Date: 20001003
Docket: 97-2826-IT-G
BETWEEN:
RICHARD GLASSFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Vancouver, British Columbia, on
July 19, 2000. There are two issues. The first is whether a sale
dated July 11, 1991 by the Appellant to West Fraser Mills Ltd.
("West") of approximately 316 to 320 acres of land and
the standing timber thereon, in the Quesnel area of British
Columbia ("Property") gave rise to an income receipt or
a capital gain. The second issue is whether, if it was a capital
gain, the Appellant was entitled to the normal deduction of
$100,000 provided for in section 110.6 of the Income Tax
Act (the "Act") or did he qualify for the
enhanced deduction for qualified farm property provided for in
subsection 110.6(2) of the Act.
[2] It should be noted that because of the decision of the
Federal Court of Appeal in Her Majesty the Queen v. Larsen
99 DTC 5757 there was no longer an issue, on the part of the
Respondent, as to whether the payment under the sale was
dependent upon the use of or the production from property, as
contemplated in paragraph 12(1)(g) of the Act. Also
the Respondent no longer contends there was a benefit as
contemplated in paragraph 10(c) of the Reply to the Notice
of Appeal.
FACTS
[3] The basic facts are:
1. Commencing in 1970 and continuing to the present, the
Appellant carried on a beef cattle business and other businesses
in the Quesnel area of British Columbia. Some of the businesses
were carried on under the name Ingenika Ranches, a proprietorship
of the Appellant. For the 1992 year and prior years, the
Appellant reported income from various sources. Schedule 1
of the Reply to the Notice of Appeal sets forth the various
amounts of income as follows:
Dollar Basis
|
5 year total
|
1992
|
1991
|
1990
|
1989
|
1988
|
Timber Sales
|
$1,056,000
|
60,000
|
377,000
|
68,000
|
186,000
|
365,000
|
Trucking Services
|
153,000
|
129,000
|
|
24,000
|
|
|
Logging Services
|
85,000
|
|
|
85,000
|
|
|
Livestock Sales
|
296,000
|
52,000
|
1,000
|
129,000
|
63,000
|
51,000
|
Miscellaneous
|
46,000
|
3,000
|
6,000
|
25,000
|
9,000
|
2,000
|
Total per T1
|
$1,635,000
|
244,000
|
384,000
|
331,000
|
258,000
|
418,000
|
Percentage Basis
|
|
|
|
|
|
|
Timber Sales
|
64%
|
25%
|
98%
|
20%
|
73%
|
88%
|
Trucking Services
|
10%
|
53%
|
|
7%
|
|
|
Logging Services
|
5%
|
|
|
26%
|
|
|
Livestock Sales
|
18%
|
21%
|
0%
|
39%
|
24%
|
12%
|
Miscellaneous
|
3%
|
1%
|
2%
|
8%
|
3%
|
0%
|
Total per T1
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
[4] In October, 1981 the Appellant signed a Crown Agricultural
Lease ("CAL") for the Property for a term of ten years
with an option to purchase the Property on clearing 25% of it for
agricultural purposes. Section 4.01(o) of the CAL obliges the
Appellant, as Grantee, not to cut, destroy or remove timber or
trees standing on the land except in compliance with the
Forest Act and then only to the extent necessary to clear
and develop those portions of the land designated as desirable or
suitable for the construction of buildings and farm-related
facilities on the plan annexed to the lease as Schedule
"B". Section 9.02 of the CAL provided that the
Grantee's option to purchase was conditional upon certain
factors, including the condition that the Grantee shall have
cleared and cultivated at least 25% of the land designated as
arable in the clearing plan annexed to the CAL. Moreover the
Grantee was bound to submit to the Grantor an option in the form
of a Schedule annexed to the CAL. Section 3.05 of that Schedule
provides as follows:
3.05 Documents necessary to transfer title shall be prepared
by the Grantee in form satisfactory to the Grantor and in
compliance with the Land Title Act.
