Kettle River Sawmills Ltd. v. The Queen, 92 DTC 6525, [1992] 2 CTC 276 (FCTD)

Strayer, J.:—

Relief Requested

The plaintiff Kettle River Sawmills Ltd. ("Kettle River”) appeals the reassessment by the Minister of National Revenue in respect of its 1980 taxation year in which the Minister concluded that the net proceeds of $69,593 from the sale by the plaintiff of all its interests in timber sales licence X82868 and interests associated therewith was to be included in income as proceeds from the sale of a"timber resource property" within the meaning of paragraph 13(21)(d.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The plaintiff Elk Bay Logging Ltd. ("Elk Bay") appeals against the Minister's reassessment in respect of its 1981 taxation year in which he treated the net proceeds of $372,600 from the sale by the plaintiff of its timber sales harvesting licence A07938 and interests associated therewith as income being the proceeds of sale of a "timber resource property".

These two actions were tried together by consent and it was agreed that all the evidence could be applied to both actions where relevant. The pleadings were amended shortly before the trial and an amended record was filed in each action at the opening of the trial.

Facts

Very complex evidence was presented by an agreed statement of facts in each case including many documents, and by lengthy oral testimony. There is very little real dispute over the facts apart from the effective date of acquisition by Kettle River of Timber Sale Licence A04361 from Miller Lumber Co. Ltd. and Keller Lumber Co. Ltd. The essential problem is the application of the Income Tax Act, particularly paragraph 13(21)(d.1) which defines a "timber resource property". If that definition applies to the interests disposed of by the plaintiffs giving rise to the proceeds which are the subject of the challenged reassessments, then those proceeds must be treated as income. If not, then they probably must be treated as capital gains.

It will first be helpful to summarize briefly the timber tenure regime applicable in British Columbia at the relevant time. In the late 1940s and 1950s the government of British Columbia developed in relation to Crown-owned timber lands a system conducing to sustained yields. There was established a system of Public Sustained Yield Units ("PSYU"). Each PSYU contained a specific area and calculations were done as to the annual growth in that area. In general terms a total allowable annual cut equivalent to that growth was to be permitted. It then became necessary to allocate the total allowable annual cut among timber operators. In effect the total allowable annual cut was prorated among the existing operators in the unit on the basis of their past annual cuts and this allowable annual cut came to be referred to as a quota. As the system developed in the 1960s the position of these “ established operators" to continue to enjoy and exercise their quota became better protected by statute and by the exercise of ministerial discretion in granting licences. [1] These established operators were recognized as having some form of entitlement (I use this neutral term at this point) to continue cutting each year in the amount of their allowable annual cut, an amount which was always subject to alteration by the Minister of Lands and Forests but which in practice was never reduced except generally on a pro-rata basis for all established operators in a particular PSYU. Established operators were notified each year of their allowable annual cut but this did not perse permit them to cut timber. They had to hold a timber sales licence (or in some cases later a timber sales harvesting licence) in order to be able to cut. A timber sales licence permitted them to cut whereas the holder of a timber sales harvesting licence still had to obtain a cutting permit which, according to the evidence, the forest service was in effect obliged to issue to the licensee. Licences would normally authorize cutting for several years but at an annual rate equivalent to the holder's allowable annual cut. The licence or a cutting permit would specify the area in which cutting was to take place. Such licences could be renewed by the licensee if there was still timber remaining to be cut under it in the area to which it related. When there was no suitable timber left to be cut in his licence area the licensee could request the forest service to advertise for sale a licence to cut timber in another area within the PSYU. Through ministerial discretion only “ established licensees”, that is established operators who held or had held licences within the PSYU, could apply in this way for a new licence to be advertised for sale in respect of a new area within the PSYU. Sale was by sealed tender with bidders being expected to offer what they would be willing to pay in“ stumpage", the royalty to be paid to the government per unit of timber cut and removed. An established operator, the applicant for the sale, would however have the right to meet or surpass any other bid which might be higher than his own initial bid. Further, all bidders except the established operator would be required to pay a non- refundable bidding fee of a substantial amount. It is not disputed that the net result of this system was, and apparently still is, that established operators with an allowable annual cut or quota were considered to have some form of ongoing entitlement to a licence somewhere within the PSYU to continue cutting at the rate of their allowable annual cut.

