Extendicare International Inc. (formerly Crowntek Inc.) v. Minister of Revenue (currently Minister of Finance) [Indexed as: Extendicare International Inc. v. Ontario (Minister of Revenue)]

47 O.R. (3d) 1

[2000] O.J. No. 274

No. C31006

Court of Appeal for Ontario

Charron, Rosenberg and MacPherson JJ.A.

February 8, 2000

Taxation -- Sales tax -- Lessee of computer equipment unable to make monthly payments under lease -- Lessor agreeing to release lessee from obligations under lease upon payment of fixed amount of compensation -- Lessor repossessing equipment -- Compensation payments constituting settlement payments for breach of lease and not payments under lease -- Compensation payments not subject to retail sales tax under Retail Sales Tax Act -- Sales tax payable only with respect to each rental payment while lease still in operation -- Retail Sales Tax Act, R.S.O. 1980, c. 454, s. 2.

The appellant leased computer equipment from C Ltd. While the leases were still in force, the appellant notified C Ltd. that it would no longer be making the agreed monthly payments and would no longer be using the equipment. The appellant and C Ltd. entered into negotiations which resulted in C Ltd. agreeing to release the appellant from any further obligation to make monthly lease payments upon payment of a fixed amount of compensation. C Ltd. did not charge, and the appellant did not pay, any sales tax with respect to the compensation payments. The respondent Minister of Revenue concluded that the appellant was liable to pay sales tax on the compensation payments and issued a notice of assessment. The appellant filed a notice of objection to the assessment. The assessment was confirmed. The appellant appealed the assessment. The appeal was dismissed. The appellant appealed.

Held, the appeal should be allowed.

The appellant defaulted under the lease. After the appellant breached and repudiated the lease, C Ltd. could have terminated it immediately and repossessed the leased computer equipment. In addition, or in the alternative, it could have commenced an action against the appellant for damages. The appellant and C Ltd. entered into negotiations against the backdrop of those two options, not against a backdrop of the continuation of the operation of the lease. The compensation payments constituted settlement payments, not payments made under the lease. The effect of s. 2(1) and (6) of the Retail Sales Tax Act is that sales tax must be paid only with respect to each rental payment while the lease is still in operation. Sales tax was not payable on the compensation payments.

APPEAL from a judgment dismissing an appeal from a retail sales tax assessment.

British Columbia Railway Co. v. R., 1978 CanLII 3704 (FC), [1979] 2 F.C. 122, 79 D.T.C. 5020, [1979] 79 C.T.C. 56 (F.C.T.D.), affd 1981 CanLII 4592 (FCA), [1981] 2 F.C. 783, 36 N.R. 369, 81 D.T.C. 5089, [1981] 81 C.T.C. 110 (F.C.A.); Keneric Tractor Sales Ltd. v. Langille, 1987 CanLII 29 (SCC), [1987] 2 S.C.R. 440, 43 D.L.R. (4th) 171, 79 N.R. 241; Schwartz v. Canada, 1996 CanLII 217 (SCC), [1996] 1 S.C.R. 254, 133 D.L.R. (4th) 289, 193 N.R. 241, 17 C.C.E.L. (2d) 141, 96 D.T.C. 6103, consd Statutes referred to Retail Sales Tax Act, S.O. 1960-61, c. 91, s. 2(2) Retail Sales Tax Act, R.S.O. 1980, c. 454, ss. 1, paras. 13, 19, 2(1), (6), 33 -- now R.S.O. 1990, c. R.31 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 22 Authorities referred to Information Bulletin I-82 (Ontario: Retail Sales Tax Branch, February 1982) The New Oxford Dictionary of English (1998), pp. 1048 "lease", 1571 "rent"

Robert G. Kreklewetz, for appellant. Walter Myrka and Chia-yi Chua, for respondent.

