Date: 19980709
Docket: 97-2648-IT-G
BETWEEN:
JENS LARSEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Castlegar, British Columbia on June 10, 1998. The Appellant testified and called Paul Jeakins, R.P.F., a professional forester who qualified as an expert witness to give testimony as to whether timber sold on private land in British Columbia must be sold on a cubic metre basis. The appeal relates to the Appellant's 1994 taxation year when the Appellant reported a taxable capital gain of $59,319.74 and a corresponding capital gains deduction. A reassessment removed the taxable capital gain and included $161,075 into his income as the Appellant's share of the sale of timber. The Appellant filed a Notice of Appeal. There are four issues:
(1) Is the $161,075 income from a business or property pursuant to paragraph 12(1)(g) of the Income Tax Act?
(2) If not, is it income from a business or an adventure in the nature of trade?
(3) If not, is it a capital gain?
(4) If so, is the Appellant entitled to the capital gains deduction for qualified farm property under subsection 110.6(2) of the Income Tax Act?
[2] The parties filed an Agreed Statement of Facts which reads:
The parties hereto by their respective solicitors admit the following facts, provided that the admission is made for the purpose of this action only and may not be used against either party on any other occasion, and provided further that the parties may produce further and other evidence relevant to the issues and not inconsistent with this Agreement.
1. The Appellant's father first acquired the 480 acres of land legally described as District Lots 6335, 3816, 8387 except that portion of District Lot 8337 lying North of the Little Slocan River and 3818, Kootenay District except parts included in Plan 18069 (the "Land") in 1951.
2. The Land is bisected by a creek, approximately 160 acres located adjacent to the creek are meadows free of timber, the land on each side of the creek gets progressively steeper and these hillsides were mostly timbered. (See copy of map at tab 14 of Respondent's Book of Documents).
3. In each of the years 1951 to 1976 the Appellant's father only used the Land to raise cattle with calves. (However the parties are not in agreement as to whether all of the land was used to raise cattle.)
4. The Appellant and his brother, Christian Larsen, assisted their father in farming the Land when they were not in school or not at work.
5. The prime grazing area for the cattle on the Land was in the valley bottom along the creek. The cattle would graze part way up the hillside.
6. The Land is 24 km from the Appellant's father's residence at Lemon Creek.
7. Cattle were only grazed on the Land during the period from May through September. The cattle were kept at the Lemon Creek property at other times.
8. It was necessary to graze the cattle on the Land from May through September so that hay could be grown on the Lemon Creek property during that time.
9. In 1964 the Appellant began working for Slocan Forest Products as a heavy-duty mechanic. As part of these duties the Appellant would repair heavy equipment in the woods. During these times the Appellant would observe the logging activities and would speak to the forestry people.
10. In 1976 the Appellant's father passed away and the Appellant, together with his brothers, Noble Larsen and Christian Larsen, and his sister Gertrude Lindstrom, each inherited an undivided one quarter interest in the Land from their father. (See copy of will at Tab 1 of Respondent's Book of Documents).
11. After the Appellant's father passed away in 1976, the Appellant in partnership with his brother, Christian, continued to only use the Land to raise cattle.
12. Since 1984 the Appellant's sister, Gertrude Lindstrom, was pressuring the Appellant and his brothers to buy out her interest in the Land. (See copy of letter at Tab 2 of Respondent's Book of Documents).
13. On October 31st, 1991 the Land, without the timber growing thereon was, valued at $328,350. Based on this valuation it was determined that Gertrude's one quarter interest in the Land, excluding timber, had a fair market value of approximately $100,000.
14. The Appellant and his siblings decided in 1994 to log the property.
15. The Appellant and his siblings had no direct experience with logging nor the necessary equipment to log the timber.
16. In 1994 the property was cruised and it was estimated that there were 150 loads of timber located on the Land based on the assumption that the timber to be cut would have a butt size of 12 inches or larger. (Ultimately, the Appellant agreed with his siblings to remove trees with a butt size of 10 inches or larger).
17. The Appellant and his brother, Christian, only wanted to remove all jackpine and all other species of timber with a butt size of 12 inches or larger since that would provide them with enough funds to buy out Gertrude's interest in the Land. The Appellant's brother in Salt Lake City and his sister, Gertrude Lindstrom, wanted all jackpine and all other species of timber with a butt size of 10 inches or larger to be removed since they felt that too much timber would be left if the minimum butt size was 12 inches or larger. The Appellant agreed to this greater amount of timber but no more.
