March 06, 2012

CIT Financial Ltd. (Appellant) v. Her Majesty the Queen (Respondent)

2004 DTC 6573
Neutral Citation: 2004 FCA 201
Federal Court of Appeal
Date: May 20, 2004

Court File No. A-455-03

Deductions in computing income from business — Capital cost allowance (“CCA”) — Corporate taxpayer’s CCA claim based on allegation that software acquired by its predecessor had a fair market value of about $33 million — Whether Minister justified in denying corporate taxpayer’s CCA claim by applying general anti-avoidance rule, or by reducing cost of the software to $13.1 million — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 20(1)(a), 67, 69(1)(a), 245 — Income Tax Regulations, ss. 1100(1), Schedule II, Class 12.

Facts: Commcorp was the predecessor of the corporate taxpayer, who, through a sale-leaseback, acquired software in a series of non-arm’s length transactions involving intermediary corporations, and leased it back to its original owner. The taxpayer’s capital cost allowance (“CCA”) claim for 1993 was predicated on its allegation that Commcorp’s cost for the software was $33,091,255. In disallowing the taxpayer’s CCA claim entirely, the Minister applied the general anti-avoidance rule (“GAAR”) in section 245 of the Income Tax Act. In the alternative, the Minister alleged that the cost to Commcorp of the software was only $13.1 million, and that the taxpayer’s CCA should be reduced accordingly. In allowing the taxpayer’s appeal in part (2003 DTC 1138), the Tax Court of Canada found that the GAAR did not apply, but that the cost to Commcorp of the software was about $20 million less than the $33,091,255 figure the taxpayer used in computing its CCA. The taxpayer appealed to the Federal Court of Appeal.

Held: The taxpayer’s appeal was dismissed. The Tax Court judge made no palpable or overriding error in determining that the present value of the income from the lease did not represent the fair market value of the software at the time of its acquisition by Commcorp. In arriving at this conclusion, the Tax Court judge considered the reports produced by the experts, and accepted some portions while rejecting others, as he was entitled to do. His reasoning, in determining the fair market value of the software using the replacement method, was sound.