Docket: 2002-3698(IT)G

BETWEEN:

TWIN ISLANDS ESTATES LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on November 20 and 21, 2003, at Vancouver, British Columbia.

Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:	Craig C. Sturrock
Counsel for the Respondent:	Margaret E. T. Clare

____________________________________________________________________

JUDGMENT

The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is allowed. The Part I reassessment and the Part III reassessment are vacated in their entirety. The Appellant shall have its costs of this appeal to be taxed.

Signed at Ottawa, Canada, this 2^nd day of April, 2004.

Margeson, J.

Citation: 2004TCC141

Date: 20040402

Docket: 2002-3698(IT)G

BETWEEN:

TWIN ISLAND ESTATES LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Margeson, J.

[1]      This is an appeal from a reassessment, notice of which was dated September 19, 2002 under Part I of the Income Tax Act (Canada) ("Act") in respect of the Appellant's 1999 taxation year ("Part I reassessment"). The Appellant also appealed from an assessment, notice of which was dated October 31, 2001, by which the Minister of National Revenue (the "Minister") assessed the Appellant for tax under Part III of the Act ("Part III assessment").

[2]      In computing income for the 1999 taxation year, the Appellant reported the sale of Twin Islands Estates Ltd. ("Twin Islands") on capital account. In assessing the Appellant for the 1999 taxation year, the Minister treated the sale of Twin Islands on income account. The Minister contended that at the time of its acquisition, the Appellant had in mind the possibility of resale at a profit and that possibility was an operating motivation for its acquisition.

[3]      Further, as there was no capital gain on disposition, the capital dividend paid exceeded the amount of the Appellant's capital dividend account immediately before the time any part of the capital dividend was paid and the Appellant was assessed accordingly.

Issues

[4]      The main issue in this case is whether or not the sale was on account of capital or income. The answer to this question determines the answer to the second question with respect to the capital account. The two issues may be characterized in another way:

1.        Did the Appellant realize a capital gain in its 1999 taxation year in the amount of $5,536,329 as a result of the disposition of this land or did it earn business income from the sale of land inventory?

2.        Was the Appellant entitled to refund of tax on its 1999 taxation year under subsection 129(3) of the Act in the amount of $1,072,201?

3.        Did the capital dividend paid by the Appellant exceed the amount of its capital dividend account immediately before the time any part of the capital dividend was paid?

[5]      The Appellant called Penny Ledoux, who was a team leader ("auditor"), from Canada Customs and Revenue Agency ("CCRA"). This witness was called under the provisions of Rule 146(3) of the Tax Court of Canada Rules, General Procedure and was cross-examined by counsel for the Appellant.

[6]      She said that she conducted a standard audit on the Appellant company. This matter was brought to her attention as a result of a joint adventure audit being done with respect to this company and two other companies. They made assumptions, viewed documents and issued the 1998 and 1999 reassessments. One assumption was that the Appellant company was not in the logging business.

[7]      She was referred to questions 48, 49 and 50 of the examination for discovery evidence. She basically said the same thing. In Court, she indicated that the Appellant had income from the sale of logs, but it was not in the logging business as far as she was concerned.

[8]      Prior to 1998 there were no sales of land or chattels by the Appellant. In 1998 some chattels were sold and the company paid logging tax in 1998 and 1999. It claimed costs against the income from the sale of the timber in 1998 (its write-off). In 1999 the company was reassessed to include those deductions and the profit on the sale. In 1998 it was not considered to be depreciation because the land was in inventory and not under schedule 6. The amount of $14,000 was disallowed as capital cost allowance ("CCA") with respect to equipment sales. The amount (cost of sales) was not disallowed. It was allowed as cost of sales because there were logs sold. She considered this to be a portion of the inventory cost.

[9]      There were sales of about $114,000 in that period of time, but the log sales income was not from the business of logging. She was then asked why she would not give the company the tax benefit. She answered that the Minister concluded that it was income from the sale of land. She then concluded that it was income from the sale of inventory. She said that it was income from a logging activity but the company was not in the logging business.

[10]     She was referred to question 122 of the discovery evidence with respect to the year 1998 and said that they did not change the income from logging activity amounts reported. At questions 134 and 135, she indicated that this was a business in the nature of trade. It was involved in the sale of real property.

