Vanwest Logging Co. Ltd. v. MNR, 71 DTC 5120, [1971] CTC 199 (Ex Ct)

WALSH, J.:—This is an appeal from re-assessments dated September 26, 1968 wherein a tax in the sum of $361,204.29 was levied in respect of income for the taxation year 1965 and a tax of nil was levied in respect of income for the taxation year 1966, and from a re-assessment for special refundable tax dated September 27, 1968 wherein special refundable tax in the amount of $19,832.84 was levied in respect of the taxation year 1966.

By a written contract dated May 1, 1964 appellant sold certain lands and timber to Weldwood of Canada Limited in an arm’s length sale for $7,500,000 payable $1,500,000 upon execution of the agreement with the balance in five equal annual instalments of $1,200,000 each, no provision being made for interest on the unpaid balance of the purchase price except in the event of default. The re-assessment appealed from included in the income of the appellant for the taxation year 1965 an amount of $303,290.19 described as ‘Interest Income—that part of the payment of $1,200,000 received from Weldwood of Canada Limited, re the sale of District Lots 240 and 1570, regarded as payment of interest—Section 7”. The re-assessment further reduced the 1966 loss of appellant carried back to its 1965 taxation year by an amount of $249,487.60 which the Minister also regarded as the payment of interest in connection with the instalment payment made during 1966. As a result, the 1966 re-assessment for special refundable tax purposes imposed such tax in accordance with Section 105E of the Income Tax Act. Appellant denies that the said amounts of $303,290.19 and $249,487.60 are income nor that they can reasonably be regarded as payment of interest within the meaning of Section 7 of the Income Tax Act.

The sole question in issue in this appeal is whether appellant has suecessfully rebutted the assumption on which the assessment was made by respondent who relies on Section 7(1) of the Income Tax Act which reads as follows:

7. (1) Where a payment under a contract or other arrangement can reasonably be regarded as being in part a payment of interest or other payment of an income nature and in part a payment of a capital nature, the part of the payment that can reasonably be regarded as a payment of interest or other payment of an income nature shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in computing the recipient’s income.

There is very little Jurisprudence on the application of the said Section 7(1), although the effect of the section has been discussed on at least four occasions in cases before the Tax Appeal Board and once before this Court in a judgment which was affirmed in the Supreme Court of Canada. In the Tax Appeal Board case of Peers v. M.N.R., 40 Tax A.B.C. 258 at 260, which was referred to and followed in the case of 'Williston Haszard v. M.N.R., 40 Tax A.B.C. 264, it was stated :

In enacting Section 7(1) of the Act, Parliament was, obviously, contemplating a contract which provides for the making of a payment of a certain sum of money at some time in the future . . . but which does not give any indication as to whether or not any interest is involved therein. When the Minister comes to deal with that type of contract, if he has reasonable grounds for thinking that the payment provided for under the contract is composed partly of interest and partly of capital, he is directed under Section 7(1) as follows: that the part of the payment that can reasonably be regarded as a payment of interest shall be included in computing the recipient’s income, irrespective of when the contract was made or the form or legal effect thereof.

The decisions in these two cases are not applicable here as they dealt with attempts by the taxpayers to apply Section 7(1) themselves so as to avail themselves of the provisions of Section 30 of the Act. In the Tax Appeal Board case of André Baril v. M.N.R., 17 Tax A.B.C. 90, it was held that the fact that mention was made in the deed of sale that no interest was payable on the outstanding balance would not constitute a bar against the Minister finding that the amounts paid were in fact in part in payment of interest and in part a payment of a capital nature if, from the context of the contract or other evidence adduced, it could reasonably be assumed that this was so. That case concluded that none of the payments received could reasonably be regarded as being in payment of interest since the appellant’s share of an estate which he had sold was worth substantially more than the amount for which he sold it. Similarly, in the Tax Appeal Board case of Wilfred R. Carter v. M.N.R., 37 Tax A.B.C. 174, it was held that this was a question of fact to be determined after consideration of all the surrounding circumstances and not merely from the form of the contract or document under which the payments were made. In that case too, the appellant’s appeal was allowed because the evidence established that the sale price did not exceed the market value of the property.

In the case of M.N.R. v. Groulx, [1966] Ex. C.R. 447; [1966] C.T.C. 115, respondent sold an unproductive farm for $395,000. The deed of sale specified that after the down payment the balance of the purchase price should be paid in eight annual instalments, without interest, provided they were paid on the due dates but that late instalments were to bear interest at the rate of 6% and a discount of 5% interest was allowed on any instalments paid before the due date. The Minister contended that the proviso in the contract for the non-payment of interest was contrary to the established practice in real estate transactions involving instalment payments of the sale price, that respondent obtained a much higher price for his farm than the other vendors of similar farms in the same area, and that the price set up in the contract therefore included interest as well as principal. According to the evidence in that case, the vendor had asked for $450,000 but had subsequently reduced this to $400,000 and the purchaser had then offered $350,000. The vendor then agreed to reduce his price to $395,000. This was not enough, however, and until that time the question of interest on the instalments had not been discussed. According to respondent’s testimony he then decided to give up interest in order to conclude the sale. Furthermore, the learned trial judge found that a good prima facie case had been established that the property was sold over its market value. This decision was upheld in the Supreme Court ([1968] S.C.R. 6; [1967] C.T.C. 422).

Appellant’s counsel referred to some of the cases which have been decided under Section 20(6)(g) of the Income Tax Act which is another section giving discretion to the Minister and using the same words ‘‘can reasonably be regarded’’. This section reads in part as follows:

20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(g) where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer of a prescribed class and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be the proceeds of disposition of depreciable property of that class irrespective of the form or legal effect of the contract or agreement; and the person to whom the depreciable property was disposed of shall be deemed to have acquired the property at a capital cost to him equal to the same part of that amount;

Appellant’s counsel argued that these cases established that in considering what may ‘‘reasonably’’ be allocated to depreciable property in an arm’s length contract, what the parties have agreed upon prima facie governs in the absence of sham. In the case of Herb Payne Transport Limited v. M.N.R., [1964] Ex. C.R. 1 ; [1963] C.T.C. 116, Noël, J. stated at page 8 [122]:

There is also no question that if the purchaser and vendor acting at arm’s length, reach a mutual decision as to apportionment of price against various assets which appear to be reasonable under the circumstances, they should be accepted by the taxation authority as accurate and they should be binding on both parties.