With respect to the particular plaintiffs in question here, suffice it to say that Kettle River as an established operator in the Kettle River PSYU acquired timber sales licence TSX82868 in 1961 which ran for ten years. During that period it was recognized as having an allowable annual cut of 690 ”cunits”. This licence was renewed annually thereafter until it was disposed of during Kettle River's 1980 tax year. The parties agree that in 1974 (although they do not agree as to when in 1974) Kettle River acquired another timber sales licence from Miller Lumber Co. Ltd. and Keller Lumber Co. Ltd. which carried with it an allowable annual cut of 180 "cunits". The timing of this acquisition is disputed because paragraph 13(21)(d.1) only applies to timber resource properties acquired after May 6, 1974. Subsequently Kettle River acquired yet another licence, A05630 carrying with it an allowable annual cut of 150“ cunits”. It is not disputed that this acquisition was of a timber resource property within the meaning of paragraph 13(21)(d.1). During its 1980 taxation year Kettle River sold its business to Hilmoe Forest Products Ltd. including the transfer of its existing licences (with the permission of the Minister of Lands and Forests, as required by law) which carried with them a total allowable annual cut of 1,020 "cunits" in the Kettle River PSYU. The proceeds of this disposition were $81,903 and in its tax return Kettle River treated this as a capital gain reporting a taxable capital gain of $40,798. It is agreed that Kettle River had claimed no capital cost allowance in respect of the rights associated with the licences sold to Hilmoe. The Minister of National Revenue reassessed the proceeds of $81,903 as income, treating them as the proceeds of disposition of a timber resource property.

With respect to Elk Bay, its predecessor Norie Bros. Logging had acquired a licence as early as 1958. By 1960 after the acquisition of another licence Norie Bros. had an allowable annual cut specified in its licence of 141 m.c.f. Their licences were transferred to the plaintiff in 1962. By November, 1963 logging had been completed in the areas covered by its licences but the plaintiff acquired a new licence in March, 1964 from Straits Logging Co. Ltd. taking over with it an allowable annual cut of 89 m.c.f. By this time Elk Bay had an allowable annual cut totalling 230 m.c.f. but this was reduced in 1967 to 207 m.c.f., reflecting a 10 per cent reduction imposed by the Minister of Lands and Forests throughout the Quadra PSYU where Elk Bay’s licences were located. In 1968 Elk Bay and Weldwood of Canada Ltd. ("Weldwood") jointly applied for a new licence which permitted an allowable annual cut of 937 m.c.f. representing Elk Bay's allowable annual cut of 207 m.c.f. and Weldwood's allowable annual cut of 730 m.c.f. Suffice it to say that Elk Bay and Weldwood continued to have these allowable annual cuts through a series of licence changes down to 1981 (the allowable cut being increased by the government by 50 per cent for part of this period for purposes of “close utilization”). In 1981 Elk Bay sold to Weldwood its interests in the licences and matters associated therewith, for $372,600. It is agreed that Elk Bay had never claimed any capital cost allowance in connection with these licence interests. In its return for the 1981 taxation year Elk Bay treated the proceeds of disposition as a capital gain, deducting these assets’ valuation day value calculated at $124,200 leaving a capital gain of $248,400 and a taxable capital gain of $124,200. The Minister reassessed on the basis that Elk Bay had sold a timber resource property for $372,600 which he treated as income.

Issues

As I understand it the issues are as follows:

1. Is allowable annual cut or "quota" an "original right” or a part thereof, as defined in paragraph 13(21)(d.1) of the Income Tax Act?

2. If so does paragraph 13(21)(d.1) apply to the renewal, extension, or substitution after May 6, 1974 of “ original rights" as defined therein originally acquired before that date?

3. What original rights if any were initially acquired, extended, renewed or acquired in substitution by the plaintiffs after May 6, 1974?

4. If original rights were initially acquired, renewed, extended, or acquired in substitution after May 6, 1974 were they “ depreciable property"?

