment five years after signature of the con
tract, as is established by the evidence.
The third contract is dated December 20,
1966, and was concluded between defendant
and Hewitt Equipment Limited. It concerns an
amount of $52,134.30 for a traxcavator and a
"Pulpwood" fork. The contract was made for
twenty-nine months, at a monthly rate of
$1,477, including insurance, after an initial pay
ment of $7,000.
The general conditions of the contract indi
cate that all provincial and municipal sales taxes
are defendant's responsibility. Damaged parts
are to be replaced by defendant; all local,
municipal, provincial and federal taxes are to be
paid by defendant. Hewitt Equipment Limited
takes care, in paragraph fifteen, to state that it
remains owner of the equipment at all times;
this appears at the very least redundant, if
Hewitt Equipment Limited is in fact the owner
of the equipment.
On December 27, 1966, defendant was given
a purchase option, which could be exercised
during the period of rental, for the balance owed
after deduction of 100% of the rental paid. A
contract with such a stipulation bears a strange
resemblance to an instalment sale.
On April 3, 1967, a contract was concluded
between defendant and the E. W. Bliss Com
pany (Canada) Ltd., relating to an automatic
compressed air sprinkler system, with all acces
sories required by such a system, for a total
amount of $16,230, with an initial payment of
$2,730 and a monthly payment of $225 over a
period of sixty months. Under this contract,
defendant undertook to pay all taxes and assess
ments and insure the system for the duration of
the contract, either with a total loss clause in the
insurance policy on the building, or by specific
insurance on the item alone.
On April 20, 1967, a purchase option was
given to defendant in the amount of $1.00, in
addition to any rental payments due or to
become due for the remainder of the lease.
In my opinion this contract, and the other
contracts reviewed above, demonstrate that
although the option was exercised prior to ter
mination of the lease, all payments due had to
be made before it was exercised.
On May 11, 1966, under a contract concluded
between Tab Rentals Limited, defendant and
Lagueux et Théberge Inc., defendant took
possession of four vehicles. The next day, Tab
Rentals and defendant exchanged irrevocable
promises to sell and purchase respectively all
the vehicles at a price equivalent to 5% of the
original value of each vehicle.
I feel such an agreement, made one day after
the alleged lease, clearly demonstrates the true
nature of the first agreement, since this bilateral
promise of sale and purchase clearly constituted
a contract of sale.
I believe this analysis of these five contracts
and options suffices to show that what is
involved is not a rental but a sale on a suspen-
sive condition, on instalment or by leasing.
I do not think it is necessary or even useful to
refer to the provisions of section 137(1) of the
Income Tax Act to determine whether deduc
tion of the costs associated with the various
contracts unduly or artificially reduces defend
ant's income. In my view, the nature of the
rights and obligations created by the contracts
concluded by defendant must be arrived at by
reference to the provisions of the Civil Code.
In my opinion fiscal law is an accessory
system, which applies only to the effects pro
duced by contracts. Once the nature of the
contracts is determined by the civil law, the
Income Tax Act comes into effect, but only
then, to place fiscal consequences on those con
tracts. Without a contract, without a law and an
obligation, there can be no fiscal levy. Applica
tion of the Income Tax Act is subject to a civil
determination, whether such a determination be
according to civil or common law.
There is no need, in deciding as to the nature
of the contracts, to have recourse to the theory
popular in fiscal law of form and substance, if
the private law of the place where the contract
was concluded, which is the Quebec Civil Code
in the case at bar, contains provisions the effect
of which is comparable to that theory.
The provisions of Article 1013 of the Civil
Code indicate the criterion to be applied in case
of doubt as to the nature of a contract:
1013. When the meaning of the parties in a contract is
doubtful, their common intention must be determined by
interpretation rather than by an adherence to the literal
meaning of the words of the contract.
The decision in Thibault v. Auger' deals
directly with this point [at page 345]:
[TRANSLATION] In interpreting a contract the Court must
seek to discover the intent of the parties, whatever the name
they have given to it.
They may in fact state that they have sold or rented a
thing, but it is not within their power to alter the meaning of
the contract itself, and if that contract, which they call one
of rental, has all the characteristics of a sale, it will be
governed, not by the principles relating to rental, but by
those relating to sale.
This will be decided by reference to the wording of the
contract itself, its purpose and the circumstances surround
ing the conclusion of such a contract.
French commentators 2 have discussed the
nature of such contracts, which they call loca-
tion-vente (hire-purchase contracts). I refer to
Mazeaud on the point:
[TRANSLATION] Hire-purchase consists of a lease accom
panied by a promise to sell ... .
