Canadian bijuralism and the concept of an acquisition of property in the federal Income Tax Act.

• Author: Duff, David G.

The acquisition of property plays an important role in the federal Income Tax Act (ITA), determining eligibility for a number of tax benefits, including entitlement to capital cost allowance, investment tax credits, and the deductibility of interest expenses incurred in respect of eligible property. In spire of its importance, the concept of an acquisition of property is not defined in the ITA, and it has been subject to divergent interpretations in the common law and the civil law.

The author traces the sources of law informing the meaning of an acquisition of property in the common law and the civil law, and concludes that certain transactions may be subject to different tax consequences depending on whether they occurred in a common law province or in Quebec. The author demonstrates that the primary reference for determining whether a taxpayer acquired property--the twofold test in M.N.R. v. Wardean Drilling Ltd.--is premised on common law concepts and is incompatible with the goals of Canadian bijuralism expressed in the Federal Law--Civil Law Harmonization Act, No. 1 and section 8.1 of the federal Interpretation Act. In response to this contradiction, the author proposes a number of statutory amendments to ensure the uniform and predictable application of the ITA across Canada.

Dans la Loi de l'impot sur le revenu (LIR), l'acquisition de bien permet de determiner l'eligibilite a un nombre d'avantages fiscaux, notamment au droit a la deduction pour amortissement, au credit d'impot a l'investissement et a la deductibilite des frais d'interets encourus relativement au bien eligible. Malgre son importance, le concept d'acquisition de bien n'est pas defini dans la L/R et a recu des interpretations divergentes en common law et en droit civil.

L'auteur retrace les sources de droit eclairant le sens d'acquisition de bien en common law et en droit civil. Il conclut que la realisation de certaines transactions dans une province de common law ou au Quebec peut entrainer des consequences fiscales differentes. L'auteur demontre que la reference principale en matiere de determination d'acquisition de bien par un contribuable (le test en deux parties de l'affaire M.N.R. v Wardean Drilling Ltd. ) est basee sur des concepts de common law et est incompatible avec les objectifs du bijuridisme canadien tel qu'exprime dans la Loi d'harmonisation no 1 du droit federal avec le droit civil et dans l'article 8.1 de la Loi d'interpretation federale. Afin de repondre a cette contradiction, l'auteur propose un nombre d'amendements legislatifs pour assurer une application uniforme et previsible de la LIR partout au Canada.

Introduction I. The Acquisition of Property in Canadian Income Tax Law A. Wardean Drilling B. Subsequent Tax Cases in Common Law Provinces C. Subsequent Tax Cases in Quebec II. The Ownership and Transfer of Property in Common Law and Civil Law A. The Ownership and Transfer of Property in Common Law B. The Ownership and Transfer of Property in Civil Law III. Canadian Bijuralism and the Meaning of an Acquisition of Property in the Income Tax Act A. Canadian Bijuralism and Section 8.1 of the Federal Interpretation Act B. Section 8.1 of the Federal Interpretation Act and the Concept of an Acquisition of Property in the Income Tax Act 1. The Need to Refer to Private Law 2. Whether Otherwise Provided by Law 3. Conclusion IV. Codifying the Concept of an Acquisition of Property in the Income Tax Act Conclusion Introduction

The concept of an acquisition of property plays an important role in the federal Income Tax Act, (1) determining eligibility for a number of benefits. The ability to deduct capital cost allowance, for example, depends on the prior acquisition of depreciable property, (2) the definition of which requires that the property was "acquired by the taxpayer." (3) Similarly, investment tax credits are available only where the taxpayer has "acquired" the property in that fiscal year, (4) while the deduction for interest expenses under subparagraph 20(1)(c)(ii) of the ITA applies to interest on an amount payable for property acquired by the taxpayer. (5) Despite its importance, the concept of an acquisition of property is not defined in the ITA, leaving its meaning to judicial interpretation.