[5] The Property contained standing timber on it when the
Lease was signed. The Appellant before, during and after 1991 had
a considerable number of years of logging experience and as
mentioned reported timber sales on account of income.
[6] The Appellant exercised the option to purchase the
Property in April, 1990 for $61,365. There is some dispute as to
the actual date of the sale or grant by the Ministry of Crown
Lands of the Province of British Columbia ("Ministry")
to the Appellant. To qualify as a "qualified farm
property" the Appellant had to have owned the Property for
at least 24 months prior to its sale to West mentioned below.
Tabs 5 and 6 of Exhibit A-1 indicate that the purchase by
the Appellant from the Ministry was to be dated December 15,
1988, whereas Tab 7 of Exhibit A-1 indicates the Crown grant date
as April 3, 1990. The 1988 date would satisfy the 24 month
condition but the 1990 date would not.
[7] The Appellant encountered financial difficulties in
meeting a considerable amount of indebtedness to the Royal Bank
("Bank"), all as more fully appears from
Exhibit A-1, Tab 10. As a partial solution to the financial
problems, the Appellant sold the Property to West on July 11,
1991. The purchase price for the property was $357,500 with
$292,500 allocated for the standing timber and $65,000 to the
land. The Appellant in 1990 also sold off all his cattle for
approximately $100,000. The bulk of the monies from those sales
went to the Bank to reduce the indebtedness.
[8] The Property was logged for West by Jay Four Contracting
Ltd., a company of which the Appellant and his wife were
directors and sole shareholders.
[9] By separate agreement dated July, 1991, West agreed to
sell the Property to the Appellant's spouse for $65,000. Thus
the Appellant and his wife reacquired the Property and continue
to own all the acreage described below.
[10] As indicated in Tab 19 of Exhibit A-1 there is still a
considerable amount of standing timber on the various properties
owned and leased by the Appellant and his spouse. A summary of
those properties owned and leased is produced at Tab 2 of
Exhibit A-1 and reads as follows:
RICHARD GLASSFORD
SCHEDULE OF PROPERTY ACQUISITIONS
Property Lot No.
|
Acreage
|
Leased
|
Purchased
|
Lot 649 (Home Ranch)
|
40
|
|
October 8, 1970
|
Lot 3929
|
160
|
|
October 5, 1978
|
Lot 8666
|
40
|
|
October 5, 1978
|
Lot 3520
|
160
|
|
June 18, 1982
|
Lot 7279
|
169
|
|
June 24, 1980
|
Lot 3928 (Subject)
|
320
|
November 15, 1981
|
...
|
Lot 3908
|
210
|
September 19, 1987
10 year lease
|
Transferred: August 18, 1999
|
Lot 3930
|
280
|
January 17, 1989
10 year lease
|
May 7, 1997
|
Lot 1611
|
461
|
August 6, 1987
10 year lease
|
Transferred: February 25, 1999
|
The Appellant estimated the present total acres of his ranch
at approximately 2000 of which 1500 had been cleared of logs. The
cleared land is used for pasture. In this connection Michael
Staves, the loan officer of the Royal Bank in charge of the
Appellant's account, testified as follows:
A. Well, agricultural leases were a way, on a relatively small
scale in terms of the Crown timber harvest, to encourage people
to expand agricultural production in the province by converting
Crown timber land, which was raw land, into agricultural
production. So by leasing the land, the timbered raw land to
ranchers and enabling them to harvest the timber and convert the
land into agricultural production as hay fields or meadowland or
pasturage, it increased the agricultural land base in the
province with the result that food production in the province
could be increased.
...
