Kempo,
T.C.J.:—The
appellant,
Mel-Bar
Ranches
Ltd.
("Mel-Bar"),
appeals
its
tax
liability
for
the
1979
and
1981
taxation
years.
As
its
tax
for
the
1980
taxation
year
was
assessed
as
nil,
the
appellant
had
served
the
respondent
with
formal
notice
to
determine
a
loss
in
order
to
protect
its
position
for
that
year
because
its
calculation
is
intimately
and
consequential
y
related
to
the
issue
now
before
the
Court.
Counsel
for
the
respondent
has
assured
the
Court
that
the
outcome
of
the
appeals
for
the
1979
and
1981
years
would
affect
the
1980
loss
which
would
then
be
adjusted
accordingly.
The
issue
before
the
Court
is
determination
of
the
nature
of
the
payment
received
by
the
appellant
from
Holding
Lumber
Co.
Ltd.
(“Holding
Lumber")
for
the
logs
removed
by
it
pursuant
to
the
terms
of
an
agreement
between
them
dated
April
12,
1979
(Exhibit
A-8).
An
agreed
statement
of
facts
plus
written
argument
and
submissions
were
filed
with
the
Court
by
both
parties
following
the
conclusion
of
the
Court's
hearing
of
the
viva
voce
testimony
of
the
witnesses
for
the
appellant
and
respondent.
The
issue
has
been
firmly
joined
as
to
whether
the
payment
(a)
was
on
account
of
capital
as
proceeds
of
disposition
of
a
capital
asset
(being
the
logs
or
standing
mature
timber);
(b)
was
an
amount
dependent
upon
the
use
of
or
production
from
property
which
is
brought
into
income
under
paragraph
12(1)(g)
of
the
Income
Tax
Act
(the
"Act");
or
that
(c)
alternatively,
it
was
income
under
sections
3
and
9
of
the
Act
as
profit
from
a
business
or
property.
The
respondent's
assessment
was
premised
on
the
applicability
of
(b)
and
(c)
and
he
denies
the
applicability
of
(a).
The
appellant
denies
the
applicability
of
(b)
and
(c)
and
submits
that
(a)
is
the
correct
one.
At
the
invitation
of
the
Court,
the
parties
have
submitted
a
written
agreed
statement
of
facts
(the
"agreed
facts")
which
they
have
extrapolated
from
the
evidence.
Agreed
Statement
of
Facts
The
parties
hereto
by
their
respective
solicitors
admit
the
following
facts,
provided
that
the
admission
is
made
for
the
purpose
of
this
action
only
and
may
not
be
used
against
either
party
on
any
other
occasion,
and
provided
further
that
the
parties
may
produce
further
and
other
evidence
relevant
to
the
issues
and
not
inconsistent
with
this
Agreement.
1.
The
Appellant
was
incorporated
under
the
Company
Act
of
the
Province
of
British
Columbia
on
the
30th
day
of
July,
1965.
2.
John
Melrose
Cruickshank,
a
Canadian
Citizen,
who
has
resided
in
France
since
1970,
beneficially
owns
all
of
the
shares
of
the
Appellant
and
serves
as
the
Company's
President.
3.
Shortly
after
it
was
incorporated
the
Appellant
purchased
a
cattle
ranch
located
at
Louis
Creek,
approximately
30
miles
from
the
City
of
Kamloops,
in
the
Province
of
British
Columbia.
4.
The
ranch
consists
of
approximately
2,200
acres
of
land.
According
to
the
financial
statements
for
1979
(Exhibit
R-2),
the
Appellant
also
owned
buildings,
fences
and
equipment.
5.
Immediately
after
the
purchase
of
the
ranch
the
Appellant
began
to
acquire
cattle.
Over
the
years
the
appellant
owned
the
following
cattle.
|
Year
|
Approximate
No.
of
Cattle
|
|
1965
|
150
|
|
1966
|
250
|
|
1967
|
400
|
|
1968
|
400
|
|
1969
|
500
|
|
1970
|
500
|
|
1971-1980
|
no
active
ranching
carried
|
|
on
by
the
appellant
|
|
Year
|
Approximate
No.
of
Cattle
|
|
1981
|
15
|
|
June
|
1982
|
248
|
|
Dec.
|
1982
|
242
|
|
June
|
1983
|
370
|
|
Dec.
|
1983
|
243
|
|
June
|
1984
|
403
|
|
Dec.
|
1984
|
242
|
|
June
|
1985
|
385
|
6.
The
type
of
cattle
owned
by
the
Appellant
varied
over
the
years.
The
Appellant
owned
purebred
Beau
Donald
Herefords
as
well
as
commercial
beef
cattle.
In
1969/1970
it
owned
approximately
250
of
each
species.
7.
In
1971
the
Appellant
discontinued
the
cattle
operation
because
it
had
suffered
losses
over
the
years
in
excess
of
$300,000.
8.
From
1972
to
the
present
the
Appellant
leased
its
ranch
property
to
Mr.
Barry
Brady
each
year
for
an
annual
rental
payment.
Mr.
Brady
owned
cattle
which
he
maintained
on
the
Appellant's
ranch.
Mr.
Brady
also
boarded
cattle
owned
by
various
investors.
9.
In
1981
the
Appellant
again
acquired
cattle
and
carried
on
a
ranch
operation
by
contracting
out
at
a
fixed
price
per
head
to
Mr.
Brady.