[11]     She was referred to Exhibit A-1, Tab 25, which was a letter from CCRA to Twin Island Estates Ltd. following the review of the 1998 and 1999 T2 income tax returns for the property. In that letter they proposed to add back in the timber land write-off of $1,423,125. Sales were left alone in 1998. In questions 134 and 135 of the discovery, she indicated that the Minister considered the actions of the Appellant to be a one-time thing. It was the sale of real property. It was land bought and sold and was not a timber limit.

[12]     Questions 146 and 147 of discovery evidence indicated that the term, "timber limit write-off" is not a good term. At question 149 she indicated that they did not reassess 1998 correctly. They could have but they did not. In question 154, she took the position that it was just a timing thing. It was a grey area as to how they were to treat it: as a reduction of inventory or cost of logs sold. The impact on the sale of the property the next year would have been the same.

[13]     In questions 164 and 165 she indicated that in 1998 the CCA was allowed for the timber limit. Counsel put to her that if she admitted that if it were claimed and allowed as a timber limit, her actions were inconsistent with the decision in 1999. She then said that she has reviewed the legislation and does not now believe that their actions were inconsistent and she does not believe it was CCA.

[14]     She referred to a letter from CCRA to Smythe Radcliffe dated July 17, 2001 in which the Minister expressed the opinion that even after a review of the material and after having considered all relevant factors and circumstances surrounding the transaction, they had determined that the profit on the sale of Twin Islands was business income rather than a capital gain. They indicated that they would be proceeding with the proposed reassessments in due course.

[15]     She was referred to questions 221 to 224 of discovery and agreed that interest was deducted in 1998 and 1999 and this deduction was allowed. She said that did not make any difference what they did in 1998 as they could take it into account in 1999. It was further pointed out that Royal Bank interest was allowed in 1998 with respect to the logging loan and that property tax deduction was allowed. In the year 1999 the same allowances were made. She said it was an adventure in the nature of trade since the "get go".

[16]     She was referred to subsection 18(2) of the Act and said that this subsection prohibits deductions of interest and property tax for adventures in the nature of trade. She was then asked why they allowed it in this case. She said it was a grey area and it would not matter in 1999.

[17]     She was referred to Tab 32, which was the report on the objection. With reference to question 239 of the discovery, she said that today she is aware that the company does do investigations as was indicated in the report on objection. It indicated that the company conducted planning and investigations to confirm that the islands would be suitable for logging. It did an initial field examination and detailed timber cruise. Zoning investigations confirmed that logging was permitted. Logging revenue projections were prepared. The taxpayer also investigated the cost of restoring the lodge. It obtained roofing estimates, appraisals of the existing furniture and equipment and estimates of costs to replace furniture.

[18]     She further confirmed at question 247 that the company did not offer Twin Islands for sale and they never advertised it for sale. As the report on the objection indicated, the Minister believed that the reassessment should be confirmed.

[19]     There was a mistake in the initial report where it said that the objection should be confirmed. The report indicated that it was a question of fact whether Twin Islands was a timber limit or inventory of the taxpayer. Due to the quantum, the matter should be litigated. This appeared to be the Minister's position.

[20]     The length of time of the holding was a factor and the amount received for the property was a factor. She was aware of protesting that took place and she was aware of the fact that the purchase offer of $10,000,000 was an unsolicited one. It was a foundation that purchased the property.

[21]     She referred to her discovery evidence and to the financial statements of the company as shown in Tab 6 and she admitted that you could make a profit of $3,300,000 on the logs. There was some serious logging taking place and the financial statements showed sales of $3,201,385.

[22]     She was referred to Tab 6 and to the discovery questions at 107 and 282 and she admitted that the company claimed B.C. Logging credit amounts and that it indicated that its major business was logging. She did not agree with this. She said that this report was for the company's first seven months of operation. She was asked what the company's business was in 1998 and she said it was land development. She was then asked if the company developed real estate and she did not give any responsive answer.

[23]     She was referred to the financial statements at page 7, line 640, which showed that the company had claimed a federal logging tax credit from Schedule 21 in the amount of $7,618. This amount was not denied. Likewise there was a federal logging tax credit claim for the year 1999. She was also referred to the 1999 return in Schedule 005 that showed that the company was paying B.C. logging tax in a significant amount.

