Leases and Licences

Commentary

Leases or licences acquired by the tenant or licensee for operating purposes

A lease of a tenant which it uses in a business that does not entail dealing in leases will generally be held by it on capital account, so that a payment received from the landlord for the termination of the lease generally will be a capital receipt (Westfair). Similarly, a payment received by company for the sale of a timber licence which it acquired solely for the purpose of securing a supply of logs for its sawmill was found in Pacific Pine to be a capital receipt (although note that s. 39(1)(a)(iv) now excludes capital gains treatment). The same result will obtain where after agreeing to sell its timber rights in principle, it applies (before its current licence expires) jointly with the purchaser for a replacement licence, so that in form it is acquiring a licence with a view to its sale (Universal Timber). A lump sum received by a fisherman from the government for the cancellation of his fishing licence was also a capital gain (Winsor).

Leases or licences acquired with a view to resale

Conversely, where a taxpayer's business does not entail it using leased or licensed property for the purpose of the generation of investment income or income from the operation of a business, e.g., a lease of mineral rights to a taxpayer which does not itself engage in drilling, a gain from a subsequent sale by it of the leasehold or licensed interest will usually be on income account (Minerals). Similarly, where mining claims are staked with a view to their quick sale rather than exploitation in a mining business, their sale will be on income account (Boychuk).

Where in a corporate reorganization, a lease or other asset is acquired from an affiliate (which held the property as capital property) with a view to an immediate transfer of the property to another affiliate, such on-transfer of the property will not generally generate any commercial gain on such disposition or have other indicia of an adventure in the nature of trade - so that such on-transfer likely will be on capital account (see Coates v. Arndale).

Gains to the lessor or licensor

A lump sum received by a landlord, licensor or other taxpayer for the sale of a lease, licence or similar agreement can represent a capital receipt even though the exploitation by it of that agreement would have given rise to rents or licence fees or similar amounts that would have been includable in its income (Sutton, Lodestar, see also McClure v. Petre). Clearly, the sale on an annual or other recurring basis of rights to use land or other property of the taxpayer will give rise to income receipts (Arnold). However, amounts received for the termination of licences of the taxpayer's property to third parties also likely will be income receipts where the entering into and termination of such contracts is a recurring incident of the taxpayer's business (see Transcontinental - see also s. 39(1)(a)(iv)).

Cases

Westfair Foods Ltd. v. The Queen, 91 DTC 5073 (FCTD), aff'd 91 DTC 5625 (FCA)

lease surrender payment received by tenant on capital account

A subsidiary of Loblaws Companies Ltd. realized a capital gain when it received the sums of $880,000 and $1,000,000, respectively, for the termination by the landlord of the lease by the subsidiary of premises at the Chinook Shopping Centre in Calgary (which the subsidiary sublet to a franchisee) and at the Polo Park Shopping Centre in Winnipeg (on which the subsidiary itself operated a retail store under the Loblaws name). Reed J. stated (pp. 5075-5076):

"[I]t is not sufficient to say ... that merely because the signing of leases is related to the plaintiff's business, a termination payment, and the circumstances of the present case, should therefore be characterized as an income receipt. Such a rule would wipe out all distinctions between capital assets and income."

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

Where the taxpayer sold each year, to a company whose forestry operations he ran, the right to cut timber on wood lots owned by him, the annual sums of $15,000 received by him from the company for the sales were fully taxable.

Transcontinental Timber Co. Ltd. v. The Queen, 81 DTC 5043, [1981] CTC 152 (FCA)

timber licence termination payments received in course of licensing business

$95,000 received by the taxpayer for the termination of three contracts whereunder some companies were licensed to cut timber on lands owned by the taxpayer, was business income. The taxpayer had entered into many similar contracts, and the termination of the three contracts in question did not put the taxpayer out of the timber-licensing business - in fact, on the termination of the three contracts, the areas referred to in them became available for licensing to others, and the taxpayer's revenues from licensing increased thereafter.

The Queen v. Boychuk, 78 DTC 6316, [1978] CTC 451 (FCTD)

It was found that the real objective of a syndicate of individuals in staking claims in areas close to where mining was being carried on was to stake whatever ground they found open with a view to making a quick sale. Net gains realized from the sale of their interests in the claims to a mining company were taxable profits.

Universal Timber Products Ltd. v. The Queen, 74 DTC 6413, [1974] CTC 499 (FCA)

After the taxpayer and its subsidiary had determined to discontinue their timbering operations and had agreed in principle with another company ("Jackson") to sell their timber licence to Jackson, the taxpayer, the subsidiary and Jackson jointly applied for a new timber licence covering the quotas of the taxpayer and its subsidiary and, shortly before the application was granted, the taxpayer and the subsidiary assigned their interest to Jackson for $100,000. These steps taken by the taxpayer were but devices for converting into dollars something of value that the taxpayer and the subsidiary already had, and were not activities constituting an adventure in the nature of trade.

Montreal Trust Company v. Minister of National Revenue, 62 DTC 1242, [1962] CTC 418, [1962] S.C.R. 570

A gain realized by a corporation, which at no time had dealt in the purchase and sale of oil or other mineral rights to others, from the disposition of a 1/2 interest under an oil farm out agreement was realized on capital account.

