Date: 20000321

Docket: 98-906-IT-G

BETWEEN:

ESTATE OF THE LATE CAMILLE DESROSIERS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

P.R. Dussault, J.T.C.C.

[1] This is an appeal from an assessment for the 1995 taxation year of the late Camille Desrosiers. Mr. Desrosiers died in 1995. On his death, he left certain woodlots in respect of which he is deemed to have realized a capital gain of $236,019.00 and a taxable capital gain of $177,014.25. A capital gains deduction in the amount of $158,160.00 was claimed under section 110.6 of the Income Tax Act (the Act). This deduction was denied by the Minister of National Revenue (the Minister) on the ground that the woodlots in question did not constitute qualified farm property within the meaning of the definition in subsection 110.6(1) of the Act. Further, the Minister added to Mr. Desrosiers's income for his 1995 taxation year an amount of $49,500.00 as recaptured depreciation.

[2] Counsel for the respondent acknowledged that the amount of $49,500.00 added to Mr. Desrosiers's income should be reduced by $46,665.00.

[3] The sole question at issue is therefore whether the woodlots meet the definition of "qualified farm property" found in subsection 110.6(1) of the Act. The only point in dispute relates to paragraph 110.6(1)(a), which defines "qualified farm property" as being, first of all, "real property that was used . . . in the course of carrying on the business of farming in Canada". The respondent argues that the properties were used in the course of carrying on a logging operation rather than a farming business.

[4] The Minister based the assessment made for Camille Desrosiers's 1995 taxation year on the facts set out in subparagraphs (a) to (t) of paragraph 9 of the Reply to the Notice of Appeal, which read as follows:

[TRANSLATION]

(a) Camille Desrosiers died on October 20, 1995.

(b) Mr. Desrosiers was the owner of woodlots, including some that were purchased prior to 1987; the deemed capital gain, on the death of Mr. Desrosiers, with respect to all of these lots is as follows:

		PD(FMV)	ACB	CG
Properties acquired prior to 1987	8	$147,034	$40,050	$106,984
Properties acquired after 1986	6	$320,081	$191,046	$129,035
TOTAL	14	$467,115	$231,096	$236,019

(c) To the time of his death, Mr. Desrosiers had capitalized the woodlots that he owned as timber limits.

(d) Mr. Desrosiers had thus claimed capital cost allowance for these timber limits in accordance with paragraph 1100(1)(e) and Schedule VI of the Income Tax Regulations, specifically, $10,000 in 1992, $8,000 in 1993 and $31,500 in 1994, which claims had been allowed by the Minister of National Revenue.

(e) Mr. Desrosiers had been operating woodlots for some fifteen years and purchased his last lot in 1991. He carried on forest management, harvesting and reforestation on these lots.

(f) The work done on Mr. Desrosiers's woodlots was carried out under the supervision of forestry technicians or engineers.

(g) Mr. Desrosiers had two skidders that he operated himself with two employees.

(h) The woodlots owned by Mr. Desrosiers were mature stands.

(i) Until his death, Mr. Desrosiers had always declared his income as being from logging operations and not as farming income.

(j) Each year, Mr. Desrosiers's business income consisted mainly of income from the harvesting of timber.

(k) Each year, the main expenses claimed by Mr. Desrosiers were related to the use of the skidders.

(l) In 1995, Camille Desrosiers's business income prior to his death also was derived essentially from the sale of timber ($60,646), to which was added $8,995 in grants.

(m) Mr. Desrosiers was identified or identified himself as a forestry worker and not as a farmer when purchasing woodlots, in bank loan documents, in his applications for grants, and in the forest management agreements that he signed.

(n) While he was alive, Mr. Desrosiers was president of the Syndicat des producteurs de bois du Bas-St-Laurent.

(o) Mr. Desrosiers won awards from the Mérite forestier québécois in 1993.

(p) For a number of years, Mr. Desrosiers was involved in various programs sponsored by the federal or the provincial government (the Eastern Quebec Forestry Development Program, in particular) aimed at helping wood producers.

(q) For 1994 and 1995, the appellant paid provincial tax to Revenu Quebec on his logging operations; a deduction with respect thereto was claimed from the Minister of National Revenue for the 1994 and 1995 taxation years under subsection 127(1) of the Income Tax Act.

(r) At all times relevant to the instant case, the woodlots at issue were never used in the course of carrying on the business of farming, but rather were used in logging operations.