The
ranching
operation
was
discontinued
in
December,
1985
because
of
accumulated
losses
from
1981
to
1985
in
excess
of
$150,000.
10.
Prior
to
1979,
the
ranch
land
consisted
of
approximately
25%
bottom
land,
25%
open
and
timbered
graze
land
and
50%
forested
area.
The
bottom
land
was
used
mainly
to
produce
hay
and
silage
crops.
However,
not
all
the
bottom
land
was
suitable
for
crop
production
because
some
of
it
was
too
rocky
and
uneven.
The
part
of
the
bottom
land
that
was
unsuitable
for
crop
production
as
well
as
part
of
the
bottom
land
which
could
be
used
for
crop
production
was
used
for
grazing
purposes.
11.
In
1978
Mr.
Cruickshank
discussed
a
sale
of
the
logs
from
an
area
of
approximately
633
acres
with
Balco
Forest
Products
Ltd.
and
Holding
Lumber
Ltd.
("Holding
Lumber").
12.
A
Log
Purchase
Agreement
was
concluded
with
Holding
Lumber
on
the
12th
day
of
April,
1979
(the
"Agreement":
see
Exhibit
A-8)
which
called
for
the
sale
of
25,500
tonnes
(more
or
less)
of
fir
at
a
price
of
$11.85
per
tonne
on
the
stump.
Payments
for
the
logs
were
to
be
made
by
Holding
Lumber
to
the
Appellant
every
two
weeks
commencing
with
the
first
scaling
of
logs
based
on
the
Forest
Service
weight
for
logs
delivered
by
the
purchases
at
the
purchaser's
expense
to
the
purchaser's
plant.
13.
The
cutting
area
from
which
the
timber
could
be
removed
was
specified
in
Schedule
A
to
the
Agreement.
14.
The
Agreement
provided
for
a
deposit
of
$5,000
to
be
held
in
trust
by
the
Appellant's
solicitors
as
a
deposit
against
damage
to
the
Seller's
property.
If
no
damage
was
sustained
the
money
was
to
be
applied
against
final
payment
by
Holding
Lumber
to
the
Appellant.
15.
Holding
Lumber
was
also
required
to
pay
$30,000
to
the
Appellant
on
account
of
the
purchase
price.
This
payment
was
not
to
alter
or
amend
the
periodic
payments
required
under
the
Agreement
until
such
time
as
the
remaining
logs
to
be
purchased
reached
the
value
of
the
deposit.
The
periodic
payments
would
then
be
reduced
so
as
to
ensure
that
the
price
paid
by
Holding
Lumber
to
the
Appellant
did
not
exceed
$11.85
per
tonne.
16.
There
were
provisions
in
the
Agreement
which
allowed
Holding
Lumber
to
extend
the
time
for
completion
from
month
to
month,
if
it
had
taken
a
minimum
of
25,500
tonnes
of
fir
by
December
31,1979
and
as
long
as
a
minimum
of
3,000
tonnes
of
fir
per
month
was
removed.
No
cutting
pursuant
to
these
provisions
was
undertaken.
17.
The
Agreement
further
provided
that
all
logs
remaining
on
the
lands
after
December
31,
1979
would
be
forfeited
to
the
Appellant
at
his
option,
if
the
Agreement
was
not
extended.
It
was
also
provided,
however,
that
this
provision
shall
not
be
construed
so
as
to
relieve
Holdings
from
its
obligation
to
make
full
payment
to
the
Appellant
under
clause
1
and
elsewhere
in
the
Agreement.
18.
The
logging
was
conducted
and
the
timber
removed
pursuant
to
the
terms
of
the
Agreement.
Holding
Lumber,
however,
had
not
removed
25,500
tonnes
of
fir
in
the
designated
areas
before
the
31st
day
of
December,
1979,
the
termination
date
of
the
Agreement.
19.
An
Extension
Agreement
was
entered
into
in
early
1980
wherein
Holding
Lumber
was
allowed
to
continue
to
purchase
timber
on
the
same
terms
and
conditions
as
specified
in
the
original
Agreement
until
June
30,
1980
except
that
the
price
per
tonne
of
logs
was
increased
by
$1.00.
20.
Holding
Lumber's
timber
cutting
operations
were
terminated
in
June
of
1980
because
Mr.
Cruickshank
determined
that
the
logging
operations
were
interfering
with
the
cattle
ranch
operations.
At
the
time
the
contract
terminated,
Holding
Lumber
had
cut
and
removed
less
than
the
25,500
tonnes
of
fir
provided
for
in
the
Agreement.
21.
Holding
Lumber
paid
a
total
amount
of
$291,134.
to
the
Appellant,
which
was
the
amount
owing
for
the
timber
actually
removed.
There
was
timber
of
value
still
remaining
in
the
designated
cutting
areas
referred
to
in
the
Agreement
which
reverted
to
the
Appellant.
22.
Mr.
Brady
oversaw
the
sale
and
logging
of
the
timber
and
looked
after
slashing
and
clean-up
of
the
lands
after
the
timber
had
been
removed,
for
which
he
was
paid
a
fee
by
the
Appellant
for
the
services
he
rendered.
This
fee
was
treated
as
a
business
expense
by
the
Appellant.
23.
Funds
from
the
sale
of
logs
in
1979
were
advanced
to
a
company
affiliated
to
the
Appellant.
24.
