Citation: 2012 TCC 106
Date: 20120330
Docket: 2007-1055(IT)G
BETWEEN:
WEYERHAEUSER COMPANY LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
HER MAJESTY THE QUEEN IN RIGHT OF THE
PROVINCE OF BRITISH COLUMBIA
Intervenor.
REASONS FOR JUDGMENT
Paris J.
[1]
The issue in this case is whether
gains made on the disposition of saw mills and real estate should be included
in the Appellant’s “income from logging operations in a province” for
the purpose of calculating the logging tax credit found at s. 127(1) of
the Income Tax Act
(“ITA”). For the reasons that follow, I conclude that the gains
should not be so included.
Introduction
[2]
The Appellant is an international integrated
forest products company with its head office in British Columbia. It is a
successor by amalgamation to Weyerhaeuser Canada Limited. The
transactions which give rise to the reassessment under appeal were carried out
by Weyerhaeuser Canada, which I will refer to as Weyerhaeuser in these
reasons.
[3]
In 1999, Weyerhaeuser disposed of
certain capital assets in B.C. and Ontario. Its taxable capital gains less the allowable capital
losses on the dispositions amounted to $504,215 (the “Gain”).
[4]
The British Columbia Minister of
Revenue determined that the Gain was subject to tax under the B.C. Logging
Tax Act
(“LTA”) as “income derived from logging operations” as defined in
the LTA.
[5]
Subsection 127(1) of the ITA provides
a credit against tax payable under Part I of the ITA for a portion
of any tax paid by a taxpayer to a province in respect of “income from logging
operations in the province” as defined in the Income Tax Regulations ("Regulations")
This is referred to as the logging tax credit.
[6]
The Minister of National Revenue
determined that the Gain was not “income from logging operations in the
province” and therefore that the B.C. logging tax paid by Weyerhaeuser on the Gain
did not give rise to a federal logging tax credit.
[7]
The definition of “income from
logging operations in the province” in the Regulations is substantially
similar to the definition of “income derived from logging operations” in the LTA.
It appears that there has been a general understanding between the tax
authorities at the two levels of government that those definitions should be
interpreted consistently across the two statutes. In the event of an
inconsistent interpretation, a taxpayer would be exposed to taxation under both
the LTA and the ITA on the same income.
[8]
The Province of British Columbia
obtained intervenor status in this appeal because of its interest in obtaining a
judicial decision whether gains from the disposition of capital property are “income
from logging operations in the province” under the ITA. The Province
appears to accept that the interpretation given ultimately in these proceedings
will determine the meaning of the phrase “income derived from logging
operations” in the provincial legislation. Counsel for the Intervenor
recognized, however, that the task before this Court is the interpretation of
the federal legislation alone.
[9]
The issue in this appeal,
therefore, is whether or not Weyerhaeuser is entitled to the logging tax credit
in respect of the tax paid under the LTA on the Gain. This will turn on
whether the Gain falls within the definition of “income from logging operations
in the province” in the Regulations.
Facts
[10]
The facts relating to the
disposition of the assets are straightforward and were largely agreed to by the
parties. A Statement of Agreed Facts and a Joint Book of Documents were filed
at the hearing.
[11]
Two of the assets that Weyerhaeuser
disposed of in 1999 were sawmills, one in Merritt, B.C. and one in Lumby, B.C. Weyerhaeuser
sold the sawmills because it was no longer economically viable to operate them.
They were disposed of as surplus assets. The decision to close the mills was
made as part of Weyerhaeuser’s overall business plan of maximizing revenues.
[12]
Weyerhaeuser began winding down
operations at the Merritt sawmill in October 1998, and it was closed in
February 1999. Weyerhaeuser subsequently sold the mill, realizing a taxable
capital gain of $469,896.
[13]
The decision to discontinue
operation of the Lumby sawmill was also made in October, 1998. The property was
sold in two transactions in 1999, which resulted in a total taxable capital
gain to Weyerhaeuser of $71,706.
[14]
The third asset disposed of by
Weyerhaeuser in 1999 was some housing in Ear
Falls, Ontario. Weyerhaeuser originally
acquired the housing in 1998 as part of its purchase of the Dryden Pulp and Paper
Mill. Dryden had used it to provide accommodation for managers at its Ear Falls
operation. Weyerhaeuser did not normally provide housing to its employees and
therefore, if it had been given the choice, Weyerhaeuser would have excluded it
from the overall purchase.
[15]
Weyerhaeuser disposed of the Ear Falls housing in 1999. This resulted in an allowable
capital loss of $37,387.
