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Date: 20030131 |
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Docket: 1999-508(IT)G |
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BETWEEN: |
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KAREN LUCILLE SMEDLEY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
_______________________________________________________________
Appeal heard together with the appeal of George Ian Smedley (1999-509(IT)G) on November 22, 2002 at Calgary, Alberta
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Before: The Honourable Judge Terrence O'Connor |
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Appearances: |
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Counsel for the Appellant: |
Deborah M. Hanly |
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Counsel for the Respondent: |
Eric Douglas |
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JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1994 taxation year is dismissed, with costs; however as mentioned in the attached Reasons for Judgment, it is recommended that a Remission Order under the Financial Administration Act be granted.
Signed at Ottawa, Canada this 31st day of January, 2003.
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"T. O'Connor" |
J.T.C.C.
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Date:20030131 |
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Docket: 1999-509(IT)G |
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BETWEEN: |
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GEORGE IAN SMEDLEY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent. |
_______________________________________________________________
Appeal heard together with the appeal of Karen Lucille Smedley (1999-508(IT)G) on November 22, 2002 at Calgary, Alberta
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Before: The Honourable Judge Terrence O'Connor |
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Appearances: |
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Counsel for the Appellant: |
Deborah M. Hanly |
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Counsel for the Respondent: |
Eric Douglas |
_______________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1994 taxation year is dismissed, with costs; however as mentioned in the attached Reasons for Judgment, it is recommended that a Remission Order under the Financial Administration Act be granted.
Signed at Ottawa, Canada this 31st day of January, 2003.
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"T. O'Connor" |
J.T.C.C.
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Date: 20030131 |
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Docket: 1999-508(IT)G |
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BETWEEN: |
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KAREN LUCILLE SMEDLEY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN,
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Respondent,
AND BETWEEN:
1999-509(IT)G
GEORGE IAN SMEDLEY, Appellant,
and
HER MAJESTY THE QUEEN,
Respondent. |
REASONS FOR JUDGMENT
O'Connor, J.T.C.C.
[1] These appeals were heard on common evidence on November 22, 2002 at Calgary, Alberta.
[2] The basic facts are as follows:
(a) In 1992 the Appellants were co-owners of approximately 135 acres of land ("Property") near Golden, British Columbia, part of which was forested.
(b) Neither Appellant had any experience with logging.
(c) In November, 1993 a major blow-down occurred in the area of the Property and numerous logs fell to the ground or were broken but still standing.
(d) The Appellants realizing that there was value in the logs contacted one, Larry Magnusson ("Larry"), a trusted neighbour, who was involved in the logging business. Larry recommended that the logs be sold to the local mill, namely, Evans Forest Products ("Evans").
(e) Larry agreed to log the property and the Appellants agreed and turned the project over to Larry. Larry contacted Hub Henderson ("Hub"), a log purchaser for Evans. Larry and Hub walked the Property and assessed the value of the wood. Hub agreed with Larry to purchase the logs/wood for Evans and told Larry to start logging. Larry commenced logging which involved moving the logs with the required equipment to a landing on the Property where the logs were processed, i.e. limbs were cut off and the logs were cut to the specifications set by Evans. This started just before Christmas of 1993.
(f) The Appellants trusted Larry absolutely and had had many other dealings with him in the past without any matters ever being committed to writing.
(g) Larry had advised the Appellants that the price Evans was prepared to pay was fair. The Appellants accepted this advice and agreed but nothing was committed to writing.
(h) The Appellants made arrangements to obtain a timber permit from the Province of British Columbia. This was received on or about February 14, 1994 and was required to enable the Appellants to obtain a timber hammer, a tool used in the identification of logs.
(i) After the timber permit or certificate was received an Evans representative drew-up a written contract, (Exhibit A-1), which the Appellants thought represented the essential terms of the verbal agreement worked out with Larry, Hub and the Appellants. George Smedley signed this written agreement without reading it. Karen Smedley did not sign and presumably was not asked to do so.
