Itt Industries of Canada Ltd. v. Canada, docket T-1048-89

Date: 19990201

Docket: T-1048-89

BETWEEN:

     ITT INDUSTRIES OF CANADA LTD.,

     Plaintiff,

     - and -

     HER MAJESTY THE QUEEN,

     Defendant.

     REASONS FOR ORDER

SIMPSON, J.

THE MOTION

[1]      This is a motion brought by the Defendant pursuant to Rule 220(1) of the Federal Court Rules, 1998, for a determination of the following question of law:

Is Tree Farm License 6 ("TFL 6") 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 FACTS

[2]      The motion was argued on a Partial Statement of Agreed Facts dated May 29, 1998 (the "Agreed Facts"). It is "partial" because it only contains the facts relevant to this motion. It sets out the Plaintiff's corporate history and explains the background of the Plaintiff's sale of TFL 6.

[3]      The Agreed Facts also indicate that a tree farm license was an agreement entered into pursuant to the Forest Act, R.S.B.C. 1948, c. 128 (the "1948 Forest Act"), between the Province of British Columbia (the "Province") and the holder. It generally provided the holder with exclusive rights to cut timber owned by the Province in specified areas. TFL 6 was such a license, and it was granted by the Province to a predecessor of the Plaintiff on October 26, 1950. Importantly, it was a perpetual license. On May 1, 1961, the Plaintiff acquired TFL 6 from its original holder, and, thereafter, the Plaintiff owned TFL 6 for approximately 20 years.

[4]      During that period, there was significant legislative change. The 1948 Forest Act was amended in 1958 by the Forest Act Amendment Act, 1958, S.B.C. 1958, c. 17. It provided that tree farm licenses granted after March 19, 1958, were awarded for 21-year terms with renewal clauses. This change did not affect TFL 6. It continued as a perpetual license. However, in 1978, the 1948 Forest Act was repealed and replaced by the 1978 Forest Act, S.B.C. 1978, c. 23 (the "1978 Forest Act"). It provided, inter alia, that all perpetual tree farm licenses would be replaced by 25-year term licenses. The legislative process in the 1978 Forest Act (which became the 1979 Forest Act, R.S.B.C. 1979, c. 140, when the Statutes of British Columbia were revised in 1979) resulted in the expiry of TFL 6 on December 31, 1979. A replacement license was issued on January 1, 1980 (the "Replacement Licence"). It was also called TFL 6 but it had a 25-year term. This was the version of TFL 6 that the Plaintiff sold on October 30, 1980, for $72,180,000.00 (the "Sale Proceeds").

[5]      In computing its income for its 1980 taxation year, the Plaintiff decided that TFL 6 was a timber limit and not a timber resource property. Accordingly, the Plaintiff computed its income for the 1980 taxation year by including in income an amount equal to one-half of the amount by which the Sale Proceeds exceeded TFL 6's adjusted cost base.

[6]      The Minister of National Revenue (the "Minister") reassessed the Plaintiff for its 1980 taxation year on the basis that the Sale Proceeds were proceeds of sale of a timber resource property rather than a timber limit. On this basis, the Minister included all the Sale Proceeds in the income of the Plaintiff for its 1980 taxation year.

THE ISSUE

[7]      The question is whether TFL 6 is a timber resource property as that term is defined in paragraph 13(21)(d.1) of the Income Tax Act (the "Paragraph"). The Paragraph reads:

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

subparagraph      (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

subparagraph      (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 extension or renewal of or as one of a series of extensions or renewals of 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.

(The references to subparagraphs in the left margin and the emphasis on the word OR between the subparagraphs are mine.)

The 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.

THE PLAINTIFF'S POSITION

[8]      The Plaintiff submits that subparagraphs (i) and (ii) of the Paragraph should be read together and that, if this approach is taken, TFL 6 is not caught by either subparagraph. TFL 6 was acquired by the Plaintiff on May 1, 1961. This acquisition predates May 6, 1974, and, accordingly, subparagraph (i) cannot apply. As well, TFL 6 was a perpetual license and therefor did not have attached to it rights or reasonable expectations concerning extensions, renewals or substitutions. The Plaintiff did not obtain substituted rights until after May 6, 1974 when the Replacement Licence was issued. The Minister agrees that TFL 6 is not caught by subparagraph (i).

[9]      The Plaintiff also says that subparagraph (ii) does not apply to TFL 6 because the right or licence it describes in its opening words is the same right or licence described in subparagraph (i). The Plaintiff takes the position that subparagraph (ii) is a provision designed only to capture renewals, extensions, or substitutions of and for original rights described in subparagraph (i). Since it is agreed that TFL 6 is not described in subparagraph (i), the Plaintiff says that TFL 6 cannot be caught by subparagraph (ii). On this point the Minister disagrees.