[16]
There was disagreement between the
parties as to whether Weyerhaeuser had used the housing in its business at any
point before it was sold in 1999. The Appellant’s witness, Ross Parker, a
retired Weyerhaeuser manager, testified that Weyerhaeuser kept the Dryden employees
on after the purchase and that the managers continued to live in the company housing
after Weyerhaeuser took over. His testimony was not seriously challenged on
cross-examination and I accept that Weyerhaeuser used the property in its
business prior to the disposition.
[17]
The net taxable capital gains from
the sale of the two mills less the allowable capital loss from the sale of the Ear Falls
property, was $504,215.
[18]
When Weyerhaeuser filed its tax
returns for its 1999 taxation year, it did not include the Gain in either its “income derived from logging
operations” for the purposes of the LTA or in its “income from
logging operations” for the purpose of calculating its federal logging tax
credit.
[19]
This manner of reporting was in
accordance with the long-standing assessing practice of the both the federal
and provincial tax authorities with respect to capital gains from the
disposition of surplus assets.
[20]
In 2005, the B.C. Minister of
Revenue revised his assessing practice under the LTA respecting capital
gains and determined that the gain realized by Weyerhaeuser in 1999 should be
included its “income derived from logging operations”. The B.C. Minister of
Revenue re-assessed Weyerhaeuser and increased the amount of logging tax
payable for the 1999 taxation year.
[21]
This resulted in
Weyerhaeuser’s “income derived from logging operations” assessed by B.C. to be
higher than its “income from logging operations” determined for the purposes of
the federal logging tax credit, and in tax being assessed on the Gains under
the LTA with no corresponding tax credit allowed under the ITA.
[22]
The Minister of
National Revenue subsequently reassessed Weyerhaeuser for its 1999 taxation
year in respect of other matters not related to this appeal, and in its objection
to that reassessment, Weyerhaeuser also sought to have its federal logging tax
credit increased based on the increase to its provincial logging tax. The
Minister refused the increase because he did not consider the Gain to be
“income from logging operations”.
[23]
The Appellant contested both the
federal and provincial reassessments. The federal reassessment was confirmed
and gives rise to this appeal. I understand that the appeal from the provincial
reassessment is being held in abeyance pending the outcome of these
proceedings.
Relevant Statutory Provisions
[24]
Subsection 127(1) of the ITA generally
credits a taxpayer for 2/3 of the amount logging tax paid to a province on
income from logging operations, up to a maximum of 6 2/3% of that income.
[25]
Subsection 127(1) reads:
127 (1) There may be deducted from the tax
otherwise payable by a taxpayer under this Part for a taxation year an amount
equal to the lesser of
(a) 2/3 of any logging tax paid by the taxpayer
to the government of a province in respect of income for the year from logging
operations in the province, and
(b) 6 2/3% of the taxpayer’s income for the year
from logging operations in the province referred to in paragraph 127(1)(a),
except that in no case shall the total of amounts in respect
of all provinces that would otherwise be deductible under this subsection from
the tax otherwise payable under this Part for the year by the taxpayer exceed 6
2/3% of the amount that would be the taxpayer’s taxable income for the year or
taxable income earned in Canada for the year, as the case may be, if this Part
were read without reference to paragraphs 60(b), 60(c) to 60(c.2), 60(i) and 60(v) and
sections 62, 63 and 64.
[26]
According to subsection 127(2) of
the ITA, the phrase “income for the year from logging operations in the
province” has the meaning assigned by regulation. That definition is found in subsection
700(1) of the Regulations. “Income from logging operations” is defined as the aggregate of
several amounts, which are determined under paragraphs 700(1)(a) to (d).
I will reproduce subsection 700(1) and then proceed to summarize the amounts
described in paragraphs (a) to (d).
