Arnold v. The Queen, 83 DTC 5425, [1983] CTC 405 (FCTD)

Dubé, J:—The plaintiff appeals from an assessment of the Minister, confirmed by the Tax Review Board, for the taxation years 1971 and 1972. The basic issue is whether the amounts received from the sales of timber rights by the plaintiff to Arnold Farms Limited constitute capital gain as claimed by the plaintiff, or income as assessed by the Minister.

The basic facts, as related by the plaintiff who represented himself at the trial, are as follows: the plaintiff had participated in his father’s business, Arnold Farms Limited, since 1947. At the time the business consisted mostly of farming and the raising of horses. Gradually, and before the death of the plaintiff’s father in 1969 Arnold Farms Limited became more and more involved in the timber business.

In 1953 the claimant began to buy wood lots and had purchased forty- three such wood lots by the year 1969. From 1965 to 1972 he sold cutting rights on those lots to Arnold Farms Limited for which he received the sum of $15,000 annually (except in 1965 where he received $5,000) over and above his annual salary of $12,000. He was, and still is, in the employ of Arnold Farms Limited. In 1971 and 1972, the years in question, he was executive vice-president, held 24.5 percent of the stock and was in charge of the company’s forestry operations.

All those facts were considered by the Tax Review Board as appears in the reasons for judgment of the Chairman.

The plaintiff testified on his own behalf that the company was having a very difficult time and that the horse breeding operations were going nowhere. It was to assist the company that he allowed it to cut wood on his lots. His basic salary of $12,000, which remains unchanged as of today, led him to lead a very frugal life. In order to supplement his income, he would draw up to $15,000 a year from company funds in compensation for the timber depletion on his lots. He had originally bought the lots in question as security for the future, as he could not obtain life insurance coverage for health reasons. He still owns the lots.

It is trite law that the onus is on the taxpayer to show that the Minister was wrong and it is for him to demolish the assumptions and the basic facts on which the assessment rests (see Johnston v MNR, [1948] CTC 195; 3 DTC 1182). Clearly, the plaintiff dealt with cutting rights on his own lots in the Same way as other lot owners would in order to raise revenues. Had the plaintiff sold all his lots as a result of an unexpected deal to a stranger, such an isolated sale might have been considered as a capital transaction. Such is not the case here. The plaintiff kept his lots, but sold the crops, on a yearly basis, to a company engaged in the timber business and operated by the plaintiff who himself is in that very type of business. To quote Thorson, P in Cragg v MNR, [1951] CTC 322; 52 DTC 1004, “I have no difficulty in finding that the appellant was carrying out a scheme of profit-making”.

In the equally well known case of MNR v James A Taylor, [1956] CTC 189; 56 DTC 1125, the president and general manager of a company engaged in fabricating metals purchased lead on his own and sold it to the company through brokers. The Court held that this was an adventure in the nature of trade and taxable.

In Mary Orlando v MNR, [1962] CTC 108; 62 DTC 1064, the Supreme Court of Canada dealt with the case of an appellant who was a shareholder in her husband’s mushroom farming company, purchased a farm as a long term investment, and during the next few years regularly sold top soil to her husband’s company, the soil being removed by the purchaser. The Court held that the amount received by the appellant for the top soil was income subject to tax and not a capital gain. In disposing of the top soil the appellant was engaged in a scheme of profit-making, or an adventure in the nature of trade.

Under the circumstances the assessments of the Minister for the two years in question must stand and the action is dismissed with costs.