In Klondike Helicopters Limited v. M.N.R., [1966] Ex. C.R. 251; [1965] C.T.C. 427, Thurlow, J. stated at page 254 [429] :

. . . As pointed out by Noël, J., in Herb Payne Transport Limited v. M.N.R., [1964] Ex. C.R. 1 at p. 8; [1963] C.T.C. 116 at p. 122, in determining this question evidence will be admissible which would be excluded if the contract or agreement alone governed the rights of the taxpayer and the Minister as parties to the proceeding. The making of a contract or agreement in the form in which it exists is, however, one of the circumstances to be taken into account in the overall enquiry and if the contract purports to determine what amount is being paid for the depreciable property and is not a mere sham or subterfuge its weight may well be decisive.

These two cases were referred to in the Groulx (supra) judgment but primarily with respect to the question of admissibility of and evidence to aid in the determination of the ‘ ‘ reasonableness” of the consideration for the depreciable property despite what might have been said in the contract.

In the case of M.N.R. v. Clement’s Drug Store (Brandon) Limited, [1968] 2 Ex. C.R. 65; [1968] C.T.C. 53, Cattanach, J. stated at page 78 [64] :

In my view the cost of the depreciable property here in question is $45,000 as determined by the contract among the parties to the sale thereof. That is the amount, under the terms of the contract, the respondent paid for the fixtures and equipment in question. The contract was the subject of arm’s length negotiations over a protracted period and was not a mere sham or subterfuge but represents the bargain arrived at by the parties and in my opinion is decisive in the circumstances of this case.

Finally, in the case of Emco Limited v. M.N.R., [1969] 1 Ex. C.R. 241; [1968] C.T.C. 457, Noel, J. stated at page 250 [465] :

I must, I believe, conclude, that the evidence indicates clearly that the bargaining between the parties, the meeting of minds on both sides in these transactions, were exclusively attributable to the value of the land and nothing was attributable to the buildings. I am, therefore, satisfied that no amount of the selling price of these properties can be reasonably regarded as proceeds of disposition of the buildings. . . .

Appellant’s counsel contended that, unlike the Groulx case (supra), there is no evidence in these proceedings that interest was discussed or the payment of same waived at any stage during the negotiations, or that the price for which the sale was made was above the market value, or that there was any discount off the price for prepayment, or even that there was any clear indication that the practice in similar sales of timber limits is to charge interest on the unpaid balance. Neither is there any indication that the agreement reached was a sham and did not represent the true facts of what the parties had agreed upon, and that therefore the Minister has no right to find that it is reasonable to impute part of the payments to interest, unless he wishes to contend that there must always be an interest component whenever a sale calls for instalment payments which do not carry interest, and this is not what Section 7 states.

Respondent’s counsel, for his part, argued that if the parties even impliedly provide for interest in an agreement then it comes under Section 6(1) (b) of the Act which reads as follows:

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing his profit) as interest or on account or in lieu of payment of, or in satisfaction of interest;

In this event the application of Section 7(1) of the Act is unnecessary, and he therefore contended that Section 7(1) has as its function to bring into Income an amount that might not be taxed under Section 6(1) (b). He compared Section 7(1) with Section 3(2) of the Income War Tax Act which read as follows, claiming that the present section is broader:

3. (2) Where under any existing or future contract or arrangement for the payment of money, the Minister is of opinion that

(a) payment of principal money and interest are blended, or

(b) payment is made pursuant to a plan which involves an allowance of interest;

whether or not there is any provision for payment of interest at a nominal rate or at all, the Minister shall have the power to determine what part of any such payment is interest and the part so determined to be interest shall be deemed to be income for the purposes of this Act.

(Appellant’s counsel argued that, on the contrary, the present section is more restrictive since Section 3(2) depended on the opinion of the Minister whereas the present section requires that assumption can only be made if it can “reasonably be regarded as interest’’.)

Respondent’s counsel argued that since, by virtue of Section 7(1), a breakdown of the payments into interest and capital elements can be made ‘‘irrespective of when the contract or arrangement was made or the form or legal effect thereof’’ even an express statement in an agreement that no interest shall be charged on the unpaid balance does not prevent the inference being drawn, and that this is all the more true where the agreement contains no such express statement but merely makes no reference to interest (save with respect to the 6% interest to be paid on overdue instalments as mentioned above). He referred in argument to certain English cases which might have some bearing on the issue although the british Act is different since it contains no statutory provision such as Section 7(1) and in the absence of some such statutory provision the British courts have encountered some difficulty in breaking down instalment payments into capital and interest components, and in some instances have considered themselves bound by the form and legal effect of the transaction (see : Foley v. Fletcher, 3 H. & N. 768; 157 E.R. 678; Commissioners of Inland Revenue v. Ramsay, 20 T.C. 79; Commissioners of Inland Revenue v. Wesleyan and General Assurance Society, 30 T.C. 11.) Despite this difficulty, however, the purchase price was broken down into interest and principal in the cases of Secretary of State v. Scoble, 4 T.C. 618 ; Lord Howard de Walden v. Beck, 23 T.C. 384; Perrin v. Dickson, 14 T.C. 608; Sothern-Smith v. Clancy, 22 T.C. 1; Vestey v. Commissioners of Inland Revenue, [1962] 1 Ch. 861, and Commissioners of Inland Revenue v. Land Securities Investment Trust Ltd., [1968] 1 W.L.R. 423. These cases dealt primarily with annuities, however, and the question of whether the deferred instalments were annuity payments, and these are covered in our Act by Sections 6(1)(aa), 11(1) (k), 139(1) (b) and Part III of the Regulations. He contended that if the British courts have, in the absence of a statutory provision like Section 7(1) seen fit in appropriate circumstances to isolate the interest element in instalments payments, the courts in Canada have, partly because of the broader statutory powers under the Income Tax Act and partly because of a readiness to look beyond the form of a transaction to its substance (for example, Dominion Taxicab Association v. M.N.R., [1954] S.C.R. 82 at 85; [1954] C.T.C. 34 at 38) been able to approach the problem on a broader basis, and that there is no justification for not looking at the commercial realities of the situation.

In order to reach a decision in the present case, based on the foregoing jurisprudence and in particular the judgment in the Groulx case (supra) it is evident that it will be necessary not only to look at the terms of the agreement reached between the parties, but also the course of the negotiations between them leading to it, to the relationship of the price paid to the apparent market value of the property at the time, and the common practice with respect to payment of interest on the sale of timber limits in order to reach a conclusion of fact on the question of whether it can reasonably be inferred that the instalment payments on account of the price contained an element of interest, or were entirely of a capital nature, as appellant claims.

In order to fully apreciate the situation it is necessary to go to some extent into the background of the parties to the agreement which was entered into on May 1, 1964 between Vanwest Logging Co. Ltd. and Weldwood of Canada Limited, both British Columbia companies, and was followed by a separate agreement entered into on May 25, 1964 between Canadian Collieries Resources Limited, a Canadian corporation, Georgia Pacific Corporation, an American corporation and Weldwood of Canada Limited, which agreement, although executed separately between different parties and at a somewhat later date, was an essential part of the agreement between the appellant and Weldwood for the sale of the timber limits in question.