[10]      In support of this position, the Plaintiff has two submissions. Firstly, it says that all of subparagraph (i) (except subsection A) forms the definition of "original right". This submission relies on the decision of the Federal Court of Appeal in Kettle River Sawmills Ltd. et al. v. The Queen, 94 D.T.C. 6086 (F.C.A.) which substantially affirmed the decision of Strayer J. (as he then was) of the Federal Court, Trial Division, 92 D.T.C. 6525 (T.D.) (both decisions hereinafter referred to as "Kettle River"), and on the wording of other sections of the Income Tax Act. Secondly, the Plaintiff submits that the Paragraph was intended to be read as a whole because (1) the provisions of subparagraph (i)(B)(I) and (II) are directly parallel to those of subparagraph (ii)(A) and (B), (2) because the opening words of subparagraph (ii) make no sense unless "original right" is used as defined as the Plaintiff suggests it should be in subparagraph (i), and (3) because the Notice of Ways and Means Motion (the "Notice") which accompanied the Federal Budget of November 1974 so indicates. Finally, the Plaintiff also suggests that policy considerations support its interpretation of the Paragraph.

I will deal with each submission in turn.

Submission      1.      The definition of original right includes subparagraph (i)(B)

[11]      In Kettle River, the taxpayers acquired a number of timber tenures. The one of relevance was a timber sale contract or license which was obtained in 1961 (ie. before May 6, 1974.) It was not a perpetual license. It ran for a term of 10 years followed by the possibility of annual renewals after 1971. It was, in fact, renewed before and after May 6, 1974, and was then sold in 1980. One of the questions before the Court was whether this license was caught by subparagraph (ii). This question was considered by the trial judge as the second issue in the case.

[12]      In this regard, Strayer J. (as he then was) said:

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).

The trial judge then considered the proper interpretation of the term "acquired" and concluded that original rights could become timber resource properties if, after May 6, 1974, they were acquired in the form of the renewal, extension, or substitution of or for earlier rights. In short, he rejected the taxpayers' argument that "acquisitions" were not possible under subparagraph (ii).

[13]      In the Court of Appeal, this issue was described as follows:

The difficulty comes in respect of subparagraph (ii) dealing with extensions, renewals and substitutions; both clauses (ii)(A) and (ii)(B) are made to depend upon whether or not the right extended, renewed or substituted for is an "original right". The use of that term drives the reader back to subparagraph (i) which tells us that the right it describes is "referred to" as an "original right".

It is this reference back from subparagraph (ii) to subparagraph (i) which creates difficulty and serves as the foundation of the respondents' argument that no extension, renewal or substitution of a pre-May 6, 1974 right which takes place after that date is an acquisition.

[14]      It is clear from the subsequent analysis that the taxpayer had again argued that no extension, renewal or substitution of a pre-May 6, 1974 right which took place after that date could be an "acquisition".

[15]      Hugessen J.A. (as he then was) wrote for the Federal Court of Appeal and, in the first of the two conclusions noted below, he upheld the trial judge's finding that acquisitions did occur under subparagraph (ii).

[16]      He said:

The answer, as it seems to me, and as determined by the trial judge, lies in the bracketed words in clause (i)(A): "(other than in the manner referred to in subparagraph (ii))". Those words do two things. FIRST, they indicate that, in the language of the draftsperson, the process described in subparagraph (ii) is one resulting in a right being "acquired". SECONDLY, they have the effect of excluding from the meaning to be ascribed to the defined term "original right" in subparagraph (i) the time limitation imposed by clause (i)(A) while retaining the other conditions imposed by clause (i)(B).

     (my emphasis)

[17]      The Plaintiff submits that the finding which begins with the word "Secondly" (the "Second Finding") is a conclusion which is binding on me and which means that subparagraph (i)(B) forms part of the definition of original right as that term is used throughout the entire Paragraph. If this argument were accepted, it would mean that a perpetual license, such as TFL 6, could not be an original right for the purpose of subparagraph (ii) because there would never have been any expectation of its extension, renewal or substitution.

[18]      I have not accepted this submission because I have concluded that the Second Finding is clearly obiter dicta and, as such, is not binding. The extent of the definition of original right was not identified as an issue in either Federal Court judgment, and it is nowhere discussed. This makes sense because the taxpayers' submission was directed only to whether an acquisition was possible under subparagraph (ii).

[19]      The Plaintiff herein does not agree that the Second Finding is obiter dicta but submits in the alternative that, if it is, it is binding on me by reason of the principles enunciated in [1981] S.C.R. 527">Sellars v. The Queen, [1981] S.C.R. 527 at 530 and in Friedman Equity Developments Inc. v. Final Note Ltd. et al. (9 September 1998), (Ont. C.A.) C27293.

