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Date: 20030131
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Docket: 1999-508(IT)G
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BETWEEN:
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KAREN LUCILLE SMEDLEY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
AND BETWEEN:
1999-509(IT)G
GEORGE IAN SMEDLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] These appeals
were heard on common evidence on November 22, 2002 at Calgary,
Alberta.
[2] The basic facts
are as follows:
(a) In 1992 the
Appellants were co-owners of approximately 135 acres of
land ("Property") near Golden, British Columbia,
part of which was forested.
(b) Neither Appellant
had any experience with logging.
(c) In November, 1993
a major blow-down occurred in the area of the Property and
numerous logs fell to the ground or were broken but still
standing.
(d) The Appellants
realizing that there was value in the logs contacted one, Larry
Magnusson ("Larry"), a trusted neighbour, who was
involved in the logging business. Larry recommended that the logs
be sold to the local mill, namely, Evans Forest Products
("Evans").
(e) Larry
agreed to log the property and the Appellants agreed and turned
the project over to Larry. Larry contacted Hub Henderson
("Hub"), a log purchaser for Evans. Larry and Hub
walked the Property and assessed the value of the wood. Hub
agreed with Larry to purchase the logs/wood for Evans and told
Larry to start logging. Larry commenced logging which involved
moving the logs with the required equipment to a landing on the
Property where the logs were processed, i.e. limbs were cut off
and the logs were cut to the specifications set by Evans. This
started just before Christmas of 1993.
(f) The
Appellants trusted Larry absolutely and had had many other
dealings with him in the past without any matters ever being
committed to writing.
(g) Larry had advised
the Appellants that the price Evans was prepared to pay was fair.
The Appellants accepted this advice and agreed but nothing was
committed to writing.
(h) The Appellants
made arrangements to obtain a timber permit from the Province of
British Columbia. This was received on or about February 14,
1994 and was required to enable the Appellants to obtain a timber
hammer, a tool used in the identification of logs.
(i) After the
timber permit or certificate was received an Evans representative
drew-up a written contract, (Exhibit A-1), which the Appellants
thought represented the essential terms of the verbal agreement
worked out with Larry, Hub and the Appellants.
George Smedley signed this written agreement without reading
it. Karen Smedley did not sign and presumably was not asked to do
so.
(j) One of the
terms of the written contract was that the Appellants were to pay
for the expenses of loading, unloading and trucking of the logs
from the Property to Evans' mill and they did so, i.e., paid
those expenses.
(k) Another term of
the written contract was that Evans would only pay for the wood
after it was weighed at Evans' mill thus determining
the price and that in fact is what happened. The payments
were made over a period of time as logs were delivered and
weighed. The payments were made from March 17, 1994 to
December 12, 1994 (Exhibit R-1).
(l) In filing
her 1994 income tax return Karen Smedley reported proceeds of
disposition of logs as $52,435.92 with a cost base of $5,251.35,
claimed a capital gain of $47,184.57 and a taxable portion (75%)
of $35,383.43. George Smedley claimed a capital gain of
$48,184.57 and a taxable portion of $36,168.43.
(m) Both the Appellants
sought to apply a portion of their respective capital gains
deductions against the said taxable portions (and against certain
other taxable capital gains not in dispute here) with the result
that their taxable capital gains were reduced to nil.
(n) If the sale of
the logs took place after February 22, 1994 the capital gains
deductions were not available to the Appellants because of
amendments made to subsections 110.6(1) and 110.6(3) of the
Income Tax Act (the "Act") and because
they did not prior to 1998 make the election contemplated in
subsection 110.6(19) of the Act.
[3] The issue
therefore is whether the actual sale or disposition of the logs
occurred only after February 22, 1994 as contended by counsel for
the Respondent or whether the said sale and disposition occurred
on or before February 22, 1994, being the position taken by the
Appellants because of their understanding that the initial verbal
agreement between the Appellants, Larry and Hub, in their
opinion, constituted the actual sale or disposition and the
alleged verbal agreement occurred prior to February 22, 1994.
SUBMISSIONS OF COUNSEL FOR THE
APPELLANT
[4] Counsel for the
Appellants submits that the actual sale and disposition occurred
prior to February 22, 1994 because of the verbal agreement
discussed above which was entered into prior to that date.
[5] The following are
extracts from the verbal submissions of said counsel:
Sir, just by way of summary and argument, I
want to reiterate that the appellants' position is that at
all relevant times they relied on a verbal agreement between
themselves and Larry Magnusson and that Larry relied on a
verbal agreement with Hub Henderson at all times up to and
including February 22nd, 1994.
The appellant's evidence that he didn't read the
agreement that he signed on February 25th and that the conditions
for performance of his requirements under the contract was
that he have the wood cut specifically for the Evans' mill
and that he ensure that he had the necessary timber mark.
Once he had completed those two conditions that he had fulfilled
his obligations. The truckers had been ordered and scheduled,
everything that could have been done by Mr. Smedley had been
done.