Van west Logging Co. Ltd., the appellant, had originally been a subsidiary of Puget Sound Pulp and Timber Company which, some time prior to 1963, had merged with Georgia Pacific Corporation, which as a result of this merger acquired Vanwest Logging Co. Ltd. as a subsidiary. Early in 1967 Georgia Pacific sold its shares of appellant to Georgia Pacific International Corporation, a wholly owned subsidiary, and when appellant subsequently went into liquidation its assets were acquired by the said Georgia Pacific International Corporation which already owned its shares. The lands and timber limits in question, located on the north of Vancouver Island in British Columbia, were sold by appellant, then a direct subsidiary of Georgia Pacific, in an arm’s length sale to Weldwood of Canada Limited which is itself a subsidiary of United States Plywood of New York. Canadian Collieries Resources Limited was at the time a public logging company and Western Plywood (as Weld wood of Canada Limited was then called) was at the time in the process of acquiring control of it.

The purchaser, Weldwood of Canada Limited, was interested primarily in top grade logs suitable for use as peelers, primarily fir logs which it could use in its plywood business, whereas the vendor’s parent company, Georgia Pacific Corporation, required logs and chips suitable for use in its Bellingham pulp mill in the State of Washington near the border. It wanted a greater volume than Weldwood could supply but Weldwood hoped to supply this volume through Canadian Collieries Resources Limited after it gained control of that company. It is a common practice in the British Columbia lumber industry to trade species of logs, or chips for logs between one company and another. The Bellingham mill used a sulphite process which could only make use of hemlock, balsam and spruce, but not fir, so that it was a logical enough procedure when its subsidiary, Vanwest Logging Co. Ltd., was selling a stand which contained extensive quantities of hemlock, balsam, spruce and fir, and the purchaser was primarily interested in the fir, to make an agreement to buy back logs or wood chips from the purchaser which it did not require, but it must be stressed here that in the subsidiary agreement it undertook to pay current market. prices for same, so the terms of this agreement do not affect the price paid by virtue of the primary agreement with which this case is concerned.

The agreement called for a price of $7,500,000 payable $1,500,000 on the execution of the agreement and $1,200,000 on or before the 1st of May in each of the years 1965 to 1969 inclusive, with interest only in the event of default on any of the payments. Provision was made that in the event that the purchaser should remove during any 12 month period fir, cedar, hemlock, balsam and other species of a value in excess of the instalment of the purchase price due, then it must forthwith repay to the vendor the amount of this excess.

By virtue of the subsidiary agreement Canadian Collieries Resources Limited undertook to deliver to Georgia Pacifie Cor- poration a total of 280,000 units of hemlock, balsam or spruce wood chips prior to December 1972. After this amount had been delivered, it undertook to offer for sale to Georgia Pacific all chips produced by its two plants named in the agreement on the same terms and conditions. It also undertook to sell to Georgia Pacific hemlock and balsam logs to a total of 72,000 M feet board measure acceptable for pulp purposes at the market price generally prevailing in Vancouver for similar type and quality of logs from time to time.

It is not disputed by the Minister that the parties were dealing at arm’s length nor that the sale by Vanwest Logging Co. Ltd. was a capital sale, no claim having been made that any profit realized on same w as income.

Considerable evidence was adduced by appellant in an attempt to establish that the price of $7,500,000 was not in excess of the market value of the property and that, if anything, it was less than its true market value. In order to reach this conclusion he had to attempt to overcome evidence indicating that only a few months previously in September and October 1963 appellant had discussed the sale of the property to Canadian Forest Products, dealing at arm’s length, for a price of about $6,250,000. The evidence concerning the negotiations leading to this sale is somewhat unsatisfactory as William McMahan, who had represented the prospective purchaser in the negotiations, is now deceased, and the only evidence that appellant could adduce other than that of Mr. Carl Sahlin of Georgia Pacific consisted of certain extracts from the minute book of Canadian Forest Products which were apparently based on reports made to the company by Mr. McMahan, a memorandum made by the said Mr. MeMahan, and the evidence of Mr. Peter Bentley of that company who had, however, played only a very minor part in the negotiations.

Carl Sahlin, now retired, was at the time manager of timber operations for the Bellingham division of Georgia Pacifie Corporation and was in charge of the Canadian operations of its subsidiary, the appellant, Vanwest Logging Co. Ltd. Dealing first with the sale with which we are here concerned, he testified that negotiations were commenced by a letter from John Bene, president of Western Plywood Co. Ltd. to John S. Brandis, executive vice-president of Georgia Pacific Corporation, dated October 10, 1963, expressing interest in this timber in the event that they wished to sell same. On December 24, 1963, after discussion by him with Mr. Pit Desjardins, vice-president in charge of timber supply of Western Plywood, he wrote a memo- randum to his superior, Mr. Turcotte. This memorandum refers to Mr. Brandis having informed Mr. Bene that he might be willing to accept $7,000,000 to $7,500,000 for the property. The memorandum indicated that he had shown Mr. Desjardins their maps of the tract together with the Eustace Smith 1944 cruise which had indicated about 250,000 M feet of timber, but that check cruises in recent years indicated approximately 300,000 M due to the increment in the past twenty years and the fact that utilization standards were now substantially greater than at the time of the original cruise. Western Plywood had an independent cruise made. During December they pressed Mr. Desjardins to make a decision, indicating that Georgia Pacific might want to log the tract itself if Western Plywood was not interested in buying. The memorandum indicated however that they had approached Mr. McMahan and Mr. Peter Bentley of Canadian Forest Products, over whose property they would have to pass to transport their logs, to inquire as to what they would charge to transport the logs on their railroad, and had not yet had a reply, and that until he had this information he could not prepare a pro forma cost of logging the timber themselves, since if the Canadian Forest Products price was too high or they were unwilling to handle the logs then it would be necessary to make a road survey and cost estimates on 35 miles of road through the MacMillan-Bloedel tree farm licence which would be an alternate route. A memorandum from Mr. R. B. Pamplin, president of Georgia Pacific, to Mr. Turcotte dated January 24, 1964, reiterated that he would like to have Mr. Sahlin work out what he thinks he can net for the timber by selling logs ‘‘in order that we might use this as a basis for negotiating’’. Mr. Sahlin’s analysis (pages 47-51, Book of Documents) indicates that he now believes there is 300,000 M feet and that the log species grades are derived from a quantity of blow down representative timber that was logged the previous autumn for them by Canadian Forest Products for $35 per M. The fir in the blow down was sold to Western Plywood Limited in trade for hemlock for Georgia Pacific’s sawmill. His stumpage appraisal gives a value of $9,282,000. This is based on log values of the various species at current market prices after deducting logging costs of $35 which he estimates to be an accurate figure, and which was the figure charged the previous autumn by Canadian Forest Products. He states that the stumpage value is about $750,000 more than the appraisal made the preceding summer because of increased log prices.

