Raby v. MNR, 65 DTC 5085, [1965] CTC 138 (Ex Ct)

DUMOULIN, J.:—Il s’agit d’un pourvoi devant cette Cour de la décision rendue le 1er mars 1963, par la Commission d’appel de l’impôt, approuvant une cotisation supplémentaire de $8,382.52 afférente à un profit de $27,191.40, réalisé par l’appelant pendant l’année d’imposition 1957.

Bien que les procédures littérales soient rédigées en anglais, l’enquête et les plaidoiries orales furent entendues en français; je rédigerai done mon jugement dans cette langue qui, du reste, est celle de Pierre Raby.

Dans un exposé très minutieux des faits, l’appelant déclare que, par le truchement d’une firme, Global Construction Corn- pany, dont il était propriétaire, il avait construit une centaine de maisons d’habitation dans le secteur Roxboro, en banlieue de Montréal. Certaines complications de nature financière et municipale ralentirent les opérations au printemps de 1956, mais, à l’été de cette même année, Pierre Raby, alias Global Construction Company, accepta de s’associer avec un dénommé Roger Pilon pour faire l’acquisition de lots à bâtir.

Il fut aussitôt procédé à l’achat de six lopins de terre, puis, le 17 décembre 1956, la société Raby-Pilon souscrivit une promesse de se porter acquéreur, au prix de $63,366, de terrains appartenant à Remi Realty Ltd., engagement exécuté peu après selon l’aveu de Roland Bigras, alors secrétaire-trésorier de cette compagnie.

Au mois de juillet 1957, Raby devint sérieusement malade, et sur le conseil de son médecin, convint de se retirer des affaires et de dissoudre la société récemment formée.

Pour faciliter la réalisation de ce dessein, Raby, qui aurait préféré le retrait pur et simple de sa moitié de l’actif social, consentit, cependant, à la contre-proposition de Roger Pilon désireux d’acheter la part de son associé dans les terrains communs à un taux dont on conviendrait, puis de compléter l’érection de certaines maisons selon les termes et conditions de l’ancienne société. Dans sa formulation anglaise cette entente se lit comme il suit:

“ (m) Pilon, desirous of continuing the partnership’s business, proposed that he acquire Appellant’s interest in the partnership’s land assets, at a price to be agreed upon and that the houses in course of construction be completed on the prevailing partnership basis.’’

A ce stade, la société Raby-Pilon possédait environ 92 lots à construire.

L’estimation des biens à laquelle il fut alors procédé établit la demi de l’appelant à $92,000, assujettie, toutefois, à une dette hypothécaire de $64,808.60, laissant une part nette de $27,191.40.

Incapable d’acquitter d’un coup cette obligation et de poursuivre son entreprise de construction, Pilon eut recours à des moyens assez compliqués afin de se procurer les ressources nécessaires.

Le plan échafaudé fut que Pierre Raby vendrait sa part des lots à une entreprise du nom de Alain Construction Inc., pour $92,000; que cette dernière, après avoir purgé l’hypothèque de $64,808.60, détenue par Remi Realty Inc. et payé $27,191.40 a Raby, revendrait ces mêmes terrains, avec profit, à Roger Pilon, au prix de $115,000.

L’admission par l’intimé de tous les faits permet, dorénavant, de supprimer le fastidieux récit des transactions multiples qui suivirent.

En bref, cette somme de $27,191.40 fut versée à l’appelant en 1957, qui omit de l’inclure dans son rapport d’impôt de l’année susdite par le motif que—et je citerai textuellement :

“4. The profits brought to tax are not properly taxable income and consisted of capital appreciation and enhancement not taxable within the meaning of the Income Tax Act.

Il s’agirait danc dans la persuasion de l’appelant d’une plus- value de capitaux.

Par ailleurs, l’appelant, dans l’article 3 de la partie B (Page 4) de son avis d’appel qualifie cette vente dans les termes ci-après :

“3. The sale was in effect the disposal of the capital of the Appellant’s undivided one-half of the partnership’s land which, in effect, was assimilable to a stock-in-trade and was acquired for and by the remaining partner.’’ (Les italiques sont de moi.)