The
Appellant
included
the
amount
it
received
from
the
sale
of
logs,
which
was
its
only
source
of
income
in
1979
and
its
major
source
of
income
in
1980
as
ordinary
income
in
its
financial
statements.
The
Appellant
was
advised,
however,
by
its
accountants,
to
treat
the
amount
received
from
the
sale
of
logs
as
a
capital
gain
for
taxation
purposes.
The
parties
hereto
by
their
respective
solicitors
have
by
their
signatures
endorsed
hereon
agree
to
the
facts
as
cited
above.
The
Log
Purchase
Agreement,
aforesaid,
reads
as
follows:
(Exhibit
A-8)
Log
Purchase
Agreement
THIS
AGREEMENT
made
as
at
the
12th
day
of
April
1979,
BETWEEN:
MEL-BAR
RANCHES
LTD.,
a
British
Columbia
Company
having
its
registered
office
at
202-2702
Ware,
Abbotsford,
British
Columbia.
(hereinafter
called
the
"Seller")
OF
THE
FIRST
PART
AND:
HOLDING
LUMBER
CO.
LTD.,
a
British
Columbia
company,
having
an
office
at
RR.
#1,
Chase,
British
Columbia.
(hereinafter
called
the
"Purchaser")
OF
THE
SECOND
PART
The
Seller
agrees
to
sell
and
the
Purchaser
agrees
to
purchase
sawlogs
at
the
price
and
on
the
terms
and
conditions
hereinafter
set
forth:
1.
The
logs
purchased
by
the
Purchaser
from
the
Seller
consist
of
TWENTY
FIVE
THOUSAND
FIVE
HUNDRED
(25,500)
TONNES
(more
or
less)
of
FIR
and
the
price
to
be
paid
by
the
Purchaser
to
the
Seller
shall
be
ELEVEN
DOLLARS
AND
EIGHTY
FIVE
CENTS
($11.85)
per
Tonne
on
the
stump
(subject
to
adjustments
hereinafter
provided).
2.
Deductions
will
be
made
from
the
amount
payable
by
the
Purchaser
to
the
Seller
from
time
to
time
as
billed
for
Government
stumpage
and/or
royalties
and
remitted
by
the
Purchaser
to
the
British
Columbia
Forest
Service.
3.
Payments
to
the
Seller
subject
to
deductions
as
aforesaid
shall
be
made
by
the
Purchaser
in
accordance
with
the
Purchaser's
established
accounting
practices
every
two
weeks
commencing
with
the
first
scaling
of
logs
and
shall
be
on
the
basis
of
the
Forest
Service
weight
of
logs
delivered
by
the
Purchaser
at
the
Purchaser's
expense
to
the
Purchaser's
plant.
4.
All
logs
purchased
shall
be
cut
from
lands
owned
by
the
Seller.
The
legal
description
of
the
cutting
area
is
set
forth
in
Schedule
“A”
hereto
bearing
Timber
Marks
specified
therein.
It
is
expressly
understood
and
agreed
that
it
shall
be
the
responsibility
of
the
Purchaser
to
satisfy
itself
as
to
the
boundaries
of
the
Seller's
lands
aforesaid
and
the
Purchaser
shall
indemnify
and
save
harmless
the
Seller
from
claims
by
third
parties
arising
out
of
any
tresspass
committed
by
the
Purchaser
on
adjoining
lands.
5.
All
trees
to
4V2"
top
and
16'
logs
shall
be
taken
by
the
Purchaser
who
shall
not
perform
any
limbing
or
topping
in
the
bush
but
shall
haul
all
trees
to
landings
designated
by
the
Seller
for
such
limbing
and
topping.
All
waste
on
the
said
landings
shall
be
piled
by
the
Purchaser
for
burning
on
completion.
The
Seller
shall
be
responsible
for
burning
at
a
time
of
his
choosing
but
only
after
completion
by
the
Purchaser.
The
Purchaser
agrees
that
the
trees
shall
be
felled
with
as
much
care
as
possible,
and
in
a
workmanlike
manner,
and
that
it
will
do
no
unnecessary
damage
to
the
Sellers
property
and
will
repair
any
damage
so
done,
or
make
compensation
therefore,
and
for
any
other
damage
done
to
the
property
of
the
Seller.
6.
All
logs
cut
from
trees
of
Eight
(8)
inches
dsh
and
larger
shall
be
purchased
by
the
Purchaser
from
the
Seller
and
the
Seller
agrees,
during
the
term
of
this
agreement,
not
to
sell
any
portion
of
the
logs
from
those
trees
to
others.
7.
All
costs
of
roads
and
bridges
shall
be
born
by
the
Purchaser
and
shall
be
constructed
or
placed
on
sites
to
be
mutually
agreed
upon
by
the
parties
hereto.
8.
Title
to
the
logs
shall
remain
with
the
Seller
until
officially
weigh
scaled
PROVIDED
that
forthwith
upon
the
execution
of
this
Agreement
the
Purchaser
shall
pay
to
the
Seller
the
sum
of
THIRTY
THOUSAND
DOLLARS
($30,000.00)
on
account
of
the
purchase
price
and
this
payment
shall
in
no
wise
alter
or
amend
the
periodic
payments
required
by
clause
3
of
this
Agreement
UNTIL
such
time
as
the
Purchaser
shall
have
given
the
Seller
notice
in
writing
that
the
remaining
logs
to
be
purchased
shall
have
reached
a
value
of
the
aforesaid
deposit
at
which
time
the
said
periodic
payments
shall
be
reduced
so
as
to
ensure
that
the
price
to
be
paid
by
the
Purchaser
to
the
Seller
shall
not
exceed
$11.85
per
Tonne
on
the
stump
as
in
clause
1
provided.