Although the stumpage value worked out at an average of $30.94 per M, he testified that the tract was offered for sale at $25 as it is necessary to allow a buyer some profit. He wrote a further memorandum on March 2 (page 52, Book of Documents) referring to a meeting in Portland with Western Plywood Limited (Bene and Desjardins, and Messrs. Pamplin, Turcotte, Gray Evans, Brewer, Kane and Sahlin himself of Georgia Pacific). Kane, who was the financial vice-president of Georgia Pacific at the time testified later. This memorandum refers to the “additional provisions proposal’’ that was made to Western Plywood but he testified that this referred to chip and log supply provisions. Western Plywood had some doubt whether they could supply the volume wanted by Georgia Pacific. The memorandum of agreement concluded on April 15, 1964 between John Bene and Pit Desjardins of Western Plywood and Pamplin, Turcotte, Sahlin, Kane and Evans of Georgia Pacific, refers to the sale for $7,500,000 Canadian funds payable $1,500,000 down and $1,200,000 a year for five years with no interest, and also to the undertaking by Western Plywood to sell a total of 72,000 M hemlock and balsam logs for six years, and 280,000 units of hemlock and balsam chips at the going market price to Georgia Pacific. He testified that he does not recall any discussion of interest at any time and that no tax considerations influenced the decision to have two contracts instead of one although there was only one memorandum of agreement covering the entire deal.

Coming to the important question of the prior discussions concerning a possible sale of the property to Canadian Forest Products, he stated that he had discussed this with Mr. McMahan of that company in 1963. An extract from the minutes of the meeting of the executive committee of Canadian Forest Products dated August 8, 1963 (page 60, Book of Documents) indicates that Sahlin was asking $6,000,000 and states:

. . . It was generally agreed that this price was much too high although, at today’s market prices, a good profit could be earned on logging this timber.

An extract from the minutes of the meeting of the executive committee on September 5, 1963 indicates that Sahlin had now advised McMahan that Georgia Pacific would be prepared to sell the timber at a total purchase price of $6.25 million with 30% down and the balance repayable over a period of seven years. The extract goes on to refer to Canadian Forest Products’ spot eruise which showed a total volume of 3.06 million feet with a content of 34% fir as against Georgia Pacific’s cruise figures which showed a content of 43% fir and that this difference would make a substantial difference in the valuation. Mr. Liersch, of Canadian Forest Products, suggested that a joint cruise be proposed. A memorandum of Mr. McMahan dated September 18, 1963 indicates that he had told Mr. Sahlin that the price of $6,250,000 was out of their reach. Next we have an extract from the minutes of a meeting of the management committee of Canadian Forest Products dated September 26, 1963 (page 63, Book of Documents) which refers to a purchase for a cash consideration of $4,250,000 ‘‘as proposed by Mr. Sahlin”. It goes on to say that the meeting agreed that the return on this timber at a purchase price of $4,250,000 was not at all attractive but that Georgia Pacific is to be advised that they might be interested in purchasing their timber limits if the price were $3,000,000, but that no open offer was to be made to Georgia Pacific in this regard. Questioned about these extracts, Mr. Sahlin denied categorically that he had ever offered to sell for a price of $4,250,000 and, in any event, it is certainly difficult to reconcile the extract from this meeting of September 26, 1963 which indicates the return on this timber at that price is not at all attractive when at the meeting on August 8, 1963, referring to a $6,000,000 price, it was stated that ‘‘it was generally agreed that . . . at today’s market prices, a good profit could be earned on logging this timber’’. (It was suggested that the figure of $4,250,000 appearing in the minutes of the September 26 meeting is a typographical error for $6,250,000 but, while this would seem a reasonable explanation of the discrepancy, this is pure speculation. )

The witness insisted that the price of $6,250,000 was based on the Eustace Smith cruise of 250,000 M feet at $25 a foot while the subsequent sale to Weld wood of Canada Limited was based on his updated estimate of 300,000 M feet at the same price. With respect to the interest question, he testified that in previous sales Georgia Pacific International had sold some of the timber it acquired from Vanwest Logging Co. Ltd. in liquidation on Vancouver Island to Rayonier for $3,000,000 with $300,000 down payment and the balance over five years with interest to be paid at the end of the first year and at the end of the second year but no interest on the last three years of the contract, and it had also made another sale to the Granite Bay Timber Company in which no interest was claimed on the balances due, so that the conditions of the present sale making no provision for interest were not unusual.

In cross-examination he stated that he had been forty years with Puget Sound Pulp and Timber Company and after its merger with Georgia Pacific he had been with them since 1963 until his retirement. He insisted that he had never considered the factor of better utilization (which he explained as resulting from the fact that a 12 inch base is no longer now left, but merely a 6 inch base and that the small trees are no longer left in the ground), or the factor of twenty years’ growth in order to upgrade the Eustace Smith cruise at the time of his negotiations with Canadian Forest Products, but that the significance of these factors had only dawned on him between that time and the commencement of negotiations for the sale to Weld wood of Canada Limited. He admitted that his figure of $9,280,000 representing the net proceeds if the company had undertaken to log the tract itself would have taken ten to twelve years to realize and that, whereas a sale of the property would result in capital gain not subject to taxation, the profits from these logging operations would be taxable, in addition to which he was aware of the economic consequences of tying up a sum of money for that period of time. When questioned as to the check cruises referred to in the plural in his memorandum to Mr. Tureotte (page 43, Book of Documents) he said that there was only one check cruise in 1957 and a cruise did not necessarily mean a cruise in the field but could be a “cruise in pencil’’. He stated that the assurance of getting chips over a long period of time was very important to Georgia Pacific. He reiterated that even though the vice-president of finance of the company, Mr. Kane, was at the meeting with Western Plywood on March 2, he does not recall any discussion of interest.

Peter Bentley, the executive vice-president of Canadian Forest Products, who was in 1963 the co-ordinator of raw materials, recalls only one meeting at which he was present in 1963 when the purchase of timber limits was discussed with Messrs. Brandis and Sahlin. The late Mr. McMahan, who was at that time the vice-president of Canadian Forest Products, was with him. It was a breakfast meeting at a hotel and his company was not really interested in buying the property as it was short of cash due to other commitments elsewhere in British Columbia at the time. They had three other active projeets and had sufficient timber for their coastal operations. The property in question was surrounded by the property of his company and it was hoped that after the owners had logged it, it could then acquire it as a tree farm as it was within the area of their tree farm licence, and adding this area to their own property would increase their annual allowable cut. He recalls no discussion of a cash price as opposed to payment of interest. He was present at all three meetings of the executive committee or management committee of his company and was quite young at the time, his father being senior vice-president, but his only recollection of what took place is what he has obtained by refreshing his mind from the minutes. It was felt that the price of $6,000,000 was too high, although the property might have proved profitable at this price at current lumber prices which he said were unusually high and might not be maintained. (Evidence of other witnesses indicated that the prices were rather low at that time and went up substantially between then and 1964.) He himself had made no calculation of the profit potential of this timber.