The judgment of the court was delivered by

MACPHERSON J.A.: --

Introduction

[1] In Ontario, all purchasers of tangible personal property must pay the provincial sales tax. The Retail Sales Tax Act, R.S.O. 1980, c. 454, [See Note 1 at end of document] defines "sale" to include a "lease or rental". A company that leases equipment must pay the sales tax on the fair value of the lease. The tax is computed, and must be paid, on the due date of each payment under the lease. Thus, if the lease remains in force for its full term, the lessee will pay, and the lessor will collect on behalf of the government, sales tax corresponding to each and every payment under the lease.

[2] In a competitive marketplace, it is not unusual for a company to run into difficulties. If it has leased business equipment from another company, it might have trouble keeping up with its lease payments. Most commercial leases contain provisions dealing with such a contingency. Not surprisingly, these provisions will usually be of substantial benefit to the lessor. A standard provision of this type is what is known as a liquidated damages clause. This clause permits a lessor, faced with a breach of a lease by the lessee, to recover as damages all unpaid amounts payable for the entire duration of the lease.

[3] Of course, a lessor may have trouble collecting pursuant to a liquidated damages clause. Litigation is time-consuming and costly, results are not certain, and execution on a judgment is not inevitable. Thus, it may be in the lessor's interests to negotiate a settlement with a defaulting lessee rather than stand on its strict legal rights. Similarly, it may also be in the lessee's best interests to negotiate a settlement, perhaps to avoid litigation or a poor reputation in the business community.

[4] If the parties successfully negotiate a settlement, the usual result is that the leased equipment is returned to the lessor and the lessee pays the lessor a sum of money to compensate for the unused portion of the lease. The compensation is not a regular lease payment because the lease has been breached. Nor is the compensation a judgment against the lessee; the matter did not proceed that far.

[5] What is the status, for purposes of Ontario's sales tax regime, of such a compensation payment? Must the lessee pay, and the lessor collect, sales tax corresponding to the amount of the compensation payment? Or is such a payment outside the sales tax regime? These are the questions posed by this appeal. The questions arise in the context of a failed lease of computer equipment which gave rise to a negotiated settlement by which a lessee paid a substantial amount of compensation ($1,749,000) to the lessor. Can the provincial government collect sales tax on this compensation?

A. Factual Background

(1) The parties and the relevant events

[6] The parties prepared, and placed before Boland J., a special case which contains a detailed history of the factual circumstances giving rise to the litigation. It is unnecessary, for purposes of this appeal, to reprint the entire special case. In my view, it is possible to summarize the essential facts so as to provide sufficient background for the legal analysis which is required in order to dispose of the appeal.

[7] The appellant, Extendicare International Inc. ("Extendicare"), [See Note 2 at end of document] leased computer equipment from Canada Lease Financing Ltd. ("Canada Lease") under a master equipment lease agreement ("the lease") dated May 10, 1982. By executing various schedules to the lease, Extendicare entered into three contractual leases of various computer equipment. The three contractual leases had effective dates of October 28, 1983, January 31, 1985 and April 30, 1985. Their durations were, respectively, 50, 38 and 48 months. One of the provisions of both the main lease and the three contractual leases required Extendicare to pay to Canada Lease retail sales tax in respect of the monthly lease payments.

[8] Clause 13 of the lease dealt with the situation of a default by Extendicare. It gave Canada Lease several options, including terminating the lease and/or commencing an action for liquidated damages:

13. DEFAULT

. . . Lessor may at its option declare this Agreement to be in default and may do one or more of the following:

(a) terminate this Agreement and Lessee's right to possession of the equipment . . .;

(c) demand and recover as damages the present value of the aggregate of all unpaid amounts payable hereunder as rental to the expiration of the term of the lease of the Equipment . . . together with all additional rental and other amounts due hereunder to Lessor, and Lessee agrees that such amounts are a genuine pre-estimate of the damages that would be suffered by lessor and are liquidated damages and not a penalty.