[27]
Subsection 700(1) reads:
700 (1) Except
as provided in subsection (2), for the purposes of paragraph 127(2)(a) of the Act “income
for the year from logging operations in the province” means the aggregate of
(a) where standing timber is cut in the province
by the taxpayer or logs cut from standing timber in the province are acquired
by the taxpayer and the logs so obtained are sold by the taxpayer in the
province before or on delivery to a sawmill, pulp or paper plant or other place
for processing logs, the taxpayer’s income for the year from the sale, other
than any portion thereof that was included in computing the taxpayer’s income
from logging operations in the province for a previous year;
(b) where standing timber in the province or the
right to cut standing timber in the province is sold by the taxpayer, the
taxpayer’s income for the year from the sale, other than any portion thereof
that was included in computing the taxpayer’s income from logging operations in
the province for a previous year;
(c) where standing timber is cut in the province
by the taxpayer or logs cut from standing timber in the province are acquired
by the taxpayer, if the logs so obtained are
(i) exported from the province and
are sold by him prior to or on delivery to a sawmill, pulp or paper plant or
other place for processing logs, or
(ii) exported from Canada,
the amount computed by deducting from the value, as determined
by the province, of the logs so exported in the year, the aggregate of the
costs of acquiring, cutting, transporting and selling the logs; and
(d) where standing timber is cut in the province
by the taxpayer or logs cut from standing timber in the province are acquired
by the taxpayer, if the logs are processed by the taxpayer or by a person on
his behalf in a sawmill, pulp or paper plant or other place for processing logs
in Canada, the income of the taxpayer for the year from all sources minus the
aggregate of
(i) his income from sources other
than logging operations carried on in Canada and other than the processing in
Canada by him or on his behalf and sale by him of logs, timber and products
produced therefrom,
(ii) each amount included in the
aggregate determined under this subsection by virtue of paragraph (a), (b) or (c), and
(iii) an amount equal to eight per
cent of the original cost to him of properties described in Schedule II used by
him in the year in the processing of logs or products derived therefrom or, if
the amount so determined is greater than 65 per cent of the income remaining
after making the deductions under subparagraphs (i) and (ii), 65 per cent of
the income so remaining or, if the amount so determined is less than 35 per
cent of the income so remaining, 35 per cent of the income so remaining.
[28]
Paragraphs 700 (1)(a) and (c)
include income earned by the taxpayer from the sale of logs that are cut in the
province. Paragraph (a) refers to the sale of logs within the province,
and paragraph (c) refers to the sale of logs that are exported from the
province or from Canada.
[29]
Paragraph 700(1)(b)
includes income earned by the taxpayer from the sale of standing timber or the
right to cut standing timber in the province.
[30]
Paragraph 700(1)(d) deals
with income earned by an integrated forest products company where, in addition
to cutting logs or buying logs in the province, the taxpayer (or someone on its
behalf) processes the logs in a sawmill, pulp and paper plant or other facility
in Canada.
[31]
The amount included in income from
logging operations pursuant to paragraph 700(1)(d) is determined in a
somewhat roundabout fashion. Paragraph 700(1)(d) starts with the
taxpayer’s income from all sources and then, broadly speaking, subtracts
everything that is not income from logging operations, log processing or the
sale of logs, timber and related products. Subparagraphs 700(1)(d)(i)
to (iii) exclude the following amounts:
- the
taxpayer’s “income from sources other than logging operations carried on in
Canada and other than the processing in Canada by him or on his behalf and sale
by him of logs, timber and products produced therefrom ( subparagraph 700(1)(d)(i)),
- any
amounts already included in income from logging operations under paragraphs
700(1)(a), (b) and (c) (subparagraph 700(1)(d)(ii));
and
- an
investment allowance in respect of the original cost of log processing
equipment (subparagraph 700(1)(d)(iii)) .
[32]
Both parties agree that since Weyerhaeuser
was an integrated forest products company, paragraph 700(1)(d) of the Regulations
is applicable. In particular, the question is whether the Gain on the
disposition of surplus assets was income to Weyerhaeuser from logging
operations carried on in Canada, or the processing and sale of logs, timber and
products produced therefrom, as set out in subparagraph 700(1)(d)(i)
Position of the parties
Appellant
[33]
At the hearing, the Appellant’s
counsel made no submissions and relied upon the arguments presented by counsel
for the Intervenor.
Intervenor
[34]
The Intervenor argues that the
most plausible interpretation of s. 700(1)(d) is that it includes the
Gain at issue. The Intervenor argues that the Gain should be considered income
from a source that is logging operations or the processing and sale of logs,
timber or products produced therefrom because taxable capital gains are income under
section 3 of the ITA.
[35]
Accepting that capital gains are
properly understood to be income from a source, the issue becomes whether the Gain
in this case is income from a source that is logging operations or processing and sale.
[36]
The Intervenor argues that
“logging operations” has a broader meaning than “logging business” and that
“income from logging operations” captures more than “income from a logging
business.” Rather, in determining whether income should be included
under s. 700(1)(d), income from activities integral to logging
operations should be included.