Comme bien on pense, pareille interprétation de la transaction n’est pas demeurée inaperçue. L’intimé, aux articles 10 et 15 de la partie B de sa réponse (pages 2 et 3) prend acte de cette admission, qui ferait de la vente une cession de fonds de commerce, de valeurs portées à l’inventaire social et, de ce chef, soumise à l’impôt sur le revenu selon les articles 3, 4 et 139(1) (e) de la loi.

Au dictionnaire de terminologie légale de Black {Black s Law Dictionary, 4th ed.) apparaissent les définitions que voici des expressions mercantiles ‘‘Stock-in- trade” (fonds de commerce) et “Inventory” (inventaire) :

“Stock-in-trade: . . . Merchandise or goods kept for sale or

traffic.

Inventory: . . . an itemized list of the various articles constituting

a collection, estate, stock- in-trade, etc., with their estimated or actual values.’

Après ces explications préliminaires, la position du problème est simple. La transaction, avec profit, par laquelle Pierre Raby cédait, en 1957, à la firme Alain Construction Inc., alias Roger Pilon, sa part dans une entreprise de construction constituait- elle un gain de capital, comme le voudrait l’appelant, ou une affaire de nature commerciale, selon la prétention de l’intimé î

Rappelons les éléments constitutifs de cette part : la propriété, pour moitié, de 92 lots et, en outre, une égale proportion des profits pouvant résulter des travaux en cours d’exécution.

Antérieurement au statut 54 de 1955, art. 27, qui intercalait, entre autres, dans la Loi de l’impôt, l’art 85E(1), la version de l’appelant se fut imposée sans conteste, vu le jugement de la Cour Suprême dans l’instance Frankel Corporation Ltd. +. M.N.R., [1959] S.C.R. 718; [1959] C.T.C. 244 auquel je réfère les parties.

Mais cet ajouté statutaire de 1955, dont le texte suit, dispose du cas dans un sens tout autre, et je cite :

“85E. (1) Quand, sur l’aliénation d’une entreprise ou de quelque ‘partie d’une entreprise ou après l’avoir aliénée, ou lorsqu’il cesse d’exploiter une entreprise ou quelque partie d’une entreprise ou après avoir cessé de l’exploiter, un contribuable a vendu la totalité ou une partie des biens compris dans l’inventaire de l’entreprise, les biens ainsi vendus sont censés, aux fins de la présente Partie, avoir été vendus par lui

(a) au cours de la dernière année d’imposition où il a exploité l’entreprise ou la partie de l’entreprise, et

(b) au cours de l’exploitation de l’entreprise.”

Intentionnellement ou pas, cet article met de côté l’autorité du précédent ci-haut mentionné. La transaction dont s’agit, disposant d’une partie, celle de Raby, des biens compris dans l’inventaire d’une entreprise que le cédant cessait d’exploiter, s’intègre, par définition de la loi, dans la catégorie des activités nommément visées au sous-paragraphe (e) du paragraph (1) de l’article 139. La pièce 1, la vente conclue le 4 octobre 1957, entre Global Construction, autrement dit Pierre Raby, et Alain Construction, démontre de façon concluante que la part du cédant se composait d’une moitié ‘des biens compris dans l’inventaire de l’entreprise” jadis exploitée conjointement avec Roger Pilon.

PAR CES MOTIFS, l’appel est rejeté mais sans frais, aucune mention de l’article 85E(1), raison essentielle du débouté, n’apparaissant dans la réponse de l’intimé à qui l’article 99(1) de la Loi fiscale imposait la divulgation ‘‘des dispositions statutaires et raisons ’ sur lesquelles il avait l’intention de s’appuyer. MINISTER OF NATIONAL REVENUE, Appellant,

and

HIGHWAY SAWMILLS LIMITED, Respondent.

Exchequer Court of Canada (Dumoulin, J,), March 9, 1965, on appeal from a decision of the Tax Appeal Board, reported 32 Tax A.B.C. 161.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections 11(1)(a), (e), 20(5) (a), (e)(ii)—Income Tax Regulations—Sections 1100(1)(e), 1100(2), 1101(3), 1102(2) and Schedule C—Capital cost allowance on timber limit—Fortuitous sale of logged-over land— Whether sale price of land equivalent to proceeds of disposition of depreciable property (timber limit)—Computation of terminal loss.