18. In 1994 the Appellant held verbal discussions with four different mills about logging the timber from the Land and asked for quotes of what they would pay for the timber located on the Land.
19. C.P.S. Investments Inc. quoted the highest price of $70 per cubic metre for the timber located on the Land.
20. The Appellant and his siblings did not ask for a fixed price for the timber located on the Land because they felt it was fairer for both parties if the price paid for the timber located on the Land was $70 per cubic metre. It was the Appellant's understanding that no matter how experienced the person doing the timber cruise was that they could be off in terms of the amount of harvestable, merchantable timber that would come off of the Land.
21. The Appellant and his siblings retained the services of Mr. Craig Gutwald, a chartered accountant, and Mr. Kenyon McGee, barrister and solicitor, to assist them with drafting the agreements governing the sale of the standing timber located on the Land.
22. The Appellant and his siblings insisted that the timber be removed from the Land by December, 1994 so that the logging operations would not interfere with the use of the Land for farming and because they did not want the logging operations to drag on longer than necessary.
23. The Appellant signed two agreements with C.P.S. Investments Inc. on July 28th, 1994. These two agreements are at Tab 4 and Tab 5 of the Respondent's Book of Documents.
24. The trees were first fallen and once all the trees had been fallen they were then hauled out. It took approximately 3 weeks to haul out all the fallen timber.
25. Approximately once a week the Appellant would check to make sure trees with a butt size of 10 inches or less were not being logged. During the three weeks that the timber was being hauled out, the Appellant attended the site on a daily basis. This was the Appellant's only involvement in the logging process.
26. Between August, 1994 and January 18th, 1995, C.P.S. Investments Inc. removed 9,204.28 cubic metres of timber from the Land. C.P.S. Investments Inc. paid the Appellant and his siblings a total of $644,300.16 for the timber.
27. Timber was removed from approximately 250 acres of the Land. The remaining 70 acres of timbered Land was not logged because it was either too steep or was too swampy. (See copies of photographs taken of the Land in December, 1997 which show the unlogged portion of the Land and the logged portions of the Land. These photographs are behind Tabs 11 and 12, respectively, of the Respondents Book of Documents).
28. The $644,300.16 received from C.P.S. Investments Inc. was split equally between the Appellant and his siblings.
29. This was the first time since the Appellant's father first acquired the Land that timber had been removed from the Land on a commercial basis.
30. After the Land was logged, the Appellant planted approximately 300 trees to prevent erosion. The tree stumps on the Land were not cleared or burned since the tree stumps were quite short (approximately 6 inches high) because the logging was done with a Faller/Buncher.
31. The Appellant did not want to clear cut the property because that was visually unattractive, he needed some trees to provide shade for the cattle, and having trees standing allowed for natural seeding and prevented problems with erosion.
32. The Appellant and Christian Larsen did not increase the size of their herd of cattle at any time after the logging took place.
33. For the December 31st, 1989 through 1997 taxation years the partnership formed by the Appellant and Christian Larsen reported the following beef sales:
|
1989 |
$22,322 |
|
1990 |
22,668 |
|
1991 |
23,767 |
|
1992 |
24,250 |
|
1993 |
21,664 |
|
1994 |
23,849 |
|
1995 |
23,996 |
|
1996 |
15,280 |
|
1997 |
19,036 |
(see copies of Income Statements behind Tab 13 of the Respondent's Book of Documents).
The parties hereto by their respective solicitors have by their signatures endorsed hereon agreed to the facts as cited above.
[3] Thus, Jens had two kinds of relationships. Jens and Christian were farming partners who operate a cattle ranch on the land: each summer they took their cattle from Lemon Creek to pasture for the summer on this land. They raised hay at Lemon Creek for the summer and then returned the cattle to Lemon Creek for each winter. As well, Jens, Christian, Noble and Gertrude were tenants in common of the land. Together, the four appear to pay some of the expenses relating to the land. Jens' income tax return relating to the ranch indicates that he paid taxes on account of the land owned with his three siblings, but there is no evidence that he paid rent (Exhibit AR-1, Tab 13).