[9] In July 1986, while all of the leases were still in force, Extendicare notified Canada Lease that it would no longer be using the leased equipment, and would no longer be making the agreed monthly payments. Canada Lease treated this as a breach of the lease. At that juncture, the present value of all unpaid rental amounts under the three contractual leases was $3,307,618.23. By virtue of cl. 13 of the lease, Canada Lease could have demanded at least that sum as damages.

[10] Extendicare and Canada Lease entered into negotiations which were successful. On September 18, 1996, Canada Lease agreed to release Extendicare from any further obligation to make monthly lease payments under two of the contractual leases upon payment by Extendicare of $1 million. Extendicare made this payment on September 22, 1986. On December 17, 1986, the two companies agreed to a similar arrangement with respect to the third contractual lease. The payment under this arrangement was fixed at $749,000. Extendicare made this payment by December 31, 1986.

[11] Canada Lease did not charge, and Extendicare did not pay, any sales tax with respect to the two payments. After Canada Lease received the payments, it repossessed the computer equipment. Extendicare had no further use of it.

[12] The respondent Minister of Revenue ("the Minister") subsequently conducted an audit of Extendicare's business. The Ministry concluded that Extendicare was liable to pay sales tax on the $1,749,000 it had paid to Canada Lease. On January 14, 1988, the Ministry issued a notice of assessment against Extendicare for $122,430 plus interest.

[13] The Minister's decision and notice of assessment were based on its interpretation of certain provisions of the Retail Sales Tax Act. For purposes of this appeal, the crucial provision is s. 2 which provides in relevant parts:

2(1) Every purchaser of tangible personal property, except the classes thereof referred to in subsection (2), shall pay to Her Majesty in right of Ontario a tax in respect of the consumption or use thereof, computed at the rate of 7 per cent of the fair value thereof.

(6) Notwithstanding subsection (5) and section 10, where a purchaser,

(b) acquires tangible personal property at a sale that is the lease or rental to him of such tangible personal property without provision for the transfer to him of title thereto, or with the provision of such transfer only upon the exercise of an option or similar right to acquire such tangible personal property,

the tax imposed by this Act shall be computed, paid and collected on the due date of, and on the fair value of the consideration given in payment of, each rental payment by or on behalf of the purchaser in respect of the lease or rental of such taxable service or tangible personal property, and tax shall, in addition, be computed, paid and collected at the time of, and on the fair value of the consideration given in payment for, each of the obtaining of any option or similar right to purchase the tangible personal property leased or rented or the exercising of any such option or similar right.

(Emphasis added)

[14] It can be seen that two of the pivotal concepts in s. 2 of the Act are "purchaser" and "tangible personal property". Both of these concepts are defined in s. 1 of the Act, the definition section:

1. In this Act,

2. "purchaser" means a consumer or person who acquires tangible personal property . . . for his own consumption or use . . .

3. "tangible personal property" means personal property that can be seen, weighed, measured, felt or touched, or that is in any way perceptible to the senses, and includes natural gas, and manufactured gas;

[15] On July 8, 1988, Extendicare filed a notice of objection to the assessment. Relying on s. 2(6) of the Act, it took the position that sales tax was payable only on the monthly rental payments under the lease. The two payments totalling $1,749,000 it made to Canada Lease arose after it had breached the lease and ceased making monthly rental payments. The two payments were in the nature of settlement payments made to Canada Lease because Canada Lease had a strong legal basis for suing Extendicare for breach of the lease. These settlement payments were not rental payments pursuant to the lease. Nor were they payments for "the consumption or use" of the computer equipment.

[16] On July 6, 1989, the Acting Assistant Deputy Minister confirmed the notice of assessment against Extendicare. Extendicare decided to appeal the assessment. The parties were able to agree on the statement of a special case pursuant to Rule 22 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

(2) The litigation

[17] The appeal by way of special case was heard by Boland J. The question posed in the special case was:

Were the payments of $1,000,000 and $749,000 (the "Payments") made by the Appellant to Canada Lease as described in paragraphs 14 and 16 subject to retail sales tax under the Act?

