Lor-Wes Contracting LTD v. Her Majesty the Queen, [1982] CTC 415, 83 DTC 5016

Dubé, J:—The central issue to be resolved here is whether the building of access roads, fireguards and landings on timber limits by a contractor for a logging operator is “logging” within the meaning of subparagraph 127(10)

(c) (vii) of the Income Tax Act.

For the 1976, 1977, 1978 and 1979 taxation years the plaintiff company, a small British Columbia road building firm, was engaged by three successive logging operators in the Clearwater and Lillooet areas of British Columbia. In its 1976 and 1977 income tax returns the plaintiff described the nature of its business as “road building”; in 1978 as “contract road builder”; and in 1979 as “logging road building”.

During the relevant period the plaintiff acquired a 1976 P & H hydraulic excavator, a 1976 DBK Caterpillar tractor and a 235 Caterpillar excavator. It Claimed an investment tax credit for those heavy units as “qualified property” acquired by the taxpayer to be used by him primarily for the purpose of logging. The above mentioned provision of the Income Tax Act reads as follows:

Sec. 127(10)

(10) “Qualified property”. For the purposes of subsection (9), a “qualified property” of a taxpayer means a property (other than a certified property) that is

(a) . ..

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(vii) logging.

By notices of reassessment for the relevant years the investment tax credits claimed were disallowed on the ground that the plaintiff was “in the business of road building which is not a designated activity under subparagraph 127(10)(c)(vii)”.

It is common ground that the equipment was acquired for the plaintiff’s operations on the timber blocks, which are limits designated by the Province of British Columbia for logging purposes. The equipment was never used, and was never intended to be used, for the building of highways elsewhere: additional features were procured by the plaintiff to adapt the equipment to forestry operations (ie bull hooks, wide padding, extra guards, lifting tongs, etc). It is also agreed that the plaintiff's sole occupation during that period was as contractor for logging operators on the timber limits.

The owner of the plaintiff company described to the Court in some detail the type of work carried out by his firm during that period, namely the building of forest access roads, landings, fireguards, skidtrails, the clearing up of debris, scarification. In the course of road building the contractor has to fell trees and to dispose of them according to specific instructions laid down by the operator. The contractor is paid by the linear meter for roads and by the cunit* [1] for cut timber.

The importance of a good quality network of forest roads in a successful logging operation is well known to the industry. An experienced logger from Squamish, BC, Norman R Barr, testified as an expert on behalf of the plaintiff. He outlined for the Court the method followed by his own logging company in its operations. At the outset, a reconnaissance cruise is conducted to determine the economic viability of a proposed cutting area; then, cutting rights are obtained; contracts are concluded; a chart area is established, followed by a five year development plan and a two year logging plan. Those plans must be approved by provincial forestry officials; a road plan detailing road and bridge locations is also submitted for approval. Upon approval, the first step is to build access roads, fireguards and landings in accordance with the approved road plan; then the fallers, buckers and yarders move in to cut and gather the timber for transport to a mill, or to tidewater.

According to the expert, some operators peform all those operations with their own equipment and employees; others contract out some, or all of the various phases of the logging operations. In coastal logging areas, roads often comprise the second largest physical and financial phase of logging, being exceeded only by the yarding and loading functions. According to Mr Barr’s observations, many small operators have experienced financial failures because of their inability to build good quality and well located roads. Consequently, many operators contract the construction of logging roads to specialists in the field.

The expert concludes that logging roads, fireguards and landings are an integral part of logging in British Columbia and that the equipment used in any of the aspects of logging operations is used for the purpose of logging “whether or not it is owned or used by the person who owns the cutting rights, the person who has the contract to cut on those rights, or the person engaged to do the specific task of logging area road construction on their behalf”.

Undoubtedly, road building is an important, indeed an essential aspect of logging. I would not hesitate to find that such road building equipment as required by a logging operator was acquired by him primarily for the purpose of logging, road building being an integral part of his whole operation. However, the equipment in question was not acquired by the operator, but by a road building firm. That being so, was the equipment acquired by the taxpayer primarily for the purpose of logging, or was it not acquired by him primarily for the purpose of building roads in the forest? There is no jurisprudence in the matter emanating from this Court but the Tax Review Board has had to resolve some issues akin to this problem.

In Noel Deschatelets v MNR [1981] CTC 2965; 81 DTC 885, the Board held that a truck acquired by the taxpayer to transport logs by contract for a paper company was not used by the taxpayer primarily for the purpose of logging. The taxpayer was driving the truck himself on the first daily shifts and another person employed by the company drove it during the second shifts. M J Bonner, Member, concluded as follows:

The position seems clear. Subparagraph 127(10)(c)(vii) of the Act looks to the Appellant’s purpose in using the truck. That purpose was the transportation of logs. Although the transportation of logs by the Appellant formed part of the company’s logging operation it did not, standing alone, constitute logging by the Appellant. The Appellant did not possess any interest in the timber limits or in the logs moved and he was not interested in any way with the disposition of those logs. The purpose of the Appellant in the use of the truck and the broader purpose of the company must not be confused.

Although I am not, of course, bound by that decision, it is nevertheless difficult to disregard the very valid points underlined by the Member in his decision. The instant case presents a parallel situation: the plaintiff acquired the equipment primarily for the building of forest roads which, although an integral part of the operator’s logging operations, does not, standing alone, constitute logging. In the present instance as well the paintiff holds no interest in the wood limits nor in the disposition of the timber.

In Gerald J Ouimette v MNR, [1981] CTC 2975; 81 DTC 886, the same Member of the Board decided that the transportation of logs, while part of logging, was not by itself logging. There the taxpayer, an employee of a paper company, acquired a truck and a trailer for the purpose of hiring it to the company for the transport of logs to the mill. This quote from Mr Bonner, reported at 2976 [887], bears reproduction:

... The evidence plainly showed that it was Great Lakes and not the Appellant who was engaged in logging. The transportation of logs may well be a part of logging, but the transportation of logs by itself is not logging. The argument advanced on behalf of the Appellant ignored the statutory words “by him” and must therefore fail.

Again, in the case before me the equipment was not acquired by the logging operator, it was acquired “by him”, the taxpayer, who is not primarily in the lumber business but primarily in the road building business.

It is trite law that the exempting provisions of a taxing statute must be construed strictly and the taxpayer must fit his claim squarely within the four corners of any exemption if he is to benefit from it. He must show clearly that “every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with”*. [2]

If Parliament had intended to extend the tax benefit to all subcontractors in the industry, it would have said so. By any definition, “logging” is the sum total of all the operations leading to the felling of timber and the transporting of logs out of the forest. In my view, the constructing of logging roads, by itself, is not “logging”, anymore than the building of fishing wharves is “fishing”, or the erecting of barns constitutes “farming”, where those operations are carried out by independent contractors who have no general interest in logging, fishing, or farming, but are specialists in their limited fields.

For all those reasons, the appeal cannot be allowed and the action is dismissed with costs.