Minerals Limited v. The Minister of National Revenue, 58 DTC 1154, [1958] CTC 236, [1958] S.C.R. 490

no evidence that resource leases acquired as investment

The taxpayer promoted the sale of shares in another company ("Farmers Mutual"). In particular, it acted as agent of Farmers Mutual in arranging for Farmers Mutual to acquire the freehold mineral rights and interests as lessor of farmers, who had previously leased their mineral rights, in consideration for Farmers Mutual issuing treasury shares to the farmers. Where the farmers had not already leased their mineral rights, the taxpayer would itself enter into a lease (as lessee) with the farmers of the mineral rights, with the farmers then transferring their interests as lessors to Farmers Mutual in consideration for shares of Farmers Mutual. Approximately one year after the formation of Farmers Mutual, the taxpayer sold its interest as lessee in the latter leases at a gain.

At the time these lease were acquired, the taxpayer was aware that they provided for delay rentals where there was no drilling, and there was no evidence that it intended to work the leases or that it intended to hold the leases as an investment. As the leases were deliberately acquired by the taxpayer as part of its business of operating Farmers Mutual, the gain was a taxable profit.

Sutton Lumber and Trading Co. Ltd. v. Minister of National Revenue, 53 DTC 1158, [1953] CTC 237, [1953] 2 S.C.R. 77

sale of timber limits on capital account after change of plan

The taxpayer acquired various timber limits with a view to cutting the merchantable timber into lumber in a mill to be erected by it, and sold some of the timber limits after its learned that they were not suitable for its proposed feeder mill. In finding that it realized the gains on capital account, notwithstanding that its memorandum of association authorized the dealing in timber limits, Locke J. stated (p. 1161):

"The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in."

See Also

Winsor v. The Queen, 2008 DTC 2116, 2007 TCC 692

A lump sum received by the taxpayer from the federal government for the cancellation by the federal government of his fishing licence was a capital gain.

McClure v. Petre, [1988] BTC 377 (Ch. D.)

£75,000 received by the taxpayer for granting a licence to a motorway contractor to deposit subsoil on 25 acres of land was a capital receipt notwithstanding that the dumping did not have any adverse effect on the rentals received by the taxpayer from the land. "The mere fact that the taxpayer remains the unfettered owner of the same area of land, with the same interest, does not preclude a finding that the receipt is a capital receipt ... [T]he payments were received by the taxpayer as consideration for a once and for all disposal of a right or advantage appurtenant to the land; namely the right or advantage of using it for dumping."

Coates v. Arndale Properties Ltd., [1984] BTC 438 (HL)

small profit on intra-group sale was mere window-dressing

Another company ("SPI") in the corporate group had acquired a 125-year lease of land and developed the site at a cost of £5.3 million. The taxpayer (Arndale Properties) acquired the leasehold interest of SPI at a cost of £3,090,000 and, on the same day, assigned the leasehold asset to a third company in the group for consideration of £3,100,000. Arndale Properties was demed to have acquired the property for SPI's cost of £5.3 million, but would have been entitled to a loss of £2.2 million on its on-sale of the asset if it had been acquired by it as a trading asset.

Before concluding that Arndale Properties was not entitled to claim this loss, Lord Templeman found (at p. 442) that it "did not trade and never had any intention of trading in the lease" and that "the profit of £10,000 was a timid veil designed to conceal the fact that the lease was not being traded."

Pacific Pine Co., Ltd. v. MNR, 61 DTC 95 (TAB)

The taxpayer sold a timber licence for 16 quarterly instalments for a purchase price whose total amount was fixed, unless the purchaser obtained less that 10,400,000 feet of timber from the lands in question. The amounts paid by the purchaser to the taxpayer were capital receipts to it because the taxpayer had never engaged in logging operations, nor was it part of its business to sell timber licences. It had obtained timber licences solely for the purpose of ensuring that it would have a supply of logs for the operation of its sawmill by granting the right to log the timber to logging contractors.

Anderson Logging Co. v. The King, [1925] S.C.R. 45, [1925] UKPC 99

In finding that gains from the sale of timber limits were realized on income account by the taxpayer, which had acquired the timber limits approximately ten years previously and had not provided any evidence that it had carried on logging operatons, Duff J. stated (p. 1214):

"... On principle it is not easy to understand why a profit made out of a profit-making venture which, as such, is within the scope of the memorandum of the association, is not an operation in execution of a profit-making scheme within the contemplation of the decisions, merely because that venture has been the only transaction of its kind in the history of the company. The sole raison d'être of the public company is to have a business and to carry it on. If the transaction question belongs to a class of profit-making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company."

Administrative Policy

IT-359R2 "Premiums and Other Amounts With Respect to Leases"

Whether lease cancellation payment recieved as part of rental business

1. A premium or other amount received by a landlord or tenant, as the case may be, as consideration for granting or extending a lease or sublease, permitting a sublease, or cancelling a lease or sublease is business income to the recipient if renting property forms part or all of a business being carried on.

28 July 1995 External T.I. 5-943255 -

"Whether the proceeds from granting a right to a third party to cut timber from a taxpayer's timber limit would be on account of income or capital, is always a question of fact to be determined and depends on the intention of the parties as evidenced by the terms of such right."