Gilbert E Arnold v. Minister of National Revenue, [1981] CTC 2158, 81 DTC 80

The Chairman [TRANSLATION]:—This is an appeal by Mr Gilbert E Arnold, Jr from income tax assessments for the 1971 and 1972 taxation years. The question relates to the nature of the profit made by the appellant from the sale of timber on his land and the calculation of the maximum deductible capital cost allowance (in accordance with pargraph 11 (1 )(a) of the Income Tax Act, RSC 1952, c 148, as amended, for 1971, paragraph 20(1)(a) of the Income Tax Act, SC 1970-71-72, c 63 as amended, for 1972 and paragraph 1100(1 )(f) of the Income Tax Regulations), in computing the appellant’s income for each of the taxation years under consideration.

The appellant claimed that the timber berth represented a capital property, that the profit from the sale of that timber was a non-taxable capital gain in the 1971 taxation year and half of the profit was a taxable capital gain in the 1972 taxation year, and that the respondent did not consider the market value of the timber cut in his assessment.

The respondent contended that the profit from the sale of timber constituted an income from a business or that the amounts received were dependent upon the use of or production from property and must be included in computing the appellant’s income, in accordance with paragraph 6(1 )(j) of the Income Tax Act, RSC 1952, c 148, as amended for 1971 and paragraph 12(1 )(g) of the Income Tax Act, SC 1970-71-72, c 63, as amended, for 1972. The respondent also claimed that, in computing the appellant’s income, he had allowed the maximum deductible capital cost allowance according to paragraphs 11(1)(a) and 20(1)(a) of the Act and paragraph 1100(1 )(f) of the Regulations, for each of the taxation years under consideration.

Facts:

The evidence on the points relating to a decision in this appeal is relatively straightforward, notwithstanding all the details in the notice of appeal and in the written arguments of the appellant.

Since 1947 the appellant had taken part in his father’s business, Arnold Farms Ltd, which was engaged in farming and raising horses. However, even before the death of the appellant’s father, Arnold Farms Ltd was deeply involved in forestry. In 1953 the appellant, while still in the employ of Arnold Farms Ltd (earning an annual salary of $12,000 in 1962), began to buy wood lots on his own behalf, and during the period from 1953 to 1969 inclusive he acquired 43 wood lots (Exhibits 1-1 and I-3).

In 1971 and 1972 the appellant, as executive vice-president of Arnold Farms Ltd was in charge of all of the company’s forestry operations and held 24.5% of the company’s stock. Each year from 1965 to 1972 inclusive the appellant sold to Arnold Farms Ltd the right to cut wood on the land he owned, thereby receiving an annual income of $15,000, except in 1965 when the income from this source amount to only $5,000 (Exhibits 1-2 and 1-3, income tax returns for the years 1965 to 1972 inclusive).

No assessment of timber depletion was made and the depletion claimed by the appellant for the 1971 and 1972 taxation years was computed according to the market value of the timber and duly recorded in the appellant’s ledgers.

In his written submission, the appellant described why he began to buy wood lots in 1953 and how he intended to use them. The appellant claimed that he had bought a number of lots in order to build up an estate for his family and that he had no intention of selling the land or the timber found on it. He claimed that he began selling timber to Arnold Farms Ltd, in which he was a shareholder and responsible for forest operations, only when business started to go badly for the company.

There is no doubt that the intention the appellant may have had when he bought his wood lots has considerable bearing on the nature of the profit made in later years from the sale of timber. However, the courts have clearly established that a stated intention must be assessed in light of all the relevant facts. Whatever the appellant’s intention may have been when he acquired the wood lots, there is evidence that in 1965 and in later years the appellant decided — for whatever reason — to sell the right to cut timber on his land and thereby became involved in the timber business. In my opinion, one of the relevant facts is that at the time when the appellant was buying his wood lots, Arnold Farms Ltd, under the appellant’s direction, was also buying timber from a number of other suppliers.