[18] In a decision rendered on October 26, 1998, Boland J. dismissed Extendicare's appeal and answered the above question in the affirmative. She considered the relevant provisions of the lease and of the Retail Sales Tax Act. The essence of her reasoning is contained in these passages:

The covenant to pay rent was unconditional and absolute and Clause 13 provides that the lessee's obligations shall survive termination of the lease agreement. The refusal to pay further monthly payments was an obvious default under the lease agreement which entitled Canada Lease, among other things, to terminate their lease agreement and demand and recover as damages the present value of the aggregate of all unpaid amounts payable under the lease as rental to the expiration of the term of the lease agreement. Surely, negotiation payments ending in cancellation of the lease rather than a law suit to enforce it, cannot alter the fact or the intent that the payment was for arrears of rent and other moneys owing under the lease agreement. It seems to me it is immaterial whether or not Canada Lease chose to accept an amount less than the present value of the unmatured rental payments, rather than engage in litigation. In my view, as the lease agreement termination payments were paid to the lessor of the equipment, they cannot be divorced from the original lease agreement.

I am satisfied that the scheme of the legislation contemplated the payment of retail sales tax calculated upon all amounts paid by a Lessee, regardless of how the parties choose to characterize the payment. The termination payments were made in response to the debt of rent owing and were calculated on the bases of the three variables set out in the lease agreement. I find the Appellant was properly assessed under the Act for rental payments made pursuant to a lease agreement of computer equipment.

[19] Extendicare appeals from Boland J.'s decision.

B. Issue

[20] There is a single issue in this appeal: were the payments of $1 million and $749,000 made by Extendicare to Canada Lease subject to retail sales tax under the Retail Sales Tax Act? C. Analysis

[21] I begin my analysis by noting a number of matters on which there is no dispute. Canada Lease was a "vendor" as defined in the Retail Sales Tax Act. Extendicare was a "purchaser" of "tangible personal property" because the definition of "sale" in the Act included "lease or rental". Thus, while the three contractual leases were in force, Extendicare always paid sales tax on its monthly rental payments.

[22] Against this background, it is necessary to characterize the $1 million and $749,000 payments made by Extendicare to Canada Lease. The Minister's submission is that Extendicare's obligation to pay rent did not end with its breach of the lease, and the two post-breach payments could reasonably be considered rental payments under the lease agreement.

[23] I do not agree with this submission. Extendicare defaulted under the lease. It informed Canada Lease that it would make no further rent payments and that it would not continue to use the leased computer equipment. The negotiations between the parties that ensued were conducted in the context of a breach of the lease.

[24] On this point, a particularly relevant case is Keneric Tractor Sales Ltd. v. Langille, 1987 CanLII 29 (SCC), [1987] 2 S.C.R. 440, 43 D.L.R. (4th) 171. In that case, a lessee defaulted on a lease of farm equipment. The lessor seized the equipment and commenced an action claiming damages resulting from breach of the lease. Although the principal issue in the case was the calculation of damages for breach of a chattel lease, Wilson J., speaking for a unanimous court, enunciated some general propositions relevant to the present appeal. She said, at pp. 453-54:

. . . we must go back to first principles in the law of contract. If a party to a contract breaches a term of sufficient importance the other party has the right to treat the contract as terminated and consider himself discharged from any further obligations under it . . . . An identical right arises where one party to a contract by words or conduct indicates to the other party that he does not intend to perform his contractual obligations. In the latter instance the first party is said to have repudiated the contract . . . .

. . . Thus, there is no conceptual difference between a breach of contract that gives the innocent party the right to terminate and the repudiation of a contract . . . .

[25] In the present appeal, Extendicare breached a fundamental term of the contract -- it refused to make its lease payments. Moreover, it repudiated the contract -- it informed Canada Lease that it did not intend to perform its contractual obligations.