9.
The
Purchaser
agrees
that
it
will
cut
down
and
remove
all
the
timber
in
accordance
with
the
terms
and
conditions
of
this
Agreement
on
or
before
the
31st
day
of
December,
1979,
after
which
date
the
final
payment
of
the
full
purchase
price
set
forth
in
paragraph
1
hereof
shall
be
made
PROVIDED
that
if
the
Purchaser
shall
have
taken
a
minimum
of
25,500
Tonnes
of
Fir
on
or
before
the
said
31st
day
of
December
1979
it
shall
be
entitled
to
extend
the
time
for
completion
from
month
to
month
for
so
long
as
the
Purchaser
shall
continue
to
remove
a
minimum
of
3,000
tonnes
of
Fir
per
month
AND
PROVIDED
ALWAYS
that
the
term
of
this
Agreement
shall
be
extended
in
the
event
that
the
Purchaser's
logging
shall
be
delayed
as
a
result
of
Forest
Closure,
strikes,
tempest
or
other
Acts
of
God.
10.
Save
as
in
clause
9
provided
all
of
the
logs
remaining
on
the
lands
after
the
31st
day
of
December
1979,
shall
be
forfeited
to
the
Seller
at
his
option
PROVIDED
that
this
clause
shall
not
be
construed
so
as
to
relieve
the
Purchaser
from
its
obligaion
to
make
full
payment
to
the
Seller
as
in
clause
1
and
elsewhere
in
this
Agreement
provided.
11.
The
Purchaser
shall
indemnify
the
Seller
for
damages
sustained
by
the
Seller
arising
out
of
operations
conducted
by
the
Purchaser
and/or
third
parties
and
the
Purchaser
shall,
before
permitting
third
parties
to
enter
upon
the
lands
of
the
Seller
provide
evidence
to
the
satisfaction
of
the
Seller
that
such
third
parties
are
acting
on
behalf
of
the
Purchaser
and
are
covered
by
insurance
in
the
name
of
the
Purchaser
or
are
otherwise
so
covered
to
the
satisfaction
of
the
Seller
whose
decision
thereon
shall
be
final.
12.
In
addition
to
the
payments
hereinbefore
provided
the
Purchaser
shall
deposit
in
Trust
with
the
Seller’s
solicitors
the
sum
of
FIVE
THOUSAND
DOLLARS
($5,000.00)
which
shall
be
held
as
a
deposit
against
damage
to
the
Seller's
property
or
in
the
event
no
damage
is
sustained
by
the
Seller’s
property
shall
be
applied
against
the
final
payment
by
the
Purchaser
to
the
Seller
PROVIDED
that
such
damage
shall
be
determined
in
accordance
with
the
practice
of
the
Forest
Service
on
Crown
Lands.
13.
It
is
agreed
that
if
any
dispute
shall
arise
between
the
parties
such
dispute
shall
be
determined
by
arbitration
conducted
by
a
single
Arbitrator
to
be
agreed
upon
by
the
disputing
parties.
If
the
parties
cannot
agree
upon
a
single
arbitrator
within
five
(5)
days
then
such
dispute
shall
be
determined
by
arbitration
pursuant
to
the
relevant
statute
in
force
at
such
time
in
British
Columbia.
Such
arbitration
shall
be
final
and
binding
upon
the
parties
and
no
appeal
shall
lie
therefrom.
14.
Waiver
by
either
party
of
the
breach
of
any
provision
of
this
Agreement
shall
not
operate
as
a
waiver
of
any
subsequent
breach.
15.
Time
shall
be
of
the
essence
of
this
Agreement.
16.
This
Agreement
shall
enure
to
the
benefit
of
and
be
binding
upon
the
parties
hereto
and
their
respective
successors
and
assigns.
According
to
the
testimony
of
Mr.
Cruickshank
the
bulk
of
the
forested
part
of
the
ranch
property
was
on
the
upper
slopes
of
the
mountain
and
that
the
elevation
of
all
of
the
ranch
land
ranged
between
1,900
feet
at
bottom
to
5,000
feet
at
mountain
top.
Much
of
the
bottom
land
was
irrigated
and
was
used
to
grow
silage
(timothy
and
alfalfa)
which
was
cropped
three
times
a
year.
Part
of
this
bottom
land
however
was
also
used
for
grazing
purposes,
thus
inhibiting
its
maximum
cropping
potential.
The
appellant's
1972-1978
time
period
showed
its
business
activity
was
in
the
main
restricted
to
the
receipt
of
nominal
and
irregular
rental
income
from
its
tenant,
Mr.
Brady,
as
described
in
paragraph
8
of
the
agreed
facts.
Mr.
Cruickshank
said
that
in
1978
he
again
considered
the
appellant's
involvement
in
a
ranching
operation
with
Mr.
Brady
on
the
lands
but
that
the
maintenance
of
any
viable
operation
necessitated
an
increase
in
land
availability
for
cattle
grazing
as
well
as
for
hay-crop
production.
It
was
his
decision
that
this
would
be
accomplished
by
the
clearing
of
certain
designated
parts
of
the
forested
land
which
would
free
it
up
for
grazing,
thus
releasing
the
grazing
bottom-land
for
extended
crop
production.