[37]
The Intervenor submits that the dispositions in issue were an
integral part of Weyerhaeuser’s overall logging operations. The dispositions
were part of its overall business plan of minimizing costs and increasing the
efficiency of its overall logging operations.
[38]
The Intervenor also argues that its
interpretation is consistent with the history of the federal and provincial logging
tax provisions.
Respondent
[39]
The Respondent says that the plain
and ordinary meaning of the words found in paragraph 700(1)(d) of the Regulations
does not allow for the Gain to be included in income from logging operations.
Rather, only income directly linked to ongoing logging or processing and sale activities
falls within the scope of paragraph 700(1)(d).
[40]
The Respondent argues that it is not sufficient in this
case that the Gain originate from the sale of assets previously used in Weyerhaeuser’s
logging operations. The Gain in this case does not come from Weyerhaeuser’s carrying
on of logging operations.
[41]
The Respondent also submits that
this interpretation is consistent with the remainder of subsection 700(1) of
the Regulations and with the ITA read as a whole. In particular,
it respects the longstanding distinction within the ITA between income
and capital.
[42]
The Respondent also argues that
excluding the capital gains in this case from income from logging operations is
consistent with the purpose of the provision. At the time Parliament enacted
these provisions, Parliament could not have intended that capital gains such as
those at issue would be included under s. 700(1)(d), as capital
gains were not generally taxed until 1972.
Analysis
[43]
The proper approach to
the interpretation of tax statutes was set out by the Supreme Court of Canada
in Canada Trustco
Mortgage Co. v. Canada:
The interpretation of a
statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a
whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words plays a dominant role in the interpretive process.
On the other hand, where the words can support more than one reasonable
meaning, the ordinary meaning of the words plays a lesser role. The relative
effects of ordinary meaning, context and purpose on the interpretive process
may vary, but in all cases the court must seek to read the provisions of an Act
as a harmonious whole.
The Supreme Court also stated that
the ITA “remains an instrument dominated by explicit provisions
dictating specific consequences, inviting a largely textual interpretation.”
[44]
In this case, it is necessary to interpret the following portion of paragraph 700(1)(d)
of the Regulations:
(d) … the income of the taxpayer for the year
from all sources minus …
(i) his income from sources other
than logging operations carried on in Canada and other than the processing in
Canada by him or on his behalf and sale by him of logs, timber and products
produced therefrom,
[45]
In particular
it is necessary to determine whether the sources of income described as “logging
operations…and…the processing…and sale… of logs, timber and products produced
therefrom” would include the taxable capital gains and the allowable capital loss that
make up the Gain.
Text
[46]
In this case, the
calculation in paragraph 700(1)(d) begins by taking the taxpayer’s
“income from all sources” and subtracts the amounts listed in subparagraphs (i)
to (iv). The taxpayer’s income from all sources would clearly include capital
gains, which are income from a source according to section 3 of the ITA:
Schwartz v. Canada.
[47]
However, it does
not follow that “income” from the source described in subparagraph 700(1)(d)(i)
(logging operations or processing… and sale) must include capital gains. The
word “income” is used in different ways in the Act and can have different
meanings. In Ludco Enterprises Ltd. v Canada, the Supreme Court of
Canada was required to determine the meaning of “income” for the purposes of
subparagraph 20(1)(c)(i) of the Act. The Court observed that:
The Income Tax Act does not define the
term “income”. The Act speaks of “net income”, “taxable income”, and
income from different sources, but it neither identifies nor describes the
legal characteristics of “income”; it only speaks of what is to be included or
excluded from income.
[48]
The word
“income” in subparagraph 700(1)(d)(i) therefore will take its meaning
from the context in which it is used.
[49]
I will first
consider the words used to describe the named source in subparagraph 700(1)(d)(i).
As the parties point out, the terms “logging operations” and “processing and
sale” are not defined in the Regulations, and therefore it is necessary
to consider their ordinary meaning.
[50]
I agree with the
Respondent’s submission that the words “logging operations” and “processing…
and sale of logs, timber and products
produced therefrom” refer to ongoing activities that are carried on by a
taxpayer. This is apparent from the following dictionary definitions of
“logging”, “operation” “logging operation”, “process” and “processing”:
Logging - the work of cutting and preparing forest timber.
“logging” - the felling, limbing, bucking and marking of trees,
construction of logging roads, off-highway transportation of logs to a
mill-pond or mill yard, log salvaging and reforestation.
“operation” - the process of operating or mode of action.
“operation” - the action or process or method of working or
operating” and “the state of being active or functioning” and “an active
process.