5. If they were depreciable property, under what schedule of the Income Tax Act should they fall for purposes of calculating depreciation?

6. Must the cost of acquisition of such original properties be determined? (The parties agree that if so, then valuation should be referred back to the Minister for determination.)

Conclusions

Paragraph 13(21)(d.1) of the Income Tax Act provides as follows:

13. (21) In this section, section 20 and any regulations made under paragraph 20(1)(a),

(d.1) “Timber resource property".—"timber resource property" of a taxpayer means

(i) a right or licence to cut or remove timber from a limit or area in Canada (in this paragraph referred to as an“ original right”) if

(A) that original right was acquired by the taxpayer (other than in the

manner referred to in subparagraph (ii)) after May 6, 1974, and

(B) at the time of the acquisition of the original right

(I) the taxpayer may reasonably be regarded as having acquired directly or indirectly, the right to extend or renew that original right or to acquire another such right or licence in substitution therefor, or

(II) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that original right or to acquire another such right or licence in substitution therefor, or

(ii) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded

(A) as an extention or renewal of or as one of a series of extensions or renewals or an original right of the taxpayer, or

(B) as having been acquired in substitution for or as one of a series of substitutions for an original right of the taxpayer or any renewal or extension thereof, . . . .

This paragraph was enacted by S.C. 1974-75-76, c. 26, subsection 6(7). Subsection 6(9) of that Act provided for the coming into force of subsection 6(7) as follows:

6. (9) Subsections (1), (7) and (8) are applicable in respect of timber resource properties acquired after May 6, 1974, subsection (2) is applicable in respect of amounts that become receivable after May 6, 1974 and subsection (3) is applicable after May 6, 1974.

[Emphasis added.]

Frequent reference must be made to these provisions in dealing with the following issues.

1. Is quota an "original right"?

A fundamental position (to which they assert various alternatives) taken by the plaintiffs is that allowable annual cut or quota is a right or interest distinct from licences. One corollary of this position is that quota is not of itself a" right or licence to cut or remove timber from a limit or area in Canada" as required by the definition of an “original right" in paragraph (d.1). (By that paragraph only an original right or a renewal, etc. thereof can be a “timber resource property".) This argument proceeds on the premise that what was being sold by the plaintiffs at the time of disposition of their licences was the quota and that the proceeds of disposition represent only the value of the quota.

There is no jurisprudence directly on point concerning the interpretation of paragraph (d.1) in this respect. The decision of the Federal Court of Appeal in Universal Timber Products Ltd. v. The Queen, [1974] C.T.C. 499, 74 D.T.C. 6413, which did deal with transactions in timber licences and quotas, was decided in reference to the law prior to the adoption of paragraph (d.1). This case is helpful, however, in emphasizing that the assignment of an interest in a timber sale licence was inextricably linked with the recognition which would flow to the new licensee as being entitled to the allowable annual cut previously enjoyed by the assignor of the licence. Notwithstanding the ingenious arguments of counsel for the plaintiffs, I am unable to see how the quota can be seen as an entity separate from the licence to which it entitles its holder. It is true that one may have a quota (as Elk Bay did for a certain period) without a licence but the quota by itself is useless. No one has suggested that one can have a licence without the quota because the licence is granted for the annual harvesting of such quantity of timber as is permitted by the quota. The quota automatically goes with or becomes a term of the licence so that the purchaser of the licence acquires, in effect, the entitlement to cut at the rate specified in the quota and to apply for a new licence to cut at a similar rate should that become necessary. The evidence is clear that "sales" of quota are and must be effected by the sale (assignment) of licences. It is the licence which is being sold, an incident of which is the quota which constitutes a term of the licence and a right to apply for renewal or replacement of the licence. It appears that the value reflected in the price of an assignment of a licence from one private party to another mostly or entirely depends on the size of the quota. But the transaction between such parties is a transaction in licences. There was no evidence of these plaintiffs or any one else in the industry trading in quotas apart from licences.

I therefore conclude that a licence (to which, of necessity, a quota is attached) is an "original right”, a right to cut or remove timber, and that the quota as an incident of the licence is part of that original right albeit the most valuable part.