Mr.
Cruickshank
readily
admitted
that
the
financial
problems
of
an
affiliated
corporation,
Mel
Cruickshank
Belting
Ltd.,
had
influenced
the
timing
of
the
timber
sales
from
the
appellant's
property:
but
he
was
adamant
that
it
was
not
the
causative
reason
for
it.
The
financial
statements
(Exhibit
R-3)
confirm
the
occurence
of
an
inter-corporate
loan
by
the
appellant
to
its
affiliate
of
approximately
$187,000
in
1979
which
had
been
reduced
to
$95,000
by
the
appellant's
1980
year
end.
In
1979
the
appellant's
only
discernible
active
business
activity
was
that
connected
with
its
land
leasing
arrangement
with
Mr.
Brady
and
that
of
its
timber
sales;
with
similar
but
lesser
such
activity
in
1980
along
with
interest
revenue
having
been
received
from
its
affiliate.
Aerial
fertilization
of
the
land
followed
its
clearing
to
encourage
the
growth
of
the
grass
and
shrubs
for
cattle
grazing.
The
cattle-raising
opera-
tion
was
planned
to
have
commenced
in
1981.
The
timber
operation
was
halted
in
June
of
1980
because
of
its
undue
interference
with
the
tenant's
cattle
operations.
In
1981
the
appellant's
ranch
operation
began.
The
method
chosen
was
by
a
contracting-out
at
a
fixed
price
per
head
to
Mr.
Brady
who
was
also
obliged
to
pay
a
progressively
increasing
annual
rental
amount
for
leasing
the
land
in
respect
of
his
own
ranching
operations.
Mr.
Cruickshank
said
he
made
a
business
decision
of
the
contracting-out
of
the
cattle
in
this
manner
in
order
to
maintain
cost
control.
His
following
testimonial
extract
is
pertinent:
A.
.
.
.after
clearing
the
land,
and
getting
some
proceeds
from
the
sale
of
the
timber,
we
reinvested
that
in
a
cattle
operation,
a
commercial
operation,
and
we
ran
that
until
1985.
And,
again,
for
economic
reasons,
I
was
forced
to
shut
down
at
the
end
of
'85.
And,
the
combination
of
the
lease
arrangement
and
the
fixed
price
per
head
on
looking
after
the
animals,
feeding
them,
allowing
them
grazing,
was
a
form
of
contracting
out
that
I
used
in
order
to
try
and
keep
complete
control
of
my
costs
without
having
any
unexpected
surprises.
Q.
When
did
that
new
operation
commence,
1980,
’81,
do
you
remember
the
period?
A.
1981.
Q.
Do
you
recall
generally
how
many
cattle
were
owned
by
the
company
during
this
second
phase?
A.
I
would
say
it
would
run
between
3
and
400
head.
It
would
vary.
When
you're
calving
in
the
spring,
your
numbers
go
up,
and
then
when
you
sell
your
yearlings
off,
and
so
forth,
in
the
fall,
or
whenever
you
sell
them,
then
you
get
a
decrease
in
number.
And
we
were
trying
to
maintain
200
cows,
and
we
were
trying
to
increase
the
cow
herd
up
to
400.
To
maintain
factual
continuity
here
it
should
be
noted
that
Mr.
Cruickshank
prepared
and
tendered
a
list
of
cattle
had
and
acquired
by
the
appellant
(see
also
the
latter
part
of
agreed
fact
#5)
which
reads:
(EXHIBIT
A-7)
|
CATTLE
|
|
|
Cows
Yearlings
Calves
Bulls
Total
Total
|
|
1981
|
|
15
approx,
|
|
June
1982
|
19
|
194
|
29
|
6
|
248
exact
|
|
1983
|
193
|
32
|
140
|
5
|
370
exact
|
|
1984
|
195
|
38
|
164
|
6
|
403
exact
|
|
1985
|
202
|
23
|
155
|
5
|
385
exact
|
Given
the
above,
it
would
be
difficult
to
agree
with
respondent-counsel's
submissions
that
there
was
no
active
ranching
business
carried
on
by
the
appellant
during
the
period
1981
to
1985,
and
that
its
timber
sales
had
no
relationship
with
any
of
its
farming
activities.
While
there
was
no
discernible
cattle-ranching
activity
carried
on
by
the
appellant
in
1979
or
1980
during
which
time
it
had
been
actively
engaged
in
supervising
the
sale
of
its
timber
through
the
services
of
Mr.
Brady,
there
is
a
clear
correlation
to
and
relationship
with
its
cattle
raising
within
the
1981-1985
inclusive
period.
I
concur
with
appellant-counsel's
submission
that
the
1979
loan
of
the
timber-sales
money
to
an
affiliate
should
not,
in
itself,
have
the
effect
of
making
the
appellant
a
trader
of,
or
dealer
in,
its
timber
given
the
entirety
of
the
facts
of
this
case.
An
objective
appreciation
of
all
of
the
facts
of
the
case
does
not
support
respondent-counsel's
assertion
that
the
appellant
used
and
sold
its
merchantable
timber
as
stock-in-trade
essentially
to
assist
an
affiliated
corporation
which
was
in
financial
difficulties.
The
evidence
surrounding
the
intent,
negotiations
of
and
entry
into
the
aforesaid
written
Log
Purchase
Agreement
was
given
not
only
by
Mr.