“logging operation” - the felling, cutting
into logs, barking in the forest, cartage, piling, driving, loading and highway
transportation of timber but not its processing outside the forest.
“process” - a course of action or proceeding, a series of stages in
manufacture or some other operation.
“process” - the adjustment, alteration, assembly, manufacture,
modification, production or repair of the goods.
[51]
I find that, according to their
ordinary meaning, the words “logging operations” denote the ongoing activity of
physical cutting of trees into logs and transporting those logs and the words “processing
and sale” connote an ongoing activity involving manufacturing or production and
sale.
[52]
I consider it
material as well that the words “logging operations” in subparagraph 700(1)(d)(i)
are qualified by the words “carried on in Canada” which reinforces the notion that the logging operations involve
ongoing activity.
[53]
Since “logging
operations” and “processing and sale” all refer to ongoing activities carried
on by a taxpayer, the source of income named in subparagraph 700(1)(d)(i)
- logging operations or processing and sale of logs or
timber products – appears to be equivalent to a business source of income,
which arises from specific activities carried on by a taxpayer.
[54]
The Intervenor, however, argues
that “logging operations” has a broader meaning than “logging business” and
that income from logging operations” captures more than “income
from a logging business” and relies on the decision in MacMillan Bloedel
Limited v. The Queen
as authority for this proposition.
[55]
The issue in that case was whether
the taxpayer, an integrated
forestry company, had
correctly included various kinds of interest income
in its “income from logging operations in the province” for the purposes of the federal logging tax
credit. The taxpayer had included the interest under subparagraph 700(1)(d)(i) of the Regulations.
[56]
Collier J. found some of the
interest was income from logging operations, while other interest was not. The
Intervenor submits that the Court took an expansive and practical approach to
determining whether something is income from a source that is logging
operations, effectively holding that “income from logging operations in the
province” is not limited strictly to income arising from the sale of timber.
[57]
I find this case to be
of very limited assistance. The Court does
not at any point purport to interpret the words “income…from logging operations…and…processing…and
sale”. Instead Collier J. evaluates each type of interest income on the basis
of what it considered “logging operations… and … processing…and sale…” to entail,
without any analysis. For example, in holding that interest earned on mortgages and advances made by the taxpayer to employees to assist with moving
expenses was income from logging operations, the Court simply states
that the amounts were “from a practical and business point of view, part of the
plaintiff's logging operations”.
[58]
It is clear that the
Court did not undertake a textual, contextual and purposive interpretation if
the kind now mandated by recent Supreme Court cases including Canada Trustco.
[59]
Even if I were able to
rely on this decision, it does not assist the Intervenor because the Court appears to have implicitly accepted
that “income from logging operations” was limited to income from the taxpayer’s
logging business. For example, in deciding that the interest on loans made to
customers was income from the taxpayer’s logging operations, Collier J. said
that the interest was “part and parcel of the plaintiff’s logging operations,
and not some separate source of business income” (my
emphasis) and, in holding that four items of bank interest should be excluded
from income from logging operations because there was no evidence as to how the
amounts arose, Collier J. said:
It is not enough to say, as
I see it, the plaintiff was carrying on an integrated forest products business,
and these items must have arisen out of that business. There must be
something, factually, more than that. (emphasis added)
[60]
Collier J.’s requirement of
“something… more” may not be the most precise language, but he clearly held
that to be “income from logging operations” an amount must bear a sufficient
connection with an ongoing logging operation.
[61]
Both the
Intervenor and the Respondent agree that ordinary meaning of “logging
operations” and “processing and sale” would include any activities that are
integral thereto. They both cite the decision of the Federal
Court Trial Division in Echo Bay Mines Ltd. v. The Queen, to
this effect.
[62]
In Echo Bay
Mines, the taxpayer was engaged in mining and processing silver. To protect
itself against fluctuations in the price of silver it entered into silver hedging
contracts. The taxpayer realized a gain on the settlement of the hedging
contracts, and it included the gain in its “resource profits” under
paragraph 1204(1)(b) of the Regulations for the purpose of
determining its resource allowance deduction under paragraph 20(1)(v.1) of the ITA.
“Resource profits” were defined as including “the amount… of the aggregate of…
incomes… from the production in Canada
of… metals or minerals…” The Minister excluded the gains from the taxpayer’s
“resource profits” on the basis that the hedging contracts were not
sufficiently integrated with production of silver by the taxpayer to be
considered income from that production.
[63]
MacKay J. considered
what was meant by “income … from production of metals…”, and determined that
production must by necessity include sales of metals because without sales, no
income would be produced. After making this finding, the Court went on to
decide that the hedging contracts were interconnected
with the sales of silver by the taxpayer and that they therefore formed an
integral part of the production of silver by it.
[64]
The Court stated,
at page 6447:
…income from “production”
may be generated by various activities provided those are found to be included
in production activities. Production activities yield no income without
sales. Activities reasonably interconnected with marketing the product,
undertaken to assure its sale at a satisfactory price, to yield income, and
hopefully a profit, are, in my view, activities that form an integral part of
production which is to yield income and resource profits, with Regulation
1204((1)
[65]
The
interpretation of the words “income…from production” given in Echo Bay Mines was adopted in this Court in 3850625 Canada Inc. v. The Queen where Woods J.
said:
The principle that flows
from Echo Bay Mines is that production and processing income is not limited to
revenues from the sale of mineral resources but it includes income from other
activities that are integral to the production and processing activity.
[66]
Insofar as
this case is concerned, it seems to me indisputable that income from activities
that are integral to logging or processing or sale of logs or timber products would
be included in income from those activities. Integral simply means something
that forms part of the whole. It is a question of fact whether an activity is
integral to another activity. Can it be said that the disposition of surplus capital
assets was an integral part of Weyerhaeuser’s logging operations or its
processing and sale of logs and timber products?
[67]
The Respondent’s counsel states
that “proceeds from the disposition of a capital property are the very antithesis
of income earned from an ongoing activity” because the disposition of the
capital assets used in logging operations makes it impossible for the operation
to be ongoing and active. Furthermore, operations ceased at the sawmill
properties the year before the gains from the dispositions of the properties
were realized. Thus, there is no way to see the proceeds from their sale as
income from ongoing activities.
[68]
The Intervenor
says that, until 1998, the Merritt and Lumby mills formed an integral part of
Weyerhaeuser’s integrated logging business, and that the decision to close the
mills was made as part of its overall business plan of maximizing revenues. It
was submitted that apart from business income, there is no type of income more
clearly sourced from Weyerhaeuser’s integrated logging operations than the
disposition of assets used in its business.
[69]
In my view,
the disposition of the capital assets by Weyerhaeuser was not an integral part
of its logging operations or an integral part of processing or selling the
timber and related products. The disposition did not involve
cutting or processing logs or the sale of timber products was outside the
ongoing logging and processing and sale activities from which Weyerhaeuser was
earning income. It was not done in the course of carrying on of the activity. The
sale of the means by which the logging or processing operations were carried on
does not form part of those operations. The sale took place after the assets
were no longer being used in such activities.
[70]
Even if the sawmills had been operational
when Weyerhaeuser sold them, the gain from their disposition would not arise
from the carrying on of an activity but from Weyerhaeuser ceasing its activity
at those mills.
Context
[71]
Both parties
directed my attention to paragraph 700(1)(b) of the Regulations,
which they say includes capital gains realized by a taxpayer on the disposition
of standing timber or of the right to cut standing timber. For
ease of reference this provision is reproduced below:
(b)
where standing timber in the province or the right to cut standing timber in
the province is sold by the taxpayer, the taxpayer’s income for the year from
the sale, other than any portion thereof that was included in computing the
taxpayer’s income from logging operations in the province for a previous year;
[72]
The parties rely
on the decision of the Supreme Court of Canada in Tabor Creek Sawmills Ltd.
v. British Columbia (Minister of Finance), which held that a capital gain from the
sale of a right to cut standing timber fell within the definition of “income
derived from logging operations” in section 2 of the LTA. Paragraph (b)
of that definition, as it read at the time, referred to “the net profit from
the acquisition…and the sale of…the right to cut the standing timber”. The
relevant portions of section 2 read:
2. In this Act, unless the context otherwise requires...
‘income derived from logging operations’ by a person in any taxation-year
means ...
(b) where standing timber in the
Province, or the right to cut standing timber in the Province, is sold by the
person in any manner, including on a stumpage or royalty basis, the net profit
from the acquisition of the standing timber or the right to cut the standing
timber, and the sale of the timber or the right to cut the standing timber.
[73]
The Supreme
Court upheld the decision of the B.C Court of Appeal, which found that, based
on the “clear and unequivocal language in s. 2(b)” the intent of that provision
was to tax both capital and income receipts.
[74]
Both counsel
suggested that the reference in paragraph 700(1)(b) of the Regulations
to income from the sale of standing timber or the right to cut standing timber
would include capital gains realized by a taxpayer from such sales, on the
authority of Tabor Creek Sawmills. Each counsel then set out how this was
helpful to the position taken by his client.
[75]
I am not
convinced, though, that Tabor Creek Sawmills is necessarily applicable. The
language used in paragraph 700(1)(b) is different from the language of paragraph
2(b) of the LTA as it then read. The latter provision referred to
“net profit” from the acquisition and sale of standing timber or the right to
cut standing tmber. Paragraph 700(1)(b) refers to “income” from the sale.
In the judgment of the B.C. Supreme Court decision in Tabor Creek Sawmills,
Ruttan J. referred to the specific use of the words “net profit” in paragraph
2(b) of the LTA in relation to the sale of the right to cut standing
timber saying:
…Whether or not such sales are part of
the normal business operation of the taxpayer, they are "logging
operations" as defined in the Act and the net profit from such logging
operations is income under this statute. It appears to me that the important
word under the Logging Tax Act is not "income" but
"profit."
(emphasis added)
[76]
Income
and net profit are not synonymous. For this reason, I find that that the particular
relevance of paragraph 700(1)(b) to the interpretation of
subparagraph 700(1)(d)(i) has not been demonstrated.
[77]
If I am wrong
in this regard, and if “income” from the sale of standing timber or a right to
cut standing timber is intended to include capital gains from such
dispositions, then I would agree with the Respondent that the specific
inclusion of that “income” by means of paragraph 700(1)(b) would
indicate that capital gains are not included in “income from logging operations
or from processing or sale” by subparagraph 700(1)(d)(i).
[78]
Another
contextual factor, however, provides support for the Respondent’s interpretation
of subparagraph 700(1)(d)(i) in this case: the source concept of income
that underpins the Act. As stated by this Court in Fortino v. The
Queen, “segregation of income by source is the essence of the structure of the
Canadian income tax system.”
[79]
According to the
source concept, income from each source is calculated separately, following
rules applicable to the particular source, and capital gains are treated as a
separate source of income. In Schwartz, the Supreme Court said at paragraph
20:
Section 3 states the basic
rules to be applied in determining a taxpayer's income for a given year and
identifies, in para. (a), the five principal sources from which income
can be generated: office, employment, business, property and capital
gains. Subdivisions a, b and c of Division B of Part I contain specific
provisions relating to the characterization of income as being from either
office, employment, business, property or as constituting capital gains.
[80]
As part of
this scheme, capital gains are dealt with as a separate source of income distinct
from the four enumerated sources under section 3, and capital gains are not
included in income from any other source.
[81]
In
subparagraph 700(1)(d)(i), “logging operations…and …processing…and sale
(of timber products)” denote a source of income. Following the scheme of the Act,
income from this source would be determined separately from income from other
sources. It would be inconsistent with this scheme to include capital gains in
income from a particular, identified source of income such as logging operations
and processing and sale, unless the statutory provision contained clear
language to this effect or unless it was otherwise apparent from the context of
the provision. This conclusion is reinforced by the fact that capital gains do
not arise under the Act from an ongoing activity but rather as a result
of the disposition of property. In Principles of Canadian Income Tax Law,
authors Hogg, Magee and Li note that capital gains “although included in income
under section 3…are not income from a source in a traditional sense –
rather, capital gains are income from the disposition of a source.”
Purpose
[82]
As instructed
by the Supreme Court in Canada Trustco, I must also take into account
the purpose of Parliament in enacting subparagraph 700(1)(d).
[83]
I agree with
the Respondent that legislative intent must be that which existed at the time
the provision was enacted. This concept is expressed in Sullivan on the Construction of Statutes, as follows:
…the purpose of legislation is a historical fact… If the duty
of the courts is to give effect to the actual intent of the legislature, it
must attempt to reconstruct the original purpose(s) of the legislation…
[84]
In R v. Big
M Drug Mart Ltd., the Supreme Court rejected the possibility that
legislation could have a shifting purpose. Per Dickson C.J.:
Furthermore, the theory of a
shifting purpose stands in stark contrast to fundamental notions developed in
our law concerning the nature of "Parliamentary intention". Purpose
is a function of the intent of those who drafted and enacted the legislation at
the time, and not of any shifting variable.
[85]
Section 700 of
the Regulations was enacted in 1963 (P.C. 1963-1421, September 26, 1963,
Canada Gazette, Part II, October 9, 1963). At the time of enactment, the
wording of paragraph 700(1)(d) was substantially similar to the present
version. Like the current version, the original version of paragraph 700(1)(d),
referred to “income from all sources” and subparagraph 700(1)(d)(i)
referred to “income from all sources other than logging
operations…and…processing…and sale”.