[24]     She was referred to other parts of the Book of Exhibits, including the notice of assessment; the election for capital gains; a 1999 original assessment; auditor's report; and the adjustments that were made at page 3 of the audit report. She said that this was her work. On page 4 of the report she indicated that the matter was referred to the tax collection section. She said that she, as a team leader, was not rewarded as a result of the larger tax assessment. The amount involved was only one factor in deciding whether or not it was on capital account or income account. She was also referred to the capital gain versus income report, which is found at page 5 of the auditor's report. If it is a timber limit, then the land and the timber are treated as one and you just write-off the value of the timber.

[25]     She was asked that if she assumed that at the time the land was purchased, it was worth so much that it could be flipped at a $6,000,000 profit. She answered that she had some experience that Michael Jenks would only pay that price for it if he believed he could get enough timber off of it to pay the purchase price. She had no knowledge that some of this land was not sold and some was sold at a loss.

[26]     She referred to the Corporation Notice of Reassessment found at Tab 29. They considered the whole thing as capital property and one could not claim CCA on inventory. The used tools and backhoe were inventory, as well, and they were trying to flip those too.

[27]     She was referred to Tabs 30 and 31 containing the Notice of Reassessment from 1999 and the Part III tax on excess of dividend paid on October 29, 1999 over the balance in the Capital Dividend account relative to the T2054 election submitted. She said that this amount was due because the Appellant paid an excessive dividend.

[28]     She was also referred to Tab 33, the Notification of Confirmation by the Minister; Tabs 49 and 50, the B.C. returns for logging operations and Tab 51, which was a letter she wrote December 6, 2001 with respect to her audit on the Appellant. In that letter she, again, confirmed that the proceeds on the sale of land were not logging income for purposes of the logging tax deduction found in section 127 of the Act. "Income for the year from logging operations" is defined under Regulation 700. She confirmed this conclusion in Court. People who pay logging tax do not have to be in the business of logging. The sale of land with timber on it is also subject to logging tax. She was asked if she was saying that the Appellant should not have paid logging tax because they were not involved in logging operations when they bought and sold the land and timber in question. She replied that their involvement with the provincial governments is that they would advise the province that this was not a logging operation and therefore they should not have paid the logging tax. When asked if she advised the provincial logging tax authority in British Columbia to this effect regarding the Appellant, she said that she would check it out at the break.

[29]     She was referred to Tabs 57 to 62, which were Minutes of Directors' Meetings of Coastland Wood Industries Ltd. ("Coastland"), and she said that Twin Islands was mentioned therein. There was nothing in these Minutes to refer to selling, flipping, etc. but only in relation to logging.

[30]     Upon her return she said that she found nothing in her file to indicate that she passed the information on to provincial authorities that this was not a logging operation.

[31]     In re-examination by counsel for the Respondent, she said that there was a federal tax credit arising out of the provincial logging tax. You do not have to be in the business of logging to pay logging tax. She was referred to Tab 7, which included a T2 Corporation Income Tax Return for 1999, and particularly to the inventory of the year 1998 which showed a value of $919,155. This return indicated that timber was not charged off to sales. Here we have commercial land, timber, buildings, equipment as inventory, which were all acquired in the purchase of land. The Appellant was referring only to this timber in its term "inventory".

[32]     She was referred to question 165 of the discovery and she said that the Minister's position was that the amount was not claimed or allowed as a timber limit. It was claimed as cost of sales. With respect to property tax and interest claimed, this was not an issue because there was income in that year. It is not inconsistent to allow this to the extent that there was income in the year.

[33]     In redirect she was asked about the year 1999 when there was no income. She said it would be deductible because the property was sold.

[34]     Donald Longstaff testified that before he retired two years ago he was the chief financial officer for Coastland. He was also vice-president of finance. He dealt with banks. He was familiar with Twin Islands.