Cruickshank
but
also
by
the
corporate
solicitor,
Mr.
Beaubien,
and
by
Mr.
Mason
who
was
a
fully
experienced
and
competent
woods-manager
for
Holding
Lumber.
The
credibility
of
this
evidence
was
not
impeached.
Indeed
one
would
be
hard
pressed
to
disturb
or
seriously
challenge
its
overall
consensus
which
is
that:
1.
all
of
the
merchantable
timber
had
been
cruised
and
all
was
to
be
removed
and
purchased
from
a
designated
area
by
the
end
of
December
1979
barring
uncontrollable
circumstances;
2.
the
only
practicable
and
fair
way
to
both
parties
of
determining
the
gross
selling
price
was
by
actual
weight
because
not
even
the
best
and
thorough
cruising
could
produce
an
exact
amount;
3.
the
appellant
wanted
to
sell
all
and
the
purchaser
needed
and
wanted
to
buy
all
there
was
in
the
designated
areas;
4.
the
$30,000
payment
called
for
in
paragraph
eight
of
the
Agreement
was
unusual
to
Holding
Lumber.
It
had
been
negotiated
by
the
appellant
as
an
incentive
and
for
the
purpose
of
ensuring
timely
contract
completion
which
was
essential
in
order
to
minimize
interference
with
the
tenant's
cattle
operation;
5.
non-completion
by
December
31,
1979
was
solely
due
to
Holding
Lumber's
subcontractors'
difficulties
and
that
the
extension
agreement,
while
increasing
the
price,
fully
confirmed
the
original
Agreement;
6.
the
extension
agreement
had
not
been
premised
on
there
being,
or
there
being
expected
to
be,
more
wood
available
than
that
which
had
been
originally
cruised
and
estimated;
7.
the
bi-monthly
payment
was
Holding
Lumber's
standard
practice.
It
formed
part
of
the
agreement
as
a
matter
of
course
from
their
point
of
view
while
at
the
same
time
it
fully
satisfied
the
appellant's
need
for
assurance
of
payment
for
their
timber
upon
its
removal.
In
other
words
it
was
not,
and
need
not
have
been,
a
negotiated
term;
and
8.
the
delays
in
1980
were
real
and
caused
unacceptable
interference
with
the
tenant's
cattle
grazing
and
ranching
activities.
Termination,
with
less
than
all
of
the
available
merchantable
timber
having
been
taken,
was
mutually
agreed
upon.
The
appellant
made
a
voluntary
settlement
based
on
the
actual
logs
taken
rather
than
enforcing
its
entitlement
to
the
contractual
gross
price
for
the
whole
amount.
The
statement
of
account
rendered
on
the
voluntary
settlement
(Exhibit
A-10)
confirms
that
Holding
Lumber's
$5,000
damage
deposit
and
$30,000
"earnest"
money
had
been
set-off
against
the
price
of
the
logs
taken
in
1980.
Capital
or
Income
Account
The
case
at
bar
lacks
the
preponderance
of
evidence
required
to
support
a
finding
that
the
appellant
was
dealing
with
its
timber
as
stock-in-trade,
or
as
a
trader,
or
in
the
same
way
as
a
dealer
in
timber
resources
engaged
in
trading
activities
would
have
dealt
with
the
property:
for
example
see
Sutton
Lumber
and
Trading
Co.
Ltd.
v.
M.N.R.,
[1953]
C.T.C.
237;
53
D.T.C.
1158
(S.C.C.),
Sterling
Paper
Mills
Inc.
v.
M.N.R.,
[1960]
C.T.C.
215;
60
D.T.C.
1171
(Ex.
Ct.),
C.W.
Logging
Co.
Ltd.
v.
M.N.R.,
[1956]
C.T.C.
15;
56
D.T.C.
1007
(Ex.
Ct.)
and
Chen
v.
M.N.R.,
[1984]
C.T.C.
2415;
84
D.T.C.
1415
(T.C.C.).
The
appellant's
business
was
related
to
leasing
of
its
cattle-ranching
lands
and
of
cattle-raising
in
its
own
right.
The
timber
was
an
adjunct
of
its
purchase
of
the
ranching
property
in
1965.
It
was
logged
in
1979/1980
in
a
one-time
type
of
operation
when
such
was
necessary
in
order
to
better
improve
its
ranch
land
in
conjunction
with,
and
for
the
purpose
of,
enhancing
the
efficiency
of
its
proposed
cattle-raising
operation.
In
this
respect
see
No.
287
v.
M.N.R.,
13
Tax
A.B.C.
417;
55
D.T.C.
519
(T.A.B.),
Mouat
v.
M.N.R.,
20
Tax
A.B.C.
424;
58
D.T.C.
694
(T.A.B.)
and
L.
&
A.
Ranching
Co.
Ltd.
v.
M.N.R.,
25
Tax
A.B.C.
423;
61
D.T.C.
43
(T.A.B.).
These
facts
and
the
jurisprudence
are
supportive
of
the
conclusion
that
the
appellant's
sale
of
standing
timber
is
on
capital
account
being
part
of
the
proceeds
of
disposition
of
a
capital
asset.
Payment
Based
on
Use
of
or
Production
of
Property
The
consensus
of
both
parties
was
that
notwithstanding
its
characterization
of
capital,
the
amount
may
still
be
fiscally
treated
as
on
income
account
if
it
is
caught
by
the
provisions
of
paragraph
12(1)(g)
of
the
Act
which
reads
as
follows:
Section
12.
