Tax Court of Canada Judgments

Date: 20021205

Docket: 2000-1849-IT-G, 2000-1850-IT-G,

2000-1851-IT-G, 2000-1852-IT-G

BETWEEN:

DENNIS WRIGHT, BETTY WRIGHT, WILLIAM WRIGHT, and

LAWRENCE WRIGHT,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Miller, J.

[1]              These are appeals of William Wright, Lorne Wright, Dennis Wright and Betty Wright, (the Appellants), individual partners of the partnership known as Wright Brothers Enterprises. The four appeals were heard on common evidence. The Wright family had held property in Manitoba since the 1950s and had farmed it until the early 1970s. In 1995 and 1996 they sold timber from the property. The issue is whether the payments for the timber is on capital account or income account. In addressing this issue, it is first necessary to determine whether the Appellants were engaged in an adventure in the nature of trade. If I find they were not engaged in an adventure in the nature of trade, and consequently the payments were on capital account, it is then necessary to determine if the payments are nonetheless captured as income, pursuant to the specific wording of paragraph 12(1)(g) of the Income Tax Act (the Act), as an amount received dependent on the production or use from property. I find that the payments received by the Appellants for the timber from their property were neither received in the course of an adventure in the nature of trade nor received in accordance with paragraph 12(1)(g) of the Act. The payments were on capital account.

Facts

[2]              William and Lawrence Wright's father, Wayne Wright farmed alfalfa seed in the United States as early as the mid 1920s. After the Second World War he sought new areas for growing his alfalfa. From a contact at a convention, he was made aware of property in the Wanless area of Manitoba. He travelled from his home in the United States to Manitoba to view the area and found lots of wild bees, which are integral in the pollination process for growing alfalfa seed. So, in the early 1950s, he acquired approximately 3,100 acres in Manitoba. For similar reasons he also acquired property in Fort Vermillion, Alberta. He also later acquired additional property in Manitoba bringing the total acreage to 5,700 acres.

[3]              The Appellant, William Wright, first was involved in the Manitoba property in the summer of 1954. He worked his summers there for a number of years, married a local Manitoban and lived in Manitoba permanently until 1968.

[4]              William Wright described the property as consisting of a lot of bush; indeed, of the approximately 5,700 acres eventually held by the partnership, only 430 were arable. In the early years the Wrights had to break the land. They did not burn the brush but piled the logs, primarily poplar in windrows, thus providing nesting places for the bees. They would also leave strips of timber between the fields to prevent cross-pollination.

[5]              Some timber was sold in those early years to help clear the land, but nothing of significance. The spruce and pine on the property were of no benefit to the Wrights, only the poplar. William Wright indicated there was always someone wanting to get the timber but until 1995 he remained uninterested. As he put it, he did not want timber people in there cutting roads and everything. The isolation of the property was its attraction, as it meant the bees would remain plentiful.

[6]              In 1968, the father, Wayne Wright, was killed in an airplane accident. William Wright was required to return to Arizona to farm the Arizona property. The Manitoba property was not faring well at that time due to a virus causing a decimation of the bees. Also, the price of alfalfa had been dropping. By 1975, the four partners decided it was foolish to carry on with the farm in Manitoba given what they were getting out of it, so they ceased farming. They sold the machinery and simply hung on to the land, paying the annual taxes for the next 20 years. Apart from $300 a year from someone taking hay off the property, and $100 a year for someone to pasture a horse, the land remained idle producing no revenue.

[7]              In 1994, William Wright was approached by Bob Anderson who was looking to take the timber off the property. William Wright knew Anderson as a reputable sort and decided to "try it out" on a piece of property (section 35), which was somewhat separated from the rest of the property. As William Wright indicated in the February 16, 1995, letter[1] to Mr. Anderson:

... This parcel would be on a trial basis with additional parcels added in the future if this arrangement works out.

[8]              In the same correspondence William Wright set out the prices per cord for pulp, saw logs and oversize. Mr. Anderson's response of February 20, 1995,[2] established the following:

                  -              the cutting would start in March;

                  -              Repap pays bi-weekly and Anderson would pay Wright once Repap paid him;

                  -              Department of National Resources would inspect the property bi-weekly;

                  -              Anderson would insure the property was left to government standards to insure the prospect of continued work with Wright;

                  -              it will take two to three months to complete the cutting; and

                  -              the prices were agreed.