[20]      I have reviewed these cases and am satisfied that, when a majority of the judges of the Supreme Court of Canada state a broad legal principle, even in obiter dictum, such statements are authoritative. However, these cases have no application here. The Supreme Court of Canada has not spoken and, in any event, the Second Finding is not a statement of broad legal principle.

[21]      Though Kettle River does not support the Plaintiff's argument, it remains to consider whether there are other reasons to find that subparagraph (i)(B) forms part of the definition of original right. The Plaintiff suggests that defined terms in other sections of the Income Tax Act are drafted in a manner similar to the Plaintiff's proposed reading of the first phrase of subparagraph (i) and that I should have regard for them in reaching a conclusion about subparagraph (i). The sections of the Income Tax Act and Regulations are:

sec. 19(5)          dealing with a Canadian newspaper or periodical and the definition of "holding corporation" in ss. (e)(iii)(b).

sec. 54.              dealing with principal residence and the definition of "specified beneficiary" in ss. (c.1)(ii).

sec. 54.              dealing with superficial loss and the definition of "substituted property" in ss. (a).

sec. 108(1)      dealing with preferred beneficiaries and the definition of "beneficiary's year" in ss. (a)(i).

sec. 146(1)      dealing with a refund of premiums and the definition of a "dependant" in ss. (b).

sec. 248(1)      dealing with a retirement compensation arrangement and the definition of an "athletes plan" in ss. (j)

reg. 8500(1)      dealing with a predecessor employer and the definition of "vendor".

The Plaintiff says that each of the listed definitions involves the placing of the label (i.e. the parenthesized descriptive term) after the generic name or description but before a description of the defining characteristics of the labelled term. Each of these examples is said to demonstrate that the words which follow the parenthesized label can and do form part of the definition of the labelled term.

[22]      The Minister says that, where labelling definitions are used, only the words which precede the parenthesis describe the defined term. This he says is a necessary convention to avoid the confusion that would arise if a definition continued after the parentheses. Accordingly, the Minister says that the definition of original right is found entirely in the first phrase of subparagraph (i) before the parentheses. He further says that subparagraph (i)(B) is not part of the definition of original right.

[23]      Having reviewed the definitions listed above, I have concluded that there are no examples in which part of the definition of the defined term in parentheses follows the parentheses. I am satisfied that the words which follow the parentheses either describe the operation of the defined term or state how the defined term relates to the subject which the whole section is devoted to defining.

[24]      Turning to the Paragraph at issue in this case, the Plaintiff seeks to have me read subparagraph (i)(B)(i) and (ii) as part of the definition of original right which appears in the opening phrase of subparagraph (i). The Plaintiff has not demonstrated that there is a drafting style in the Income Tax Act which would suggest such a reading. Further, the Plaintiff's suggested definition is broken up. In the Paragraph, subparagraph (i), subsection (A) intervenes between the parenthesized definition and subsection (B) which is said to be the continuation of the definition. I am not prepared to conclude that the definition of original right stops after the parentheses and then reappears and continues in the second subsection after the parentheses.

[25]      As well, the Plaintiff's submission is not persuasive when the Paragraph is read as a whole. It is important to remember that the Paragraph is devoted to defining a timber resource property. In my view, subparagraph (i)(B) describes situations in which original rights can be regarded as timber resource properties. It does not further define original rights. Accordingly, I have concluded that the definition of original right ends with the parentheses in the opening phrase of subparagraph (i).

Submission 2.      The Paragraph is to be read as a whole such that subparagraph (ii) deals only with the original rights described in subparagraph (i)

[26]      The Plaintiff indicates that, in its view, a direct parallel can be drawn between the descriptions of rights or licences in subparagraph (i)(B)(i) and (ii) and subparagraph (ii)(A) and (B). This is another way of presenting the submission that the rights described in the latter flow from the former. However, I do not find the descriptions to be clearly parallel. Indeed, the Plaintiff ignores the fact that subparagraph (i)(A) has no parallel and that subparagraph (ii) therefore required the separate "in-force" provision described in paragraph 7 above. Further, dealing with the parallels the Plaintiff suggests, it seems clear to me that subparagraph (i)(B) deals with the acquisition of rights which, when acquired, have actual or foreseeable future rights to renewals, extensions or substitutions, and subparagraph (ii) deals with a different kind of acquisition, i.e. of the further rights themselves after they have come into existence.