His evidence is that the timber both standing and fallen had been
irrevocably altered to suit the Evans' manufacturing
requirements which changed from month to month and varied from
mill to mill. This preparation of the logs by Mr. Magnusson
tailored the logs to an extent that the only means of obtaining
full value for the timber was to ship them to the Evans'
mill, no other mill would accept the timber for full value once
it had been cut.
The act of detrimental reliance on the appellants' part
through their agent Larry Magnusson rendered the timber in
deliverable condition with or without the timber mark.
Obtaining the timber mark was a condition set by
Hub Henderson, he told Larry Magnusson and the Smedleys that
the timber would not be accepted without the timber mark, in
fact, if Mr. Smedley had relied on the written contract he would
have known that the timber could be transported without a timber
mark, but any fines would be charged back to the vendor, that is
if he and the other parties transacting this agreement had been
relying on written agreements. The written agreement states that
the title and the timber does not pass until it's officially
scaled, however the Smedleys did not sign the agreement until
after they had performed and satisfied all the conditions set by
Hub Henderson and assented to by Larry Magnusson. The agreement
was concluded before the contract was signed.
SUBMISSIONS OF COUNSEL FOR THE
RESPONDENT
[6] I cite the
following extracts from counsel's verbal submissions.
In my submission, the test that Your Honour must apply is that
that is set out in the decision of Wardean Drilling and I will
refer Your Honour to page 6 of that decision and I'm
referring to paragraphs 22, 23, 24 and 26.
The Court finds:
"The decision in this appeal turns on
the question as to when the rig and substructure were
"acquired" by the respondent. The submission on behalf
of the respondent was, as I understood it, that goods are
acquired by a purchaser thereof when the vendor and the purchaser
have entered into a binding and enforceable contract of sale and
purchase.
The test and concept of a contract was that
adopted by the Tax Appeal Board in the decision now under
appeal.
With all deference I cannot accede to that
view. In my opinion the proper test as to when property is
acquired must relate to the title to the property in question or
to the normal incidents of title, either actual or constructive,
such as possession, use and risk."
Skipping down to paragraph 26:
"As I have indicated above, it is my
opinion that a purchaser has acquired assets of a class in
Schedule B when title has passed, assuming that the assets exist
at that time, or when the purchaser has all the incidents of
title, such as possession, use and risk, although legal title may
remain in the vendor as security for the purchase price as is the
commercial practice under conditional sales agreements. In my
view the foregoing is the proper test to determine the
acquisition of property described in Schedule B to the Income Tax
Regulations."
Sir, in my submission, Your Honour, this is
the test that we must apply to the facts in the Smedleys'
situation. This test has been accepted and applied by the Federal
Court of Appeal as recently as 1999. ...
[7] After reviewing
certain authorities counsel continued as follows:
First, a disposition for capital gains
purposes occurs when beneficial ownership is transferred.
Secondly, the test for beneficial ownership is the date at which
the party has acquired the indicia of ownership, those being
risk, use and possession.
Third, the definition of disposition in section 54 of the Act
specifically states that disposition does not include a change in
legal ownership without a corresponding change in beneficial
ownership, so in my submission this leaves us in a position where
we have to determine a point in time at which beneficial
ownership of the logs passed to Evans' Forest Products, that
is when did possession, use and risk of the logs pass to
Evans.
In my submission, this happened when the shipments of logs were
officially scaled. The evidence is that prior to that time, the
logs were on the land of the appellants'. They were being
dealt with by Larry Magnusson who was a contractor hired by the
appellants. They were being processed by Mr. Magnusson, again a
contractor employed by the appellants and paid for by the
appellants. Evans did not have care and control of those logs at
that time, although they were being cut to specifications set out
by Evans this was not being performed by employees of Evans. It
wasn't being done by a contractor hired by Evans.
Mr. Magnusson was chosen by the Smedleys and paid by the
Smedleys. Clearly it was the Smedleys that had care and control
of those logs at that time or possession of the logs. It was the
Smedleys that gave the go-ahead to Mr. Magnusson to process those
logs in accordance with the instructions provided by Evans.
It was Mr. Magnusson who arranged for the shipping. Again, an
agent, an independent contractor hired by the Smedleys.
It was only once the logs were scaled that Evans took possession
of the logs and were free to do with those logs whatever they
wished and this is clear from the fact that the Smedleys had to
pay the wages of Mr. Magnusson and had to pay for the hauling and
were responsible for any misbehaviour, if you will, by the
truckers on the way to the scaling. That is all set out in
paragraph 17 of the agreement, which is exhibit A-1.
Now, there has been talk about the oral agreement and Mr. Smedley
testified in a very honest and forthright way that Mr. Magnusson
handled the negotiations and the terms and that his understanding
was that the written agreement was simply the detailing of the
oral agreement and he seems to be trying to step away from that
little bit now or at least my friend has a little bit in
argument, however in my submission, clearly the written agreement
does reflect Mr. Smedley's understanding. He knew he was
going to pay for the trucking; he knew that he had to pay for Mr.