A. Well, commonly in a situation where a person is logging,
you cut down the tree and haul it away and then deal with the
stumps afterwards. The stumps are left in the ground. In the case
of a rancher who is clearing land for agricultural production,
the elimination of those stumps can sometimes be a problem,
particularly if you don't have heavy enough equipment to pull
the stumps out of the ground after the trees have been pulled or
chopped down. Mr. Glassford's method was to push the tree
over with the root still intact and then chop the tree off after
the stump was up-tilted. This wouldn't fit with normal
logging operations where hauling the trees out after the stumps
are all sticking up from the ground would not be -- it would be
tougher to do that. But certainly from his perspective, as a
rancher clearing property for agricultural development, having
the stumps already tipped out of the ground made it a lot easier
to pile them up and burn them afterwards.
SUBMISSIONS
[11] The basic submission of the Respondent is that prior to
1991 the Respondent had reported timber sales on account of
income and that is evidenced by the T-1 returns. Further a large
percentage of his income in the years mentioned above in
paragraph 1 represented logging income. In other words, the
Appellant was primarily a logger and only partially a rancher.
The corollary of this is that the sale to West triggered an
income receipt as opposed to a capital gain.
[12] The Respondent's submission with respect to the 24
month issue is that one must look at the Land Act of
British Columbia, [RSBC 1996] Chapter 245. The Land
Act governs dispositions of Crown land generally and
section 42 provides as follows:
42 (1) The date of a disposition under this
Act is the date on which the instrument creating the
disposition is executed on behalf of the government.
[13] Counsel for the Respondent also refers to section 8 of
the Land Act, which provides as follows:
8 (1) A person may not acquire by prescription,
occupation not lawfully authorized or a colour of right, an
interest in Crown land, or in any land as against the
government's interest in it.
(2) A person does not acquire a right, vested or contingent,
in Crown land, or a priority to Crown land by filing an
application for Crown land under this Act.
(3) A disposition of Crown land is not binding on the
government until the certificate of purchase, grant, lease,
licence of occupation, right of way or easement is executed by
the government under this Act.
(4) Negotiations or arrangements, whether in writing or
otherwise, before the execution of the documents referred to in
subsection (3) are not binding on and do not commit the
government to perform or complete a disposition.
[14] The principal submissions of the Appellant are to the
effect that the sale to West was essentially a once in a lifetime
transaction caused by the financial difficulties the Appellant
was in at that time. Moreover, what was sold was real property,
i.e. land and timber thereon. This is a capital asset and its
sale resulted in a capital gain.
[15] On the 24 month issue Counsel for the Appellant points to
section 11 of the Land Act, which provides as follows:
11 (1) Subject to compliance with this Act and the
regulations, the minister may, on an application, by public
auction, public notice of tender or public drawing of lots,
dispose of Crown land, either surveyed or unsurveyed, to a person
entitled under this Act, as the minister considers advisable in
the public interest.
(2) The minister may, under subsection (1),
(a) sell Crown land,
(b) lease Crown land,
(c) grant a right of way or easement over Crown land, or
(d) grant a licence to occupy Crown land.
(3) In a disposition of Crown land under this section, the
minister may impose the terms, covenants, stipulations and
reservations the minister considers advisable, and without
limiting those powers, the minister may impose some or all of the
following terms:
(a) the applicant must personally occupy and reside on the
Crown land for a period set by the minister;
(b) the applicant must do that work and spend that money for
permanent improvement of the Crown land within that period the
minister requires.
[16] Counsel argues that that provision gives a certain
discretion in the Crown to fix a date other than the actual date
of the grant. He argues further that adjustments for interest and
rent point to December 15, 1988 as the effective
date.
ANALYSIS AND DECISION
[17] Reference is made to Sutton Lumber & Trading Co.
Ltd. v. The Minister of National Revenue 53 DTC 1158
(S.C.C.). In this case the Supreme Court of Canada determined
that although the Appellant company had extensive timber rights
and leases and that one of its stated business objects was to
deal in such rights and leases, it was not in the business of
buying and selling timber leases with a view to dealing in them
for the purpose of profit. The company was actually in the
business of manufacturing lumber. However the sale of the timber
lease in question was merely a realization upon one of its
capital assets. Consequently the sale was treated on capital
account and not income account.
