Transcontinental Timber Company Limited v. Minister of National Revenue, [1978] CTC 2388, [1978] DTC 1292

A W Prociuk (orally: November 16, 1977):—The appellant corporation appeals from the respondent’s reassessment of its income for the taxation year 1973 wherein an amount of $95,000, which the appellant received and treated as capital, was added back to income and taxed accordingly.

The appellant was incorporated in 1942 pursuant to the laws of the Province of Ontario, with its head office at the City of Toronto. It owns, and has owned for many years, land in excess of some 300,000 acres in Northern Ontario in the vicinity of Hearst, and the value of this land depends primarily on standing timber situate thereon.

The appellant’s principal business is licensing a number of companies and individuals to enter upon certain designated areas of its land to remove timber therefrom for a stated fee calculated on a stumpage basis. The appellant is anxious to grant long-term licences, from 5 to 15 years, as this ensures a steady annual income flow; but it also grants or has granted what is termed packsack jobbers licences, which are of short period duration.

In 1972 the three long-term licences in question were in effect with three companies, J D Levesque Lumber Limited, Yvonne Levesque, and Hearst Transport and Lumber Limited (hereinafter referred to as “Levesque Group’’). These licences covered a period of 15 years terminating in 1978. Each licensee deposited $15,000 by way of security deposit for the term which bound these firms to cut a minimum and not to exceed a maximum of timber of various species and sizes in each year, as more particularly described in Exhibit R-2, being one of the licence agreements and consisting of some 35 pages with a schedule attached thereto.

The evidence establishes that the Levesque Group provided, on the average, approximately 45% of the appellant’s annual gross income (see Exhibits A-1 to A-5). In Exhibit A-1,. for example, the Levesque Group paid a total of $1,579,987 out of a total revenue of $3,515,032 over a period of 8 years, or approximately 45%. Of the long-term licensees it provided the appellant with 68% of the gross income, as stated in Exhibit A-5.

By letter dated August 23, 1972, filed as Exhibit A-6, the Levesque Group gave notice that it wished to terminate its licences as soon as possible and hoped this could be amicably achieved. It offered to forfeit the $45,000 deposit for the release of its obligations under the licences which would ordinarily not expire until 1978.

The appellant corporation, through its director and secretarytreasurer, C Miller, Esq, QC, who testified on its behalf, commenced negotiations in this connection. The appellant, Mr Miller states, was cognizant of the fact it had the right to specific performance for the remainder of the term of the licences, but also considered the fact that the logging and lumbering economy at that time was sagging, and it might well be stuck with a worthless judgment. After considerable haggling back and forth an agreement was reached on December 20, 1972, and the appellant released the Levesque Group on receipt of $95,000. The agreements in question were then cancelled on that date.

The appellant’s woodland manager was instructed to seek other long-term licensees to replace the Levesque Group, but this was not possible until 1974 when Tremblay secured a 5-year licence from the appellant.

In 1973 the appellant’s gross revenue increased by 40%. However, in 1974 the situation changed and the economy in this area dramatically improved and the appellant’s gross revenue rose substantially.

The issue in this appeal is the characterization of the said sum of $95,000 received in 1973 by the appellant. Would the appellant’s source of profit be crippled by the termination of these licences in the foreseeable future? With hindsight, which is always twenty-twenty, one could see that the appellant was successful in regaining lost ground a little over a year later, but at the material time this fact was nowhere in sight. The licences, as an income-producing asset, at this point, tc all intents and purposes were nothing more than a hope that some day the appellant may be able to generate revenue.

Mr Justice Urie, in the case of MNR v Import Motors Limited, [1973] CTC 719; 73 DTC 5530, discussed the leading case in this area at pages 725-9 [5534-7] and concludes in that case, which is not dissimilar from the instant case, that the receipt was on a capital account.

The amount arrived at in the instant appeal, according to the evidence, which I accept, is not in any way based on the surrender of calculated future profits. The appellant bargained as vigorously as it could in the circumstances and succeeded in obtaining the said amount. As Mr Miller stated in evidence, “it was in an amount we thought we could get in Court”.

There was no indication at the time that there were any other companies interested in the cutting of timber, any more than there was any prospect at the material time for Import Motors Limited to obtain a franchise from another automobile manufacturer to replace Volkswagen. The appellant negotiated a settlement for the relinquishment of a right to an income-producing asset, the long-term timber Cutting licences.

In my opinion this is a capital receipt and the respondent erred in treating it as income. I also accept the plea that the fair market value of this asset on Valuation Day was at least equal to the sum received, so the capital gains factor doesn’t enter into play herein.

The appeal is allowed and the matter is referred to the respondent for reassessment accordingly.

Appeal allowed.