Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 (1997)

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 t...

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