[9]              William Wright indicated at trial he believed section 35 was ideal for clearing for farming. Dennis Wright made no mention of the possibility of farming section 35 in his examination for discovery. William Wright further testified he had been told by forestry officials that trees on his property were dying and could prove a fire hazard. In discussions with Anderson he told him he wanted to leave the poplar, as they were good for the bees. There was no discussion of reforestation.

[10]            William Wright was happy with the result of the cutting on section 35 and on December 1995 agreed to allow Anderson to cut on section 20, a section Wright described as one his father always felt would be good for farming alfalfa. In a letter dated December 1, 1995,[3] William Wright added poplar to pulp wood, saw logs and oversize and also stated:

... If per chance the price for lumber to REPAP should go up we feel it would be fair to split any ups.

Dennis made no mention of this in his examination for discovery. William Wright acknowledged that he approached the timber operation the same way as the farming business in that respect. By May 1996, William Wright and Anderson had drawn up a five-year schedule for taking all usable trees off the Wrights' property. In 1995 the Wrights received $61,019 for the timber and in 1996 they received $254,090 (only $7,000 of which was for the poplar). In answer to why he did not sell timber to others, William Wright indicated that as an absentee owner it would be too difficult to monitor more than one.

[11]            The five-year plan to cut the entire property, according to William Wright, was staged to go from one area to the next, not moving on until an area was completely cleared up. He did not want Anderson to pick and choose the cream of the timber. He believed the staging was based more on convenience of access. Dennis Wright's take on the staging was that Anderson rated the property to cut the good stuff first. The cutting took place pretty much as planned though there were some disruptions due to mill strikes or uneven demands.

[12]            The Wrights had no plans in 1995 and 1996 to farm the property and still today have no definite plans, although William Wright indicated that the bees are starting to come back. According to William Wright they move in 30 or 40 year cycles. The Wrights are also not looking to sell the property, as there is little market for such property at this time.

Adventure in the nature of trade

[13]            Turning to the first issue of whether the Wrights' activities constitute an adventure in the nature of trade, I asked the parties to submit written arguments on this issue as it was clear the Appellants had not contemplated the Respondent raising this line of argument. Only the Appellants' counsel responded to my request. She argued that an adventure in the nature of trade refers to a transaction that is of the same kind and carried on in the same manner as the transaction of an ordinary trader in property of the same kind. The relevant criteria, the Appellants suggest, are the intention at the time of acquisition of property, the nature of the goods and the manner of carrying out the transactions.

[14]            With respect to the intention, the Appellants argue that the Wrights' intention, at the time of acquiring the property, was to farm, which they did for 20 plus years. Although they stopped for a considerable period of time, that alone is not sufficient to constitute an adventure in the nature of trade. This must be in conjunction with an activity that constitutes trading. The Appellants relied on the Exchequer Court case of McGuire v. M.N.R.,[4] in which a farmer's subdivision of property into lots and subsequent sale of 20 lots was not sufficient to constitute a trading activity. The man was simply selling his own property.

[15]            With respect to the nature of the assets, the Appellants' position is that timber on farmland cannot be characterized as assets of an exclusively trading nature. Finally, on the issue of the manner in which the transaction was carried out, the Appellants state the Appellants' arrangements are dissimilar from those of a trading transaction because:

                  (a)           the Appellants did not advertise or otherwise seek out offers for their timber;

                  (b)          there is little if any negotiation of the price;

                  (c)           the Appellants did not participate in the activity of cutting or transport of the timber;

                  (d)          the Appellants did not seek competing bids from other contractors;

                  (e)           the Appellants did not seek to maximize return by permitting other contractors to cut timber on the property; and

                  (f)           the Appellants have not operated any logging business in Wanless or elsewhere.

[16]            The Respondent's position was that the elements of an adventure in the nature of trade did exist in that:

                  (i)            the Wrights' sole purpose was to earn profit from the timber, and one need only look at the percentage of the property that was not arable to support that position; the character of the property changed from farming property to timber property;

                  (ii)           the arrangement called for a logging operation, not simply clear cutting;

                  (iii)          the property was not left for cultivation, that is the logging had nothing to do with farming; and

                  (iv)         splitting of the "ups" was indicative of a business.