2. Does paragraph (d.1) apply to renewals or extensions of, or substitutions for, original rights acquired before May 6, 1974?

This issue involves very difficult questions of interpretation of paragraph (d.1) and the coming into force provision quoted above.

It is common ground that the initial acquisition of an original right is not covered by subparagraph (d.1)(i) unless that acquisition occurred after May 6, 1974. The essential question is, if the plaintiffs in the taxation year in question were disposing of interests which were in effect renewals, extensions, or substitutions obtained after May 6, 1974 of original rights acquired before that date, are such renewals, extensions, or substitutions made timber resource properties by virtue of subparagraph (d.1)(ii)?

The plaintiffs argue that renewals, extensions, or substitutions of pre-May 6, 1974 original rights are not covered by subparagraph (d.1)(ii). This argument is based on the coming into force provision which states that paragraph (d.1) is only applicable" in respect of timber resource properties acquired after May 6, 1974”. [Emphasis added.]

The plaintiffs contend that the term "acquired" cannot apply to extensions, renewals, or substitutions of licences; that “acquired” can only apply to the initial obtaining of the licences (with quotas). With some difficulty I have come to the conclusion that this argument is not tenable. There is evidence within paragraph (d.1) itself that the term "acquired" has a meaning broad enough to embrace extensions, renewals, or substitutions. Clause (d.1)(i)(A) requires as a condition of an original right being a "timber resource property":

. . . that [it] was acquired by the taxpayer (other than in the manner referred to in subparagraph (ii)) after May 6, 1974. . . .

[Emphasis added.]

Thus the subparagraph itself indicates that rights or licences obtained under the procedures referred to in subparagraph (ii) namely by extension, renewal, or substitution, can be considered “acquired”. Further, clause (d.1)(ii)(B) refers to rights or licences being "acquired in substitution . . .for an original right "It is true that this latter clause specifically uses the word "acquired" whereas clause (d.1)(ii)(A) does not use the word "acquired".

The importance of the proper interpretation of the word "acquired" flows from the coming into force provision which says that paragraph (d.1) is to apply only to timber resource properties acquired after May 6, 1974. Can renewals or extensions or substitutions of original rights effected after May 6, 1974 be regarded as the acquisition of timber resource properties? As I have suggested, the internal evidence in paragraph (d.1) suggests that extensions or renewals can amount to acquisitions and certainly it is made clear in subparagraph (d.1)(ii) that an original right substituted for an earlier right is “ acquired”. If one were to accept the plaintiffs' argument, then an original right 'acquired" in substitution for an earlier right after May 6, 1974 would be a timber resource property within the ambit of the coming into force section, but an original right extended or renewed after that date would not be a timber resource property to which the regime of paragraph (d.1) would be made to apply by the coming into force section. The wording of paragraph (d.1) and of the coming into force provision is very difficult. One would nave thought, however, that if the intention were to achieve the result for which the plaintiffs contend, there would have been a special term to describe original rights acquired before May 6, 1974 and it would have been specified that neither those rights nor any renewal or extension of, or substitution for, those rights would be regarded as a timber resource property.

While there remain provisions in paragraph (d.1) unexplained to me I have concluded that the reasonable interpretation of it is that original rights may become timber resource properties if initially obtained, renewed, extended or substituted for earlier rights, after May 6, 1974. Among other things I can see no purpose in the coming into force section if it was not intended to fix a time for the commencement of the application of subparagraph (d.1)(ii) to the obtaining by extension, renewal, or substitution, of original rights. Subparagraph (d.1)(i) has its own coming into force provision with respect to initial acquisition: it only applies to such acquisitions after May 6, 1974. Subparagraph (d.1)(ii) on its face applies to original rights renewed, extended or substituted for at any time. The coming into force provision, subsection 6(9) of the 1975 Act, can therefore only have some meaningful application with respect to subparagraph (d.1)(ii). The latter subparagraph does not by its terms have any starting date for its application and the coming into force provision must have been intended to provide that starting date, in effect making it the same as that provided in subparagraph (d.1)(i).