(s) Accordingly, the Minister of National Revenue denied the capital gains deduction of $158,160 claimed by the appellant for the 1995 taxation year on the taxable capital gain of $177,014.25 ($236,019 x 75%) realized on the deemed disposition of the woodlots on the death of Camille Desrosiers.

(t) Recaptured depreciation of $49,500 arising from the deemed disposition of the woodlots on which a capital cost allowance had previously been claimed by Camille Desrosiers, was also included in computing his income for the 1995 taxation year pursuant to section 13 of the Income Tax Act.

[5] Frédéric Morneau, a forestry technician, and Jean-Baptiste Desrosiers, brother of the deceased, testified for the appellant. Isabelle Guévin, a Revenue Canada auditor at the time in question, testified for the respondent.

[6] Mr. Morneau has worked for the Société des ressources de la Métis (the Société) since 1989. The Société is a forestry resource management organization for the owners of private woodlots. He took over Camille Desrosiers's file in 1990; Mr. Desrosiers had, however, been doing business with the Société since 1987.

[7] Between 1990 and 1995, Mr. Morneau dealt with around 200 owners involved in forest management activities, including thinning, reforestation and planting on their own woodlots.

[8] According to Mr. Morneau, Camille Desrosiers was one of the biggest owners with 28 to 31 lots in the municipality of Sainte-Jeanne-d’Arc, Quebec. The total area of the woodlots owned by Camille Desrosiers was 1,200 hectares.

[9] Mr. Morneau testified that Camille Desrosiers did more work than most owners and he submitted in evidence a report prepared at the request of the estate, which portrays the forest management operations carried out between 1987 and 1996 under the Société's supervision. The summary at the end of the report is as follows:

[TRANSLATION]

Summary

Harvesting: 43.7 ha

Thinning: 23.1 ha

Land preparation: 55.3 ha

Reforestation: 75.2 ha

Plantation maintenance: 37.5 ha

Bush clearing: 9.4 ha

Cutting with regeneration protection: 11.7 ha

Forest roads: 5.8 ha

Of the total 261.7 hectares on which work was carried out under forestry programs, only 43.7 hectares were harvested. The remaining forestry operations involved reforestation, maintenance of plantations and tending. Harvesting represented only 17% . . . which meant that the former owner was a forestry producer who was very much involved in the management of his woodlots, not to mention his involvement in the marketing aspect.

[10] According to Mr. Morneau the trees in the woodlots acquired by Mr. Desrosiers were almost mature in 1990.

[11] Mr. Morneau described his work as consisting mainly of directing forestry operations in accordance with a forest management plan based on the inventory taken on the lots concerned. Mr. Morneau stated that, following a meeting with Camille Desrosiers in the spring to prepare the work to be done during the year, he visited the sites every week or every second week since all of the work being done was under his supervision.

[12] Mr. Morneau testified in detail about, among other things, thinning operations, land preparation work for reforestation or land preparation for former wild land, bush clearing, reforestation, maintenance of plantations using chemical treatments, and the roadwork required to ensure access to the lots. In particular, Mr. Morneau explained that thinning operations do involve harvesting, up to 35% of the trees in the case of commercial thinning, but that the primary purpose of this work is to improve the quality of stands by removing stems that interfere with the best growth.

[13] Mr. Morneau also explained that Mr. Desrosiers never purchased any cutting rights, that all of the trees harvested came from his own lots and that they were mature trees, except in the case of timber from thinning operations. Harvesting was done in accordance with the forest management plan on areas averaging about two hectares in size. Planting was always done the following spring. I should point out here that Mr. Morneau's report indicates that more than 166,000 trees were planted during the period from 1987 to 1995. I am excluding the planting done in 1996, that is, after Camille Desrosiers's death.

[14] If we examine Mr. Morneau's report in detail in terms of the land treated as "qualified farm property" in Mr. Desrosiers's tax return for 1995 (Exhibit I-7), it is apparent that work was carried out on the vast majority of the land in question between 1987 and 1995.

[15] According to Mr. Morneau all of the work done met the criteria set out in the federal and provincial forest management programs and thus most of it was subsidized.

[16] Under cross-examination, Mr. Morneau explained that producers received federal grants under the Eastern Quebec Forestry Development Program (the Program) (Exhibit A-1). Under this program, management or supervision was assigned to the Syndicat des producteurs de bois (the Syndicat), which in turn assigned it to the Société. The Syndicat is a timber marketing organization that directs producers to buyers.