The taxpayer owned a timber limit which had been subject to deductions for capital cost allowance under Section 11(1) (a) of the Act and under Section 1100(1) (e) of and Schedule C to the Regulations. In 1947 the undepreciated capital cost of this timber limit was $49,379 when it was sold for a net amount of $22,620, the price being predicated on logged-over land, or land from which all the merchantable timber had been removed, an operation which the taxpayer was given a period of 3^ years thereafter to complete. Because the taxpayer considered the bare land worthless, and would ordinarily have allowed the logged-over land to revert to the Crown for unpaid taxes, it considered the sale an “extremely fortuitous windfall” and a capital receipt, rather than as proceeds of depreciable property (the timber limit) as contended by the Minister. In the Minister’s view the terminal loss deductible under Section 1100(2) of the Regulations in respect of the timber limit should be reduced by the said proceeds of disposition thereof. In the taxpayer’s view, however, Section 20(5)

(e) (ii) of the Act had no application when what was disposed of was bare land, said not to be “depreciable property”’.

HELD (reversing the decision of the Tax Appeal Board) :

(i) That a timber limit was depreciable property by virtue of Section 20(5) (a) of the Act and that upon its sale the undepreciated capital cost thereof required to be reduced by the proceeds of disposition, so that the amount deductible under Section 1100(2) of the Regulations was only the net amount, or $26,759.30, as contended for by the Minister.

(ii) That the Minister’s appeal be allowed.

CASE REFERRED TO:

Caine Lumber Co. v. M.N.R., [1958] Ex. C.R. 216; [1958] C.T.C.

132; [1959] S.C.R. 556; [1959] C.T.C, 221.

D. M. Goldie, R. C. McCall and G. F. Jones, for the Appellant.

K. Meredith, for the Respondent.

DUMOULIN, J.:—The Minister of National Revenue has appealed from a decision of the Tax Appeal Board, dated May 10, 1963, respecting an income tax assessment for the respondent’s 1957 taxation year.

The appellant asserts that, during its 1957 taxation year, the respondent owned a timber limit, consisting of several blocks east of the Sooke River, District of Malahat, B.C., which had an undepreciated capital cost of $49,379.30, immediately prior to a sale of these holdings to Alaska Pine and Cellulose Company Limited, on March 4, 1957 (cf. exhibits Z-7 and Z-8).

The sale price was $28,800 (ef. ex. Z-8) which, after deducting commission and sundry selling expenses, the Minister estimated, in net proceeds, at $22,620, a valuation uncontested by respondent in paragraph 3(e) of its Reply to Notice of Appeal.

In consequence of the disposal aforesaid, Highway Sawmills, at the end of 1957, no longer retained any proprietary title in this limit, a fact that induced the appellant to assess at $26,759.30 the ‘‘undepreciated capital cost’’ to respondent company of this timber limit at the end of the taxation year which terminated on September 30. The above figure of $26,759.30 was reached by subtracting the sale price—net proceeds—of $22,620 from $49,379.30, undepreciated capital cost of the timber limit before the transaction of March 4, 1957.

Highway Sawmills’ claim of $45,411.42 capital cost allowance for its timber limits during taxation years 1957 was disallowed and, in lieu thereof, a deduction of $26,759.30 was permitted.

“The appellant relies, inter alia, upon sections 11 and 20 of the Income Tax Act, R.S.C. 1952, chapter 148, and upon section 1100 and Schedule C of the Income Tax Regulations.” (Notice of Appeal, para. 5.)

Paragraphs 6 and 7 of appellant’s pleadings respectively set out the twofold basis of this appeal, namely : that the respondent, having sold the timber limit prior to end of its 1957 taxation year, was not entitled in computing its Income, to any deduction under Section 1100(1) (e) of and Schedule ‘‘C’’ to the Regulations (Notice of Appeal, para. 6) ; but, on the other hand, that respondent was entitled to and allowed a $26,759.30 deduction, pursuant to Section 1100(2), the latter amount representing, in the Minister’s estimation, the undepreciated capital cost of the timber limit as of September 30, 1957, closing date of Highway Sawmills’ fiseal year (para. 7).