For almost thirty years now, the meaning of this expression for Canadian income tax purposes has generally been governed by the judicial test set out in M.N.R. v. Wardean Drilling Ltd., in which Justice Cattanach stated that "the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk." (6) Regularly cited in subsequent tax cases involving the acquisition of property, (7) this two fold test stipulates that property is acquired by a taxpayer within the meaning of the ITA not only when the taxpayer obtains legal title to the property, but also when the taxpayer obtains constructive or beneficial ownership of the property (i.e., through the "normal incidents of title" such as "possession, use and risk"). (8)

Although the concept of beneficial ownership is well established in common law systems, where the law of equity and trusts has long recognized a distinction between legal and beneficial ownership, (9) it does not exist in civilian systems, which regard ownership as absolute and indivisible. (10) For this reason, a number of tax cases in the Province of Quebec have established that lessee-purchasers under lease-option agreements do not acquire property within the meaning of the ITA if legal ownership is retained by the lessor-vendor, notwithstanding the fact that the lessee-purchaser has obtained possession and use of the property and has assumed the risks normally associated with ownership. (11) In Berou, however, a majority of the Federal Court of Appeal rejected this line of reasoning, concluding that the test in Wardean Drilling governs the acquisition of property in Quebec as well as the rest of Canada. (12) In so doing, the decision effectively distinguished or "dissociated" the tax meaning of an acquisition of property from the civil law of Quebec. (13)

Because the judgment in Berou was released on 15 November 1999, the court did not consider section 8.1 of the federal Interpretation Act, (14) which came into force on 1 June 2001. According to this provision:

Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles or concepts in force in the province at the time the enactment is being applied. (15) Thus, the test in Wardean Drilling may no longer apply within the Province of Quebec if the two conditions in section 8.1--the necessity of referring to provincial sources of law and the absence of a prohibition on doing so--are met in interpreting the meaning of an acquisition of property in the ITA. If so, it would be advantageous to amend the ITA to ensure that the meaning of an acquisition of property for tax purposes has uniform application throughout Canada.

This paper examines the concept of an acquisition of property for the purposes of the ITA, considering tax cases in which the concept has been addressed; private law rules, principles, and concepts that may be relevant to its interpretation; the impact of section 8.1 of the Interpretation Act on this interpretation; and the merits of a statutory amendment to ensure that the meaning of this expression is given uniform application throughout Canada. The first part of the paper reviews tax cases in which the concept of an acquisition of property has been interpreted and applied, beginning with the judgment in Wardean Drilling and then considering tax cases in common law provinces and the Province of Quebec. The second part of the paper examines the common law and civil law rules, principles, and concepts to which courts have implicitly or explicitly referred in order to interpret the meaning of an acquisition of property for tax purposes, with particular attention to conditional sales agreements and leasing transactions, the most common types of tax cases concerning the acquisition of property. The third part of the paper considers the impact of the Interpretation Act on the meaning of an acquisition of property in the ITA, arguing that the two conditions in section 8.1 for referring to provincial sources of law are met. Since this analysis suggests that the meaning of an acquisition of property may be subject to different interpretations in common law provinces and the Province of Quebec, the fourth part of the paper proposes that the ITA should be amended to include a statutory definition of this term to ensure that the concept is given a uniform interpretation throughout Canada. The fifth part of the paper summarizes the argument and offers concluding observations.

1. The Acquisition of Property in Canadian Income Tax Law

   In order to appreciate the possible effect of section 8.1 of the Interpretation Act on the meaning of an acquisition of property for tax purposes, it is essential to begin by examining the way in which Canadian courts have interpreted this concept thus far. The following sections review the interpretation of this concept in Wardean Drilling and subsequent tax cases in common law provinces and in Quebec.

   1. Wardean Drilling

      The issue in Wardean Drilling concerned the date at which property was acquired by the taxpayer for the purpose of deducting capital cost allowance. The taxpayer had carried on a business of drilling oil wells in Alberta and Saskatchewan and had purchased a drilling rig and a substructure for the rig, in respect of which it deducted capital cost allowance...