Bowman, J.T.C.C.:— These cases were heard together on common evidence and involve appeals from assessments for 1985, 1986, 1987 and 1989 as well as from a determination of loss for 1988.
One preliminary procedural or possibly jurisdictional point should be disposed of at the outset. Originally the appellant asked that this Court make a determination of its loss for 1988 as the size of that loss affected its taxable income for 1985, 1986 and 1987. The respondent took the position that in the appeals for 1985, 1986 and 1987 the appellant could not challenge the Minister’s computation of the loss for 1988 because the appellant had not requested a determination of loss for 1988.
The appellant acceded to this position and requested a loss determination for 1988 under subsection 152(1.) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). A determination was made by the Minister, an objection was filed, the determination was confirmed and an appeal was brought to this Court from the loss determination for 1988.
The Minister’s position in the original reply to the notice of appeal that the Minister's ascertainment of a loss for a particular taxation year is immutable unless a loss determination is made under subsection 152(1.1) is, however, wrong. It is true that this Court cannot make a formal loss determination under subsection 152.(1.1). That is the Minister's function. If such a loss determination is made it is valid and binding unless challenged by way of objection or appeal and, if it is sustained on appeal, it stands. The purpose of subsection 152(1.1) is to permit a taxpayer to have its loss for a year determined definitively and, if necessary, to have the Minister’s determination reviewed by the Court. One of the reasons for the enactment of subsection 152(1.1) was that no appeal lies from a nil assessment. In the absence of a binding loss determination under subsection 152(1.1.), it is open to a taxpayer to challenge the Minister's calculation of a loss for a particular year in an appeal for another year where the amount of the taxpayer's taxable income is affected by the size of the loss that is available for carryforward under section 111. In challenging the assessment for a year in which tax is payable on the basis that the Minister has incorrectly ascertained the amount of a loss for a prior or subsequent year that is available for deduction under section 111 in the computation of the taxpayer's taxable income for the year under appeal, the taxpayer is requesting the Court to do precisely what the appeal procedures of the Income Tax Act contemplate: to determine the correctness of an assessment of tax by reviewing the correctness of one or more of the constituent elements thereof, in this case the size of a loss available from another year. This does not involve the Court’s making a determination of loss under subsection 152(1.1) or entertaining an appeal from a nil assessment. It involves merely the determination of the correctness of the assessment for the year before it.
It was, therefore, unnecessary for the appellant to seek a determination of loss under subsection 152(1.1). The matter of the 1988 loss is now before the Court on two bases—both as an appeal from the 1988 loss determination and as a component of the taxable income for 1985, 1986, and 1987 and, to the extent that any amount of loss remains available for carryforward, for 1989. While it was unnecessary for the purposes of these appeals that I deal at length with the point, the Crown's position is so out of line with both the law and with prevailing practice and could potentially have such far-reaching effects on any number of appeals before this Court that I considered it desirable that the idea be nipped in the bud.
I come now to the issue that relates to the loss incurred in the 1988 taxation year. That issue is the treatment of $250,000 received by the appellant from the sale of a contract that it had with Weyerhaeuser Canada Ltd. ("Weyerhaeuser") to supply pulpwood. Since 1976 the appellant has been engaged in the pulpwood business whereby it harvested pulpwood and delivered it to a pulpmill in recent years owned by Weyerhaeuser and in earlier years by Parsons and Whitmore Ltd. Each year it would enter into a supply contract with the pulpmill. Mr. Romanchuk, the owner of the appellant, stated that the contracts entered into in prior years were similar to that in force in 1988, which was put in evidence. The amount of pulpwood that the appellant was to supply each year would vary. In 1988 it was 50,000 cubic metres. The practice was that the amount to be delivered in any quarter was set out in Schedule C to the agreement so that Weyerhaeuser’s needs could be regulated over the term of the year. For example, Schedule C for the period from April 5, 1988 to July 29, 1988 provided for 6,470 tonnes of spruce at $24.4833 per tonne and 5,670 tonnes of trembling aspen at $19.0905 per tonne for a total of 12,140 tonnes for the quarter. Mr. Romanchuk stated that a cubic metre of wood was about 840 kilograms.
At the end of each quarter a new Schedule C would be added to the contract setting out the number of tonnes to be produced in that quarter and the rates payable therefor.
It is entirely possible that Weyerhaeuser could have refused at the end of the year to enter into a new contract. That was not, however, the practice and I am satisfied on the evidence that the appellant had a commercial expectation of being able to supply pulpwood to Weyerhaeuser for so long as both stayed in business and so long as the appellant kept up its previous level of performance.
In 1988 the appellant decided to go out of the pulpwood business and to go into the business of manufacturing fence posts. This is an entirely different type of enterprise. It involves the cutting of wood from areas assigned to the appellant and requires different equipment for preparing and treating the fence posts, which were then sold to customers in North America. I need not elaborate on the fundamental differences. They are obvious. Accordingly the appellant sold the balance of its contract to two companies, Terry Thoms Enterprises Ltd. (“Thoms”) and Isayew Contracting Ltd. ("Isayew"). Since the contract was not automatically assignable Weyerhaeuser’s consent was needed and was obtained. Each purchaser paid the appellant $125,000. At the time of the sale of the contract, June 1, 1988, the appellant had delivered 6,912 cubic metres out of the total allocation for the year of 50,000 cubic metres. This left 43,088 cubic metres to be split equally between the two purchasers.
The contract of sale was identical in both cases. The Isayew contract read as follows:
For the sum of $125,000 the sellar agrees to transfer 50 per cent of existing volume of Weyerhaeuser Contract #27679 which is 21,568 m as of this date to the buyer and all future volumes which may accrue. Weyerhaeuser has been advised of this transaction, will make the transfer as required.
