OCTOBER 29, 1999 APPEAL

Federal Court of Appeal Date: October 29, 1999 BETWEEN: HER MAJESTY THE QUEEN and JENS LARSEN Heard at Vancouver, British Columbia on October 29, 1999 Judgment delivered at Vancouver, British Columbia on October 29, 1999 REASONS FOR JUDGMENT BY:           NOEL, J.A. [1] This is an appeal from a decision of Beaubier J.T.C.C. of the Tax Court of Canada in which he allowed the respondent's appeal from a reassessment issued for his 1994 taxation year. [2] The litigation arises from a contract whereby the respondent and his three siblings gave a lumber company the right to enter their land and remove timber during a five-month period against a consideration of $70,000 per cubic metre of timber removed. Some 9,200 cubic metres of timber were removed pursuant to this arrangement giving rise to a monetary entitlement of $644,300 which was divided equally amongst the siblings. The land in question had been used as agricultural land for ranching purposes and continued to be so used after the timber was removed. [3] In filing his taxation return for the 1994 taxation year, the respondent took the position that the transaction was capital in nature and that the right disposed of under the contract was "qualified farm property". The Minister of National Revenue reassessed the respondent's share of the proceeds on the basis that it was received on income account relying on paragraph 12(1)(g) of the Income Tax Act; 12(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 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 the agricultural land is not included by virtue of this paragraph; [4] On appeal, Beaubier J.T.C.C. held that the transaction gave rise to a capital receipt. With respect to paragraph 12(1)(g), Beaubier J.T.C.C. concluded that the amounts received were not "dependent on the use of or production from property". Alternatively, he held that: ...in any event, the instalments paid fall within the meaning of ss.110.6(1) thereby entitling the respondent to an enhanced capital gain deduction provided by ss. 110.6(2). [5] According to ss. 110.6(1): . 110.6(1) "qualified farm property" of an individual... at any particular time means a property owned at that time by the individual, the spouse of the individual or a partnership, an interest in which is an interest in a family farm partnership of the individual or the individual's spouse that is (a) real property that was used by (i) the individual, ... in the course of carrying on the business of farming in Canada... [6] Paragraph 110(6)(2) then provides for specified deduction from gains realized on the disposition of "qualified farm property" as follows: 110.6(2) In computing the taxable income for a taxation year of an individual (other than a trust) who was resident in Canada throughout the year and who disposed of qualified farm property in the year or a preceding taxation year ending after 1984, there may be deducted such amount as the individual may claim not exceeding the least of ...etc. [7] The appellant submits that Beaubier J.T.C.C. erred in holding that the amounts received were not "dependent on the use of or production from property" within the meaning of paragraph 12(1)(g). The appellant also challenges Beaubier J.T.C.C.'s alternative conclusion that these amounts came within the exception embodied in paragraph 12(1)(g). Finally, the appellant submits that the Tax Court Judge also erred in holding that the property sold constituted "qualified farm property". [8] In excluding the application of paragraph 12(1)(g), Beaubier J.T.C.C. relied on the decision of Strayer J. (as he then was) in the Queen v. Mel-Bar Ranches Ltd. and in particular on the following passage: 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 fulfilment 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". [9] The jurisprudence alluded to by Strayer J. is Mowat v. M.N.R., Hoffman v. M.N.R. and Lackie v. The Queen. Both Mowat and Hoffman involved the one-time sale of standing timber. In Hoffman, Board Member Weldon expressed the view that the right to remove trees as a result of a single grant limited in time was to be distinguished from an ongoing "profit a` prendre" where one is granted the continuing right to enter and take away the product of profit of the soil. In Lackie, payments for an ongoing right to take away gravel from the land were held to come within 12(1)(g). In so holding, the Federal Court, Trial Division (Dube'J.) relying on the rule stated in Hoffman drew a distinction between a continuing licence to use land and "a single final transaction on transferring all the property" subject to the grant: I should think that if plaintiffs spouse had sold all the gravel, whether the amount agreed upon had been paid in one lump sum, or by instalments, that would be described as a transaction in the nature of capital (It is common ground that she was not in the business of selling gravel). But we are faced here with the sale of some gravel over a continuous period, the use of land and a profit a` prendre over more than five years. [10] In Mel-Bar, the Court was dealing with a one-time contract for the removal of timber in a specified area within a specified time for a consideration computed by reference to the timber actually removed. Relying on the above authorities, Strayer J. held that the payments under this contract were not "dependent upon the use of a production from property" within the meaning of paragraph 12(1)(g). [11] The appellant asks us to disregard Mel-Bar on the basis that the word "use" in paragraph 12(1)(g) necessarily encompasses a single or one time "use" of property having regard to the method of payment. The appellant concedes that a lump sum payment would take the transaction outside the scope of paragraph 12(1)(g). However, Strayer J. found as the Trial Judge did in this instance, that the amounts paid were consideration for the disposition of all specified timber within the designated area despite the manner in which the payments were computed. The case law has consistently excluded from the ambit of 12(1)(g) receipts arising from a one-time contract for the removal of timber; I see no basis for disturbing this line of authority. [12] That being so, it is not necessary to express any view with respect to Beaubier J.T.C.C.'s alternative ground for excluding the application of paragraph 12(1)(g), namely that the payments came within the exception expressed in the concluding words of paragraph 12(1)(g). [13] The appellant also attacks Beaubier J.T.C.C.'s subsequent conclusion to the effect that the right disposed of by the respondent and his siblings constitutes "qualified farm property". According to ss. 110.6(1), "qualified farm property" means "real property" that is used in the business of farming. In this respect, I have no doubt that a right to remove timber by severance is, at the time of the grant, an incorporeal hereditament in land which as such constitutes real property as was found by Beaubier J.T.C.C. [14] Nevertheless, the appellant contends that in order for "real property" to qualify under ss. 110.6(1), it must be real property actually used in farming, and that the particular property sold by the respondent namely the standing timber, was not being so used at the time of the grant. In my view, this argument calls for a distinction which ss. 110.6(1) does not embody. Based on ss. 110.6(1), it is sufficient that the property, timbered as it was, was being used for farming at the relevant time. The Tax Court Judge so found as a fact. As the standing timber was itself real property and as it was an integral part of the farm property, this seems sufficient to bring it within the ambit of ss. 110.6(1). [15] I would dismiss the appeal with costs. Original Appeal June 1998 HOME PAGE