[17]            Further, the Respondent relies on Orlando v. M.N.R.[5] in which a disposition of topsoil was held to constitute an adventure in the nature of trade. The test considered in that case was summed up as follows:[6]

                When the whole course of conduct of a taxpayer who had an investment in a farm indicates that in dealing with the topsoil of his property he is disposing of it in a way capable of producing profits and with that object in view and that the transactions are of the same kind and carried on in the same way as those of ordinary trading in that commodity, I am of opinion that he is engaged in an adventure or concern in the nature of a trade or in a scheme of profit making....

Analysis

[18]            The issue of whether cutting timber on farm property constitutes an adventure in the nature of trade has not been extensively considered in the cases reviewed, although it was addressed by Kempo J. in the Tax Court of Canada judgment in Mel-Bar Ranches Ltd. v. The Queen[7] where she stated:[8]

                The case at Bar lacks the preponderance of evidence required to support a finding that the Appellant was dealing with its timber as stock-in-trade, or as a trader, or in the same way as a dealer in timber resources engaged in trading activities would have dealt with the property. ... It was logged in 1979/1980 in a one-time type of operation when such was necessary in order to better improve its ranch land in conjunction with, and for the purpose of, enhancing the efficiency of its proposed cattle-raising operation.

She then went on to deal with the application of paragraph 12(1)(g) of the Act. On appeal[9] Strayer J. stated the following:[10]

                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 more difficult issue is as to whether this payment falls within paragraph 12(1)(g) of the Income Tax Act ...

[19]            Similarly in Ray v. The Queen,[11] Bowman J. (as he then was) decided the issue with no mention of paragraph 12(1)(g) but just the discussion of the capital versus income. In that case the disposition of the timber was to the Appellant's son's logging company. Bowman J. stated:[12]

                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.

...

                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.

[20]            Bearing in mind the factors of intention, the nature of goods and the manner of carrying out the transactions, I will review the indices both for and against the finding of an adventure in the nature of trade. First, the indices of trading shown by the Wrights that would suggest an adventure in the nature of trade, and consequently income, are:

                  -              at the time of the contract with Anderson the property was not being used for farming, with no immediate plans to do so;

                  -              only 430 of the 5,700 acres were suitable for farming;

                  -              more than one contract was negotiated;

                  -              a term of the more significant contract provided for the splitting of the "ups", as William Wright suggested he approached the timber business the same way as the farming business;

                  -              the Wrights did not seek the cutting contract for farming purposes;

                  -              the reasons they did not contract with other logging companies was it would be too difficult to monitor as absentee owners; and

                  -              the lengthy nature of the contract.

[21]            The following factors weigh against the finding of an adventure in the nature of trade and therefore point to capital:

                  -              the property was acquired with the intention of farming only;

                  -              the Wrights held the property for over 40 years and never looked favourably on any overtures for removing the timber until Mr. Anderson's approach;

                  -              the Wrights did not seek competitive bids;

                  -              no extensive contracts were negotiated; the terms were simple and concise and were set out, apart from the test run, only once;

                  -              the Wrights sold all their timber;

                  -              once it was taken off, that was the end of the arrangement;

                  -              a motivating factor was the state of the trees and to a lesser extent clearing the land;

                  -              though there were no concrete plans William Wright still saw the property as farm property;

                  -              the Wrights considered the spruce and pine to be impediments to the farming of alfalfa;

                  -              the nature of the property itself, the trees, were acquired as part of the land, not as inventory;

                  -              no steps were taken to market the timber or make the timber more marketable;

                  -              factors suggested in the government's IT373 R2 to indicate a commercial woodlot are not present here, for example:

(i)             no forestry management plan;

(ii)            no significant effort of the taxpayer to implement the plan;

(iii)           no more time was spent on the woodlot compared to time spent on other activities;

(iv)           the taxpayer had no qualifications for government assistance;

(v)            the expenditures claimed were not indicative of a woodlot business;

(vi)           the Wrights had no woodlot experience; and

(vii)          the Wrights were not members in any woodlot organization.

When comparing the Wrights' actions to that of a commercial woodlot operator, I am satisfied that on balance the Wrights did not display sufficient characteristics of a trader in timber to find they are involved in an adventure in the nature of trade. They were simply selling part of their property.

Paragraph 12(1)(g)

[22]            It is now necessary to consider that, notwithstanding the disposition of timber was not part of an adventure in the nature of trade, whether paragraph 12(1)(g) comes into play to capture the proceeds of disposition of the timber as income.