Magnusson's wages and he ensured that that was done, he
testified. So, whether he thought that he no longer had control
of the logs or not does not change the legal test, risk, use and
possession.
Possession, again, they were in the hands firstly of
Mr. Magnusson, a contractor employed by the Smedleys. Then
they were in the hands of the truckers who again were paid by the
Smedleys.
Use, possession and use, Evans could not do anything with those
logs until such time as they arrived at the weight scales. They
didn't have the rights under the agreement, there is no
evidence that they were coming onto the Smedleys' land and
determining exactly how much wood they had and what they would do
with it or anything to that effect and the risk, in my
submission, again, is clearly spelt out both in the written
contract and in the practical operation of this sale as testified
to by Mr. Smedley.
Payment was only due upon the weighing of the logs at a
designated weight scale, no money was owing by the purchaser to
the vendor, to the Smedleys, until such time as delivery took
place.
[8] Counsel for the
Respondent stated further:
Now, I also would like to refer to the British Columbia Sale of
Goods Act. These transactions did occur in British Columbia
near Golden as the evidence related.
Sale of Goods Act and certain excerpts will be found at tab 5 of
my authorities and I would refer Your Honour to section 25, which
is about 5 or 6 pages in from the start of tab 5.
Now, that section provides that:
"...the goods remain at the
seller's risk until the property in them is transferred to
the buyer..."
unless a contrary intent appears.
Now, in my submission, there is no contrary intent in this case
and as previously submitted, the property in the logs did not
transfer until they were officially scaled and that indeed is the
intent that is reflected in the contract.
First, it's reflected in the fact that it
specifically says that title passes once the logs are weighed and
secondly it's reflected by the fact that it is Smedleys and
not Evans that is responsible for paying for the processing and
the shipping of the logs and, again, everything about this
arrangement is consistent with title not transferring until such
time as the logs arrive at the weight station.
Now, it's clear that no logs were delivered to the weight
station until after February 25, 1994, so in my submission
it's clear that risk, use and possession of the timber all
remained with the appellants until after the 22nd of February,
1994.
[9] Counsel for the
Respondent also submitted the following:
Now, subsection 23, sub 1, provides that in
the absence of a contrary intention, the intention of the parties
as to be determined in accordance with the provisions of that
section and subsection 23, sub 4, on the next page,
then states that where the seller is bound to weigh the goods for
the purpose of ascertaining the price, the property does not pass
until that act is done, and in my submission -- and specifically
if there is a sale of specific goods in a deliverable state and
by deliverable state we are talking about the processing, they
have to put the goods into a particular state, they have to
process the logs according to those specifications of Evans, so
we have a contract for the sale of specific goods in a
deliverable state, but the seller is bound to weigh, measure,
test or do some other act or thing with reference to the goods
for the purpose of ascertaining the price. The property does not
pass until that act or thing is done and the buyer has notice of
it, so in order to determine the price that the Smedleys are to
be paid, in order to determine their revenue from these logs,
those logs have to be weighed and it is based on that weight that
the Smedleys receive money.
So once again we are brought to the conclusion that title of the
goods passed as of the date of delivery to the weight scales.
So in my submission, it's clear that risk, use and possession
of the timber both under common law and in accordance with the
provisions of the B.C. Sale of Goods Act, which applies to this
transaction, they point to the fact that risk, use and possession
of the timber and title in the timber all remained with the
appellants until after the 22nd of February of 1994. There was no
delivery to the weight scales prior to that date.
I also point out that the test is set out in the cases I referred
to as conjunctive, that is use, risk and possession must each
have been transferred to Evans in order to argue that they had
title to those goods.
ANALYSIS
[10] In my opinion the
authorities and submissions of counsel for the Respondent are
applicable. There was no disposition or sale until after
February 22, 1994 as beneficial ownership did not pass and
there was no possession use and risk in Evans until after the
weighing of the wood and the determination of the price.
[11] I do not rely solely
on the written contract: The method it was signed by George
Smedley indicates that he did not read it and obviously did not
consider it that important. Nor was it signed by Karen Smedley.
However, as mentioned above certain of the terms of the written
contract were in fact carried out by or under the authority of
the Appellants, namely being responsible for the expenses of the
truckers and the loaders and in all of the processes to the point
of when the wood was scaled. An agreement to enter into a sale in
the circumstances of this case is not the actual sale. In my
opinion it is clear that there was no disposition until the wood
was weighed at Evans' scales.
[12] For all the above
reasons these appeals are dismissed, with costs.
[13] However, and this is
most important, had the Appellants been properly advised they
could have elected under section 110.6(19) of the Act in
which event the treatment that they sought would have been
allowed. Moreover, there was no evidence of any attempt to evade
tax illegally, the good faith of the Appellants not having been
questioned. Considering these circumstances it is strongly
recommended that Remission Orders under the Financial
Administration Act be granted to the Appellants.
Signed at
Ottawa, Canada this 31st day of January 2003.
J.T.C.C.
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