Charles Schultz, president of C. D. Schultz and Company, foresters and consulting engineers, was called as an expert witness. His affidavit had not been submitted ten days in advance as required by Rule 164B, but the parties had agreed at the opening day of the trial that appellant’s attorney would furnish respondent’s attorney with a summary of what he would say and, if desired, his cross-examination would be postponed until the day after he testified, following which respondent’s attorney would decide whether he required to call an expert in rebuttal. Since the parties agreed on this procedure, I exercised my discretion under Rule 164B(1) and permitted his expert evidence to be received. The summary which had been furnished to respondent’s counsel was filed as an exhibit. The witness is both a registered forester and registered professional engineer and before graduation had had eight years employment on forest surveys and was a licensed log scaler and certified lumber grader. After graduation in 1931 he worked with the forestry service until 1934 and later became British Columbia Timber Commissioner to the West Indies and South America. Subsequently he was with MacMillan-Bloedel from 1940 to 1944 when he started his consulting engineering firm. He has had occasion to prepare many feasibility studies respecting timber limits. In his experience some are sold on a lump sum basis and some on a stumpage basis with payment being made mainly as the trees are cut. He believes that on some occasions sales are made without any interest being charged on the instalment payments but could cite no examples of this from his personal knowledge. The practice of exchanging timber is not unusual. He had occasion to visit the present tract in 1933 and went back again on February 28, 1971 just before this trial. He filed plans of it in evidence. He testified that the practice is to clear cut a whole area and not merely selectively log and best trees first. The areas that have already been logged in this tract are staggered, he believes largely for fire protection purposes. The timber that remains to be logged is therefore, he believes, representative of that which was formerly on the area but has been logged. The timber is above average with very little undergrowth and there was a high volume per acre which cuts the logging cost. His instructions were to prepare a valuation as of 1963-64 and he verified this by using the data now available in 1971. Had he been asked to make this valuation in 1964, he would have taken the available cruise information and calculated the grades from that, ascertained the logging cost, including booming and towing costs, and then made a calculation on the basis of market prices weighted by the quantities of the different types of timber, in order to arrive at a stumpage value multiplied by the total volume of the stand. Another approach would be to take figures from published average stumpage sales and multiply these by the percentage of the various species of timber. He is familiar with the Eustace Smith cruise made in 1944 and in his experience that expert’s cruises were always .very conservative so he added 85% which would also provide for normal growth in the meantime. In addition he added a further ten per cent for the increased utilization factor (compare Sahlin’s addition of 20% to cover all factors) arriving at a final estimate of 365,000 M feet. A volume projection based on the scale sheets on the basis that 3,002 acres of the total of 4,594 acres had been logged by December 31, 1970 gave the figure of 353,620 M feet which is only slightly less than his projection. He made various calculations of the value as follows:

1. Based upon average stumpage prices in the Vancouver district in 1963, duly weighted for the percentages of the different types of timber on the property, of, $22.87, he reached a value for 365,000 M feet of $8,346,000 to which he added $194,000 for 32,297 cedar poles at $6 and $138,000 for 4,594 acres of land at $30 providing a total value of $8,678,000 or an average of $24 per thousand board feet.

2. Based on log values of B.C. loggers for 1963, again weighted for the various percentages of different types of timber, he reached an average value of $61.49 from which he deducted $35 logging costs (this is the same figure used by Mr. Sahlin, and which the Canadian Forest Products had charged for logging the windfalls) arriving at a stumpage value of $26.49. Making the same calculations as before, he arrived at a total value of $10,100,000 or an average of $27 per thousand board feet.

3. Making the same calculation as in No. 2 but based on B.C. loggers average 1964 values, he arrived at a total value of $14,859,000, or $35 per thousand board feet.

4. Based on log values obtained from the prices received for the blow down timber logged for appellant by Canadian Forest Products in 1964, he arrived at a value of $10,457,000 or $29 per thousand board feet.

5. Based on data available in 1971 as opposed to 1964, he arrived at a value based on B.C. loggers 1963 log values of $7,927,000 or $22 per thousand board feet, somewhat lower than No. 2 which was based on estimates of 1963 log values.

6. Based on data available in 1971 and the B.C. loggers 1964 log values he arrived at a figure of $11,124,000 or $31 per thousand board feet, again somewhat lower than No. 3 which was based on his estimates of 1964 log values.

He explained that the latter two methods were based on the sale of the actual logs from the property in question, at 1963 and 1964 prices respectively, and indicated that the quality yield was slightly less than anticipated. There was also somewhat less fir, being the most valuable wood, than anticipated from the Eustace Smith cruise.

He testified that some companies wish to make their profit on logging, although some include logging in their final costs. Weldwood by the purchase obtained the type of timber it needed to keep its plant going and, in fact, it was the only timber of that sort (i.e. peelable fir of good quality) available at the time. There is a vanishing wood supply and timber of this sort will never be available again and all timber limits are now on limited yield logging. The situation was commencing to get tight in 1964.

On cross-examination, he admitted that in his first calculations he had taken the average stumpage prices from the British Columbia Forest Service Tables of timber sales during 1963 which show, for example, for Douglas Fir in Vancouver prices ranging from $1.60 to $26.40 per hundred cubic feet and he then converted these to board feet. He had taken the highest figure of $26.40 however because, in his judgment, the type of fir available on this property was worth it. In the case of the other types of wood, however, he had only taken 75% of the highest figure. There was also a mathematical error in this calculation resulting in the total being $51,100 less than the $8,678,000 shown. In the calculation made under No. 2 the average fir prices of all grades worked out at $75 but he had added $10 to this figure in his calculations since the published figures make no allowance for peeler logs which are not graded separately. His figures represent the actual valuation of the timber and make no allowance for the fact that it would take ten to

twelve years to log the entire property, nor is the present worth of these logging proceeds taken into consideration by him. He conceded that the logger would like to get a 20% return on his investment after taxation and would have to pay considerably less than the actual value of the timber in order to realize this. He maintained, however, that a person with a conversion plant such as the purchaser would be glad to pay $7,000,000 to $10,000,000 cash, making its profits on the conversion and not on the logs, whereas a person in the logging business alone would have to allow about 13% to arrive at the stumpage value. He said that this is a standard practice. Taking his example No. 2 he would take 13% off the $61.49 average figure. If payment were made as the property were logged the 13% a year would cover this. He concluded that, while a logger would pay less, he thinks that at $7,500,000 the present purchaser made a good buy.