[26] What then were the consequences of Extendicare's breach and repudiation of the contract? In the passage from Keneric Tractor set out above, Wilson J. stated that a consequence of the breach of an important contractual term by one party is that "the other party has the right to treat the contract as terminated". That is one of the rights, at common law, that Canada Lease possessed after Extendicare breached the contract. Moreover, it is worth recalling that cl. 13(a) of the lease expressly gave this same right to Canada Lease.

[27] Canada Lease had a second right, at common law and under the terms of the lease. It could commence an action against Extendicare and seek damages. In Keneric Tractor, Wilson J. said, at p. 455:

The modern view is that when one party repudiates the contract and the other party accepts the repudiation the contract is at this point terminated or brought to an end. The contract is not, however, rescinded in the true legal sense, i.e., in the sense of being voided ab initio by some vitiating element. The parties are discharged of their prospective obligations under the contract as from the date of termination but the prospective obligations embodied in the contract are relevant to the assessment of damages: see Johnson v. Agnew, [1980] A.C. 367, [1979] 1 All E.R. 883 (H.L.) and Moschi v. Lep Air Services Ltd., [1973] A.C. 331, [1972] 2 All E.R. 393 (H.L.). Such is the law for contracts generally and it is this law which should apply equally to breaches of chattel leases.

(Emphasis added)

[28] This statement of the common law position was, again, replicated in the lease. Clause 13(c) is a liquidated damages clause which entitled Canada Lease to "demand and recover as damages the present value of the aggregate of all unpaid amounts payable as rental to the expiration of the term of the lease".

[29] Against the backdrop of these legal options, the parties entered into negotiations. Canada Lease insisted that Extendicare had breached the lease. Canada Lease did not terminate the lease immediately, as it was entitled to do. Rather, it held Extendicare to the terms of the lease while negotiations ensued.

[30] The negotiations were successful. With respect to two of the three contractual leases, an agreement was reached on September 18, 1986. An exchange of correspondence on that date between representatives of the two companies documented the contents of the agreement. Howard Strolicht of Extendicare wrote to Gordon Levoy of Canada Lease:

2. We will pay you an amount of $1,000,000 (one million Canadian dollars) for a complete and final release from all our commitments on the machine to you, or to whom you have assigned the leases. The payment will take place no later than Tuesday, September 23, 1986.

(Emphasis added)

[31] Mr. Levoy's letter to Mr. Strolicht stated:

This letter is to confirm that upon receipt of payment of $1,000,000.00 Crowntek will no longer be responsible for the lease payment of $125,072.00 for Schedule No. 8 of Master Lease No. 591 or the lease payment of $24,007.36 for Schedule No. 20 of Master Lease No. 591.

(Emphasis added)

[32] Extendicare paid Canada Lease $1 million on September 22, 1986.

[33] Negotiations continued with respect to the third contractual lease. They, too, were successful. On December 17, 1986, Mr. Levoy of Canada Lease wrote to Mr. Strolicht at Extendicare:

Please take this letter as our authorization to cancel the 3083 E portion of Lease No. 591, Schedule No. 21 . . .

This cancellation will take effect upon receipt by Canada Lease of a payment of $749,000 . . . .

(Emphasis added)

[34] Extendicare paid Canada Lease $749,000 by December 31, 1986.

[35] In my view, the negotiations between the parties, and the two agreements they made, fit precisely within the language of both Keneric Tractor and cl. 13 of the lease. After Extendicare breached and repudiated the lease, Canada Lease could have terminated it immediately and repossessed the leased computer equipment. In addition (or in the alternative), it could have commenced an action against Extendicare. The potential damages it could have sought to recover pursuant to the main lease and the three contractual leases were $3,307,618.23.