If the contract really involves a lease and a sale distinct
from each other, it is lawful and of full effect ... .
Very often, however, the hire-purchase contract disguises
an instalment sale with a reservation of ownership; the rental
payments agreed on being, in reality, only fractions of the
purchase price, and the price fixed in the promise of sale
only the last of these fractions. In such cases the courts
disregard appearances; weighing the proportion of the stipu
lated rental to the price fixed in the promise of sale, they
analyze the hire-purchase contract as an instalment sale with
a reservation of ownership.3
The Quebec courts have frequently had occa
sion to analyze similar contracts. In Gravel v.
Massicotte and Couillard 4 the Court of Appeal
considered such a contract to be a conditional
sale, not a lease:
1 [1950] S.C. 343.
2 Planiol & Ripert, Traité pratique de droit civil français,
No. 220, p. 260. Mazeaud, Leçons de droit civil, Vol. 3, No.
923, p. 754.
3 Mazeaud, op. cit., p. 754.
4 (1932) 52 Que. K.B. 146, at page 151.
[TRANSLATION] Under the contract the obligations of the
alleged lessee seem to be those of any ordinary owner.
Unquestionably, the parties to such a contract may give it
the name of a lease; nonetheless our courts have often had
to interpret such contracts, and have at times construed
them as having the nature of a disguised sale, particularly
when they involve immovables, the possession of which is
yielded up to the lessee, who is made subject to all the
obligations of a true owner; in the case at bar, the alleged
rental is $250 a month, amounting to $3,000 a year; how
ever, it is stipulated that interest at 7% shall run on the
entire balance of the sum of $27,500; and other clauses
require the lessee to maintain the premises and pay munici
pal taxes and assessments, pay for insurance and so forth.
In Carey v. Carey' the Court observed:
[TRANSLATION] In order to decide as to the nature of a
contract, ... we must look to the common intent of the
parties, rather than looking only at the literal meaning of the
words, but the way in which the contract is described must
also be taken into account.
After a careful examination of the evidence and of the
document itself, I have come to the conclusion that it does
not contain a lease; it contains either a sale on a suspensive
condition or a sale on a resolutory condition.
The words "lessee" and "rental" are used ... in the
document, but there is no rental and no lessee. The lessee is
the purchaser and the rental is the selling price.
In distributing the payments plaintiff's purpose was to
permit defendant to pay a capital sum which he could not
pay all at once.
In A.R. Williams Machinery & Supply Co.
Ltd. v. Morin 6 Cannon J. of the Supreme Court,
after reviewing the Quebec case law, said, at
page 580:
[TRANSLATION] This solution, adopted in several similar
cases, is not binding on this Court. However, we wished to
indicate the pattern in Quebec jurisprudence. We do not
depart from that pattern in refusing to treat respondent as a
lessor with respect to the intervenant, irrespective of the
ownership rights of the latter, when all indications are that
the contract in question, or to use the textbook expression,
the essential purpose of the legal operation, was to confer
on defendant company, which lacked the capital needed to
make the purchase immediately, not the uncertain posses
sion of a lessee, but rather, absolute ownership of the
immovable in question.
Taking into consideration the facts estab
lished, the precedents and legal commentary
cited, the Court concludes that the payments as
a whole were made in order to purchase the
(1912) 42 S.C. 471, at page 475.
6 [1933] S.C.R. 570.
equipment; indeed, the total amount of the pay
ments made during the period of alleged rental
are wholly deductible from the purchase price,
and correspond exactly to the purchase price of
the equipment plus interest payable, during the
period of alleged rental, on the balance of the
purchase price. I therefore conclude that these
were conditional sales, on a suspensive condi
tion, and not leases.?
The appeal is allowed and the assessments
referred back to the Minister for re-examination
and re-assessment, j to allow for interest and
administrative costs; the whole with costs.
It is worth noting that, by a new article in the Civil Code,
the legislator has enacted, in relation to such contracts, that:
1603. This chapter does not apply to a leasing made by a
person who carries on the business of lending or granting
credit and who, at the request of the lessee, has acquired
from a third person ownership of the property forming the
object of the contract provided that
1. the leasing is made for commercial, industrial, profes
sional or handicraft purposes;
2. the leasing relates to a moveable;
3. the lessee has personally chosen the property;
4. the lessor conveys expressly to the lessee the warran
ty resulting from the sale entered into with the third
person; and that
5. the conveyance of warranty is accepted without
reserve by the third person.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.