[23]            The Appellants rely on two groups of cases: the first group having been decided in 1965 and earlier (Mouat v. M.N.R.,[13] John Hornick v. M.N.R.,[14]Israel Hoffman v. M.N.R.,[15]and Morrison v. M.N.R.);[16] the second group having been decided since 1989 (Mel-Bar Ranches Ltd. v. The Queen,[17] Jens Larsen v. The Queen,[18] and Ray v. The Queen).[19] The Appellants maintain that the earlier cases were decided on the basis of what did or did not constitute a profit à prendre, and that the key element required was an ongoing activity. As it was indicated in Mouat:[20] "... timber, which is fructus naturales, may become fructus industriales if it is exploited in such a way as to provide a return, year after year, from cutting and lumbering." Other factors considered in Mouat were that the appellant was not dependent on the sale of timber and that the trees were not planted in anticipation of a crop. Similarly, in Hoffman, the Court found the predecessor to paragraph 12(1)(g) is not intended to apply to one sweeping timber transaction.

[24]            The later group of cases have approved the earlier cases, reinforcing the requirement for an ongoing yearly activity. In the Larsen case, the motivation for cutting the timber was not for farming purposes but to provide funds to buy out one of the family members. Therefore it appears to take away any requirement that the cutting of the timber be related to farming. The Appellants stress Justice Strayer's words in the Federal Court of Appeal decision in Larsen:[21]

... 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.

[25]            The Appellants conclude that the Wrights' situation falls squarely within these principles. Their land was acquired for farming. No timber was cut for 40 years after the acquisition. The Wrights always had it in mind the property was for farming. They ultimately sold for three reasons; to cover the taxes, to get rid of diseased trees and to clear the farmland. The Wrights looked on the pine and spruce as an impediment to farming. The sale was a one-time deal, although it took a few years simply due to the size of the Wrights' holdings. There was no reforestation or plans for ongoing harvesting - once September was gone that was the end of it.

[26]            The Respondent sees the Wrights' situation quite differently from the cases relied upon by the Appellants. The Respondent maintains there was an ongoing activity - the cutting did take place over a number of years. There was more than one contract. Further, unlike Larsen for example, where the ranch and operation continued after the cutting, the Wrights had not farmed the property for over 20 years and had no concrete plans to ever do so. The sole purpose must be to make a profit from the 75 per cent of their large tract of land that was unsuitable for farming. This is not a matter of a farmer requesting the assistance of a logging company to clear some land. This was a logging company seeking out the Wrights to get the timber. The Respondent argues the cutting had nothing to do with farming.

[27]            The Respondent suggests this situation is more properly addressed by referring to the gravel case of Lackie v. The Queen.[22]

Analysis

[28]            Although there are some factors which weigh against the Wrights in determining the nature of the payments received from Anderson, I am satisfied that on balance the transaction with Anderson was not an ongoing, continuous right to use the land but was more of a one-time sale of all the timber. This is not a profit à prendre. There are some distinctions between the Wrights' situation and the timber cases cited by the Appellants, but there are sufficient key similarities to find the payments were on capital account. I refer to the Respondent's gravel case of Lackie and Justice Dube's statement:[23]

... But, if what is sold relates to the use of land, including excavation for gravel, that is a profit à prendre, thus taxable income, whether or not the sale is considered to be a 'business' ... . Profit à prendre implies a continuing licence, or continuous right to use land; a single final transaction transferring all the property (i.e. gravel) would not be a profit à prendre.

Here, although extensive due to the amount of land owned, I find there was a single final transaction transferring all the timber. That is all I need to find for the payments to fall outside the scope of paragraph 12(1)(g).

[29]            The factors I have weighed in reaching this conclusion are as follows:

                  (i)            The property was acquired as farm property, and although idle for a lengthy period of time it was not used during that period for any other purpose. The character of the property had not changed in William Wright's mind to anything other than farm property.

                  (ii)           The motivation for selling the timber was multi-faceted, and was not primarily for the purpose of clearing land for farming. The Federal Court of Appeal in Larsen have emphasized the one time nature of the contract much more so than the motivation for entering the contract. As Noël J. indicated: "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;".[24]

                  (iii)          The Appellants had two contracts with Anderson, but the first was a test run only. There would have been no further contracts had the property not been left in a state acceptable to the Wrights. I therefore consider the arrangement with Anderson as a one time arrangement for the removal of all the Wrights' usable timber.

