Universal Timber Products Ltd. v. The Queen, 74 DTC 6413, [1974] CTC 499 (FCA)

Thurlow, J (concurred in by Ryan, J and Sheppard, DJ—judgment delivered from the Bench):—The question raised by this appeal is whether an amount of $100,000 which the appellant received in its 1967 taxation year from Jackson Brothers Logging Company Limited was profit from an adventure or concern in the nature of trade and therefore taxable as income under the provisions of the Income Tax Act.

From the time of its incorporation in 1932 the appellant had been engaged in logging operations on Crown lands in the Province of British Columbia under timber licences which for some years prior to 1966 included licences granted by the Crown to cut annually to the extent of an allotted portion of the total allowable annual cut of timber on a 20,000 square mile area known as the Quadra Public Sustained Yield Unit.

Such licences were granted for a specified period of years but as a matter of the practice of the Forest Service, if for no other reason, applications for the putting up for sale of additional licences to cut timber in the unit were accepted only from persons already established as operators in the unit and when an application was accepted from such an operator certain statutory rights accrued to him which gave him advantages over other bidders including the right to have the licence sold to him on his matching the highest bid or tender. The privileged position or opportunity of an established operator in such a unit to acquire additional licences to cut timber could be of considerable value to him, so much so that other established operators in the unit or persons seeking to become operators were prepared to pay substantial amounts over and above the value of the timber in order to acquire a timber sale licence and thus get in this favoured position to apply for and acquire further timber in the unit.” [1]

Early in 1966 the appellant decided to discontinue its logging operations and the events which led to the payment here in question followed. Jackson Brothers Logging Company Limited (hereafter referred to as Jackson), an established operator in the unit and already holding a substantial quota of the allowable annual cut was interested in increasing that quota and by August 1966, if not earlier, a price had been arranged for the appellant’s quota and that of Phillips and Lee Logging Limited, its subsidiary or related company (hereafter referred to as Phillips and Lee) at $100,000 calculated at $40 per thousand on 2 /2 million feet board measure of annual allowable cut, which was the going rate. A problem remained, however, as to the method by which the intended result was to be accomplished and it was not until December 1967 that it was brought about.

In the meantime in January 1967 the appellant and Phillips and Lee had joined with Jackson in applying for the sale of a new licence embodying the quotas of the appellant and of Phillips and Lee and some of the Jackson quota and in October 1967 a timber sale harvesting licence had been granted to the three companies. Jackson had carried out all the survey and other arrangements in connection with the application for the licence and it paid the deposit required by the Forest Service as at no stage did the appellant or Phillips and Lee have any intention of operating under the licence.

On December 12, 1967 the appellant and Phillips and Lee assigned their interest in the licence to Jackson subject to the approval of the Minister and on the same day they signed letters addressed to the District Forester in a form in use for the purpose advising of the transfer of their logging interests to Jackson who proposed to continue logging in the unit, applying to have their position as established operators in the unit transferred to that company and stating that they understood that if the request for transfer was presented they would no longer be considered as recognized applicants for the purpose of applying for licences in the unit.

The transfer so requested was made, the assignment of their interest in the licence was approved and Jackson paid the appellant the $100,000 or the balance of it after allowing for a deposit already made.

The learned trial judge on considering the documentations involved in the transaction held that the $100,000 was paid only for the assignment of the appellant’s interest, and that of Phillips and Lee, in the licence and that as neither company ever intended to use the licence in carrying on a logging operation but intended to sell it as soon as acquired the amount received was profit from an adventure or concern in the nature of trade and therefore taxable as income from a business within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act.

With respect I do not think this conclusion should be drawn from the evidence. The particular document to which the learned judge attributed a great deal of weight, that is to say the agreement of July 1967 (Exhibit 4) in which a consideration of $100,000 is expressed as being for transfer of the interest of the appellant and Phillips and Lee in the timber harvesting licence which had not yet been granted but which was then expected to result from the joint application made in January 1967, is but one among a number of documents of some importance in resolving the present problem. There is first the joint application which prompts the question as to why in January 1973 the appellant would not have made its own application if all that was transpiring was the taking of action to secure a licence for the purpose of selling it. Moreover, the assignment of the appellant's interest in the licence made on December 12, 1967 cannot be divorced from the letter dated the same day from the appellant and Phillips and Lee to the District Forester requesting him to have their positions as recognized applicants transferred to Jackson. To my mind in the circumstances described in the evidence it is not conceivable that the appellant would have received the $100,000 had that letter not been signed as well as the formal assignment of the interests of the appellant and Phillips and Lee in the timber harvesting licence. I am therefore of the opinion that for the purpose of resolving the question here at issue, that is to say, whether what transpired was an adventure or concern in the nature of trade, the $100,000 cannot properly be treated as having been received by the appellant solely in respect of the transfer of its interest and that of Phillips and Lee in the particular newly acquired timber harvesting licence.

In my view what the evidence as a whole shows is that by the transactions in question the appellant succeeded in converting into dollars something of value that it already had, whether that something was a legal right or privilege or position or not and whether it was capable of being the subject matter of a sale as known to the law or not. The several steps taken by the appellant including joining Jackson in the application for the new licence, the assignment of the interest in the fliicence to Jackson and the letter to the District Forester, as I view them, were but devices used and steps taken to effect that conversion. They amounted to no more than a liquidation or realization of what the appellant already had and were not activities constituting an adventure or concern in the nature of trade for the purpose of making profit by acquiring and selling an interest in the new licence.

I would allow the appeal with costs here and in the Trial Division.