Tax Court of Canada Judgments

Date: 20001003

Docket: 97-2826-IT-G

BETWEEN:

RICHARD GLASSFORD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1] This appeal was heard at Vancouver, British Columbia, on July 19, 2000. There are two issues. The first is whether a sale dated July 11, 1991 by the Appellant to West Fraser Mills Ltd. ("West") of approximately 316 to 320 acres of land and the standing timber thereon, in the Quesnel area of British Columbia ("Property") gave rise to an income receipt or a capital gain. The second issue is whether, if it was a capital gain, the Appellant was entitled to the normal deduction of $100,000 provided for in section 110.6 of the Income Tax Act (the "Act") or did he qualify for the enhanced deduction for qualified farm property provided for in subsection 110.6(2) of the Act.

[2] It should be noted that because of the decision of the Federal Court of Appeal in Her Majesty the Queen v. Larsen 99 DTC 5757 there was no longer an issue, on the part of the Respondent, as to whether the payment under the sale was dependent upon the use of or the production from property, as contemplated in paragraph 12(1)(g) of the Act. Also the Respondent no longer contends there was a benefit as contemplated in paragraph 10(c) of the Reply to the Notice of Appeal.

FACTS

[3] The basic facts are:

1. Commencing in 1970 and continuing to the present, the Appellant carried on a beef cattle business and other businesses in the Quesnel area of British Columbia. Some of the businesses were carried on under the name Ingenika Ranches, a proprietorship of the Appellant. For the 1992 year and prior years, the Appellant reported income from various sources. Schedule 1 of the Reply to the Notice of Appeal sets forth the various amounts of income as follows:

Dollar Basis	5 year total	1992	1991	1990	1989	1988
Timber Sales	$1,056,000	60,000	377,000	68,000	186,000	365,000
Trucking Services	153,000	129,000		24,000
Logging Services	85,000			85,000
Livestock Sales	296,000	52,000	1,000	129,000	63,000	51,000
Miscellaneous	46,000	3,000	6,000	25,000	9,000	2,000
Total per T1	$1,635,000	244,000	384,000	331,000	258,000	418,000
Percentage Basis
Timber Sales	64%	25%	98%	20%	73%	88%
Trucking Services	10%	53%		7%
Logging Services	5%			26%
Livestock Sales	18%	21%	0%	39%	24%	12%
Miscellaneous	3%	1%	2%	8%	3%	0%
Total per T1	100%	100%	100%	100%	100%	100%

[4] In October, 1981 the Appellant signed a Crown Agricultural Lease ("CAL") for the Property for a term of ten years with an option to purchase the Property on clearing 25% of it for agricultural purposes. Section 4.01(o) of the CAL obliges the Appellant, as Grantee, not to cut, destroy or remove timber or trees standing on the land 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 desirable or suitable for the construction of buildings and farm-related facilities on the plan annexed to the lease as Schedule "B". Section 9.02 of the CAL provided that the Grantee's option to purchase was conditional upon certain factors, including the condition that the Grantee shall have cleared and cultivated at least 25% of the land designated as arable in the clearing plan annexed to the CAL. Moreover the Grantee was bound to submit to the Grantor an option in the form of a Schedule annexed to the CAL. Section 3.05 of that Schedule provides as follows:

3.05 Documents necessary to transfer title shall be prepared by the Grantee in form satisfactory to the Grantor and in compliance with the Land Title Act.

[5] The Property contained standing timber on it when the Lease was signed. The Appellant before, during and after 1991 had a considerable number of years of logging experience and as mentioned reported timber sales on account of income.

[6] The Appellant exercised the option to purchase the Property in April, 1990 for $61,365. There is some dispute as to the actual date of the sale or grant by the Ministry of Crown Lands of the Province of British Columbia ("Ministry") to the Appellant. To qualify as a "qualified farm property" the Appellant had to have owned the Property for at least 24 months prior to its sale to West mentioned below. Tabs 5 and 6 of Exhibit A-1 indicate that the purchase by the Appellant from the Ministry was to be dated December 15, 1988, whereas Tab 7 of Exhibit A-1 indicates the Crown grant date as April 3, 1990. The 1988 date would satisfy the 24 month condition but the 1990 date would not.

[7] The Appellant encountered financial difficulties in meeting a considerable amount of indebtedness to the Royal Bank ("Bank"), all as more fully appears from Exhibit A-1, Tab 10. As a partial solution to the financial problems, the Appellant sold the Property to West on July 11, 1991. The purchase price for the property was $357,500 with $292,500 allocated for the standing timber and $65,000 to the land. The Appellant in 1990 also sold off all his cattle for approximately $100,000. The bulk of the monies from those sales went to the Bank to reduce the indebtedness.

[8] The Property was logged for West by Jay Four Contracting Ltd., a company of which the Appellant and his wife were directors and sole shareholders.