It follows that in my view it is irrelevant whether the plaintiffs’ rights or licences to cut, the disposition of which gave rise to the sums in question, were extensions, renewals, or substitutions for original rights initially acquired before or after May 6, 1974. In case the matter should go further, however, I would find as a matter of fact that the acquisition by Kettle River of Timber Sale Licence A04361 from Miller Lumber Co. Ltd. and Keller Lumber Co. Ltd. occurred after May 6, 1974. Notwithstanding the evidence concerning the intended adjustment date of March 26, 1974 the assignment of the licence was not completed until the Minister consented to it on January 13, 1976. I think a reasonable argument could have been made that the licence was not acquired until that time but the parties have agreed that the assignment occurred in 1974. It seems to me that the earliest time in 1974 it might have been said to be assigned was when the parties signed a revised joint declaration, as required by the forest service, on August 10, 1974. Counsel for the plaintiffs cited my decision in Kirsch Construction Ltd. v. The Queen, [1988] 2 C.T.C. 338, 88 D.T.C. 6503, at page 340 (D.T.C. 6504) where I held, following earlier jurisprudence, that property is acquired for the purposes of capital cost allowance when title is either passed to the taxpayer or the taxpayer has obtained all the incidents of title such as possession, use and risk. In the present case I do not think it could be said that “title” passed to Kettle River until the Minister approved the transfer of the licence in 1976. As for the incidents of title, what Kettle River had bought for our purposes was the right to cut timber, and according to the evidence no cutting was done until October or November, 1974 in the exercise of the Miller/Keller right or licence. I therefore conclude that at the earliest the licence could be deemed to be acquired at that time. I so conclude without embarking on the issue of whether the date of acquisition for purposes of capital cost allowance should be the date of acquisition for the purposes of paragraph 13(21)(d.1): I am merely saying that even accepting the criteria for date of acquisition advanced by the plaintiffs, that acquisition did not occur before May 6,1974.

For completeness I would add, although the matter was not seriously disputed, that the original rights consisting of licences bearing quotas, where acquired after May 6, 1974, are the kind of original rights which meet the requirements of clause 13(21)(d.1)(i)(B) as potential timber resources properties. That is, an established operator with a licence to harvest his quota could reasonably be regarded as having acquired the right to extend or renew such original right. In effect with his quota he would, as an established operator, have more than a reasonable expectation of renewing or replacing his licence. Similarly renewals or replacements of licences, no matter when originally acquired, would fall within subparagraph 13(21)(d.1)(ii) as they would be renewals or extensions of, or substitutions for, the right to cut the quota provided by the same licence prior to renewal or to licences replaced by new licences for cutting the same quota.

3. If the rights disposed of were timber resource property, were they "depreciable property"?

Counsel for the plaintiffs developed a most elaborate argument on this issue. If I understand it correctly, he contends that even if I should find that a licence and quota are collectively timber resource property the proceeds of disposition are still not taxable as income under subsection 13(1) of the Income Tax Act which provides for treating as income certain amounts "in respect of a taxpayer's depreciable property. . . ." Notwithstanding the fact that timber resource property is treated as depreciable pursuant to paragraph 20(1)(a) and Schedule II, Class 33 of the Income Tax Regulations, he argues that it would not come within the definition of "depreciable property" in paragraph 13(21)(b) as follows:

13(21)(b) Depreciable property".—" depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which he has been allowed, or, if he owned the property at the end of the year, would be entitled to, a deduction under regulations made under paragraph 20(1)(a) in computing income for that year or a previous taxation year; . . . .

Counsel argued that "not all timber resource properties are depreciable properties" because

when you look at the definition of depreciable property you must find that you only have depreciable property if you have been allowed a deduction under section 20, which is the capital cost allowance section. And there was no allowance of that kind here.

[Transcript page 493.]

