The Queen v. Mel-Bar Ranches, 89 DTC 5189, [1989] 1 CTC 360 (FCTD)

Strayer, J.: —

Introduction

This is an appeal from a decision of the Tax Court of Canada of July 17, 1987 in which that Court referred back to the Minister for reassessment the assessments of the defendant herein in respect of its 1979 and 1981 taxation years. The amount in question is $291,134 received by the defendant in 1979 and 1980 in respect of logs cut from its ranch property and purchased by Holding Lumber Co. Ltd.

Background Facts

The essential facts are set out in the decision of the Tax Court. I agree with the findings of fact of the Tax Court except where otherwise indicated.

The essential issues raised in this appeal are whether the sum of $291,134 represents the sale price of a capital asset, whether it represents income from the defendant's business arising from an adventure in the nature of trade, or whether it represents income as prescribed in paragraph 12(1)(g) of the Income Tax Act being an amount "that was dependent upon the use of or production from property . . ."

Conclusions

I do not think it can be seriously contended that the amount in question was income from the business of the defendant. I am satisfied that the essential business of the defendant was ranching or the rental of ranch land. This sale was an isolated transaction whose main purpose was the clearing of land to increase the grazing area for ranching purposes. Therefore the sale of the timber was not a sale of inventory made in the ordinary course of business. [1]

The more difficult issue is as to whether this payment falls within paragraph 12(1)(g) of the Income Tax Act which requires that there be included in income

. . . any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph);

As the Supreme Court of Canada has observed, Parliament has by such a provision required that receipts which might ordinarily be termed capital are to be treated as income. [2]

It remains to determine, however, whether the payments in question can be characterized as "dependent upon the use of or production from property". I have come to the same conclusion as the learned Tax Court Judge, namely that when one looks at the entire context of this transaction the receipts from it cannot be so regarded.

There is, at the outset, a certain probability that an isolated sale of all marketable timber on property to improve land or maximize its value will not be regarded as yielding an "amount . . . dependent upon the use of or production from property". [3] There is at least some authority that paragraph 12(1)(g) only applies to revenues from use or production of a continuing nature. [4]

Unfortunately, the written agreement of April 12, 1979 under which the logs were cut and removed in this case was ambiguous and by itself creates some uncertainty as to whether this was a one-time sale of a finite amount of timber or a contract for the ongoing sale of an indefinite quantity of logs. This ambiguity can be illustrated by the first paragraph of the contract which states as follows:

1. The logs purchased by the Purchaser from the Seller consist of TWENTY FIVE THOUSAND FIVE HUNDRED (25,500) TONNES (more or less) of FIR and the price to be paid by the Purchaser to the Seller shall be ELEVEN DOLLARS AND EIGHTY FIVE CENTS ($11.85) per Tonne on the stump (subject to adjustments hereinafter provided).

While the defendant has contended that this was a sale of a precise quantity of logs for a lump sum of $302,175 (representing 25,500 tonnes at $11.85 per tonne) the contract nowhere really says that. Instead it provides in clause 9 that if the purchaser, Holding Lumber Co. Ltd., were to cut 25,500 tonnes prior to December 31,1979 it could have an extension of the right to cut from month to month. One assumes that had this eventuality occurred, it would have continued to pay $11.85 for each tonne in excess of the 25,500 tonnes referred to in clause 1 of the agreement. No provision seems to have been made for the eventuality which in fact occurred, namely that the purchaser was unable to cut 25,500 tonnes even with an extension of the time until July, 1980. While the defendant takes the position that strictly speaking it was entitled to the full sum of $302,175 even though Holding Lumber never received the contract quantity of 25,500 tonnes, the fact remains that in the final accounting between the two companies Holding only paid the equivalent of $11.85 per tonne (raised to $12.85 per tonne in 1980) for the tonnes actually obtained by it. It is these factors which give some credence to the argument of the plaintiff that the money received by the defendant was dependent on the use or production of its property, varying with the quantity of logs which happened to be removed by the purchaser.

I agree with the learned Tax Court judge, however, that when one views the total context of the agreement it is not possible to accept the plaintiff's characterization of these receipts. As I view it, the essential purpose of the contract was to have all usable timber (all logs cut from trees of eight inches diameter at stump height, according to clause 6 of the contract) in a specified area (described in the Schedule to the contract) removed within a very limited period of time, namely between April 12 and December 31, 1979, there being some possibility for extension but only as long as the quantity of timber left allowed Holding to cut at the rate of at least 3,000 tonnes per month. I am satisfied from the evidence that the main objective of the defendant in making this arrangement was to have its timber lands cleared to the extent that they could be used for grazing, thus increasing its grazing area. The time limitation was imposed in order to minimize disruption of the ranching operation then being carried on by its tenant, Mr. Brady. While I am, with respect, unable to conclude as did the learned Tax Court judge that there was an "aggregate gross specified price”, because of what appears to me to be a sale price linked to the quantity removed, I do not think that that alone defeats the defendant's case. This was a one-time contract for the removal of timber in a specified area within a specified time. It was eminently reasonable that the purchaser should pay, and the defendant should receive, a price related to the amount of usable timber actually cut and removed in the fulfilment of the objective of removing timber. In retrospect one can criticize the wording of the contract for not taking into account all the contingencies and thus not spelling out the consequences in each case. It is not, however, my role to enforce the contract but rather to characterize the transaction. It appears to me that when clause 1 was drafted it was the assumption of all concerned that there was approximately 25,500 tonnes of logs which could and should be removed from the area designated by the contract. Recognizing the difficulties of estimating quantities available this precisely, the price was fixed at a rate per tonne actually cut. But the main focus throughout was the objective of getting all usable timber removed from the area designated within the time specified. That the defendant realized some undoubtedly welcome proceeds from the clearing of its land for grazing does not make those proceeds revenues "dependent upon the use of or production from property" in my understanding of the jurisprudence.

I have reviewed the jurisprudence cited by the plaintiff, most of which dealt with removal of materials other than timber. These cases are, I believe, distinguishable, each turning mainly on its own facts and on the case law built up with respect to such resources as sand and gravel.

I will therefore dismiss the appeal and confirm the decision of the Tax Court of Canada that the reassessments of the 1979 and 1981 taxation years of the defendant be referred back to the Minister of National Revenue for reassessment on the basis that the amounts received by the defendant in 1979 and 1980 with respect to the sale of timber were on account of capital. The defendant concedes that in such a reassessment it will be open to the Minister to treat the expenses incurred with respect to such sale of timber as also on account of capital.

Appeal dismissed.