Conflicting with this view, the respondent asserts that it had purchased certain timber limits anteriorly to 1957 ‘‘for the purpose solely of logging timber therefrom . . . and the price therefor was fixed with reference to the value of the timber thereon with no allowance whatsoever for land’’ (Reply to Notice of Appeal, para. 3(c)). In paragraph 3(d) the company goes on to say that: “Between the years of the acquisition of the said Blocks and the end of the fiscal year of the Respondent 1957, the Respondent logged all the merchantable timber from the timber limits aforesaid . . .” and, consequently, the full purchase price of those lands was deducted from income as capital cost allowance. Paragraph 3(e), after mentioning the sale for $22,620 to Alaska Pine and Cellulose Ltd., during 1957 (March 4), specifies Highway’s basic interpretation of the transaction, which would have been: ‘‘. . entirely fortuitous insofar as the Respondent was concerned, the Respondent considering at all material times that the land had no value . . . save, of course, that of the timber growing on it, and, therefore, the sum brought in by the sale of the bare ground .. . constituted a capital receipt . . . and a windfall.’’ (This last quotation excerpted from para. 7.)

The respondent, attaching a different meaning to Sections 11 and 20 of the Act, relies on those statutory enactments and also upon Sections 1101, 1105 of the Regulations and Schedules B and C thereto.

Unravelling the interplay of the pertinent legal provisions herein, albeit lucidly drafted, is by no means a simple task and calls for a considerable degree of concentration in order to distinguish what to a layman might seem Ariadne’s clew. In point of fact, the issue narrows down to deciphering which Regulations and Schedule should govern, but, as we shall see, a rather intricate statutory skein must be unwound before the labyrinth’s exit is reached. Once again, let us bear in mind the question awaiting a solution: whether or not the disposal price of bare land, denuded of all merchantable timber, must be deducted from the undepreciated capital cost of the limit immediately prior to its sale to determine its undepreciated capital cost after the sale.

The respondent was entitled, during the years following the purchase of the timber limit, to deduct capital cost allowance under the following provisions:

(1) Section 11(1) (a) of the Income Tax Act which authorizes a deduction in computing a taxpayer’s income for a taxation year of ‘‘such part of the capital cost to the taxpayer of property . . . as is allowed by regulation’’

(2). Section 1100(1) (e) of the Income Tax Regulations which

provides for an allowance under paragraph (a) of Section 11(1) of ‘‘such amount as he may claim not exceeding the amount calculated in accordance with Schedule C in respect of the caiptal cost to him of a timber limit .. . ” ;

(3) Schedule C to the Income Tax Regulations which sets out a formula for determining the amount of the annual deduction in respect of the capital cost of a timber limit. During the 1957 taxation year, the respondent disposed of the timber limit (which, by virtue of Section 1101(3) is a prescribed class) and was therefore entitled, by virtue of Section 1100(2) (infra), to a deduction ‘‘equal to the amount that would otherwise be the wndepreciated capital cost of property of that class at the expiration of the year’’.

Section 1101(3) enacts the following:

“ (3) For the purpose of this Part and for the purpose of Schedules C and D

(a) a timber limit or a right to cut timber from a limit shall be deemed to be a separate class of property . . .”

Undepreciated capital cost is defined by Section 20(5) (e) of the Income Tax Act:

“ (e) “Undepreciated capital cost’ to a taxpayer of depreciable

property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(i) the total depreciation allowed to the taxpayer for property of that class before that time,

(ii) for each disposition before that time of property of the taxpayer of that class, the least of

(A) the proceeds of disposition thereof,

(B) the capital cost to him thereof, or

(C) the undepreciated capital cost to him of property of that class immediately before the disposition, and

(iii) each amount by which the undepreciated capital cost to the taxpayer of depreciable property of that class as of the end of a previous year was reduced by virtue of subsection (2).”