As I understand it, his argument is based on the fact that no capital cost allowance was ever claimed by the plaintiffs here and it could not have been claimed because they had already deducted from income the modest expenses attached to the issuance or holding of licences. Counsel for the defendant now contends that the plaintiffs were entitled by virtue of paragraph 20(1)(a) of the Act and of Schedule II, Class 33 of the Regulations to claim depreciation and thus these timber resource properties were "depreciable property" within the definition of paragraph 13(21)(b). I accept the position of the defendant in this respect. It appears to me by the Act and Regulations the plaintiffs were entitled to claim depreciation and if they deducted the licence expenses as current income expenses (there is no evidence in fact as to what happened in respect of most of these expenses except that it is agreed that capital cost allowance was not claimed) this does not alter the legal characterization of the timber resource properties as "depreciable property”. I need not go into the question here of what the capital cost of the property would have been. If I understand the plaintiffs’ argument correctly, however, I think that it depends in part on the continuing conviction that there were really two sets of rights, one surrounding the licence and the other surrounding the quota, and in part on the implicit rejection of the idea that a quota is a timber resource property.

Instead, for reasons which I have stated, I am satisfied that the quota and licence are interlocking devices which for purposes of paragraph 13(21)(d.1) form one property: namely the entitlement to cut and to continue cutting timber in a certain area in British Columbia. Further, it seems to me that the Act and Regulations are adequately clear as to the special regime pertaining to timber resource property. By subparagraph 39(1)(a)(iv) the disposition of a timber resource property does not give rise to capital gain. Instead by virtue of paragraph 13(21)(f) the amount by which the net proceeds of disposition of a timber resource property, plus total depreciation allowed to the taxpayer before disposition, exceeds the capital cost to the taxpayer, is to be included as income.

4. If property is depreciable, under what schedule?

From the foregoing I think it is clear that I have concluded that as timber resource properties the rights in question are depreciable under Schedule Il, Class 33 of the Regulations.

5. Must capital cost of the licences disposed of be determined?

As I understand it, argument of counsel for the plaintiffs is that if the proceeds of sale of the licence rights are to be treated as income under paragraph 13(21)(f) of the Income Tax Act as proceeds of disposition of a timber resource property, then by subparagraph 13(21)(f)(i) the capital cost to the plaintiffs of those rights should be determined and deducted from that income. The Minister has allowed no amount as capital cost. The plaintiffs contend that the capital cost should be what they “gave up” to acquire the licence rights (including quotas) ultimately disposed of. In the case of Kettle River the Minister appears to have treated the proceeds of disposition as coming from the sale of timber licence TSX82868 [2] (with which all quota rights of Kettle River then existing would have passed to the purchaser). In the case of Elk Bay the Minister treated them as coming from the sale of its interest in TSHL A07938 in which all quota rights of Elk Bay had merged in December 1976. The plaintiffs further argue that in the case of Kettle River the capital cost should be the amount which the licence was worth at the time of its last annual renewal. In the case of Elk Bay the capital cost, it is said, would be the value of the licences which Elk Bay surrendered in 1976 to obtain TSHL A07938, the proceeds of disposition of which are in question here.

Counsel for the defendant in effect argued that there was no capital cost to the plaintiffs of these licences whose proceeds of disposition are in dispute. Counsel for the plaintiffs had relied on the decision of the Exchequer Court in The D'Auteuil Lumber Co. v. M.N.R., [1970] C.T.C. 122, 70 D.T.C. 6096, where President Jackett had held that the capital cost to a company of certain timber cutting rights was the value of what it gave up to get them, namely a right to compensation for expropriation of other property which the company could otherwise have pursued against the province of Quebec. In the present case counsel for the defendant distinguished D’Auteuil on the basis that under the Income Tax Act compensation for expropriation is specifically treated as "proceeds of disposition". I respectfully adopt the principles in D’Auteuil, supra, however, and believe that it justifies an assessment of capital cost for the purposes of subparagraph 13(21)(f)(i) in terms of the value of rights which these taxpayers had which they could have sold but instead rolled over into timber resource properties acquired after May 6, 1974 whose proceeds of disposition are in issue here.

Subsection 13(1) and paragraph 13(21)(f) permit a taxpayer, in effect, to deduct from the proceeds of disposition of a timber resource property "the capital cost to the taxpayer of each depreciable property of that class acquired before that time” in determining income.