Pit Desjardins, vice-president and resources manager of Weldwood who, in 1963, was in the employ of its predecessor company, Western Plywood, and participated in the negotiations at that time together with Mr. Bene, then the president of his

company, testified and referred to his diary notes made at the | time which were filed with the Book of Documents. He testified

that they had had a Mr. Schiedel, a forester employed by them, make a check cruise of the property in December. His report, which was also filed, was highly favourable: He reached the conclusion that there were 372,346 M board feet of timber on the property plus 32,000 cedar poles. (His figures compare with

Georgia Pacific’s estimate at the time of 304,000 M board feet.) ® The report describes the timber as ‘‘fantastic’’ and adds “I

have never before seen such high volumes in such thick stands on such easy ground’’. It places the age of most of timber at 300 years. In his memorandum dated January 14, 1964, after reviewing the timber prospects with the budget committee, Mr. Desjardins stated as follows:

Steps to consider in negotiation of acquisition:

1. How do we finance acquisition: Talk to B of M and Prudential.

2. Whom do we deal with in G.P.? Jack Brandeis has left Co. Timber people at G.P. may have different attitude. Roger M. & M. Leeper to advise us.

3. Set up negotiation to avoid setting a floor for G.P. to sell to

someone else. I

4. Ray Heilpern suggests that we ask G.P. to put asking price

and terms in form of letter to which we would have only to say yes or no.

By this time they had already had an opportunity of supplementing Schiedel’s report as a result of having handled the blow down timber for the vendor, which, when sorted, gave them an indication of the quantity of each type and the portion that was peelable. This indicated that 90% of the fir was peelable. At the time his company was not aware of the previous offer which had been made by the vendor to Canadian Forest Products.

His further memorandum dated January 21, 1964 states, under the heading ‘‘Payment Terms’’:

7 to 10 years — 7.5 years preferred.

Under the heading ‘‘Comments’’ he states:

Asking price represents full retail value. No allowance for profit and risk. Proposal appears to be designed to realize full market value for logs but on basis that perhaps puts company in a position to claim capital gain.

Under the heading of ‘‘Queries’’ he states:

1. Is G.P. expecting interest on unpaid balance?

2. If 1) affirmative, can we negotiate adjustment in price to compensate for interest?

He stated that at the time he wrote this he had seen his own company’s appraisal of $8,000,000 or $9,000,000 and thought that this might be the asking price. He had heard Messrs. Bene and Brandis discuss the figure of $7,000,000 to $7,500,000 but felt that the asking price might be somewhere in between. He was thinking of making a logging profit when he made his comments. Prior to 1964 the company had not been in the logging business to any extent but it was now getting into it and hoped to make a logging profit as well as plywood profit. He stated that they would always inquire whether interest was to be charged on an unpaid balance and, if so, they would seek a reduction in the total price to be paid. He does not recall this ever having been discussed with the vendors however.

In a memorandum dated February 24, 1964 by John Bene to the witness, among others, and also filed in the Book of Documents, reference is made to a meeting that day between Messrs. Pamplin, Kane, Brewer (legal counsel), Turcotte and Sahlin on behalf of Georgia Pacific, and Pit Desjardins and Bene on behalf of Western Plywood, and it is stated that Pamplin indicated that Georgia Pacific was prepared to consider an offer of $7,500,000 Canadian for the tract payable $1,500,000 down and $1,200,000 each year thereafter without interest on the unpaid balance. It also refers to the requirement that Western Plywood is to offer to the vendor hemlock and fir logs and first refusal of all chips produced at the going market price. The memo- randum states further that Pamplin gave them the sheets estimating Georgia Pacifie’s profit if they were to liquidate the timber themselves based on today’s market prices and

Pamplin stated that the sale of this timber is subject to the Canadian Tax Advisor’s reassurance that the offer for it will entitle the company to make a capital profit.

(The Georgia Pacific estimate of potential profit referred to is that which has been previously mentioned showing estimated returns from logging the property itself of $9,282,000.)

A further memorandum from Bene to Desjardins dated April 17, 1964 confirms the agreement made following a further conference with representatives of the vendor, the agreement being subject to the company acquiring effective control of Canadian Collieries which it expected to do some time during May. This refers to the terms of the primary contract already outlined calling for payments without interest and the secondary contract for the selling back of chips and hemlock and balsam logs in specified quantities. Desjardins testified that during the various conferences leading to the final offer most of the haggling had been about the chip supply contract and there had been very little discussion about the price or terms of payment. They did not make Mr. Schiedel’s report available to the vendors. In a letter from Bene to Gene C. Brewer, president of the company in New York, dated April 21, 1964, outlining the agreement, he states:

For tax reasons G-P wishes to deal in two separate contracts for the sale of the timber and the purchase of the chips. They may ask us to pay for the timber $7,750,000 and pay us $250,000 for the right to purchase the chips from us, this sum to be amortized at the rate of $1.00 per unit of chips.

This letter confirms that their tests had indicated that this was an extremely high grade of timber and the test run showed better than average yield and higher than average grade so that the peelable fir logs are worth at least $5 per M feet over the market price of the average logs of the same grade (this partially confirms Schiedel’s estimate of the $10 premium for the fir) and adds that a substantial portion of the hemlock and balsam is high grade too and suitable for peeling and that even the cedar logs are very sound and contain a high percentage of logs which could be peeled if a market for cedar plywood for siding existed. He stated that the limit also contains cedar poles worth at least $200,000 stumpage value, and confirms that their independent cruises check indicated that the property contains 372,300 M feet, most of the increment over the Georgia Pacific estimate of 304,000 M feet being in hemlock and balsam. In their estimates of profit they had allowed a residual value for the logged-over land of $50 an acre and had assumed an average return on investment over a ten year period which was 5% lower than today’s log prices. On the basis of these assumptions, they estimated 27.2% return on investment and this does not reflect all the benefits that the purchase of this timber would entail, and he states that the grade of fir represents the best which the country has to offer. His letter enclosed a report from J. A. Crawford of his company with sheets attached showing the estimated return on the investment. Crawford’s report states that the logging costs of $35 per M board feet inclusive of towing used by Georgia Pacific in their estimates appear to be reasonable, but comments that no provision has been made for interest which they might have to pay in financing the acquisition. If interest at 6% per annum were provided, it concludes that the average return after interest would be 21.2% instead of 27.2%. This average return on investment is based on profit before income taxes. His figures show an estimated logging profit of $12,368,500 on which depletion on the portion of the purchase price which is depletable, amounting to $7,232,000 is deducted to arrive at the total estimated profit before income taxes of $5,655,900.