                  (iv)         The fact the cutting was over a period of years is due only to the size of the Wrights' property and the capability of Anderson in getting at it. It does not reflect the type of continuous activity required by the cases. It required only the one contract for the sale of all the timber.

[30]            The case law appears to have developed with respect to the cutting of timber on farmland to the point that, to fall outside the scope of paragraph 12(1)(g) requires only that the property be initially acquired for farming, and that the sale of timber is a one time sale of all the timber on the property. If those two elements exist, then notwithstanding the motivation for the sale, the extent of the property, or even the current state of the farming operation, there is no profit à prendre, no application of paragraph 12(1)(g).

[31]            I therefore allow the appeals and refer the matter back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition from the cutting of the timber are on capital account. These cases having been heard on common evidence, only one set of costs is allowed to the Appellants.

Signed at Ottawa, Canada, this 5th day of December, 2002.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2000-1849(IT)G, 2000-1850(IT)G,

2000-1851(IT)G and 2000-1852(IT)I

STYLE OF CAUSE:                                               De nnis Wright, Betty Wright,

William Wright and Lawrence Wright and Her Majesty the Queen

PLACE OF HEARING:                                         Winnipeg, Manitoba

DATE OF HEARING:                                           October 2, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge Campbell J. Miller

DATE OF JUDGMENT:                                       December 5, 2002

APPEARANCES:

Counsel for the Appellant: Barbara Shields

Counsel for the Respondent:              Lyle Bouvier

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Barbara Shields

Firm:                  Aikins, MacAulay & Thoraldson

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-1849(IT)G

BETWEEN:

DENNIS WRIGHT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence with the appeals of Betty Wright

(2000-1850(IT)G), William Wright (2000-1851(IT)G) and Lawrence Wright

(2000-1852(IT)G) on October 2, 2002 at Winnipeg, Manitoba by

the Honourable Judge Campbell J. Miller

Appearances

Counsel for the Appellant: Barbara Shields

Counsel for the Respondent:              Lyle Bouvier

JUDGMENT

                The appeals from reassessments of tax made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition from the cutting of the timber are on capital account. These cases having been heard on common evidence, only one set of costs is allowed to the Appellant.

Signed at Ottawa, Canada, this 5th day of December, 2002.

"Campbell J. Miller"

J.T.C.C.

2000-1850(IT)G

BETWEEN:

BETTY WRIGHT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on on common evidence with the appeals of Dennis Wright

(2000-1849(IT)G), William Wright (2000-1851(IT)G) and Lawrence Wright

(2000-1852(IT)G) October 2, 2002 at Winnipeg, Manitoba by

the Honourable Judge Campbell J. Miller

Appearances

Counsel for the Appellant: Barbara Shields

Counsel for the Respondent:              Lyle Bouvier

JUDGMENT

                The appeals from reassessments of tax made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition from the cutting of the timber are on capital account. These cases having been heard on common evidence, only one set of costs is allowed to the Appellant.

Signed at Ottawa, Canada, this 5th day of December, 2002.

"Campbell J. Miller"

J.T.C.C.

2000-1851(IT)G

BETWEEN:

WILLIAM W. WRIGHT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on on common evidence with the appeals of Dennis Wright

(2000-1849(IT)G), Betty Wright (2000-1850(IT)G) and Lawrence Wright

(2000-1852(IT)G) October 2, 2002 at Winnipeg, Manitoba, by

the Honourable Judge Campbell J. Miller

Appearances

Counsel for the Appellant: Barbara Shields

JUDGMENT

                The appeals from reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition from the cutting of the timber are on capital account. These cases having been heard on common evidence, only one set of costs is allowed to the Appellant.

Signed at Ottawa, Canada, this 5th day of December, 2002.

"Campbell J. Miller"

J.T.C.C.

2000-1852(IT)G

BETWEEN:

LAWRENCE WRIGHT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeals of Dennis Wright

(2000-1849(IT)G), Betty Wright (2000-1850(IT)G) and William Wright

(2000-1851(IT)G) October 2, 2002 at Winnipeg, Manitoba, by

the Honourable Judge Campbell J. Miller

Appearances

Counsel for the Appellant: Barbara Shields

JUDGMENT

                The appeals from reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition from the cutting of the timber are on capital account. These cases having been heard on common evidence, only one set of costs is allowed to the Appellant.

Signed at Ottawa, Canada, this 5th day of December, 2002.

J.T.C.C.