[36] Canada Lease and Extendicare entered into negotiations against the backdrop of these two options. The backdrop was not a continuation of the operation of the lease. Extendicare had informed Canada Lease that it would not be making further rent payments, and Canada Lease appeared to accept this reality. Accordingly, the negotiations ensued with two shared goals -- first, to persuade Canada Lease to accept Extendicare's breach and repudiation of the lease and to exercise its (Canada Lease's) right of termination; and second, to forestall a lawsuit by Canada Lease which, if successful, might net $3,307,618.23 (plus, presumably, interest and costs).

[37] The parties reached an agreement. Extendicare paid Canada Lease $1,749,000, not $3,307,618.23. In return, Canada Lease terminated the lease and released Extendicare from all further obligations under the lease. The contractual leases were legally terminated at precisely the same time as Canada Lease received the two payments of $1 million and $749,000. That is clear from the contents of Mr. Levoy's two letters to Mr. Strolicht.

[38] In summary, Canada Lease is accurate in its description of the two payments as settlement payments. The post-breach negotiations, and the two payments made as a result of those negotiations, took place under the umbrella of a potential lawsuit for damages for breach of contract. The lawsuit was averted, and the lease was ultimately terminated by Canada Lease. However, these results were achieved because, and when, Extendicare paid Canada Lease $1,749,000.

[39] The next question is: are the two settlement payments negotiated in the context of potential damages for breach of the lease covered by the Retail Sales Tax Act? The answer to this question must be found in the interpretation of s. 2(1) and (6) of the Act, which for ease of reference I set out again:

2(1) Every purchaser of tangible personal property, except the classes thereof referred to in subsection (2), shall pay to Her Majesty in right of Ontario a tax in respect of the consumption or use thereof, computed at the rate of 7 percent of the fair value thereof.

(6) Notwithstanding subsection 5 and section 10, where a purchaser, . . . . .

(b) acquires tangible personal property at a sale that is the lease or rental to him of such tangible personal property without provision for the transfer to him of title thereto, or with the provision of such transfer only upon the exercise of an option or similar right to acquire such tangible personal property,

the tax imposed by this Act shall be computed, paid and collected on the due date of, and on the fair value of the consideration given in payment of, each rental payment by or on behalf of the purchaser in respect of the lease or rental of such taxable service or tangible personal property, and tax shall, in addition, be computed, paid and collected at the time of, and on the fair value of the consideration given in payment for, each of the obtaining of any option or similar right to purchase the tangible personal property leased or rented or the exercising of any such option or similar right.

(Emphasis added)

[40] Extendicare contends that only s. 2(6) is relevant to the two payments it made. Its position is, in effect, that s. 2(6) is a code for lease situations. In support of this position, Extendicare makes two arguments. First, s. 2(6) applies because it deals specifically with lease situations, whereas s. 2(1) does not: generalia specialibus non derogant. Second, s. 2(1) does not apply to lease situations because it does not make provision for the time in which the tax is to be paid: see British Columbia Railway Co. v. R., 1978 CanLII 3704 (FC), [1979] 2 F.C. 122, [1979] 79 C.T.C. 56 (T.D.), affirmed 1981 CanLII 4592 (FCA), [1981] 2 F.C. 783, [1981] 81 C.T.C. 110 (C.A.).

[41] I disagree with this submission. Section 2(1) is the general charging provision. It identifies all of the relevant aspects of the tax -- who pays ("every purchaser"), for what (purchases of "tangible personal property"), to whom ("Her Majesty in right of Ontario"), and how much ("7 per cent of the fair value"). Moreover, s. 2(6) says that it is to apply notwithstanding ss. 2(5) and 10; it does not say it is to apply notwithstanding s. 2(1). Accordingly, the interpretation of s. 2(1) is central to the legal issue presented by this appeal.

[42] That is not to say, however, that s. 2(6) is irrelevant. In my view, the two provisions must be read together. Section 2(1) is the general charging section applicable to all sales which, by definition, includes leases. Section 2(6) provides additional information about the relationship between the general sales tax and leases.

