A W Prociuk (orally: September 20, 1974):
1 At the commencement of the hearing of this appeal from the respondent's reassessments of income tax for the taxation years 1969 and 1970, the matters at issue consisted of five separate items, namely, (1) the disallowance by the respondent of a deduction in respect of debenture interest in the sum of $15,715.72 claimed in 1970; (2) the disallowance of the cost of timber position amortized, during the year, as stated in the amended notice of appeal, in the sum of $16,875.40 in 1969; (3) reduction of sales contingency reserve in the sum of $21,294.46; and the addition to appellant's income for the taxation year 1970 of (4) gain on the sale of equipment in the sum of $23,891.61; and (5) gain on foreign exchange in the sum of $17,656.25. Both counsel advised the Board that items (1), (3) and (5) were no longer in issue. The respondent had agreed that the debenture interest is properly deductible. Learned counsel for the appellant advised that the appeal in respect of items (3) and (5) was withdrawn by the appellant.
2 The appellant is engaged in the business of manufacturing plywood. By agreement dated May 30, 1967, filed as Exhibit A-7, Silver Creek Timber Ltd, hereinafter referred to as “Manuck”, agreed to carry out certain logging operations for the appellant. The appellant had advanced funds to Manuck in the past, and the indebtedness to the appellant stood at $128,755.42 on that date. Manuck executed, on even date, and delivered to the appellant a promissory note for the said sum, and a chattel mortgage by way of collateral security, which included, inter alia, two D8 caterpillar tractors which Manuck had purchased from Finning Tractor and Equipment Ltd earlier under a conditional sales contract (see Exhibits A-8, A-10 and A-11). Manuck defaulted in making payments to Finning under the conditional sales contracts and in respect of certain substantial repairs effected to one tractor, and Finning repossessed the two tractors on or about May 16, 1969. Copies of notices of intention to resell the said tractors, dated May 29, 1969, and addressed to Manuck, were received by the appellant (see Exhibits A-12 and A-13). Finning demanded a total payment of $71,108.39 in respect of the balance owing under the conditional sales contract and, as well, the amount of repairs as stated therein. Appellant paid the said amount on June 12, 1969 and had the tractors delivered to its premises. Between November 3 and 12 of 1969 it sold both tractors for $95,000, realizing a gain of $23,891.61. It had written off Manuck's indebtedness as a bad debt and treated this sum of $23,891.61 as a capital gain, on the ground that the sale of the two tractors was a separate and isolated transaction. The respondent added this amount to the appellant's income as partial recovery of a debt written off.
3 Alternatively, the respondent argued at the hearing that this transaction was an adventure in the nature of trade and therefore any profit thereon was taxable.
4 The appellant argued that it had any number of intentions in acquiring the tractors, including the initiation of discussions and negotiations with Manuck to work out arrangements to carry on logging operations, which did not materialize.
5 The minutes of the meetings of directors of the appellant as shown by Exhibits R-1 and R-3 indicate to some considerable extent that the appellant's concern was to recover some of its losses from Manuck. It paid the exact amount owing by Manuck to Finning, took possession of the machines and sold them. It took possession of other equipment, as per its agreement with Manuck, and resold it as well. The net gain on the sale of the two machines was properly added to its income as recovery of part of the debt written off.
6 The appellant paid a total of $31,760 for assignments of timber sales licences X97967 and X83398 to the assignors, Czene and Campbell, and to McKay and McCallum Limited. The assignments were duly approved and consented to by the Minister of Lands, Forests and Water Reserves for the Province of British Columbia (see Exhibits A-2 and A-5). The appellant took this step to assure itself of a continuous supply of logs for its manufacturing business. In 1969 it availed itself of the provisions of Income Tax Regulation 1100(1)(e) and deducted the sum of $16,875.40 pursuant to the provisions of the said Regulation and Schedule C.
7 The question to determine here is: Was this consideration for the assignment of a depreciable capital asset within the meaning of the Income Tax Act and the pertinent regulations thereto, or was this a capital outlay to acquire a preferred position to obtain timber sales licences in the future?
8 In reviewing the evidence adduced in respect of this portion of the appeal, and the case law which has been referred to by both counsel, I have come to the conclusion, with some hesitation, that this was a capital outlay not subject to the provisions of the regulations referred to.
9 In the result, the appeal is allowed in part, with the consent of the respondent, to permit the appellant to deduct the debenture interest in the sum of $15,715.72 from its income, and the matter is referred back to the respondent for reassessment accordingly. In all other respects, the appeal is dismissed.
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