[17] Mr. Morneau explained that the grants are given out if producers submit a forest management plan, the costs of which are covered by the Program. According to Mr. Morneau, the management plan authorizes a certain type of harvesting and also entitles the producer to an 85% refund of property taxes.

[18] During cross-examination, Mr. Morneau stated that, in 1990, the majority of the lots owned by Mr. Desrosiers contained mature or almost mature growth and that the agricultural area actually represented only a small part of the lots, specifically, 10%, or even somewhat less, of the total area.

[19] With respect to his report showing that Mr. Desrosiers harvested a total of 43.7 hectares, Mr. Morneau pointed out that this obviously does not reflect the quantity of timber cut, that thinning cuts were also carried out, but that these yielded less wood. Mr. Morneau further admitted that it is possible that some of the land was counted twice in the work summary presented in his report because planting is done on land that has been prepared. I would simply comment at this point that, while it may be the same land, it is still distinct types of work that was done on it.

[20] In Mr. Morneau's opinion, Mr. Desrosiers was truly involved in silviculture, which is not the case for everyone. In Mr. Morneau's view, the difference lies in the reason for the harvesting. He also emphasized that those who overcut and who harvested on a large scale were not eligible for the Program.

[21] Jean-Baptiste Desrosiers, one of the deceased's brothers, also testified. Jean-Baptiste Desrosiers stressed the fact that his brother Camille's philosophy had always been to have a beautiful forest for the future and thus to protect it and preserve it. In his opinion, his brother Camille did a great deal of management and planting so that all of the harvested areas and the former wild land had been reforested. Jean-Baptiste Desrosiers who, with his brothers and sisters, inherited the land on his brother Camille's death, stated that he was continuing the forestry activities following the same philosophy and that he had systematically refused to sell to individuals or corporations whose sole focus was harvesting.

[22] Jean-Baptiste Desrosiers testified that his brother had acquired the land in the 1960s, in the 1980s and even in the 1990s, and that he had never sold any of it. He also mentioned that his brother had been president of the Syndicat des producteurs de bois du Bas-St-Laurent since 1990 and that he received a second prize in forest management in 1992.

[23] As for his brother Camille's use of skidders, Jean-Baptiste Desrosiers testified that it was necessary to do thinning and also to cut mature trees because otherwise the timber would be lost. He also mentioned that the skidders were used in watering operations.

[24] Jean-Baptiste Desrosiers acknowledged that his brother Camille is described as a forestry worker in the declaration of transmission on death and that, while he was alive, he always declared his income as a forestry producer and not as a farmer.

[25] Isabelle Guévin, a Revenue Canada auditor in 1996 and 1997, reviewed all of Camille Desrosiers's operations. After obtaining the relevant documents from the estate, she analysed the purchase of the lots, their forestry potential and the logging operations for the previous years.

[26] Ms. Guévin focused first on this point and analysed Mr. Desrosiers’s tax returns from 1987 to 1994, as well as that for 1995, the year in which he died. She noted that it was not until 1995 that the income was declared as farm income and not as income from logging as had previously been the case. In reality, his income in all of the years prior to 1995 had come from the sale of timber and from grants.

[27] Exhibit I-9 is a summary of income from 1989 to 1995, except for 1991 for which data are not available. It shows the following sales of timber and grants for those years:

Year	Sale of timber	Grants
1989	$25,127	0
1990	$17,212	$3,356
1991	N.A.	N.A.
1992	$41,890	$4,430
1993	$15,305	$11,134
1994	$65,790	$19,136
1995	$60,646	$8,995

[28] Ms. Guévin testified that, among the other items considered, the expenses claimed included mainly employee wages and expenses related to the machinery used, particularly, two skidders. The income was always declared using accrual accounting, which is, in her view, a method seldom used to account for farm income. Ms. Guévin further noted that Camille Desrosiers had also claimed a depletion allowance with respect to his woodlots in 1993 and 1994.

[29] Using the forest management plans and other documents supplied by the estate, Ms. Guévin also reviewed the composition of the lots. She concluded that the majority of the lots contained mature growth. Exhibit I-10 submitted in evidence shows the location of the lots and the results of the study on which this conclusion was based.