Amounts
to
be
included
as
income
from
business
or
property.
(1)
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
.
.
.
(g)
Payments
based
on
production
or
use.
—
any
amount
received
by
the
taxpayer
in
the
year
that
was
dependent
upon
the
use
of
or
production
from
property
whether
or
not
that
amount
was
an
instalment
of
the
sale
price
of
the
property
(except
that
an
instalment
of
the
sale
price
of
agricultural
land
is
not
included
by
virtue
of
this
paragraph);
The
forerunner
to
this
paragraph
was
paragraph
6(1)(j)
of
the
1952
Income
Tax
Act
from
which
much
of
the
jurisprudence
in
this
area
springs.
For
all
practical
purposes,
the
currently
applicable
provision
is
identical
to
its
predecessor.
In
M.N.R.
v.
Morrison,
[1966]
C.T.C.
558;
66
D.T.C.
5368,
after
examining
paragraph
6(1)(j)
and
the
case
law,
Thurlow,
J.
of
the
Exchequer
Court
at
page
563
(D.T.C.
5371)
was
of
the
view
that:
.
.
.
the
qualification
imposed
by
the
words
"dependent
upon
use
of
or
production
from
property"
in
my
opinion
has
the
effect
of
limiting
the
"amounts"
referred
to
to
amounts
which
vary
with
and
are
in
that
sense
"dependent"
in
some
way
upon
the
extent
of
use
of
or
production
from
property
whether
according
to
time
or
quantity
or
some
other
method
of
measurement.
In
Lackie
v.
The
Queen,
[1978]
C.T.C.
157;
78
D.T.C.
6128,
Dubé,
J.
of
the
Federal
Court
—
Trial
Division
summarized
the
case
law
on
the
issue.
He
noted
at
page
162
(D.T.C.
6132):
In
Hoffman
v.
M.N.R.,
39
Tax
A.B.C.
220;
65
D.T.C.
617,
the
Board
held
that
the
sale
of
all
of
the
marketable
timber
was
just
the
appellant
farmer's
first
step
in
making
the
best
realization
of
his
farm
property;
it
was
not
a
transaction
in
the
course
of
business.
Weldon,
Q.C.,
provides
a
definintion
of
profit
a
prendre
at
page
230-31
[623]:
From
the
legal
background
to
the
phrase
profit
a
prendre,
quoted
above,
it
is
clear
that
the
expression
should
be
reserved
to
cover
such
typical
situations
as
the
granting
of
a
continuing
licence
or
right
to
fish
and
to
take
away
the
catch,
to
hunt
and
to
take
away
the
bag,
to
dig
and
to
take
away
the
gravel,
to
cut
and
to
remove
the
timber,
and
so
on.
In
all
of
those
examples,
it
is
readily
discernable
that
the
licence
or
right,
known
as
a
profit
a
prendre,
is
used
to
cover
some
continuing
activity
which
can
be
described
in
no
better
way
than
in
the
pertinent
language
of
Section
6(1)(j)
of
the
Act
which
reads
as
follows:
a
profit
dependent
upon
use
of
or
production
from
property.
The
Court's
guidelines
and
comments
at
page
163
(D.T.C.
6132)
are
applicable
to
the
case
at
bar:
Several
useful
guidelines
emerge
from
the
decisions
above
referred
to.
Where
property
is
sold
for
a
set
sum
to
be
paid
in
fixed
instalments,
those
payments
are
not
income.
If
it
is
sold
for
a
share
of
the
profits,
the
payments
then
bear
the
character
of
income,
and
so
would
annuities
and
royalties.
If
property
is
sold
for
a
sum
certain,
plus
annual
sums
dependent
on
the
volume
of
business,
those
annual
sums
would
be
income.
But,
if
what
is
sold
relates
to
the
use
of
land,
including
excavation
for
gravel,
that
is
a
profit
à
prendre,
thus
taxable
income,
whether
or
not
the
sale
is
considered
to
be
a
"business"
(under
the
provisions
of
the
old
paragraph
139(1)(c)
or
the
new
subsection
248(1).
Profit
à
prendre
implies
a
continuing
licence,
or
continuous
right
to
use
land;
a
single
final
transaction
transferring
all
the
property
(i.e.
gravel)
would
not
be
a
profit
à
prendre.
I
should
think
that
if
plaintiff's
spouse
had
sold
all
the
gravel,
whether
the
amount
agreed
upon
had
been
paid
in
one
lump
sum,
or
by
instalments,
that
would
be
described
as
a
transaction
in
the
nature
of
capital
(It
is
common
ground
that
she
was
not
in
the
business
of
selling
gravel).
But
we
are
faced
here
with
the
sale
of
some
gravel
over
a
continuous
period,
the
use
of
land
and
a
profit
a
prendre
over
more
than
five
years.
The
agreement
does
provide
a
minimum
of
$50,000,
but
no
maximum.
Neither
can
it
really
be
said
that
the
agreement
and
the
benefits
derived
therefrom
are
not
dependent
upon
the
volume
of
business:
to
recall
the
words
of
Rowlatt,
J.:
in
Jones
v.
Commissioners
of
Inland
Revenue
(supra),
the
vendor
"took
something
which
rose
or
fell
with
the
chances
of
the
business".