[18] The decision in Her Majesty the Queen v. Mel-Bar
Ranches Ltd. 89 DTC 5189 dealt mainly with the
application of paragraph 12(1)(g) of the Act with
respect to use and production. However some comments from that
case would appear to apply equally to the present appeal. For
example in Mel-Bar the headnote reads as follows:
The corporate taxpayer owned a 2,200-acre piece of land on
which it carried on a cattle ranch operation. Pursuant to the
terms of a log purchase agreement between the taxpayer and H
Ltd., entered into on April 12, 1979, the latter agreed to pay
the taxpayer for 25,500 tonnes of fir at a price of $11.85 per
tonne on the stump. H Ltd. was to cut and remove the entire
25,500 tonnes from the taxpayer's land, at its expense,
prior to December 31, 1979, which it was unable to do. An
extension agreement entered into early in 1980 permitted H Ltd.
to continue cutting up to the 25,500 tonne limit, albeit at an
increased price of $1 per tonne, until June 30, 1980. In June of
1980, the taxpayer terminated the agreement because the logging
operations were interfering with its cattle ranch operation. At
this point, H Ltd. had not cut and removed the entire 25,500
tonnes, but it paid the taxpayer during 1979 and 1980 a total of
$294,134 for the logs which actually were cut and removed. The
taxpayer initially included the amounts comprising the $294,134
in its business income for its 1979 and 1980 taxation years, but
was advised by its accountant to treat those amounts as capital
receipts, which was done. The Minister reassessed the taxpayer,
adding the amounts back into income either as business income,
or, as amounts "dependent upon the production or use of
property" which, under s. 12(1)(g), are required to be
categorized as income. The taxpayer appealed to the Tax Court of
Canada, and its appeal was allowed (87 DTC 467). That Court found
that the logs in question were not inventory or stock in trade,
since the taxpayer's business was not logging, but operating
a cattle ranch. Nor was the price received for the logs an amount
"dependent upon production", since the original log
purchase agreement, when viewed in its total context, was really
one which provided for the sale of a specified block of logs at a
fixed price. This did not change, even though the agreement was
later extended, the price was changed, and the taxpayer was, as
matters transpired, paid only for the logs actually cut. The
Crown appealed to the Federal Court–Trial Division,
reiterating the position it had taken in its original
assessment.
Held: The Crown's appeal was dismissed. The reasoning of
the Tax Court of Canada was affirmed, and the Minister was
directed to treat the amounts in question as capital receipts in
the taxpayer's hands. Similarly, all expenses incurred by the
taxpayer with respect to the log sales were directed to be
treated as on account of capital.
[19] The fact that the Appellant reported prior timber sales
on account of income is not conclusive. There was no evidence to
the effect that any of those sales were similar to the sale in
question, which comprised the sale of a large tract of land with
the timber thereon as opposed to sales of timber. As mentioned in
Mel-Bar the trees still standing form part of the real
property and consequently what occurred was the sale of real
property comprising land and standing timber. This in my opinion
is clearly a disposition of a capital asset and deserves capital
gain treatment.
[20] On the issue of the effective date of the disposition by
the Crown, I am of the view that the provisions of the Land
Act cited by counsel for the Respondent are to apply
especially in cases of doubt where previous correspondence refers
to a date different from that of the date of the actual grant.
The result is that the Appellant did not own the Property for a
period of 24 months. Thus the sale of the Property to West does
not qualify as a disposition of qualified farm property.
CONCLUSION
[21] The gain realized on the sale to West was a capital gain
and should be taxed as such. However, since it was not a sale of
qualified farm property the Appellant is not entitled to the
enhanced deduction provided for in subsection 110.6(2) of the
Act.
[22] As requested by Counsel, they are to contact the Registry
of this Court to set a date when I can hear, by conference call,
their submissions as to costs.
Signed at Ottawa, Canada, this 3rd day of October,
2000.
"T. O'Connor"
J.T.C.C.