[30] Lastly, Ms. Guévin pointed out that Camille Desrosiers had always described himself as a logger or forestry worker in the contracts relating to the purchase of his land. On one occasion only did he describe himself as a farmer, and on one other occasion he called himself a businessman (see Exhibit I-11).

[31] During cross-examination, Ms. Guévin appeared to agree that Camille Desrosiers was involved in silviculture. However, she characterized this activity as having been logging rather than agriculture. What came out of her testimony is mainly the fact that the trees on the lots actually purchased by Mr. Desrosiers since the early 1980s were already mature and that the main activity therefore consisted of harvesting the timber rather than planting on wild land. On this point, Ms. Guévin mentioned that the income from harvesting had increased year after year and that it was much higher than the grants received.

[32] However, Ms. Guévin did acknowledge that the harvesting, excluding thinning cuts, represented only 17% of the work done and that the area harvested was only a small percentage of the total land owned by Mr. Desrosiers.

[33] According to Ms. Guévin, it was the review of all the elements that led her to the conclusion that this was a logging rather than a farming operation. In addition to the elements already mentioned, she reiterated that she took into consideration the expenses claimed, which related mainly to the use of the skidders, the claim of a depletion allowance, Mr. Desrosiers's designation as a forestry worker and, lastly, the fact that he declared his income as business income and not as income from farming.

Appellant's position

[34] Counsel for the appellant began by reminding the Court of Mr. Morneau's conclusion in his report that Camille Desrosiers was "a forestry producer who was very much involved in the management of his woodlots". He further stated that, according to Mr. Morneau's testimony, among the some 200 owners with whom he dealt, Mr. Desrosiers was one of those who did the most management. According to counsel for the appellant, this activity is exactly what is meant by silviculture. In Le Petit Robert, dictionnaire alphabétique et analogique de la langue française, "sylviculture" (silviculture) is defined as follows:

Sylviculture n.f. (1935; de sylvi-, de silva “ forêt ”, et culture). Exploitation rationnelle des arbres forestiers (conservation, entretien, régénération, reboisement, etc.)

[TRANSLATION]

Silviculture n. (1935; from sylvi, sylva "forest", and culture). Rational exploitation of forest trees (conservation, maintenance, regeneration, reforestation, etc.).

[35] Counsel for the appellant also stressed the fact that Mr. Desrosiers had acquired his lots over a number of years and that he had never sold any of them. Nor had he ever purchased or granted cutting rights. Furthermore, he had never obtained any timber limits.

[36] In addition, the areas harvested were insignificant compared to the total amount of land owned and these operations always took place on only very small areas at a time.

[37] Counsel for the appellant also emphasized that all of the work was overseen and that the harvesting involved the mature and healthy parts of the forest. He stressed the importance of the other work, including the large amount of planting done. He also mentioned that the income from harvesting was not large all the same and that if Mr. Desrosiers had wanted to exploit his woodlots commercially, he would have granted cutting rights, something he never did despite the fact that part of the forest was mature growth.

[38] Counsel for the appellant further argued that the use of the skidders was not significant because they were used for purposes other than harvesting. Nor did he see any negative connotation in Mr. Desrosiers's designation as a forestry worker since the activity actually did involve working in the forest.

[39] As for the characterization of the activity as being in the nature of farming, counsel for the appellant referred to a number of Interpretation Bulletins in which the Department of Revenue explains its position on certain aspects related to farming and, in particular, the circumstances under which forestry work is recognized as constituting the carrying on of a farming business.

[40] The Interpretation Bulletins in question are IT-322R (October 25, 1978) Farm Losses, IT-373R (March 14, 1985) Farm Woodlots and Tree Farms, IT-373R2 (July 16, 1999) Woodlots, and IT-433R (June 4, 1993) Farming or Fishing - Use of Cash Method.

[41] Counsel for the appellant pointed out that, in paragraph 8 of IT-433R, the decision of the Federal Court of Canada, Trial Division in The Queen v. Matthews, 74 DTC 6193, [1974] CTC 230, is specifically referred to in support of the proposition that, in addition to the activities listed in subsection 248(1), farming includes tree farming.