It is also important to note that the appellant was not only very familiar with the forestry industry but also in charge of the forestry operations of Arnold Farms Ltd. Even if the appellant did buy the land solely for investment purposes — which, in my opinion, is far from definite — the nature of the amounts received by the appellant from the sale of timber, in the circumstances of this case, became income from a commercial source when he decided to use the property and the products of his land and began to sell timber. Moreover, the appellant, in buying forty-three wood lots and deriving from them an annual income of $125,000 from 1965 to 1972 inclusive, was not acting any differently from other logging contractors. The fact that the appellant never offered to sell timber is not relevant since the appellant, being responsible for the forestry operations of Arnold Farms Ltd, had a ready-made market in which to sell his timber. I therefore conclude that the income from the timber berths on the appellant’s land, which constituted fifty per cent of his income for the 1971 and 1972 taxation years, was income from the operation of a business, as described in his income tax returns for the taxation years under consideration, no matter what the appellant might have to say about it eight and nine years later.

The appellant also claimed that the assessments for the 1971 and 1972 taxation years were made in an arbitrary manner. According to my notes, Mr Léon Petit, the auditor for the Department of National Revenue responsible for the files of the appellant for the 1971 and 1972 taxation years, made no statement in his testimony that the income from the sale of timber amounted to $28,239.89 in 1971 and $28,073 in 1972. The auditor felt that the income from the timber berths — which he considered income from a business — amounted to $15,000 in each of the years under review, as indicated in the income tax returns for those years. The amounts of $13,239.80 for 1971 and $13,873.10 for 1972, claimed by the appellant as a depletion allowance, were not allowed by the respondent. Only $188 for 1971 and $564 for 1972 were allowed by the respondent in this regard, in accordance with paragraph 11 (1)(a) of the Act for 1971, paragraph 20(1)(a) of the Act for 1972 and paragraph 1100(1 )(f) of the Regulations, in computing the allowable deduction.

The appellant probably meant to refer to section 1100 of the Regulations when he quoted:

For the purposes of this Part and Schedules C and D, each property of a taxpayer that Is

(a) a timber limit other than a timber resource property, or

(b) a right to cut timber from a limit other than a right that is a timber resource property,

is hereby prescribed to be a separate class of property.

Paragraph 1100(1 )(e) of the Regulations reads as follows:

Timber limits and cutting rights

(e) such amount as he may claim not exceeding the amount calculated in accordance with Schedule C in respect of the capital cost to him of a property, other than a timber resource property, that is a timber limit or a right to cut timber from a limit.

The point at issue here is clearly not a timber limit but rather a forestry operation as referred to in paragraph 1100(1 )(1)(f) of the Regulations.

Paragraph 1100(1 )(f) of the Regulations read as follows:

Woods Assets

(f) such amount as he may claim not exceeding the amount calculated in accordance with Schedule D in respect of the capital cost to him of property of Class 15 in Schedule B;

I do not think that the appellant must be a forestry operator before paragraph 1100(1 )(f) of the Regulations is applicable to him; the appellant only had to be involved in a forestry operation for the deduction to be calculated in accordance with Schedule D [now Schedule IV].

Schedule D of the Regulations reads as follows:

WOODS ASSETS

1. For the purposes of paragraph (f) of subsection (1) of section 1100, the amount that may be deducted in computing the income of a taxpayer for a taxation year in respect of property described in Class 15 of Schedule B [now Schedule II] is the lesser of

(a) an amount computed on the basis of a rate per cord or board foot cut in the taxation year; and

(b) the undepreciated capital cost to the taxpayer as at the end of the taxation year (before making any deduction under section 1100 for the taxation year) of property of that class.

In light of the conclusion already reached that the appellant was operating a forestry business in 1971 and 1972, the respondent’s assessment was not arbitrary and he did not err in applying paragraph 1100(1 )(f) of the Regulations and Schedule D of the Income Tax Regulations to calculate the amount of depletion allowable to the appellant under the Act, as shown in the calculations made by Mr Petit (Exhibit I-4).

Clearly, with regard to the appellant’s arguments, I do not have jurisdiction to review the assessments for the taxation years from 1965 to 1970 inclusive, and I am not required to consider them. Nonetheless, I have taken note of the respondent’s statement that reassessments for the taxation years from 1965 to 1970 have not been issued since the deadline for such action has already passed.

The appellant, who had the burden of proof, did not show to the Board’s satisfaction that the Minister’s assessments were unjustified in law or in fact.

For these reasons, the appeal is dismissed.

Appeal dismissed.