[9] By separate agreement dated July, 1991, West agreed to sell the Property to the Appellant's spouse for $65,000. Thus the Appellant and his wife reacquired the Property and continue to own all the acreage described below.

[10] As indicated in Tab 19 of Exhibit A-1 there is still a considerable amount of standing timber on the various properties owned and leased by the Appellant and his spouse. A summary of those properties owned and leased is produced at Tab 2 of Exhibit A-1 and reads as follows:

RICHARD GLASSFORD

SCHEDULE OF PROPERTY ACQUISITIONS

Property Lot No.	Acreage	Leased	Purchased
Lot 649 (Home Ranch)	40		October 8, 1970
Lot 3929	160		October 5, 1978
Lot 8666	40		October 5, 1978
Lot 3520	160		June 18, 1982
Lot 7279	169		June 24, 1980
Lot 3928 (Subject)	320	November 15, 1981	...
Lot 3908	210	September 19, 1987 10 year lease	Transferred: August 18, 1999
Lot 3930	280	January 17, 1989 10 year lease	May 7, 1997
Lot 1611	461	August 6, 1987 10 year lease	Transferred: February 25, 1999

The Appellant estimated the present total acres of his ranch at approximately 2000 of which 1500 had been cleared of logs. The cleared land is used for pasture. In this connection Michael Staves, the loan officer of the Royal Bank in charge of the Appellant's account, testified as follows:

A. Well, agricultural leases were a way, on a relatively small scale in terms of the Crown timber harvest, to encourage people to expand agricultural production in the province by converting Crown timber land, which was raw land, into agricultural production. So by leasing the land, the timbered raw land to ranchers and enabling them to harvest the timber and convert the land into agricultural production as hay fields or meadowland or pasturage, it increased the agricultural land base in the province with the result that food production in the province could be increased.

...

A. Well, commonly in a situation where a person is logging, you cut down the tree and haul it away and then deal with the stumps afterwards. The stumps are left in the ground. In the case of a rancher who is clearing land for agricultural production, the elimination of those stumps can sometimes be a problem, particularly if you don't have heavy enough equipment to pull the stumps out of the ground after the trees have been pulled or chopped down. Mr. Glassford's method was to push the tree over with the root still intact and then chop the tree off after the stump was up-tilted. This wouldn't fit with normal logging operations where hauling the trees out after the stumps are all sticking up from the ground would not be -- it would be tougher to do that. But certainly from his perspective, as a rancher clearing property for agricultural development, having the stumps already tipped out of the ground made it a lot easier to pile them up and burn them afterwards.

SUBMISSIONS

[11] The basic submission of the Respondent is that prior to 1991 the Respondent had reported timber sales on account of income and that is evidenced by the T-1 returns. Further a large percentage of his income in the years mentioned above in paragraph 1 represented logging income. In other words, the Appellant was primarily a logger and only partially a rancher. The corollary of this is that the sale to West triggered an income receipt as opposed to a capital gain.

[12] The Respondent's submission with respect to the 24 month issue is that one must look at the Land Act of British Columbia, [RSBC 1996] Chapter 245. The Land Act governs dispositions of Crown land generally and section 42 provides as follows:

42 (1) The date of a disposition under this

Act is the date on which the instrument creating the disposition is executed on behalf of the government.

[13] Counsel for the Respondent also refers to section 8 of the Land Act, which provides as follows:

8 (1) A person may not acquire by prescription,

occupation not lawfully authorized or a colour of right, an interest in Crown land, or in any land as against the government's interest in it.

(2) A person does not acquire a right, vested or contingent, in Crown land, or a priority to Crown land by filing an application for Crown land under this Act.

(3) A disposition of Crown land is not binding on the government until the certificate of purchase, grant, lease, licence of occupation, right of way or easement is executed by the government under this Act.

(4) Negotiations or arrangements, whether in writing or otherwise, before the execution of the documents referred to in subsection (3) are not binding on and do not commit the government to perform or complete a disposition.

[14] The principal submissions of the Appellant are to the effect that the sale to West was essentially a once in a lifetime transaction caused by the financial difficulties the Appellant was in at that time. Moreover, what was sold was real property, i.e. land and timber thereon. This is a capital asset and its sale resulted in a capital gain.

[15] On the 24 month issue Counsel for the Appellant points to section 11 of the Land Act, which provides as follows:

11 (1) Subject to compliance with this Act and the

regulations, the minister may, on an application, by public auction, public notice of tender or public drawing of lots, dispose of Crown land, either surveyed or unsurveyed, to a person entitled under this Act, as the minister considers advisable in the public interest.

(2) The minister may, under subsection (1),

(a) sell Crown land,

(b) lease Crown land,

(c) grant a right of way or easement over Crown land, or

(d) grant a licence to occupy Crown land.