[35]     He was referred to the document at Tab 42 and he said that the purpose of that letter was to obtain financing to acquire the property in question. Tabs 57 to 61 were Minutes of Directors' Meetings of Coastland. Coastland gets its logs on the open market or by trades. Tab 59 referred to certain protests that were taking place with respect to the subject land. Tab 60 was with respect to a possible sale of the property. Real estate development never came into play in consideration of this project. They were primarily interested in producing veneer and wood was not available to make it. They dealt with the bank in the same way that they would in other cases. They never were able to gain financing on the basis of land value. The bank made it clear to them that they wanted to be paid off when the timber was sold. They did not want to take the chance on possible development.

[36]     In cross-examination he said that there was an interim agreement in place for the purchase of the land. It is shown at Tab 8. At the time he approached the bank he had intended to go into this agreement subject to financing. The $4,000,000 figure for the land referred to in the document following Tab 42 was someone's estimate that it might be worth that. He believed that it was a pretty good deal that they were getting into but they did not know if they would realize $4,000,000 for the land or when it might be realized.

[37]     They were looking at possibly having it completed within nine months but they had flexibility and did not know if they could have the land ready for sale in nine months. The Bank's greatest interest was in getting their money when the logs were sold. He had previous dealings with Mike Jenks whose name was on the interim agreement. He referred to the Interim Joint Venture Agreement, Tab 34, between Coastland and Jemi Holdings Ltd. John McKay signed it. These lands were timbered and located at Gabriola Island. The land is still unsold. There is no market for it as far as he is concerned. Their intention was to log it and then sell the land. It contained a number of legal parcels but Coastland did not intend to go further with development in spite of the agreement to subdivide. To subdivide would only be to the extent of selling it as one lot or for seasonal purposes.

[38]     With respect to Twin Islands, he did not remember Mr. Jenks coming in to discuss it with him. He referred to Tab 56, which was the Vendor's Statement of Adjustments for Twin Islands. He recalled it. His writing is on it at the bottom. The bank telephoned him. There were protests and demonstrations outside the Royal Bank and someone had written to the Bank's head office about the project. They were asked by the public relations people at the Bank to make some response. He wanted the company to peruse it and make sure that there was nothing in it that they disagreed with.

[39]     This letter refers to developing the property and selling lots. This was an attempt to get them off their back. The Board had never seriously considered development. There were five separate parcels. The intention was to sell the five parcels at some point.

[40]     He was referred to the Agreement between Michael Jenks and Coastland, which is found at Tab 39, which talks about the intent to use and develop the lands. He said that this could be referring to the logging development and not otherwise. They never intended to get into development or sub-dividing. They intended to sell it after it was logged.

[41]     In 1999 they probably needed 400,000 to 500,000 cubic meters of board to produce their veneer. They would use primarily the Douglas Fir. They would sell some off. They would sell cedar and all hemlock. They might use about 60 percent of the wood or 40,000 to 50,000 cubic meters. To a small degree, it was self-financing.

[42]     In the year 1999 they probably would have used about one month's supply of wood from this project for producing their veneer. As far as this witness was concerned, he understood Mr. Jenks to be primarily in the business of logging. In this project it was considered that Mr. Jenks' company would do the logging, but his equipment was busy and they had to use someone one else's.

[43]     In redirect, he was referred to Tab 42 and the $4,000,000 figure that was quoted. He said that his figure was optimistic. The land was not too appealing after logging had taken place on it. There were a few bad locations on it. He was referred to paragraph 5 at Tab 34, and he said that the minimum of four years would be required after logging to develop the land. He had to look at many sources of supply. This project would be ten percent of their supply requirements.

[44]     Barry Simpson testified that he was the vice-president of forest operations for Coastland. He had been a 50 percent owner of Twin Islands since 1992. He was the first employee of Coastland. The mill is located at Nanaimo. It has used 100 percent Douglas Fir since the last two to eight years. There are seven acres of land at the site. It employs 200 people, including 40 people in Vancouver and 160 at Nanaimo. It works 24 hours a day, six days a week. It produces a product to the value of $100,000,000 per year. The cost of fiber is $75,000 to $80,000 per year.

[45]     Logs are 75 to 80 percent of the plant's cost. They have a drying plant and five percent of the material goes to plywood manufacturing and 70 percent is made into 4' x 8' sheets which is mostly used in construction of wooden trusses. He was responsible for obtaining the logs. They have no provincial quota. They obtain the logs from sales from the Government, from individuals who are clearing land and from other large companies who have quotas. They finance others to clear the land and sell them the logs. They also buy logs and land. They have purchased land before but it did not do well and they have been directed never to buy land. They finance others to buy it.