[42] Further, despite the fact that Interpretation Bulletin IT-373R2 is a recent publication, counsel for the appellant pointed out the distinction made in paragraphs 12 and 13 thereof for the purpose of determining whether certain forestry activities qualify as farming, a distinction that is based on the main focus of the activities. Those paragraphs read as follows:

12. For the purposes of the Act, the word "farming" is defined in subsection 248(1) to include a number of activities. Generally, farming contemplates the raising and harvesting of various animals or plants in a controlled environment. It is defined to include tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees. However, "farming" does not include an office or employment with a taxpayer engaged in the business of farming. This list is not exhaustive and it has been decided by the courts that the word "farming" can include growing trees. In certain factual circumstances, it is considered that farming includes the operation of nurseries and greenhouses.

13. Whether a woodlot constitutes a farming operation or a logging business or another commercial operation is a question of fact. If the main focus of a business conducted with a reasonable expectation of profit (a COMMERCIAL WOODLOT) is not lumbering or logging, but is planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan and significant attention is paid to manage the growth, health, quality and composition of the stands, it is generally considered a farming business (a COMMERCIAL FARM WOODLOT). If the main focus of a business is logging (a commercial non-farm woodlot), and is not growing, nurturing and harvesting trees, the fact that reforestation activities are carried out would not transform that business into a farming operation.

[43] Counsel for the appellant therefore argued that it is necessary to examine the ultimate purpose of the activities in order to be able to characterize those activities. In the instant case, counsel maintained that the long period during which the property was held, the fact that none of it was ever sold despite many offers to buy, the fact that Camille Desrosiers waited until the trees were mature before doing any harvesting, as well as all of the work carried out show that the main focus was not logging, but essentially tree farming, which has been recognized as a farming activity.

[44] Counsel for the appellant also stressed that the interpretation of the word "farming" cannot be restricted, as the respondent would like, to activities related solely to farm woodlots and new plantings from scratch.

[45] According to counsel for the appellant, the other elements raised, such as Mr. Desrosiers's designation as a forestry worker, are not in reality of any great significance.

Respondent's position

[46] Counsel for the respondent began by pointing out that the reference, in paragraph 8 of Interpretation Bulletin IT-433R, to the decision in Matthews (supra) as establishing that tree farming is considered farming is incorrect, and that in certain decisions and also Interpretation Bulletins tree farming has erroneously been assumed to be such (see the decisions in Malone v. M.N.R., 84 DTC 1798 and Madronich v. The Queen, 89 DTC 5093, among others).

[47] Counsel for the respondent also referred to the decision in Kirkpatrick v. M.N.R., 72 DTC 1120 in which it was established that reforestation did not constitute farming. However, she pointed out that in other decisions it has been acknowledged that plantings to produce Christmas trees or ornamental trees or shrubs do constitute farming. The decisions in question are Sobczak v. The Queen, 93 DTC 963, [1993] T.C.J. No. 314 (Q.L.), Solotorow, 88 DTC 1667 and Wong et al v. M.N.R., 90 DTC 1710. Counsel for the respondent also pointed out that woodlots were deemed to be qualified farm property for the purposes of the capital gains deduction under subsection 110.6(2) of the Act in Larsen v. Canada, [1998] T.C.J. No. 594 (Q.L.).[1] In the latter case, which involved the sale of a profit à prendre on a woodlot, the land in question had been used by cattle as shelter at certain times when they were grazing in that location.

[48] Counsel for the respondent argued that all corporations involved in logging carry out reforestation and that that activity is not enough to establish the existence of a farming operation.

[49] Counsel for the respondent pointed out as well that Camille Desrosiers had claimed a depletion deduction with respect to his woodlots in certain years. She further remarked that, while it had been shown that significant work had been done, that work only involved about 20% of the total area of the woodlots and in reality, the work was carried out on woodlots that were already mature.

Analysis

[50] The appellant argues that the woodlots left by Camille Desrosiers on his death were used in the course of carrying on the business of farming, while the respondent claims that they were used in carrying on a logging operation. Neither party attempted to focus the debate on the use of specific lots for one purpose rather than another. Evidence was presented regarding the activities carried out on the whole of the land, whose area totals 1,200 hectares.

[51] Subsection 248(1) of the Act does not provide a true definition of the word "farming". However, it does indicate the following:

"farming" includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming.

[52] Clearly, such a definition is not intended to be exhaustive. Recourse to the ordinary meaning of the word therefore seems appropriate in order to determine its scope.

[53] In Le Grand Robert, Dictionnaire alphabétique et analogique de la langue française, 2nd Edition, 1988 (Le Grand Robert) the primary meaning of the French word "agriculture" (farming) is given as follows:

Culture, travail de la terre; par ext., production des plantes et des animaux utiles fournissant les denrées alimentaires et les matières premières d'autres industries. & Culture; apiculture, arboriculture, aviculture, horticulture, pisciculture, sériciculture, sylviculture, viticulture; élevage; primaire (secteur primaire).

[TRANSLATION]

Cultivation, working the land; by ext., production of useful plants and animals providing foodstuffs and raw materials for other industries. & Cultivation; bee-keeping, arboriculture, poultry raising, horticulture, pisciculture, sericulture, silviculture, viticulture; animal raising; primary (primary sector).

[54] While this definition does not set absolute limits for the scope of the word, it does nevertheless indicate a number of activities that are associated with it and which go beyond those already listed in the Act. The words "aboriculture" and "silviculture" are clearly the ones in which we are interested in the instant case. There are no definitions of these terms in the Act. Le Grand Robert defines their French equivalents as follows:

ARBORICULTURE

. . .

Partie de l'agriculture qui a pour objet la culture des plantes ligneuses. & Arbre. Arboriculture forestière. & Foresterie, sylviculture. – Spécialt. Production de fruits. Arboriculture fruitière. & Agrumiculture, horticulture, pomoculture (ou pomologie), viticulture. Arboriculture d'ornement. & Jardinage; horticulture.

[TRANSLATION]

Part of farming having to do with the cultivation of ligneous plants. & Tree. Forest arboriculture. & Forestry, silviculture. – Esp. Fruit production. Fruit arboriculture. & Citriculture, horticulture, pome fruit production(or pomology), viticulture. Ornamental arboriculture. & Gardening; horticulture.

SYLVICULTURE

. . .

Didact. Exploitation rationnelle des arbres forestiers (conservation, entretien, régénération, reboisement, etc.). & Arboriculture.

[TRANSLATION]

Tech. Rational exploitation of forest trees (conservation, maintenance, regeneration, reforestation, etc.). & Arboriculture.

[55] In the same work, the French verb "exploiter" (exploit) in the expression "exploiter un bois" (exploit a woodlot) is given the meaning of "en abattre et débiter les arbres" (felling and cutting up the trees).

[56] Where do these definitions lead us? While they do not draw an absolute line between the words "farming" on the one hand and "logging" on the other, they do quite clearly indicate those activities that are more specifically associated with one or the other and whose scope it is appropriate to measure, to the extent that farming and logging are carried on concurrently. In a borderline case like this one, the solution therefore ultimately hinges on the nature of the activities and their relative importance.

[57] One will have already noted that this is precisely the approach suggested in paragraph 13 of Interpretation Bulletin IT-373R2 dealing with woodlots, published on July 16, 1999. As we know, these bulletins are not binding on the courts but they can prove very useful when interpretation problems crop up. The recent publication date is not, in my view, an obstacle as regards this case since the bulletin sets out a logical, realistic and balanced approach. I would add that, with respect to the question before us, the ideas expressed in the bulletin are not in any way the result of recent changes in the legislation or case law. For the sake of convenience, I cite again paragraph 13 of Interpretation Bulletin IT-373R2, which reads as follows:

13. Whether a woodlot constitutes a farming operation or a logging business or another commercial operation is a question of fact. If the main focus of a business conducted with a reasonable expectation of profit (a COMMERCIAL WOODLOT) is not lumbering or logging, but is planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan and significant attention is paid to manage the growth, health, quality and composition of the stands, it is generally considered a farming business (a COMMERCIAL FARM WOODLOT). If the main focus of a business is logging (a commercial non-farm woodlot), and is not growing, nurturing and harvesting trees, the fact that reforestation activities are carried out would not transform that business into a farming operation.

[58] In terms of the case law relevant to the question, paragraph 13 is not inconsistent with it. However, I point out that, to date, no decision has been rendered that deals directly with a dispute such as the one before us here.

[59] With respect to the decision of the Federal Court, Trial Division in Matthews, which is relied on in paragraph 8 of Interpretation Bulletin IT-433R to state that farming also includes tree farming, it is important to make two points. First, the expression "tree farming" is translated in the French version of the decision by "exploitation arboricole" (see [1974] F.C.J. No. 204 (Q.L.)). As for the question of whether such an operation constituted farming, Mahoney, J. simply declined to rule on this point because he did not feel that it was necessary to do so in order to decide the question submitted, even though in the earlier decision of the Tax Review Board, the Board had found that it did constitute farming (see 72 DTC 1526 at 1528).

[60] Paragraph 6 of Interpretation Bulletin IT-322R goes even further because it states the following with respect to the list of activities included in the definition of farming found in subsection 248(1) of the Act:

This list is not exhaustive and it has been decided by our courts that the word "farming" also includes tree farming . . . .

[61] However, in another decision of the Tax Review Board dating back to the same period and which was referred to by counsel for the respondent, namely the Kirkpatrick decision, it was held that the planting of trees on 25 acres of land to produce timber for lumbering operations 25 to 40 years in the future did not constitute farming but reforestation.

[62] It is somewhat surprising that counsel for the respondent should have referred to this decision to support her position when we know that the opposite was stated in the first part of paragraph 7 of Interpretation Bulletin IT-373R, which paragraph, moreover, is headed "Forest Planting".

[63] Be that as it may, the circumstances in Kirkpatrick and those described in paragraph 7 of Interpretation Bulletin IT-373R have little to do with the case before us. As I pointed out earlier, it seems to me that paragraph 13 of Interpretation Bulletin IT-373R2 provides the balanced approach that is required with respect to the focus of activities so that the matter at issue in this case can be decided.

[64] As regards those activities, I refer first to the forestry activity report by Mr. Morneau (Exhibit A-1). The summary of activities covers the period from 1987 to 1996. If the activities carried on in 1996 on an area of 13.1 hectares, which did not include any harvesting, are excluded, the total activities for the period from 1987 to 1995 involved 248.6 hectares or 20.7% of the total holdings of 1,200 hectares. Harvesting operations occurred on 43.7 hectares. This represents only 17.6% of all of the work done during the period and it involved only 3.6% of the land owned. It is quite clear that Camille Desrosiers's activities did not have as their "main focus . . . lumbering or logging, but . . . planting, nurturing and harvesting trees pursuant to a forestry management or other similar resource plan", to use the words employed in paragraph 13 of Interpretation Bulletin IT-373R2.

[65] If we were to add to the commercial harvesting the thinning cuts and the cutting with regeneration protection, cutting operations would have taken place on a total of 78.5 hectares, or 6.5% of the total land. So even then, cutting operations would represent only 31.6% of all the work done between 1987 and 1995. Consequently, the focus was on the other work.

[66] Moreover, Mr. Morneau stated during his testimony that, among the some 200 owners with whom he had dealt, Camille Desrosiers was the one who did the most forest management.

[67] Of course, thinning operations involve harvesting some timber. However, their primary objective is to provide more room for the best stems and to improve the quality of the woodlot, as Mr. Morneau points out in his report.

[68] As for reforestation, it can be seen that this work was carried out in areas significantly larger than those where cutting was done. The other work done was also substantial and merely serves to confirm the direction taken by Mr. Desrosiers in order to achieve his objective of improving the quality of his woodlots.

[69] Despite the fact that Camille Desrosiers's woodlots consisted largely of mature stands in 1990, as pointed out by Mr. Morneau, it should be remembered that some of the land had been acquired five and even ten years earlier. The evidence also shows not only that silviculture work was carried out each year, but also that it even increased significantly during the period from 1993 to 1995. Further, as mentioned earlier, Mr. Morneau's report indicates that, during the period from 1987 to 1995, work was carried out on the vast majority of the land treated as "qualified farm property" in Camille Desrosiers's 1995 tax return.

[70] As for the income earned by Mr. Desrosiers from the sale of timber during the period from 1989 to 1995, it is not hard to imagine what that income might have been had Mr. Desrosiers’s main objective been lumbering and logging.

[71] A review of all of Camille Desrosiers's silviculture activities leads me to find that the work carried out was in the nature of farming.

[72] In light of the above, it is my view that the woodlots in question were used in the course of the business of farming and that the capital gains deduction provided for in section 110.6 of the Act can be claimed with respect to those woodlots.

[73] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the amount of $49,500.00 included in the income of Camille Desrosiers as recaptured depreciation must be reduced by $46,665.00 and that Camille Desrosiers is entitled to a capital gains

deduction of $158,100.00 under section 110.6 of the Act in computing his taxable income for that year, the whole with costs to the appellant.

Signed at Ottawa, Canada, this 21st day of March, 2000.

"P.R. Dussault"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 9th day of May 2000.

Erich Klein, Revisor

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