It may be worthwhile to note that since the decision by this Court of Caine Lumber Company v. M.N.R., [1958] Ex. C.R. 216: [1958] C.T.C. 132, April 16, 1958, affirmed by the Supreme Court of Canada, [1959] S.C.R. 556; [1959] C.T.C. 221, April 28, 1959, paragraph (a) of Section 20(5) was amended in 1959 (S.C., ce. 45, Section 6(1)) by closing the quotation marks after the word ‘‘property’’ in the first line rather than as formerly after the word ‘‘taxpayer’’, same line. Similarly, para. (e) of Section 20(5) was amended (1959, S.C., e. 45, Section 6(3)) by closing the quotation marks after the word “cost” in the first line, rather than, as previously, after the word ‘‘property’’ in the same line. Possibly those slight variations intended bringing the definitions closer to the current acceptation of the bracketed terms and more in line with the remarks of Locke, J. at p. 561 of the Caine Lumber case (supra).

Once more, let us look at the deductions allowed in computing income, particularly at paragraph (a), subsection (1) of Section 11, providing for fiscal allowances in relation to capital cost of propert :

" (a) such part of the capital cost to the taxpayer of property,

or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation ; ’’

This refers the matter to Part XI of the Regulations, entitled ‘* Allowances in Respect of Capital Cost’’, under which appear Section 1100, subsection (1) and paragraph (e), this latter disposition captioned ‘‘Timber Limits and Cutting Rights’’; I quote :

"1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, [dealing with capital cost of property] there is hereby allowed to a taxpayer in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

(e) such amount as he [the taxpayer] may claim not exceeding the amount calculated in accordance with Schedule C in respect of the capital cost to him of a timber limit or a right to cut timber from a limit;”

Next in line as affording a general direction are subsection (2) of Section 1100 and subsection (3) (a) of Section 1101, hereunder :

"(2) Where, in a taxation year, otherwise than on death, all property of a prescribed class that had not previously been disposed of or transferred to another class has been disposed of or transferred to another class and the taxpayer has no property of that class at the end of the taxation year, the taxpayer is hereby allowed a deduction for the year equal to the amount that would otherwise be the undepreciated capital cost to him of property of that class at the expiration of the taxation year.”

Subsection (3) of Section 1101 hereunder also bears the specific title of ‘‘Timber Limits and cutting Rights’’:

"(3) For the purpose of this Part and for the purpose of Schedules C and D

(a) a timber limit or a right to cut timber from a limit shall be deemed to be a separate class of property . . . ’ ’

I might also mention Section 1102(2) to the effect that:

“ (2) The classes of property described in Schedule B shall be deemed not to include the land upon which a property described therein was constructed or is situated.’’

Before passing on to Schedule C, it may be of some interest to ascertain the nature of the transactions between Highway Sawmills Limited and Alaska Pine Company as stated in ex. Z-7 and Z-8.

Exhibit Z-7, dated July 26, 1956, is an option ‘‘open for acceptance by the Optionee’’ (Alaska Pine Co.) until the 24th day of September 1956, whereby for the sum of $30,000 the Optionor (Highway Sawmills Ltd.) promises to sell ‘‘the lands and premises (description follows) . . . together with all timber (except as herewith provided) . . .”, an exception of no indifferent significance, reserving to Highway Sawmills ‘‘. .. the right to cut and remove free of charge all merchantable timber on said lands for a period of two years from the date of such acceptance, together with all necessary rights-of-way over the roads crossing said lands whether presently in existence or constructed by the optionor or the optionee during the said two-year period”.

Exhibit Z-8, dated March 4, 1957, is the deed of sale whereby Highway Sawmills, for a price of $28,800, conveys unto Alaska Pine Company the full ownership in fee simple of certain designated lands in the Malahat and Otter Districts, Vancouver Island, ‘‘save as set out in Schedule ‘A’ hereto . . .’’ The grantor company thereby reserved to itself “‘the right to enter upon all or any part of the lands described . . . for the purpose of felling, cutting and removing all merchantable timber now standing, lying or being on the said lands and for such purposes to use any existing roads on the said lands and to construct and use such other roads on the said lands as the Grantor may deem necessary, provided however that the Grantor shall conduct its operations in such a manner as to minimize any damage to other timber growing on the said lands; and the rights hereby reserved to the Grantor shall terminate on the 20th day of September, 1960, or so soon as the Grantor shall have removed . . . all merchantable timber now standing, lying or being thereon . . .’’.