(j) One of the terms of the written contract was that the Appellants were to pay for the expenses of loading, unloading and trucking of the logs from the Property to Evans' mill and they did so, i.e., paid those expenses.
(k) Another term of the written contract was that Evans would only pay for the wood after it was weighed at Evans' mill thus determining the price and that in fact is what happened. The payments were made over a period of time as logs were delivered and weighed. The payments were made from March 17, 1994 to December 12, 1994 (Exhibit R-1).
(l) In filing her 1994 income tax return Karen Smedley reported proceeds of disposition of logs as $52,435.92 with a cost base of $5,251.35, claimed a capital gain of $47,184.57 and a taxable portion (75%) of $35,383.43. George Smedley claimed a capital gain of $48,184.57 and a taxable portion of $36,168.43.
(m) Both the Appellants sought to apply a portion of their respective capital gains deductions against the said taxable portions (and against certain other taxable capital gains not in dispute here) with the result that their taxable capital gains were reduced to nil.
(n) If the sale of the logs took place after February 22, 1994 the capital gains deductions were not available to the Appellants because of amendments made to subsections 110.6(1) and 110.6(3) of the Income Tax Act (the "Act") and because they did not prior to 1998 make the election contemplated in subsection 110.6(19) of the Act.
[3] The issue therefore is whether the actual sale or disposition of the logs occurred only after February 22, 1994 as contended by counsel for the Respondent or whether the said sale and disposition occurred on or before February 22, 1994, being the position taken by the Appellants because of their understanding that the initial verbal agreement between the Appellants, Larry and Hub, in their opinion, constituted the actual sale or disposition and the alleged verbal agreement occurred prior to February 22, 1994.
SUBMISSIONS OF COUNSEL FOR THE APPELLANT
[4] Counsel for the Appellants submits that the actual sale and disposition occurred prior to February 22, 1994 because of the verbal agreement discussed above which was entered into prior to that date.
[5] The following are extracts from the verbal submissions of said counsel:
Sir, just by way of summary and argument, I want to reiterate that the appellants' position is that at all relevant times they relied on a verbal agreement between themselves and Larry Magnusson and that Larry relied on a verbal agreement with Hub Henderson at all times up to and including February 22nd, 1994.
The appellant's evidence that he didn't read the agreement that he signed on February 25th and that the conditions for performance of his requirements under the contract was that he have the wood cut specifically for the Evans' mill and that he ensure that he had the necessary timber mark.
Once he had completed those two conditions that he had fulfilled his obligations. The truckers had been ordered and scheduled, everything that could have been done by Mr. Smedley had been done.
His evidence is that the timber both standing and fallen had been irrevocably altered to suit the Evans' manufacturing requirements which changed from month to month and varied from mill to mill. This preparation of the logs by Mr. Magnusson tailored the logs to an extent that the only means of obtaining full value for the timber was to ship them to the Evans' mill, no other mill would accept the timber for full value once it had been cut.
The act of detrimental reliance on the appellants' part through their agent Larry Magnusson rendered the timber in deliverable condition with or without the timber mark.
Obtaining the timber mark was a condition set by Hub Henderson, he told Larry Magnusson and the Smedleys that the timber would not be accepted without the timber mark, in fact, if Mr. Smedley had relied on the written contract he would have known that the timber could be transported without a timber mark, but any fines would be charged back to the vendor, that is if he and the other parties transacting this agreement had been relying on written agreements. The written agreement states that the title and the timber does not pass until it's officially scaled, however the Smedleys did not sign the agreement until after they had performed and satisfied all the conditions set by Hub Henderson and assented to by Larry Magnusson. The agreement was concluded before the contract was signed.
SUBMISSIONS OF COUNSEL FOR THE RESPONDENT
[6] I cite the following extracts from counsel's verbal submissions.
In my submission, the test that Your Honour must apply is that that is set out in the decision of Wardean Drilling and I will refer Your Honour to page 6 of that decision and I'm referring to paragraphs 22, 23, 24 and 26.