[4] Jens Larsen is 57. He lives near Slocan, farms and works for a firm in the forest industry. His brother Christian is 51 and lives nearby. Christian works full-time as a loader operator for Slocan Forest Products. Their sister, Gertrude, and brother, Noble, are also in their 50's. They live in Alberta and in Utah, respectively. Jens and Christian had a direct interest in continuing the business of grazing and summering cattle on the property. Gertrude and Noble's involvement with the property consisted of their interests as tenants in common. Jens testified that the family decided to sell the timber rights for the principal purpose of allowing his sister to sell her interest in the land. Jens could not pay her otherwise. The removal of diseased trees and opening up of more pasture land were secondary to his sister's sale. The four children owned all of the land as tenants in common and, according to Gertrude's letter of 21 January 1991 (Exhibit AR-1, Tab 2), were equally responsible "for the debts incurred towards the farm".
[5] Jens' testimony is that Gertrude always wanted to sell her interest in the land. However, from the evidence, the letter of 21 January 1991 caused Jens to realize that Gertrude was going to sell and Jens had to make arrangements to buy. He did not testify that any of the other siblings intended otherwise after the letter of 21 January 1991. From 21 January 1991 on, matters proceeded on the basis that Gertrude was going to sell her interest in the land and Jens was going to buy all or part of her interest in the land.
[6] In 1991 Jens obtained the appraisal of the land without reference to the value of the timber on the land. He testified that he knew then that he might sell the timber to pay Gertrude out. He never obtained bids or a valuation of the timber in 1991, but he thought it was worth about $400,000 at that point in time. By 1994 Jens thought the timber was worth $500,000. During this period he only considered the timber which was of a butt diameter of 12 inches or more. However, Gertrude and Noble insisted on selling timber of a butt diameter of 10 inches or more because they thought that they would leave too much value if the cut was made on the 12 inch basis. The divergence was resolved at the time the contracts were signed. Cutting was done on a 10 inch basis.
[7] In 1994 Jens thought the market price of timber was right. He decided to sell the timber rights. He solicited bids from four sources on the timber rights in the spring and took the highest bid at $70 per cubic metre. The Court finds that when Jens was doing these things he was acting for the four Larsens.
[8] Jens obtained professional advice to sell the timber rights at a lump sum so as to avoid being taxed on an income basis (Exhibit AR-1, Tab 3). The siblings' agreements with C.P.S. Investments Inc. (Exhibit AR-1, Tabs 4 and 5) were both signed on July 28, 1994. Tab 4's agreement sets out a lump sum of $350,000 for timber on a 10 inch basis and a schedule of payments. Tab 5's agreement sets out a price of $70 per cubic metre of timber and states that the $350,000 figure in the Tab 4 agreement is based upon 5,000 cubic metres at $70 each. Payment was made as the timber was removed from the land.
[9] The agreement described in Tab 4 was first drafted on a lump sum basis of $350,000 premised on Jens' position that timber cut would be on a 12 inch basis. It was agreed that the timber was to be cut and removed during the period from July 12, 1994 to December 31, 1994. Cutting was completed by December 31, 1994 although the last load was not hauled out until January 18, 1995 which was approximately the date of the last payment.
[10] Mr. Jeakins testified that selling by the cubic metre price is better and fairer than selling for a lump sum. In cross-examination he admitted that it is legal in British Columbia for all timber on private land to be sold on a lump sum basis and that those kinds of sales occur on private land. He testified that the logger usually does better on the lump sum sale because the logger is more capable than an owner at calculating a correct estimate of the amount of marketable timber on an owner's land.
[11] Mr. Jeakins testified that the total variance of production, from an estimate by an experienced forester cruising the land, could be about 30 percent. He also testified that the likelihood is that the owner of the timber would be the loser in that estimate. The concept of fair market value indicates that the seller, for example Gertrude, wants to get the best price; the buyer, for example Jens, wants to pay a lower price. That is obviously what Jens intended when he unsuccessfully tried to restrict the butt size of timber to be cut to the 12 inch diameter. However Jens could not afford to purchase any of Gertrude's interest without recovering money from the timber himself. To that extent, it was also in Jens' interest to get the best price from the timber rights.