[46]     Tab 1 was a typical plan for a log operation. This was taken from his file. Tab 8 contained the Agreement of Purchase and Sale in issue here. They obtained a three-month's delay for the completion of the agreement because they did not need the logs until the first quarter of 1998.

[47]     Tab 9 contained an offer to purchase by the Reifel Cooke Group Limited for $1,000,000. This witness said that the offer infuriated him. He told the offeror to get lost.

[48]     Tab 10 was a reply to the Reifel Cooke Group Limited's offer of purchase for $1,000,000 in which Mr. Jenks discloses no interest whatsoever in flipping the real estate but indicates that the potential was for long-term investment which probably exceeded the offer to purchase. However, he did indicate that the party might re-offer.

[49]     Tab 11 contained the Timber Inventory Cruise report on the property. Nothing came out of it. Tab 12 was an agreement between Ulloa Resorts Ltd. and Twin Islands for purchase of the backhoe and tools. The purchase and sale at Tab 13 was an agreement for the purchase and sale of the lodge and its contents. Tab 14 was an agreement of purchase and sale for the timber between Twin Islands and Mill & Timber Trading Ltd. It provided for a $500,000 advance. It was an agreement to log the cedar on the property first as their Douglas Fir inventory was high. The price of cedar would go down in the new year as far as their calculations were concerned. Tab 21 contained the final agreement between Montreal Trust Company and the Appellant for a purchase price of $10,000,000.

[50]     Tab 34 contained the Interim Joint Venture Agreement between Coastland and Jemi Holdings Ltd. for eight parcels of land contiguous to the 11,000 acres. The date on the agreement is the 15th day of November, 1996. This witness said that logging commercially commenced shortly thereafter. It took nine months for the bulk of the wood to be harvested. One piece was harvested the following year, and one other piece this year. They still have the land. It is for sale. They paid $4.4 million for it. It was their intention to take four years to log it but they needed the wood and logged it immediately.

[51]     Tab 36 contained documents with respect to another joint venture agreement of Jemi Holdings Ltd. Coastland collects income and pays it to Jemi. They must undertake to sell the lands. He was referred to the term development and sale as referred to in some of the documents. He did not know what it meant. He said that their aim was to get rid of the lands.

[52]     The document at Tab 37 was a report of an on-site viewing of Twin Islands. This was completed by Mr. Jenks and him on August 1, 1997. Tab 38 contained his own handwriting. This was his draft. It indicated the quality, volume and species and what was involved in logging it. It is referred to as an on-site visit report. This is an estimate only. No costs of financing were considered. They did not finish and some high volume logs were not taken. It was never proved.

[53]     Tab 39 was an agreement between Michael Jenks and Coastland. Tab 40 contained the figures of this witness which were only an estimate and were completed after obtaining more information on the types and number of trees. He also considered market changes. These were tighter numbers. On the right of his figures were numbers which were completed by G. Childs. Tab 41 also contained Childs' estimate. Tab 46 contained five applications for timber marks and included one for each title. Tab 47 was a logging agreement between Twin Islands and Coastland. This was standard. There was no schedule B. These specs were given directly to the logger. The price is fixed for a quarter.

[54]     Tab 48 was a calculation for the value of Twin Islands. They were getting a lot of pressure and telephone calls from protestors who wanted them to stop logging immediately and to take offers. He did that in order to come up with the ridiculous figure to make the offeror go away (George Reifel). There was no real value to these figures and they were just figures in the air.

[55]     Tab 52 was a letter from George Reifel which did not materialize in the signing of a listing agreement with him. At the end of the day George Reifel did get a finders' fee from Twin Islands. Tab 53 was a so-called "term sheet" prepared by George C. Reifel and directed to Twin Islands. This witness said that neither himself nor Mark Jenks every signed a term sheet.

[56]     Tab 54 was a letter alleging that they were clear-cutting the property. They were not. They took the high value timber and left low value timber behind. Tab 55 contained a "Standby Statement". When this was composed, there were heavy protests going on. The major shareholder of Coastland was being harassed at home and at his club. The Royal Bank was picketed as well.