[43] The trial judge considered both s. 2(1) and (6). She reasoned:

Section 2(6) simply provides for the time at which tax was payable on lease or rental payments. In my view that subsection cannot be regarded as a tax charging provision independent of subsection 2(1). Had this been the intent of the legislature it is reasonable to assume it would have been clearly stated.

[44] I agree with the trial judge that s. 2(6) is not an independent charging provision. I also agree that s. 2(6) speaks to the timing of tax payments under leases. However, in my view, s. 2(6) goes beyond this function; it contains language that is helpful in determining whether the two payments made by Extendicare were subject to sales tax. In other words, s. 2(6) addresses the questions of "when" and "for what" in a lease situation.

[45] Bearing in mind my characterization of the two payments made by Extendicare, namely settlement payments made in the context of a potential lawsuit for its breach and repudiation of the lease, my conclusion is that a careful reading of s. 2(1) and (6) of the Act indicates that sales tax need not be paid on these payments. Rather, sales tax must be paid only with respect to each rental payment while the lease is still in operation. I reach this conclusion for several reasons.

[46] First, s. 2(1) provides that sales tax is payable in respect of "the consumption or use" of tangible personal property. While the lease was in force, the leased computer equipment was on Extendicare's premises and was employed in its business operations. This fits comfortably within common notions of consumption or use. Once the lease was terminated, however, the equipment was repossessed. There could be no further consumption or use. The two payments were linked to termination (simultaneous) and repossession (soon after), not to continuing consumption and use.

[47] Second, both s. 2(1) and (6) provide that the sales tax is payable in relation to the sale (which includes lease) of "tangible personal property". It will be recalled that the definition of "tangible personal property" is "personal property that can be seen, weighed, measured, felt or touched, or that is in any way perceptible to the senses". I do not think that the $1 million and $749,000 payments made by Extendicare to Canada Lease come within this definition. The payments were made by Extendicare to purchase Canada Lease's acceptance of Extendicare's breach and reputation of the lease and to "buy off" a potential damages award that Canada Lease might obtain in a lawsuit. If this is the case, Extendicare purchased intangibles.

[48] Third, s. 2(6) employs the words "lease" and "rental". In The New Oxford Dictionary of English (1998), "lease" is defined as "a contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment" (at p. 1048). "Rent" is defined as "a tenant's regular payment to a landlord for the use of property or land" (at p. 1571). The two payments made by Extendicare do not appear to come within these definitions. The definitions are anchored in notions of regularity of payments and continuation of the relationship between lessor and lessee. Neither of these notions was present in Extendicare's two payments. They were one-time payments made at the precise moment the contractual relationship ended. Moreover, the payments were intended to prevent a continuation of the relationship in a different context -- i.e., in a lawsuit.

[49] Fourth, the legislative history of the relevant provisions of the Retail Sales Tax Act supports the conclusion that it does not cover the two payments in issue in this appeal. The original Retail Sales Tax Act, S.O. 1960-61, c. 91, defined "sale" to include "lease or rental". However, there was no provision dealing specifically with leases. Since the general charging provision said that the tax was to be computed "at the time of sale" (s. 2(2)), a technical application of the Act would have required lessees to pay the tax on an up front basis, immediately following the execution of a lease.

[50] In 1976, the legislature amended the Act to deal specifically with leases of tangible personal property. The new provision, then numbered s. 2(5a), was very close to the provision, s. 2(6), in issue in this appeal. The Explanatory Notes to Bill 170 stated:

Section 2. The amendment clarifies a long-standing administrative practice that, where a sale is by a lease that transfers only the possession of tangible personal property and that does not provide for the transfer of title to the property except through the exercise of an option that may or may not be exercised, tax is payable on each rental instalment at the time the instalment is paid. This procedure, it has been felt, better equates the tax payable with the use made of the property, by the lessee.