[12] The Court finds that the four siblings, including Jens, formed a joint purpose to sell the timber rights in order that Gertrude could sell her interest in the land at the best price. In order to purchase, Jens had to pay that price and he did not have the money to pay it. Nor did the farm operation or his salaried income yield enough to warrant mortgaging the land. Gertrude knew the value of the timber growing on the land and wanted to realize that as part of her selling price. Whether from the buyer's or the seller's point of view, timber growing on the land represents part of the fair market value of that land. If Jens was going to retain his interest in the land and continue to ranch on the land, he had to buy Gertrude's interest. He wanted to retain his interest in the land and to continue ranching on the land. For these reasons, the Court finds that Jens' sole purpose in selling the timber rights in 1994 was to enable Gertrude's sale to Jens to occur. In Lemieux v. The Queen, 73 DTC 5428 (F.C.T.D.), a real estate agent purchased farmland on August 18, 1966 and sold the farmhouse on March 31, 1967. The taxpayer kept a large portion of the land. On July 22, 1968, the taxpayer sold a portion of the land adjoining the farmhouse to the original purchaser. The Minister assessed the profit on these sales as income. In finding for the taxpayer, Pratte J., for the Federal Court, Trial Division, stated at page 5429:
Though the plaintiff sold the house and parcel of her land on March 31, 1967, this was solely in order to settle a family dispute. The plaintiff's husband, who had limited financial resources, could not accept his wife being the owner of a holiday cottage on which he himself could not pay the expenses.
This sale of timber rights was a one-time occurrence, to be exercised within a specified period of time, in a specified area. The quantity to be removed depended on the terrain on which the timber was situated and the size of the timber. The contracts of sale of the timber rights do not impose a minimum or maximum quantity of production on C.P.S. Investments Inc. There is merely a time limit in which it can exercise its profit à prendre.
[13] This was the first time that timber had ever been logged from the land. Jens' business was ranching, not logging. The sale of the profit à prendre was an isolated transaction which was done in order to allow Gertrude to realize the full value of her capital asset including her timber rights and to allow Jens to purchase. Jens' solicitation of bids was for the purpose of realizing the best price from the sale of the profit à prendre so as to maximize the value of the land. There was no use or production of a continuing nature for the purposes of Gertrude's sale. The sale of the profit à prendre did improve the value of the land for ranching purposes. But that improvement was marginal and incidental to the entire transaction.
[14] Paragraph 12(1)(g) of the Income Tax Act reads:
(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:
...
(g) any amount received by the taxpayer in the year that was dependent on the use of or production from property whether or not that amount was an instalment of the sale price of the property, except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph;
(italics supplied)
It was reviewed in a context similar to this case by Kempo, J.T.C.C. of this Court and subsequently by Strayer, J. of the Federal Court Trial Division, both of whom found for the Appellant. The following quote taken from that decision of Strayer, J. in The Queen v. Mel-Bar Ranches Ltd., 89 DTC 5189 at 5191 and 5192 reads:
... This was a one-time contract for the removal of timber in a specified area within a specified time. It was eminently reasonable that the purchaser should pay, and the defendant should receive, a price related to the amount of usable timber actually cut and removed in the fulfillment of the objective of removing timber. ...It appears to me that when clause 1 was drafted it was the assumption of all concerned that there was approximately 25,500 tonnes of logs which could and should be removed from the area designated by the contract. Recognizing the difficulties of estimating quantities available this precisely, the price was fixed at a rate per tonne actually cut. But the main focus throughout was the objective of getting all usable timber removed from the area designated within the time specified. That the defendant realized some undoubtedly welcome proceeds from the clearing of its land for grazing does not make those proceeds revenues "dependent upon the use of or production from property" in my understanding of the jurisprudence.
Pursuant to the judgment of Strayer, J., and for the same reasons, the amount received by Jens from the sale of the profit à prendre was not dependent upon the use of or production from property within paragraph 12(1)(g) of the Income Tax Act. Moreover, the siblings had inherited the land and timber from their father who had used it in the same way as Jens and Christian did, that is as agricultural land used for ranching purposes. Jens testified that when they rounded the cattle up on the land to return them to Lemon Creek for the winter, they spread fresh hay in the meadow so as to attract the cattle out of the timber and surrounding area. The cattle sheltered themselves in the timber when they were not grazing. The siblings continued to use it in the same way as their father had for the purpose of Jens' and Christian's ranching partnership.
[15] In Jens' case, the realization of proceeds from the sale of timber on a 10 inch basis was not what he wanted. He was trying to limit the sale of timber to a 12 inch basis so that the land he purchased from Gertrude would have bigger trees on it. Thus, some of the proceeds to Jens may have been welcome, but they were not wanted. They were wanted by Noble and Gertrude.