The final witness, Eric Kane, vice-president of finance for Georgia Pacific, who has been with the company since 1955, stated that in establishing the price they had relied heavily on Mr. Sahlin’s information as to the quantity of lumber and the price of $25 per thousand board feet. It was Mr. Pamplin who had agreed to sell to the purchasers without interest on the unpaid balance. Instead of selling the property, they could have logged it themselves profitably over the years. There was an advantage to them, however, which does not appear in the negotiations in that, because of their world-wide operations and the United States tax situation, it was particularly desirable for them to complete the sale during 1964. He admitted, however, that they were concerned in establishing that no tax would be paid in Canada on the capital gain resulting from the sale. With reference to Mr. Bene’s comment in his letter to Mr. Brewer, referred to above, that Georgia Pacific wished to deal in two separate contracts for the sale of the timber and the purchase of the chips for tax reasons, he said that this had reference to the United States tax situation. If there had been any suggestion as that letter indicated that the purchaser would pay more for the timber and receive $250,000 back for the right to purchase the chips, this idea was abandoned. He stated that the incidence of interest was a minor part in his company’s think- ing in comparison with the U.S. tax advantages of completing the sale in 1964. This resulted from the fact that they could get a tax credit on foreign sales elsewhere in the world set off against capital gains tax payable in the United States at a lower rate, and that the company had to pay high taxes elsewhere in the world in 1964.

In cross-examination he conceded that the company is well advised tax-wise both in Canada and in the United States and does not ignore all tax implications and that the tax impact in Canada would be significantly different if part of the consideration had been capital and part in interest. If the company had sold for $6,000,000 with interest on the unpaid balance instead of $7,500,000, it would have used the receipts to pay off loans in the United States on which the interest was 4%. The difference between 4% which they were paying in the United States and the 6% which they would have received on the outstanding balances in Canada was only 2 % and was insignificant from their point of view, considering the other tax advantages, and that $7,500,000 was a fair price.

Some portions of the Examination for Discovery of J. C. Palmer, the assessor in this case, were read into the record. In particular, on page 7 of his Examination for Discovery, questions 23, 24 and 25 read as follows:

23 Q. Well, that’s fine. I am asking you whether it is the posi-

tion of the respondent that there is any other side deal, if you like, or any other agreement between Weldwood and the appellant in connection with the sale of this timber that is not reflected in the two written contracts we have referred to? A. To the best of my knowledge there is no other arrangement.

24 Q. And at the time you made the assessment I assume the

Same answer would obtain; you were not aware of any other arrangements? A. That is correct.

25 Q. We, therefore, agree that the two written contracts, for

better or worse, contain the whole of the agreement between the two parties, is that fair? A. Yes.

Respondent called no witnesses.

I have given the foregoing somewhat lengthy summary of the evidence given by the various witnesses since it is essential to reach certain conclusions of fact based on this evidence in order to determine whether or not the holding of this Court and of the Supreme Court in the Groulx case (supra) is applicable to the present circumstances.

The first point of difference is that there is no evidence whatsoever in the present case that the question of interest on the deferred payment was ever discussed by the representatives of appellant or its parent company, Georgia Pacific, unlike the Groulx ease where appellant himself finally closed the deal by indicating to the purchaser that if it would pay his final asking price he would charge no interest on the outstanding balance. Interest was certainly in the minds of representatives of Weldwood (Western Plywood) and, in fact, Mr. Desjardins indicated that if they had to pay interest they would always seek a lower price. They negotiated in such a manner as to attempt to force Georgia Pacific to make a firm offer to them rather than have them make an offer to Georgia Pacific, and they wanted to be sure that the offer of $7,500,000, which was eventually made, would not require payment of interest on the outstanding balance. Georgia Pacific for its part appears to have been particularly concerned about three factors :

1. Would the proceeds of the sale be accepted by the Canadian taxation authorities as capital gain and free from tax on this account?

2. The subsidiary contract, which assured a supply of wood chips and logs from the purchaser or Canadian Collieries under its control for the Bellingham plant of Georgia Pacific.

3. Completing the sale in 1964, at which date there were allegedly certain American taxation advantages to be obtained.

The evidence on this latter point was not too clear. Since the vendor was Vanwest Logging Co. Ltd. and not Georgia Pacific, the money had to be funnelled from the former to the latter by way of dividend or in some other manner, and it would be going too far afield and be too speculative to have inquired further into the American taxation situation in 1964 of Georgia Pacific and its controlled or affiliated companies.

While interest may have been a minor factor in the negotiations, as Mr. Kane testified, the appellants were certainly aware of the taxation advantage of selling the property for $7,500,000, payable over five years, without interest (assuming that the profits on this sale would be accepted as capital gains) as against selling for, say, $6,000,000 or $6,250,000, the balance after the down payment being spread over the same period with interest. While their discussions with their Canadian tax counsel may have emphasized the capital gain question, it would be unreasonable to assume that the vendor was not well aware that it was advantageous to receive the purchase price in a series of capital payments rather than to receive a similar amount partially in the form of interest and partially in the form of capital pay- ments. This is not to say, however, that because a taxpayer is well informed and foresighted he should not be allowed to make use of provisions of the Act which are to his advantage, or that because it is advantageous not to charge interest on deferred instalments of the purchase price but rather to receive them in the form of a capital payment, Section 7 of the Act must take effect in all cases, as it seems clear to me that in order for part of the payment to “reasonably be regarded as a payment of interest’’, there must be some extraneous facts justifying such a conclusion and that this conclusion cannot merely be reached on the simple fact that no interest has been provided for in the agreement on these deferred instalments.

Neither would I conclude, however, that merely because there is no evidence of any discussion respecting interest, this necessarily establishes that this factor was not taken into consideration by the vendor in establishing its price. A vendor might well be prudent enough not to put into writing or discuss openly in negotiations with the prospective purchaser the question of whether interest would be payable on deferred instalments, knowing full well that if he did so and subsequently a higher price was fixed as a result of the non-payment of interest the Minister could apply Section 7 and reasonably infer that part of the price finally fixed represented interest on such instalments, and he would be unable to rebut this presumption if any evidence of such discussions were available to the Minister. In the present case the Minister is forced to rely on a general assumption that a well informed vendor, such as the appellant, must have been aware of the interest factor but, unlike the Groulx case (supra), could bring no evidence whatsoever to establish this. In fact, the assessor was forced to admit in his Examination for Discovery, that the two contracts reflected the complete agreement between the parties and that he was not aware of any other arrangement on the side. I would not go so far as to conclude, however, that the Minister can never make the assumption under Section 7(1) unless he can establish that there has been some discussion between the parties to the sale respecting interest.