(Emphasis added)

[51] This explanation strongly supports Extendicare's position. The fundamental purpose of the forerunner to s. 2(6) was to make a link between "the tax payable" and "the use made of the property by the lessee". That link does not exist with respect to Extendicare's two payments totalling $1,749,000. Those payments were made several months after Extendicare had informed Canada Lease that it would no longer be using the computer equipment or making monthly rental payments. The payments were also made in the context of a simultaneous termination of the lease and repossession of the equipment very soon thereafter.

[52] Fifth, Information Bulletin I-82 published by the Retail Sales Tax Branch of the Ministry in February 1982 is instructive. The bulletin advised the public as follows:

For retail sales tax purposes, a rental on an item is considered to be a sale. In other words, if a person is required to pay tax on an item, such as a television or an automobile, tax would also apply if he prefers to rent the item.

When an item is purchased, tax is payable on the full purchase price.

When an item is rented, tax is payable on each rental payment made and on any payment made in exercising an option to purchase the item.

(Emphasis added)

[53] The emphasized words are telling. The words "each rental payment made" do not speak to only the timing of the payment of the tax. Rather, because these words are linked with the words "tax is payable" they also address the substance or the computation of the tax.

[54] Sixth, the Minister concedes that if Canada Lease had sued Extendicare for damages for breach of the lease and recovered damages after a trial, these damages would not be subject to sales tax. It is difficult to see why damages recovered through negotiations to avoid a lawsuit should be treated differently.

[55] For these reasons, my conclusion is that the payments of $1 million and $749,000 by Extendicare to Canada Lease do not attract retail sales tax.

[56] In Schwartz v. Canada, 1996 CanLII 217 (SCC), [1996] 1 S.C.R. 254, 133 D.L.R. (4th) 289, the Supreme Court of Canada held that a $400,000 payment by a company to a man to whom it offered a senior position, only to withdraw the offer later, was not income under the federal Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). In reaching this conclusion, La Forest J. stated that "one must obviously go back to the concept of income and consider the whole scheme of the Act" (at p. 293).

[57] In my view, a similar approach should be taken with respect to the Retail Sales Tax Act. The thrust of that Act is the imposition of a sales tax for the consumption and use of tangible personal property. In the present case, Extendicare breached and repudiated the lease. The consumption and use of the computer equipment stopped and payments on the lease ceased. Negotiations ensued and resulted in Extendicare making payments totalling $1,749,000 to Canada Lease. The payments achieved two purposes -- they purchased Canada Lease's acceptance of Extendicare's repudiation of the lease (thereby terminating the contract), and they purchased Canada Lease's forbearance from commencing a lawsuit in which, potentially, Canada Lease could have recovered about double the settlement payment amounts. In short, the two payments were made in the context of a termination of all relationships (contractual and litigation) between the parties, not in the context of a continuing lease. Accordingly, the two payme nts do not come within "the whole scheme of the Act". Disposition

[58] I would allow the appeal. The special case stated by the parties is disposed of as follows:

Question: Were the payments of $1,000,000 and $749,000 (the "Payments") made by the Appellant to Canada Lease as described in paragraphs 14 and 16 subject to retail sales tax under the Act?

Answer: No.

[59] The respondent should vacate the notice of assessment and repay to the appellant $122,430 plus the interest paid by the appellant. The appellant is entitled to receive interest in accordance with s. 33 of the Retail Sales Tax Act.

[60] The parties have agreed that in light of the novelty of the issue there should be no costs order in this court or in the trial court.

Appeal allowed.

Notes

Note 1: I use the citation that applies tot he facts of this appeal. The key provisions that must be considered int his appeal remain unchanged. The current Act is the Retail Sales Tax Act, R.S.O. 1990, c. R.31.

Note 2: Extendicare is a successor to Crowntek Inc. I will refer to Extendicare in these reasons. Some of the correspondence to which I will refer mentions Crowntek. It is common ground for purposes of this appeal that Crowntek and Extendicare are the same.