The Court finds:
"The decision in this appeal turns on the question as to when the rig and substructure were "acquired" by the respondent. The submission on behalf of the respondent was, as I understood it, that goods are acquired by a purchaser thereof when the vendor and the purchaser have entered into a binding and enforceable contract of sale and purchase.
The test and concept of a contract was that adopted by the Tax Appeal Board in the decision now under appeal.
With all deference I cannot accede to that view. In my opinion the proper test as to when property is acquired must relate to the title to the property in question or to the normal incidents of title, either actual or constructive, such as possession, use and risk."
Skipping down to paragraph 26:
"As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements. In my view the foregoing is the proper test to determine the acquisition of property described in Schedule B to the Income Tax Regulations."
Sir, in my submission, Your Honour, this is the test that we must apply to the facts in the Smedleys' situation. This test has been accepted and applied by the Federal Court of Appeal as recently as 1999. ...
[7] After reviewing certain authorities counsel continued as follows:
First, a disposition for capital gains purposes occurs when beneficial ownership is transferred. Secondly, the test for beneficial ownership is the date at which the party has acquired the indicia of ownership, those being risk, use and possession.
Third, the definition of disposition in section 54 of the Act specifically states that disposition does not include a change in legal ownership without a corresponding change in beneficial ownership, so in my submission this leaves us in a position where we have to determine a point in time at which beneficial ownership of the logs passed to Evans' Forest Products, that is when did possession, use and risk of the logs pass to Evans.
In my submission, this happened when the shipments of logs were officially scaled. The evidence is that prior to that time, the logs were on the land of the appellants'. They were being dealt with by Larry Magnusson who was a contractor hired by the appellants. They were being processed by Mr. Magnusson, again a contractor employed by the appellants and paid for by the appellants. Evans did not have care and control of those logs at that time, although they were being cut to specifications set out by Evans this was not being performed by employees of Evans. It wasn't being done by a contractor hired by Evans.
Mr. Magnusson was chosen by the Smedleys and paid by the Smedleys. Clearly it was the Smedleys that had care and control of those logs at that time or possession of the logs. It was the Smedleys that gave the go-ahead to Mr. Magnusson to process those logs in accordance with the instructions provided by Evans.
It was Mr. Magnusson who arranged for the shipping. Again, an agent, an independent contractor hired by the Smedleys.
It was only once the logs were scaled that Evans took possession of the logs and were free to do with those logs whatever they wished and this is clear from the fact that the Smedleys had to pay the wages of Mr. Magnusson and had to pay for the hauling and were responsible for any misbehaviour, if you will, by the truckers on the way to the scaling. That is all set out in paragraph 17 of the agreement, which is exhibit A-1.
Now, there has been talk about the oral agreement and Mr. Smedley testified in a very honest and forthright way that Mr. Magnusson handled the negotiations and the terms and that his understanding was that the written agreement was simply the detailing of the oral agreement and he seems to be trying to step away from that little bit now or at least my friend has a little bit in argument, however in my submission, clearly the written agreement does reflect Mr. Smedley's understanding. He knew he was going to pay for the trucking; he knew that he had to pay for Mr. Magnusson's wages and he ensured that that was done, he testified. So, whether he thought that he no longer had control of the logs or not does not change the legal test, risk, use and possession.
Possession, again, they were in the hands firstly of Mr. Magnusson, a contractor employed by the Smedleys. Then they were in the hands of the truckers who again were paid by the Smedleys.
Use, possession and use, Evans could not do anything with those logs until such time as they arrived at the weight scales. They didn't have the rights under the agreement, there is no evidence that they were coming onto the Smedleys' land and determining exactly how much wood they had and what they would do with it or anything to that effect and the risk, in my submission, again, is clearly spelt out both in the written contract and in the practical operation of this sale as testified to by Mr. Smedley.
Payment was only due upon the weighing of the logs at a designated weight scale, no money was owing by the purchaser to the vendor, to the Smedleys, until such time as delivery took place.
[8] Counsel for the Respondent stated further:
Now, I also would like to refer to the British Columbia Sale of Goods Act. These transactions did occur in British Columbia near Golden as the evidence related.