The defendant has successfully contended that the plaintiffs acquired timber resource properties after May 6, 1974, and that those properties are “depreciable property". By treating an initial licence acquisition or a licence renewal (in the case of Kettle River) or a licence substitution (in the case of Elk Bay) after May 6, 1974 as acquisitions of a timber resource property for the purposes of the coming into force section and for the purposes of bringing the new regime for timber resource properties introduced in 1974 to bear on such licences, the Act must also be treated as regarding those post-May 1974 acquisitions as the relevant acquisitions for the purpose of calculating capital cost under subparagraph 13(21)(f)(i). It appears to me that the first acquisition after May 6, 1974 of the quota (whether through initial purchase or renewal of a licence), by the taxpayers who ultimately disposed of these interests in the dispositions in question in these actions, should be the acquisition whose cost should represent the capital cost of the licence with quota disposed of. The licences with quotas when first acquired, renewed, etc. after May 6, 1974 became “timber resource property" as defined by paragraph 13(21)(d.1) and remained in the hands of the same owners (notwithstanding changes in the licences to which it was attached) until final disposition.

I can therefore make some findings as to when the various interests disposed of were acquired for the purpose of determining capital cost. In the case of Kettle River, the licence with quota was "acquired" as a timber resource property by the first renewal of licence TSX82868 after May 6,1974. The cost of that property should be based on the price the plaintiff could have obtained if it had agreed to assign the licence rather than continuing to use it through renewal, that is, its market value. Some of the value of the property involved in the disposition in question (treated by the Minister as the disposition of TSX82868) may have come from the quota originating in TSL A05630 which Kettle River acquired on September 29, 1975. If such be the case then that would be the relevant date for acquisition of that portion of the value reflected by the proportion of the final quota acquired with that licence and the cost would be the amount paid for that licence. In the case of Elk Bay, its capital cost of interests sold with its share of licence TSXL A07938 should be calculated as of the respective dates when the various components of Elk Bay's quota, ultimately merged in its share of TSHL A07938, were first acquired by renewal, purchase or substitution of licences after May 6, 1974. The capital cost should be based either on what was paid for licences newly acquired after May 6, 1974, or on the market value of any licences immediately prior to their first renewal after May 6,1974 where the use of the quota was continued through licence renewal rather than being assigned for value.

It appears to me that this interpretation is fully justified by the language of the Act and it also meets the fairness argument advanced by counsel for the plaintiffs. As I understood it his position was that to treat as income the gains realized in 1980 or 1981 upon the selling of quotas which had their quota origins in 1960 when they had no market value or cost would be grossly unfair: it would have a retroactive effect which was avoided in the general scheme introducing a tax on capital gain where at least the valuation date was established to coincide approximately with the coming into force of that regime. It appears to me that by its language Parliament intended the timber resource property regime to come into operation as such properties were acquired initially or by renewal after May 6, 1974 and it is appropriate that capital cost should be determined as of the first acquisition of such a property after that date.

The parties agreed that if I should conclude that there had to be a further determination of capital cost that determination should be left to the Minister of National Revenue.

Disposition

I am therefore in the case of Kettle River confirming the Minister's assessment of the proceeds of disposition of TSX82868 as being from the sale of a timber resource property but referring back to him for reassessment the determination of the capital cost of that licence to be calculated on the basis of the cost of the first acquisition of TSX82868 or TSL A05630, after May 6, 1974. In respect of Elk Bay I am confirming the Minister's assessment of the proceeds of sale of licence TSHL A07938 as proceeds of sale of a timber resource property but referring back to the Minister for reassessment the capital cost to Elk Bay of the licence thereby sold which is to be determined by reference to its cost whenever such licence was first acquired through purchase, or renewal after May 6, 1974.

In the light of these mixed results I am unable to ascertain the degree of success of the respective parties. In the formal judgment I will therefore leave the question of costs open for further determination. I would ask counsel for the defendant to prepare a formal judgment as to costs and submit it to the Court for approval, if possible with agreement by counsel for the plaintiffs as to form, or if this is not possible By a motion for judgment as to costs preferably submitted in writing under Rule 324.

Appeal dismissed.