[27]      I agree with Hugessen, J.A. when he said in Kettle River¹ that the Paragraph is not a model of clarity. Indeed, his was an understatement. I also agree with the Plaintiff that the opening passage of subparagraph (ii) is oddly worded because the defined term original right is not used. If it had been used the phrase would have read "any original right owned by the taxpayer if that right or license may reasonably be regarded ...". However, I am unable to agree with the Plaintiff's submission that, if the term original right had been used, subparagraph (ii) would make no sense. In my view, it would read in an awkward fashion, but it would still have meaning.

[28]      The Plaintiff also suggests that the Notice which accompanied the November 1974 Budget that introduced the Paragraph should be used as an aid in its interpretation. Under the heading "Timber Limits and Cutting Rights" at page 35 the Notice reads in part:

"That where a taxpayer acquires after May 6, 1974, a property that is a timber limit or right or licence to cut timber from a timber limit or area in Canada, provided that all or any part of the cost may reasonably be regarded as consideration for an expectation of being able to or a right to renew, acquire or apply for a timber limit or a right or licence to cut timber from a timber limit or area in Canada..."

The Plaintiff says that the Notice shows that the entire Paragraph only applies to timber rights which had rights or expectations of renewals, extensions or substitutions at the time of acquisition. The difficulty I see is that the Notice appears to describe only those acquisitions made pursuant to subparagraph (i). It does not address acquisitions under subparagraph (ii), which are of rights that are in the nature of extensions, renewals or substitutions. It is noteworthy that the first line of text in the Notice states that "... it is expedient to amend the Income Tax Act and to provide among other things..." (my emphasis). From this language I conclude that the Notice is presenting the highlights of the Income Tax Act changes and does not purport to provide an exhaustive review of the changes. It is therefore not surprising that subparagraph (ii) was not addressed.

[29]      The Plaintiff also suggests that the higher taxation costs attached to a timber resource property make good policy sense because, if there was a right or expectation of renewal extension or substitution at the time of acquisition, such a licence would have a higher value. I have two problems with this suggestion. Firstly, as the trial judge observed in Kettle River, the value of a particular licence may vary depending on the annual cutting quota it carries. I also think it possible that perpetual licences would be the most valuable and, if the Plaintiff's logic were applied, they would attract the higher tax burden associated with timber resource properties. In sum, I have concluded that the Plaintiff's submission about policy is too speculative to contribute to this decision.

[30]      The logic of the Paragraph must also be explored. In that regard, I must consider whether there were licenses to which subparagraph (ii) could have applied at the time it came into force in May 1974. Perpetual licences still existed when the Paragraph came into force, and the legislation which led to their demise did not pass until 1978. It follows that subparagraph (ii) could not have been enacted with perpetual licenses in mind because they would never have been caught. However, it is clear from the case law that other types of licences existed in 1974 which were already being renewed. For example, this was the case with the licence in Kettle River which was discussed earlier in these reasons. It was a pre-May 6, 1974 licence with an expectation of renewal and with renewals before and after May 6, 1974. It was not caught by subparagraph (i) but would be caught by subparagraph (ii). Accordingly, when the Paragraph came into force in 1974, subsection (ii) had a purpose which was distinct from subsection (i) in that it could apply to the extensions, renewals and substitutions of and for rights which were not caught by subparagraph (i).

[31]      There are two final points which suggest to me that, contrary to the Plaintiff's position, the subsections were intended to apply independently. I will itemize them briefly:

a)      The disjunctive word "or" is used between the subparagraphs.

    

b)      Subparagraph (i) has an in-force date included in its text. None appears in subparagraph (ii). If the subparagraphs were to be read as one, there would be no need for Parliament to specify an in-force date for subparagraph (ii), yet this was done.

CONCLUSION

[32]      For all these reasons I have concluded that TFL 6 is a timber resource property because it falls under the provisions of paragraph 13(21)(d.1)(ii).

                                                         (Sgd.) "Sandra J. Simpson"

                                                                 Judge

Vancouver, B.C.

February 1, 1999

     NAMES OF COUNSEL AND SOLICITORS OF RECORD

STYLE OF CAUSE:          ITT INDUSTRIES OF CANADA LTD.

                     - and -

                     HER MAJESTY THE QUEEN

COURT NO.:              T-1048-89

PLACE OF HEARING:          Toronto, Ontario

DATE OF HEARING:          December 17, 1998

REASONS FOR ORDER:      SIMPSON, J.

DATED:                  February 1, 1999

APPEARANCES:

     Colin Campbell, Esq.                  for Plaintiff

     Brian Carr, Esq.

     Jag S. Gill, Q.C.                      for Defendant

     David E. Spiro, Esq.

SOLICITORS OF RECORD:

     Davies, Ward & Beck                  for Plaintiff

     Toronto, Ontario

     Morris Rosenberg                      for Defendant

     Deputy Attorney General

     of Canada

__________________

     ¹      supra at p. 6090