Sale of Goods Act and certain excerpts will be found at tab 5 of my authorities and I would refer Your Honour to section 25, which is about 5 or 6 pages in from the start of tab 5.
Now, that section provides that:
"...the goods remain at the seller's risk until the property in them is transferred to the buyer..."
unless a contrary intent appears.
Now, in my submission, there is no contrary intent in this case and as previously submitted, the property in the logs did not transfer until they were officially scaled and that indeed is the intent that is reflected in the contract.
First, it's reflected in the fact that it specifically says that title passes once the logs are weighed and secondly it's reflected by the fact that it is Smedleys and not Evans that is responsible for paying for the processing and the shipping of the logs and, again, everything about this arrangement is consistent with title not transferring until such time as the logs arrive at the weight station.
Now, it's clear that no logs were delivered to the weight station until after February 25, 1994, so in my submission it's clear that risk, use and possession of the timber all remained with the appellants until after the 22nd of February, 1994.
[9] Counsel for the Respondent also submitted the following:
Now, subsection 23, sub 1, provides that in the absence of a contrary intention, the intention of the parties as to be determined in accordance with the provisions of that section and subsection 23, sub 4, on the next page, then states that where the seller is bound to weigh the goods for the purpose of ascertaining the price, the property does not pass until that act is done, and in my submission -- and specifically if there is a sale of specific goods in a deliverable state and by deliverable state we are talking about the processing, they have to put the goods into a particular state, they have to process the logs according to those specifications of Evans, so we have a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price. The property does not pass until that act or thing is done and the buyer has notice of it, so in order to determine the price that the Smedleys are to be paid, in order to determine their revenue from these logs, those logs have to be weighed and it is based on that weight that the Smedleys receive money.
So once again we are brought to the conclusion that title of the goods passed as of the date of delivery to the weight scales.
So in my submission, it's clear that risk, use and possession of the timber both under common law and in accordance with the provisions of the B.C. Sale of Goods Act, which applies to this transaction, they point to the fact that risk, use and possession of the timber and title in the timber all remained with the appellants until after the 22nd of February of 1994. There was no delivery to the weight scales prior to that date.
I also point out that the test is set out in the cases I referred to as conjunctive, that is use, risk and possession must each have been transferred to Evans in order to argue that they had title to those goods.
ANALYSIS
[10] In my opinion the authorities and submissions of counsel for the Respondent are applicable. There was no disposition or sale until after February 22, 1994 as beneficial ownership did not pass and there was no possession use and risk in Evans until after the weighing of the wood and the determination of the price.
[11] I do not rely solely on the written contract: The method it was signed by George Smedley indicates that he did not read it and obviously did not consider it that important. Nor was it signed by Karen Smedley. However, as mentioned above certain of the terms of the written contract were in fact carried out by or under the authority of the Appellants, namely being responsible for the expenses of the truckers and the loaders and in all of the processes to the point of when the wood was scaled. An agreement to enter into a sale in the circumstances of this case is not the actual sale. In my opinion it is clear that there was no disposition until the wood was weighed at Evans' scales.
[12] For all the above reasons these appeals are dismissed, with costs.
[13] However, and this is most important, had the Appellants been properly advised they could have elected under section 110.6(19) of the Act in which event the treatment that they sought would have been allowed. Moreover, there was no evidence of any attempt to evade tax illegally, the good faith of the Appellants not having been questioned. Considering these circumstances it is strongly recommended that Remission Orders under the Financial Administration Act be granted to the Appellants.
Signed at Ottawa, Canada this 31st day of January 2003.
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"T. O'Connor" |
J.T.C.C.
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COURT FILE NO.: |
1999-508(IT)G and 1999-509(IT)G |
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STYLE OF CAUSE: |
Karen Lucille Smedley v. The Queen |
George Ian Smedley v. The Queen
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PLACE OF HEARING: |
Calgary, Alberta |
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DATE OF HEARING |
November 22, 2002 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge O'Connor |
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DATE OF JUDGMENT |
January 31, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Deborah M. Hanly |
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Counsel for the Respondent: |
Eric Douglas |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |