Ray v. R., [1997] 2 CTC 2022

Bowman T.CJ .:

These appeals, which were heard together, are from assessments made under the Income Tax Act for the 1993 and 1994 taxation years. The appellants owned property in British Columbia from which they harvested timber and realized a profit of $37,139 and $24,806 in 1993 and 1994 respectively. The Minister on assessing included one-half of these amounts in each appellant’s income as income from a business. The appellants contend that the profit is a capital gain.

Mr. Ray at the time of trial was 65 years of age and retired. He formerly carried on a roofing and sheet metal business. In May of 1976, he became aware of a cattle ranch that was for sale. He and his wife purchased the property jointly with two other persons, V. and L. Mortinow. The property consisted of 160 acres, plus a separate 44 acres. It had 85 head of cattle, two tractors, haying equipment and buildings. Adjacent to the property purchased was an 80 acre parcel on which the appellants had a grazing lease.

Mr. Ray moved to the property in July 1976 and his wife followed him in September of that year. They farmed the property and raised cattle and hay. Between 1976 and 1981, the 80 acres was used for spring pasture. In early 1977, Mr. Ray took on a slashing contract, involving the removal of debris from property that had been logged. He also supplemented his income with sheet metal work. He worked in the logging industry about three days per week between July until the spring break up in March. In about 1980, he first became aware that he might be able to obtain an agricultural lease on the 80 acres and in 1982 was given permission to apply for such a lease.

The 160 acre parcel was sold in 1981 because his son, as the result of an allergy, could not help him to farm it. They kept the 44 acre parcel and put a home on it. That parcel was farmed, along with the adjoining 80 acres, on which hay was grown.

On April 1, 1982, the appellants entered into a 10 year lease of the 80 acre parcel. The lease contained a covenant not to remove timber or trees except in compliance with the Forest Act and then only to the extent necessary to clear and develop those portions of the land designated as arable and suitable for the construction of buildings and farm related facilities on an annexed plan.

Article IX contained an option to purchase the property provided that the appellants had cleared and cultivated at least 25% of the land designated as arable on the plan.

Article X read as follows:

In 1987, however, the Government of British Columbia announced a new policy of deferring stumpage payments until the wood was harvested. The amount of land designated as arable was 50-55 acres. Mr. Ray cleared about 20 acres.

In 1982, Mr. Ray’s son formed a logging company, Grove Logging Ltd. Mr. Ray, his son and two daughters were shareholders and Mr. Ray was the chief executive officer. Mr. Ray was involved in logging on a seasonal basis until 1990 or 1991.

His plans to continue farming the lands were curtailed in February of 1992 when he suffered a serious accident in a fall from a farm building.

On October 22, 1992, the appellants decided to exercise the option to purchase the 80 acres. The offer of Crown Grant dated September 3, 1993 provided that the Crown Grant transferring the land to them would:

(b) Except and reserve to the Province or any person authorized by the Province, 3111.6 cubic meters of merchantable timber on the land as of the date of the Crown Grant.

The purchase price was $35,600.00 plus $150.00 documentation fee, $4,081.87 interest on $28,480.00 (i.e. $35,600.00 less the rental credits of $7,120.00) from April 2, 1992 to October 1, 1993 and GST of $2,402.82. Rental credits from April 1, 1987 of $7,120.00 were granted.

On November 15, 1993 about 45 days after the land was granted to the appellants, they received a licence from the province to cut and remove Crown timber from the property during the period from November 15, 1993 to November 14, 1994. On November 24, 1993, Mary Ray agreed to sell an estimated 3,000 cubic meters of timber to Sparrow Enterprises at $80.00 per cubic meter to be removed during the period of November 24, 1993 to March 15, 1994. The contractor was Grove Logging Ltd.

The appellants paid stumpage as the timber was harvested rather than paying the stumpage in its entirety when they exercised their option.

Timber was in fact removed. One of the so-called “assumptions” of the Minister of National Revenue, which has not been questioned, was that 25 loads were sold in 1993, further loads were sold in 1994 and 30 loads remained unsold at the end of 1994.

Mrs. Ray declared a business profit in 1993 of $37,139 but did not declare any business profit from logging in 1994. She took the position subsequently that the gain from the sale of timber was a capital gain. Mr. Ray did not declare anything from the operation in either 1993 or 1994.

The Minister’s position was that this was income from a business and allocated the profits equally between the two appellants, as follows:

There is no dispute about the amount of profit realized by the appellants. The question is whether it is a profit on revenue or capital account.

At the outset, I must confess to some surprise at learning that there is a considerable body of jurisprudence in this country to the effect that a sale of standing timber can be a transaction on capital account. I should have thought that whenever a landowner sells something produced on the land it would be income from the land — whether it be crops, trees, gravel or other minerals. As will be apparent from the discussion of the cases that follows this view is not supported by the cases.

We are all familiar with the venerable analogy of the tree and the fruit, but that analogy breaks down where the tree itself becomes the object of commerce.

We may start from the obvious proposition that the 80 acres themselves are capital assets of the appellants. They have held the property since 1982 and they continue to own it to the present.

In Mel-Bar Ranches Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 2146, 87 D.T.C. 467 Kempo J. of this court held that a sale of standing timber by a cattle ranching company was a transaction on capital account. Her decision was affirmed by Strayer J. of the Federal Court ([1989] 1 C.T.C. 360, 89 D.T.C. 5189). At page 361 (D.T.C. 5190) he said:

I do not think it can be seriously contended that the amount in question was income from the business of the defendant. I am satisfied that the essential business of the defendant was ranching or the rental of ranch land. This sale was an isolated transaction whose main purpose was the clearing of land to increase the grazing area for ranching purposes. Therefore the sale of the timber was not a sale of inventory made in the ordinary course of business.

The Mel-Bar case was followed by Sarchuk J. of this court in Cromwell v. Minister of National Revenue, [1990] 1 C.T.C. 2438, 90 D.T.C. 1335.

A similar result was reached in No. 287 v. Minister of National Revenue, (1955), 13 Tax ABC 417, 55 D.T.C. 519 by the Assistant Chairman of the Tax Appeal Board, Mr. Cecil L. Snyder, Q.C. At page 420 (D.T.C. 521-2) he said:

From what has been set out in the foregoing it will be seen that the decision to be reached in this appeal is peculiarly restricted to a summation and consideration of the facts. No evidence was called by the respondent. The appellant appeared to be an eminently credible witness. If the assessment against him is to be upheld it would seem that in order to escape taxation he should either have refrained from selling the logs or else should have given them away or should have burned them, all of which seems contrary to thrift and common sense. However the assessment in this case is not being upheld. The appellant’s evidence that he did not buy the property for the specific purpose of cutting the trees and selling the logs is accepted. As has already been pointed out, he bought a piece of property and it was necessary to cut the trees to provide acreage for hay and for grazing and for the purposes to which he wished to put the property. Instead of wasting the felled trees he did the normal thing and sold them. This would seem to be a reasonable course.

The reported cases seem to attribute to the word “business” the meaning of an act or occupation or profession continuously carried on.

It was said in the Californian Copper Syndicate case, supra, —

It is quite a well settled principle in dealing with questions of assessment of income tax that where the owner of an ordinary investment chooses to realize it and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit assessable to income tax,

and by Thorson, P., in the Cragg case, supra:

There is, I think, no doubt that each of the profits made by the appellant could, by itself, have been properly considered a capital gain and the Court must be careful before it decides that a series of profits, each one of which would by itself have been a capital gain, has become profit or gain from a business. Such a decision cannot depend solely on the number of transactions in the series, or the period of time in which they occurred, or the amount of profit made, or the kind of property involved. Nor can it rest on statements of intention on the part of the taxpayer. The question in each case is what is the proper deduction to be drawn from the taxpayer’s whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.

I shall not refer in detail to the numerous other cases that have been decided in this area of the law. In Sutton Lumber & Trading v. Minister of National Revenue [1952] C.T.C. 361, 52 D.T.C. 1194 the Supreme Court of Canada held that a sale of standing timber was a transaction on capital account. In Minister of National Revenue v. Morrison, (sub nom. Morrison v. Minister of National Revenue), [1966] C.T.C. 558, 66 D.T.C. 5368 (Exch.) the sale of rock fill to construct a causeway was held to be the sale of a capital asset whereas in Minister of National Revenue v. Lamon [1963] C.T.C. 68, 63 D.T.C. 1039 (Exch.) a sale of gravel was held to be on income account. Each of the cases depends upon its own facts, which is perhaps merely a euphemistic way of saying that they are not easily reconciled.

As Mr. Riley pointed out, the receipt of the deed following the exercise of the option, the obtaining of the licence to cut timber, the sale of the timber and the actual cutting and removal of it followed closely upon each other and could give rise to the conclusion that the reason for exercising the option was to gain access to and to sell the timber. In this regard the case bears some resemblance to Hill-Clark-Francis Ltd. v. Minister of National Revenue, [1963] S.C.R. 452, 63 D.T.C. 1211, [1963] C.T.C. 337. Moreover, Mr. Ray was experienced in the logging business and the timber was in fact removed by a company in which he had an interest. On the other hand, the lease as well as the option to purchase the land, and the land itself were capital assets in the appellants’ hands. I do not think it can be said that the appellants carried on the logging business on a continuous basis. They held the property, with the option, since 1982 and, although the timber cutting rights were withheld unless a licence was obtained from the province and stumpage fees paid, the potential or inchoate right to remove the timber inhered in the property and formed part of the bundle of rights that they obtained. Those rights were of a capital nature.

Although as stated above my initial predisposition would have been to treat all revenues from the sale of the produce of the land — in this case the trees — as income, such a position cannot, in light of the authorities, be sustained. I have concluded therefore, and despite Mr. Riley’s very able argument, that the better view is that the sale of the timber was a transaction on capital account.

The appeals are therefore allowed and the assessments for 1993 and 1994 are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the profit from the sale of timber by the appellants was capital in nature.

The appellants are entitled to their costs, but only one set of counsel fees between them.

Appeal allowed.