[16] Jens and his siblings sold C.P.S. Investments Inc. a profit à prendre when they granted it "... a right to remove timber from the properties" (Exhibit AR-1, Tab 4, page 1). In The Queen in the Right of the Province of British Columbia v. David Evans Tener and Gertrude Marina Tener [1985], 1 S.C.R. 533 at 540 and 541, Wilson, J. elaborated on the concept of a profit à prendre. She said:
Before proceeding to a detailed consideration of the applicable legislation it is necessary, I think, to analyze with greater particularity the nature of the respondents' interest in the land. I think the learned Chambers Judge may have been in error in treating the respondents as having two separate and distinct interests in the land - the mineral claims and the right to go on the surface for the purpose of developing them - and characterizing the latter interest as a profit à prendre. It has been held that an owner of a mineral claim with ancillary surface rights cannot dispose of its surface rights as if they were a separate interest. Such rights can be transferred only in conjunction with a transfer of the mineral claim itself: see In Re Reliance Gold Mining and Milling Co. (1908), 13 B.C.R. 482, per Wilson Lo. J., at p. 483. I believe that what the respondents had was one integral interest in land in the nature of a profit à prendre comprising both the mineral claims and the surface rights necessary for their enjoyment.
A profit à prendre is defined inStroud's Judicial Dictionary (4th ed.), vol. 4, at p. 2141, as "a right vested in one man of entering upon the land of another and taking therefrom a profit of the soil". In Black's Law Dictionary (5th ed.), it is defined as "a right to make some use of the soil of another, such as a right to mine metals, and it carries with it the right of entry and the right to remove and take from the land the designated products or profit and also includes the right to use such of the surface as is necessary and convenient for exercise of the profit".
Wells J. elaborated on the nature of a profit à prendre in Cherry v. Petch, [1948] O.W.N. 378, where he said, at p. 380:
It has been said that a profit à prendre is a right to take something off the land of another person. It may be more fully defined as a right to enter on the land of another person and take some profit of the soil such as minerals, oil, stones, trees, turf, fish or game, for the use of the owner of the right. It is an incorporeal hereditament, and unlike an easement it is not necessarily appurtenant to a dominant tenement but may be held as a right in gross, and as such may be assigned and dealt with as a valuable interest according to the ordinary rules of property.
It is important to note that it is the right of severance which results in the holder of the profit à prendre acquiring title to the thing severed. The holder of the profit does not own the minerals in situ. They form part of the fee. What he owns are mineral claims and the right to exploit them through the process of severance. This may be significant when attempting to answer the questions: what constitutes the expropriation of a profit à prendre? what constitutes injurious affection in the case of a profit à prendre?
Profits à prendre may be held independently of the ownership of any land, i.e., they may be held in gross. In this they differ from easements. Alternatively, they may be appurtenant to land as easements are, i.e., they may be a privilege which is attached to the ownership of land and increases its beneficial enjoyment. In this case the respondents would appear to have a profit à prendre in gross since they do not own any land to which the profit is appurtenant.
Dickson, C.J., concurred with her. The remainder of the Supreme Court panel did not dissent from Wilson, J.'s analysis of a profit à prendre.
[17] What was sold was the siblings' power to exploit the standing timber by severance, and to enter and take the timber from the land within a specified period of time. In this case it constitutes an interest in agricultural land coupled with powers and privileges respecting that interest. It is a capital asset. The proceeds of the sale of the profit à prendre were not income from a business or property for the year. Thus, in any event, the instalments paid fall within the exception contained in paragraph 12(1)(g), since they are instalments of the sale price of an interest in agricultural land. They resulted in a capital gain to the Appellant pursuant to subsection 39(1).
[18] The Appellant thereupon states that the gain constitutes a disposition of a qualified farm property. (See subsections 110.6(2) and (3) of the Income Tax Act). "Qualified farm property" is defined in subsection 110.6(1) as:
...a property owned at that time by the individual ... or a partnership, an interest in which is an interest in a family farm partnership ... that is
(a) real property that has been used by
...
(v) a partnership, an interest in which is an interest in a family farm partnership of .... (the individual)
and
(vi) ...
(B) the property was used by (the) ... partnership ... principally in the course of carrying on the business of farming in Canada throughout a period of at least 24 months during which time an individual ... was actively engaged on a regular and continuous basis in the farming business in which the property was used ...
[19] Using the above definition, Jens owned an interest in the land with its standing timber as a tenant in common. His partnership's cattle used the timber for shelter when they pastured on the land. It was the only use of the timber until the sale of the profit à prendre. For this reason, his interest was used by Jens and Christian in the family farm ranching partnership. Jens sale of the profit à prendre was the sale of an interest in qualified farm property.
[20] The appeal is allowed. This matter is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons. The Appellant is awarded party and party costs.
Signed at Ottawa, Canada this 9th day of July 1998.
"D.W. Beaubier"
J.T.C.C.