The terms of this agreement shall be as follows:
Down payment of $50,000. Balance of $75,000 to be paid at the rate of $10,000 monthly till full payment is received. In case of work disruption due to shutdown by Weyerhaeuser or other acts no penalty will be imposed if monthly payment is missed. Total to be paid by March 31, 1989 or sooner.
The appellant treated the $250,000 as a receipt on capital account. The Minister treated it as income from the appellant's business.
There is no question in my mind that the contract was a capital asset in the appellant’s hands. It formed part of the fixed capital of the enterprise. Indeed it may well have been the most important single asset of the business. Without it the appellant could not have carried on the pulpwood business at all. Weyerhaeuser was the only customer for pulpwood in the area.
Counsel for the respondent in his very thorough and detailed written submission argues that what was sold was merely the right to earn income under balance of the contract to supply pulpwood and the proceeds from the sale of that right were themselves income. While a detailed analysis of the figures such as that set forth in the respondent's brief could indicate that it might well have been a profitable transaction from the purchasers’ point of view even if only the remainder of the existing contract was all that the purchasers expected from the transaction, I do not think that this conclusion conforms to commercial reality. What was sold was, of course, the contract but it carried with it the benefit, as a matter of reasonable commercial expectation, of being able to stand in the appellant's shoes year after year and obtain a succession of such contracts with Weyerhaeuser. The argument advanced by the respondent is precisely that rejected by Cattanach, J. in Metropolitan Taxi Ltd. v. M.N.R., [1967] C.T.C. 88, 67 D.T.C. 5073 (Ex. Ct.), and by the Supreme Court of Canada on appeal from his judgment ([1968] S.C.R. 496, [1968] C.T.C. 163, 68 D.T.C. 5098). At page 98 (D.T.C. 5079) Cattanach, J. said:
I am convinced that what the appellant paid for was a long-term commercial benefit. When the appellant bought the assets of Adolph's it succeeded to Adolph’s position before the taxicab board and, because of the well-known policy of that board, could reasonably expect to be able to operate an expanded fleet of taxicabs from year to year. For that expectation and privilege the appellant was prepared to pay and did pay a substantial amount. To attribute that amount to the value of the 14 taxicabs, as contended by the appellant, would, in my opinion, be unreasonable and, as I conceive it, a distortion of the true substance of the transaction.
In affirming his judgment in the Supreme Court of Canada, Cartwright, C.J. said at page 498 (C.T.C. 164, D.T.C. 5098):
After a consideration of the arguments of counsel and the authorities to which they made reference I find myself so fully in agreement, not only with the conclusion of the learned Exchequer Court judge but also with his reasons, that I am content simply to adopt them.
Counsel for the respondent argues that the best evidence of what Thorns and Isayew thought they were paying for should come from them, and they were not called. The evidence that is most relevant to the determination of the nature of the receipt in the appellant’s hands is that of Mr. Romanchuk as to the nature of the asset owned by the appellant. It was a capital asset in the appellant’s hands and it carried with it, on Mr. Romanchuk's testimony, a reasonable commercial expectation of its being renewed indefinitely.
The proceeds from the sale of the contract were a receipt of capital and should be so treated in the computation of the appellant’s income. I raised with counsel, at the conclusion of the evidence, the question whether, if the receipt of the $250,000 was on capital account, it should be treated as a receipt arising from the disposition of eligible capital property within the meaning of section 14 of the Income Tax Act. Neither counsel dealt with the point. It appears to me, without the benefit of any argument on the point, that it is eligible capital property and that the provisions of section 14 apply. This is a matter that will have to be considered by the Minister when he reassesses.
So far as 1989 is concerned two transactions took place, both involving the sale of equipment by the appellant.
(a) A Liebherr, model No. R925 SN 513213 complete with Roger Denis Delimber was sold for $15,000 to one Jim Wood. It was described as a “rental purchase agreement” and "rent" was to be paid at $2,000 per month until the last month, in which the balance of $1,000 was to be paid. Title was to pass to the lessee when the final payment was made. In fact nothing ever was paid although Jim Wood still has the machine.
Regardless of the reference to rent, the agreement was one of purchase and sale with title being held by the appellant as security until the final instalment of the purchase price was made.
(b) Also, under a bill of sale dated July 28, 1989, the appellant sold to Alberta 238660 Ltd. an excavator and delimber for $174,000. The agreement provided that:
Title to the equipment does not pass to the buyer upon delivery but shall remain with the seller at the buyer's risk until the entire purchase price is paid.
A schedule to the agreement provided that payment was to be effected in instalments at specified times after the machine began work, and by the assumption of a $126,000 financing with the National Bank and the refinancing thereof. This refinancing was in fact done, according to Mr. Romanchuk, although he testified that no instalment payments were made until 1990 and $18,000 remains outstanding.
The fact that title did not pass until the final payment was made is not in my view determinative. The only reason for title being held by the vendor was for security reasons. Both sales in my view constituted dispositions in 1989 of depreciable property within the meaning of paragraph 13(21 )(c) of the Income Tax Act and gave rise to proceeds of disposition within the meaning of subparagraph 13(21)(d)(i). If any of the amounts owing to the appellant can be established to have become bad in the year or in a later year the appellant is entitled to a deduction under subsection 20(4). No reserve is available in respect of the proceeds of disposition of depreciable property even where a portion is not payable until a subsequent year.
The appeals are allowed and the assessments and determination of loss are referred back to the Minister for reconsideration and reassessment or redetermination as the case may be in accordance with these reasons. Since success is divided each party should bear its own costs.
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