[86]
The relevant
portion of the original enactment read:
700. (1)
Except as provided in subsection (2) …“income for the year from logging
operations in the province” means the aggregate of
(d) where
standing timber is cut in the province by the taxpayer or logs cut from
standing timber in the province have been acquired by the taxpayer, if the logs
are processed by the taxpayer, if the taxpayer operates a sawmill, pulp or
paper plant or other place for processing logs in Canada, the income of the
taxpayer for the year from all sources minus the aggregate of
(i)
his income from sources other than logging
operations and other than the processing and sale by him of of logs, timber and
products produced therefrom, …
(underlining
added)
[87]
The current
version reads:
700. 1) Except as provided in subsection (2)… "income
for the year from logging operations in the province" means the aggregate of
(d) where
standing timber is cut in the province by the taxpayer or logs cut from
standing timber in the province are acquired by the taxpayer, if the logs are
processed by the taxpayer or by a person on his behalf in a sawmill, pulp or
paper plant or other place for processing logs in Canada, the income of the
taxpayer for the year from all sources minus the aggregate of
(i) his
income from sources other than logging operations carried on in Canada and
other than the processing in Canada by him or on his behalf and sale by him of logs, timber and
products produced therefrom, …
(underlining
added)
[88]
The Intervenor maintains that historically,
the federal government intended to allocate taxing room over logging to the
provinces. With the introduction of the
taxation of capital gains in 1972, the amount of logging income available to be
taxed was expanded. An interpretation of “income from logging operations” that
excludes capital gains would mean that Parliament intended to reserve this new
area of logging income for its own tax base. The Intervenor says that this
interpretation runs counter to the historical development of the federal
logging tax credit.
[89]
This argument cannot
succeed for two reasons.
[90]
First, the history of section 127 of the ITA and section
700 of the Regulations shows that while Parliament always intended to
allow relief for taxes imposed by a province on income from logging, the credit
has always been subject to limitations.The intention to limit the amount of the credit is apparent. One such
limitation is found in subsection 127(1) (and its predecessor section 41A) which
restricts the credit to a maximum provincial logging tax rate of 6 2/3% of the
taxpayer’s “income from logging operations”. Therefore, an increase to the
provincial logging tax rate would not result in a corresponding increase in the
amount of the federal logging tax credit available. Furthermore, Parliament
has chosen to define “income from logging operations” for the purposes of the
logging tax credit, in order to control the tax base on which the credit will
be available. Therefore, it is apparent that Parliament did not intend to
allocate all taxing room in respect of logging activities to the provinces.
[91]
Second, capital gains
cannot be considered logging income as suggested by the Intervenor. As Krishna says, “there is an intuitive notion that the
appreciation of capital is not what we normally consider “income.” A capital gain
derives from an increase in the capital value of an asset. It does not
result from any activity carried on by a taxpayer. Therefore, it cannot be
said that with the advent of capital gains tax Parliament was taxing a “new
area of logging income.” In my view, the
Intervenor’s interpretation would result in an expansion of the base on which
the federal logging tax credit is calculated by including gains that were never
intended by Parliament to be part of the logging tax credit regime. If the
Intervenor were correct, even gains from the sale of land that had become more
valuable for residential or recreational use than as forest land would be
considered “income from logging operations” despite the fact that the increase
in value would have nothing to do with any logging or processing business
activities carried on.
[92]
I agree with the
Respondent’s submission concerning the purpose of subparagraph 700(1)(d)(i).
I find that at the time Parliament enacted this provision, it did not intend
that income from a source that was logging operations or processing and sale of
logs or timber products would include capital gains because in 1963 capital
gains were not a source of income under the ITA. Since purpose is a
historical fact, the inclusion of capital gains as a source of income under the
ITA in 1972 would not alter the purpose for which subparagraph 700(1)(d)(i)
was enacted.
Conclusion
[93]
I find that a textual, contextual
and purposive interpretation of paragraph 700(1)(d) of the Income Tax
Regulations leads to the conclusion that the Gains were not “income from
logging operations in the province” and therefore tax paid under the LTA
on those Gains does not qualify for the federal logging credit.
[94]
The appeal is therefore
dismissed, with costs on a party and party basis to the Respondent.
Signed at Ottawa, Canada, this 30th day of March 2012.
"B. Paris"
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