True,
the
amounts
could
not
fall
below
a
certain
floor,
but
above
that,
they
could
rise
and
fall,
and
in
fact
did
rise
and
fall
during
the
first
part
of
the
schedule..
I
concur
with
appellant-counsel's
submission
that
when
all
of
the
following
facts
have
been
accurately
distilled
and
compiled,
paragraph
12(1)(g)
of
the
Act
would
not
be
applicable.
The
entire
matter
was
one
of
a
clear-cut
logging
operation,
the
intent
of
the
parties
involved
being
the
sale/purchase
of
all
of
the
merchantable
timber
located
in
designated
areas
for
a
specific
aggregate
gross
sale/purchase
price
for
which
the
purchaser
was
at
all
times
liable
to
pay.
Payment
of
the
gross
sale
price
for
the
timber
was
to
be
made
on
an
instalment
basis
in
accordance
with
Holding
Lumber's
ordinary
practice
and
as
well
to
ensure
payment
to
the
appellant
for
the
timber
actually
removed.
The
actual
amount
of
the
payment
was
to
be
determined
by
the
value
of
the
logs
as
set
at
the
scaling
station
because
of
the
legal
requirement
of
weighing
the
logs
in
order
to
determine
the
amount
of
the
stumpage
and/or
royalty
payments
required
to
be
paid
to
the
government.
The
variable
instalment
amounts
and
the
subsequent
events,
including
the
six-month
extension
followed
by
voluntary
settlement
and
receipt
of
less
than
the
aggregate
gross
sale
price
had
not
changed
the
fundamental
nature
of
the
agreement
entered
into
and
that
in
its
essentials
a
single,
short
term
clear-cut
logging
contract
for
land
clearing
purposes
had
been
obtained
transferring
all
of
the
timber
in
the
designated
area
to
Holding
Lumber
which
was
not
in
the
nature
of
profit
à
prendre
(Lackie)
but
was
for
the
sale
of
capital
property
owned
by
the
appellant.
The
above
facts
are
supportive
of
the
position
taken
by
the
appellant
that
the
amounts
received
were
not
in
the
nature
of
amounts
which
depended
upon
the
extent
of,
use
of
or
production
from
the
appellant's
property
by
Holding
Lumber
within
the
meaning
of
the
subject
fiscal
provision.
Respondent-counsel's
analytical
approach
to
the
facts
was
predicated
on
a
clause-by-clause
and
event-by-event
basis.
The
submission
was
that
the
payment-amounts
were
periodic,
that
they
varied
depending
upon
the
amount
of
timber
cut
from
time
to
time
and
were
thereby
dependent
upon
the
use
of
or
production
from
property,
and
that
a
right
to
enter
and
cut
timber
during
an
eight-month
period
with
a
proviso
and
conditions
for
an
extension,
followed
by
actual
receipt
of
a
lesser
aggregate
sale
price,
was
not
a
single
final
transaction
transferring
all
the
property
as
per
Lackie
at
page
163
(D.T.C.
6132),
supra.
While
this
apprach
may
be
innovative
and
somewhat
meritorious,
its
shortcoming
lies
in
its
excessive
focus
on
contractual
formalities
while
ignoring
or
minimizing
the
true
nature
and
substance
of
the
transaction.
That
this
fiscal
provision
casts
a
wide
net
has
already
been
observed
by
the
Tax
Review
Board
in
Pallet
v.
M.N.R.,
22
Tax
A.B.C.
40;
59
D.T.C.
230
and
in
Mouat
v.
M.N.R.,
32
Tax
A.B.C.
269;
63
D.T.C.
548.
Many
of
the
cases
referred
to
by
respondent's
counsel,
while
persuasive,
are
distinguishable
on
their
facts.
In
some,
the
particular
agreements
or
arrangements
in
question
gave
the
purchaser
the
right
to
enter
and
remove
a
product
for
a
period
of
time
but
without
specification
or
delineation
as
to
quantity.
Rather,
a
licence
to
remove
as
much
as
the
purchaser
could,
needed
or
chose
to
remove
within
a
time
frame
had
been
granted.
That
stands
in
considerable
contrast
with,
as
we
have
here,
an
obligation
to
remove
all
merchantable
timber
at
an
aggregate
gross
specified
price
within
a
short
specified
time
in
connection
with
and
for
the
purpose
of
enhancing
the
efficiency
of
farm
land
use.
Accordingly,
and
for
the
reasons
given,
the
appellant
has
in
my
view
shown
error
on
the
part
of
the
respondent
in
the
1979
and
1981
assessments
under
appeal.
Therefore
the
appeals
are
allowed
and
the
matter
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
amounts
received
by
the
appellant
in
1979
and
in
1981
with
respect
to
the
sale
of
timber
were
on
account
of
capital,
being
proceeds
of
disposition
from
the
sale
of
a
capital
asset,
and
that
the
said
amounts
are
not
to
be
brought
into
income
under
paragraph
12(1)(g)
of
the
Income
Tax
Act.
As
noted
in
the
beginning
of
these
reasons
for
judgment,
want
of
jurisdiction
precludes
an
order
directing
reassessment
for
the
1980
year.
The
Court
recommends
that
the
respondent
adjust
the
appellant's
1980
fiscal
matters
consequentially
upon
its
success
of
these
1979
and
1981
appeals.
The
appellant
will
have
its
costs
on
a
party-to-party
basis.
Appeal
allowed.
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