(3) In a disposition of Crown land under this section, the minister may impose the terms, covenants, stipulations and reservations the minister considers advisable, and without limiting those powers, the minister may impose some or all of the following terms:

(a) the applicant must personally occupy and reside on the Crown land for a period set by the minister;

(b) the applicant must do that work and spend that money for permanent improvement of the Crown land within that period the minister requires.

[16] Counsel argues that that provision gives a certain discretion in the Crown to fix a date other than the actual date of the grant. He argues further that adjustments for interest and rent point to December 15, 1988 as the effective date.

ANALYSIS AND DECISION

[17] Reference is made to Sutton Lumber & Trading Co. Ltd. v. The Minister of National Revenue 53 DTC 1158 (S.C.C.). In this case the Supreme Court of Canada determined that although the Appellant company had extensive timber rights and leases and that one of its stated business objects was to deal in such rights and leases, it was not in the business of buying and selling timber leases with a view to dealing in them for the purpose of profit. The company was actually in the business of manufacturing lumber. However the sale of the timber lease in question was merely a realization upon one of its capital assets. Consequently the sale was treated on capital account and not income account.

[18] The decision in Her Majesty the Queen v. Mel-Bar Ranches Ltd. 89 DTC 5189 dealt mainly with the application of paragraph 12(1)(g) of the Act with respect to use and production. However some comments from that case would appear to apply equally to the present appeal. For example in Mel-Bar the headnote reads as follows:

The corporate taxpayer owned a 2,200-acre piece of land on which it carried on a cattle ranch operation. Pursuant to the terms of a log purchase agreement between the taxpayer and H Ltd., entered into on April 12, 1979, the latter agreed to pay the taxpayer for 25,500 tonnes of fir at a price of $11.85 per tonne on the stump. H Ltd. was to cut and remove the entire 25,500 tonnes from the taxpayer's land, at its expense, prior to December 31, 1979, which it was unable to do. An extension agreement entered into early in 1980 permitted H Ltd. to continue cutting up to the 25,500 tonne limit, albeit at an increased price of $1 per tonne, until June 30, 1980. In June of 1980, the taxpayer terminated the agreement because the logging operations were interfering with its cattle ranch operation. At this point, H Ltd. had not cut and removed the entire 25,500 tonnes, but it paid the taxpayer during 1979 and 1980 a total of $294,134 for the logs which actually were cut and removed. The taxpayer initially included the amounts comprising the $294,134 in its business income for its 1979 and 1980 taxation years, but was advised by its accountant to treat those amounts as capital receipts, which was done. The Minister reassessed the taxpayer, adding the amounts back into income either as business income, or, as amounts "dependent upon the production or use of property" which, under s. 12(1)(g), are required to be categorized as income. The taxpayer appealed to the Tax Court of Canada, and its appeal was allowed (87 DTC 467). That Court found that the logs in question were not inventory or stock in trade, since the taxpayer's business was not logging, but operating a cattle ranch. Nor was the price received for the logs an amount "dependent upon production", since the original log purchase agreement, when viewed in its total context, was really one which provided for the sale of a specified block of logs at a fixed price. This did not change, even though the agreement was later extended, the price was changed, and the taxpayer was, as matters transpired, paid only for the logs actually cut. The Crown appealed to the Federal Court–Trial Division, reiterating the position it had taken in its original assessment.

Held: The Crown's appeal was dismissed. The reasoning of the Tax Court of Canada was affirmed, and the Minister was directed to treat the amounts in question as capital receipts in the taxpayer's hands. Similarly, all expenses incurred by the taxpayer with respect to the log sales were directed to be treated as on account of capital.

[19] The fact that the Appellant reported prior timber sales on account of income is not conclusive. There was no evidence to the effect that any of those sales were similar to the sale in question, which comprised the sale of a large tract of land with the timber thereon as opposed to sales of timber. As mentioned in Mel-Bar the trees still standing form part of the real property and consequently what occurred was the sale of real property comprising land and standing timber. This in my opinion is clearly a disposition of a capital asset and deserves capital gain treatment.

[20] On the issue of the effective date of the disposition by the Crown, I am of the view that the provisions of the Land Act cited by counsel for the Respondent are to apply especially in cases of doubt where previous correspondence refers to a date different from that of the date of the actual grant. The result is that the Appellant did not own the Property for a period of 24 months. Thus the sale of the Property to West does not qualify as a disposition of qualified farm property.

CONCLUSION

[21] The gain realized on the sale to West was a capital gain and should be taxed as such. However, since it was not a sale of qualified farm property the Appellant is not entitled to the enhanced deduction provided for in subsection 110.6(2) of the Act.

[22] As requested by Counsel, they are to contact the Registry of this Court to set a date when I can hear, by conference call, their submissions as to costs.

Signed at Ottawa, Canada, this 3^rd day of October, 2000.

"T. O'Connor"

J.T.C.C.