The second distinction between the present case and the Groulx case is that in the latter there was a clear provision of a discount for prepayment and this clause of the contract is referred to and quoted in the Supreme Court judgment. This indicates again that interest was in the minds of the parties in that case but there is no such evidence in the present proceedings.

There was also evidence in that case which dealt with the sale of land to the effect that it is an almost invariable practice in such sales to charge interest on the balance of payment secured by hypothec, whereas in the present case the evidence is not so clear on this point. There is a greater variety of arrangements made in the lumber industry, and frequently payment is made on a stumpage basis as the trees are cut. We have it in evidence that the present appellant itself, in two previous sales, charged no interest on the unpaid balance in the case of the sale to Granite Bay and charged interest on only the first two of five annual instalments in the sale to Rayonier. There was some evidence from the witness Schultz that he believes that such agreements are made, but he could not cite a specific instance. Certainly, it would be more normal to charge interest and this is the usual commercial practice, but there is at least some indication that in the lumber industry it is not as invariable a practice as in the case of straight sales of land, and this, therefore, somewhat weakens the presumption made under Section 7(1).

While these are points of distinction between the present case and the Groulx decision (supra) I would not necessarily reach a different conclusion on these factors alone.

This brings us to what I consider is the decisive element in the present case, namely the question of price, and whether it is in excess of market value so as to indicate that the vendor, by forgoing interest on the deferred instalments, was able to obtain a greater price than he otherwise would have. In the Groulx case (supra) the finding was based largely on the fact that a prima facie case had been established that the property was sold for a price substantially in excess of its market value.

In the present case, if we look at the selling price of $7,500,000 without interest it would appear from the evidence that this was not excessive. If interest had been charged at 6% on the unpaid instalments, slightly over a million dollars additional would have been involved, but Mr. Crawford’s report to Mr. Bene indicates that, at a purchase price of $7,500,000, they would make an average estimated return on their investment of 27.2% and that even if they had to pay interest the return would still be 21.2%. It is true that his report is based on their Mr. Schiedel’s check cruise figures which indicated a total timber volume of 372,300 M board feet while Georgia Pacific was thinking in terms of 304,000 M feet at the time it made the sale, but Mr. Sahlin, who had made a similar investigation for the vendors and had strongly recommended that they operate the tract themselves, had reached a figure of $9,282,000 based on 300,000 M board feet as being the stumpage value after deducting logging costs. Admittedly it would take ten to twelve years to realize this net yield, but it appears that this total represents an adequate return on an investment of $7,500,000, and would seem to justify this price. Mr. Schultz arrived at various figures varying between $7,927,000 to $14,859,000 depending on how the calculation was made. The lowest one was based on 1963 log values, however, and the evidence indicates that they were substantially higher by 1964 when the present sale was actually made. In fact, when he used the 1964 prices he arrived at a figure of $11,124,000.

The principal evidence which might indicate that the price paid by the purchasers was too high and in excess of the market value comes, oddly enough, from the attempt by the vendors themselves to sell the property in 1963 for $6,250,000. I am unable to accept Mr. Sahlin’s explanation that at the time of the attempted sale to Canadian Forest Products he thought only 200,000 M board feet were involved and that it was only in the interval between that sale and the present sale that he suddenly realized that due to better utilization factors and the growth in the twenty years intervening since the Eustace Smith cruise, the quantity of timber should be estimated at 300,000 M board feet and that therefore this accounts for the entire difference between the price of $6,250,000 and $7,500,000, calculated in both mstances on the basis of $25 per thousand board feet. I find it inconceivable that a man of his experience, and working in conjunction with other experienced people in his company, would still have based his price on a cruise which was twenty years out of date without even considering making any adjustments to it prior to the discussion with Canadian Forest Products. It appears to me rather that Georgia Pacific, who had only recently acquired control of appellant, was anxious to dispose of this property and was urging the sale on Canadian Forest Products who owned the surrounding property and seemed to be the most likely customer but, on the other hand, Canadian Forest Products was not at all seriously interested in acquiring more timber limits as its funds were already heavily committed at the time. The subsequent mentions in extracts from the minute book of Canadian Forest Products of a price of $4,250,000 are utterly incomprehensible and Mr. Sahlin vigorously denied that such a price was ever discussed, and his evidence must certainly be accepted on this point as opposed to second or third hand evidence of what the minute book of Canadian Forest Products records on the basis of information allegedly furnished to the management committee by Mr. McMahan, now deceased. In any event, I find it difficult to conclude that the abortive and somewhat tentative discussions with Canadian Forest Products in 1963 established a market price for the property of $6,250,000 or less, at that time, although it certainly does indicate that appellant would have been willing to sell for this price at that date.

There is, however, nothing whatsoever to indicate that during these discussions with Canadian Forest Products the question of interest on instalment payments ever came up so that there is nothing on which the Minister can justify an assumption that the asking price of $6,250,000 in 1963 was based on payment of interest on outstanding balances as against a price of $7,500,000 in 1964 because no interest was to be paid. In any event, the evidence as to the increase in timber prices between 1963 and 1964 would alone appear to justify most, if not all, of this increase.

I therefore conclude that the Minister cannot base his assumption, as was done in the Groulx case (supra), on the fact that the property was sold for a price in excess of its market value.

Thus it appears that none of the factors on which the Groulx case concluded that it could reasonably be regarded that part of the payments represented interest and part were of a capital nature justifying the application of Section 7(1) by the Minister are present here, since there was no evidence that interest was considered by the vendor and affected the price it charged the purchaser, nor was there any evidence in this case that it is the invariable practice to charge interest on deferred payments in such sales of timber limits, nor was there evidence justifying a conclusion of fact that the price was excessive and could only be justified by not charging interest on the deferred instalments. The Minister is therefore left with nothing on which to base his ‘‘reasonable conclusion” save for the bare fact that it was obviously to the advantage of the vendor to sell for $7,500,000 without interest on the deferred payments rather than for $6,250,000 with interest. Since there is no indication, however, that in connection with the present sale the vendor ever considered selling for $6,250,000 with interest (nor for that matter that this offer had been made to Canadian Forest Products) this becomes a mere assumption on the part of the Minister, not based on any evidence and not a “reasonable” conclusion as required by Section 7(1). I do not consider that Section 7(1) can be applied by the Minister in all cases where no interest is claimed on deferred payments, but rather that it should only be used when something in the evidence indicates that it was the intention of the vendor to avoid taxation on interest by including it as part of a larger capital payment than would otherwise have been made.

The appeal is therefore maintained, with costs, and the assessments appealed from are referred back to the Minister to delete from income of the appellant for the 1965 taxation year the sum of $303,290.19, to increase the 1966 loss of appellant carried back to 1965 by $249,487.60, and to adjust the amounts of the special refundable tax assessed in respect of the 1966 taxation year accordingly.