Mr. John Williams White, office manager of Highway Sawmills (in voluntary liquidation since 1960), testified his company “had no intention of selling logged-over lands, but being offered $15 an acre for 2002 acres we nevertheless decided to accept that windfall’’. The witness explains that his firm ‘‘hoped to get rid of the ground for unpaid taxes after cutting all merchantable timber”.

It remains uncontested that immediately prior to the disposal deed of March 4, 1957 (exhibits Z7 and Z8) the undepreciated capital cost was $49,879.30. Then, at the date aforesaid, the respondent, reserving to itself during three years and six months, viz. March 4, 1957, September 20, 1960, the right to cut and remove the entire timber crop, sold the land and received therefor a price of $22,620. Under such circumstances it would be difficult, I believe, to deny the applicability of subsection (2) of Section 1100, next repeated for convenience’s sake, with some deletions :

“1100. (2) Where, in a taxation year, . . . all property of a prescribed class . . . has been disposed of . . . and the taxpayer has no property of that class at the end of the taxation year, the taxpayer is hereby allowed a deduction for the year equal to the amount that would otherwise be the undepreciated capital cost to him of property of that class at the expiration of the taxation year.’’

The appellant has set at $49,379.30 the undepreciated capital cost to respondent of the limit immediately prior to its disposal, a figure undisputed and exceeding the capital cost allowance of $45,411.42 claimed by Highway Sawmills for 1957. Out of the valuation of $49,379.30, a fraction, or $22,620, was paid into the company’s coffers. The agreed figure of $49,379.30 remains undisturbed, save that the respondent received an important portion of it. The sale price of $22,620 plus the deduction allowed of $26,759.30, add up to $49,379.30.

In brief, applying Section 20(5)(e)(ii) (supra) the Minister deducted the proceeds of sale from the undepreciated capital cost as it was before the sale and determined that ‘ ‘ the undepre ciated capital cost of property of that class at the expiration of the year’’, deductible under Section 1100(2), was $26,759.30.

The respondent contends that Section 20(5)(e)(ii) does not apply when what was disposed of was, in effect, bare land. He contends that there is a principle that land is not depreciable property.

The only principle of law concerning land in respect of capital cost allowance is Section 1102(2) which reads as follows:

“ (2) The classes of property described in Schedule B shall be deemed not to include the land upon which a property described therein was constructed or is situated.”

This provision concerning land applies only to property described in Schedule B to the Income Tax Regulations. It has no application to property described in Schedule C.

The respondent also claims that land is not a ‘‘depreciable asset’’ but is a “depletable asset’’. The answer to that contention is that a timber limit is a property in respect of which a taxpayer is entitled to a deduction under Section 11(1) (a) and it is therefore ‘‘depreciable property’’ by virtue of Section 20(5) (a), which reads:

“ (a) ‘depreciable property’ of a taxpayer as of any time in

a taxation year means property in respect of which the taxpayer has been allowed, or is entitled to, a deduction under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for that or a previous taxation year;’’

It is clear where ‘‘depreciable property’’ has been disposed of, that the proceeds of disposition are to be deducted from the amount that would otherwise be the undepreciated capital cost of property of that class in order to determine undepreciated capital cost within the meaning of that expression as defined by Section 20(5)(e). Each timber limit is a prescribed class of depreciable property. The respondent’s claim to deduct $45,411.42 is based on Section 11(1) (a) of the Act and the Regulations made thereunder. It follows that it can only deduct under Section 1100(2) the amount that would otherwise be the undepreciated capital cost of the limit at the end of the year as determined under Section 20(5) (e).

FoR THE REASONS ABOVE, the Court reaches the conclusion that the respondent’s 1957 taxation year was properly assessed, and would therefore allow the appeal with costs in favour of the appellant.