[57]     They did no perk tests on the property and no water tests. Tabs 58 to 61 contained the Minutes of Coastland. There were never any development plans presented to the board of Coastland. No proposal was ever put to Coastland except the logging operation.

[58]     Coastland entered into the joint venture with Jenks in December, 1996. The Gabriola project was for $4.4 million. It was logged. It is now listed for sale. They logged 70% the first year and tried to sell it but could not. In 2000 or 2001 they listed it for sale at $2.6 million. It has not sold. They had a draft agreement to sell it in December, 1998 for $2.6 million.

[59]     The joint venture agreement with Mr. Jenks for Cortez was for 80 acres. It was bought September of 1998 for $249,000. It was logged and sold. It was listed at $220,000 and sold for $130,000 in 2001. It was logged in 1998.

[60]     With respect to the joint venture on Gambier, this property was purchased in January of 2000 for $4,200,000. It was logged. It took nine months to one year to log it. They still own it. They cannot sell it. They went in the hole on it. Companies will not list it for enough for them to break even. They hoped to sell it at $3.5 million.

[61]     With respect to the Reed Island project, it was for 170 acres and was purchased in January, 2000. The purchase price was $685,000. It was logged. It was listed for sale. It was sold on October 1, 2003 for $500,000.

[62]     With respect to the Nelson Island project it was bought in February, 2000 for $485,000. It was logged. It was listed. It was not sold. It was also listed on a web site but they received no offers for it. They logged it within three months. The Reed Island Project (Number 2), had a purchase price of $800,000. It was purchased in the year 2000. It was logged. It was listed for sale and it was not sold. It was listed for $549,000 which was less than the purchase price. The Gabriola Island project for 2001 was for 90 acres. The purchase price was $250,000. It was cut into four pieces. They had to drill four wells on it. They obtained water. They sold one lot in October of 2001 for $224,000. The other three acres are still for sale. The logging operation brought in approximately $255,000.

[63]     Coastland entered into its own venture as well. This was the Orton farm project. It paid $850,000 for it. They logged it. They sold it for $640,000. The property in question could not be sold for the $3,000,000 to $4,000,000 referred to. It was not cashable. After logging a property the value is reduced by about one-half.

Cross-Examination

[64]     Barry Simpson had been Vice-President of Coastland since 1992. He was also Secretary of Twin Islands Estates Ltd. He was aware of the offer of $1,000,000 for purchase of the interest in the agreement by the Reifel group. He was referred to Tab 9 and he was asked why he was upset. He said that Coastland is the largest company in British Columbia which manufactures logs and it is not easy to find logs. The mill could be shut down for two to three weeks and cost it $2,000,000 to $3,000,000 if it did not have a sufficient supply of logs. He never heard of Reifel before. There was a threat implicit in the offer. He did not think that "Mike" knew him before.

[65]     He was referred to the agreement between Montreal Trust Company of Canada and Twin Islands Estates Ltd. for the purchase price of $10,000,000. There was no set-off for timber taken against it. He was referred to the document found at Tab 19 which was an offer for $11,000,000. He did not consider this to be a real offer in spite of the fact that the offer that finalized was from the same source. All of the lots in Twin Islands are waterfront lots. This makes it more valuable.

[66]     With respect to the Gabiola Island project, the joint venture, he agreed that they paid $4.4 million for it. They had logging expenses and they had income from it. It was suggested to him that the net income from logging was $3 to $3.5 million so that only left $1.4 million to recover. Since they have $500,000 worth of logs remaining, this left about $1,000,000 in unrecoverable costs. He did not agree because the "net logging" does not include "holding costs". He did not really know about land values or holding costs. His side was the logging side.

[67]     He was referred to Tab 35, the Read Island project (Number 2) or the second property which was a joint venture with Jemi, in particular with respect to paragraphs 7 and 8. He said that Mike Jenks' advice is always sought. He is more educated in the land part of the matter than he is. He flew up a number of times to see the property. The first was on August 1, 1997. In April of 1997 Mike told him that he was negotiating on this property.

[68]     He referred to his discovery evidence which indicated a later date than April, 1997. Then he said the later date was the date when he first flew up. The interim agreement was accepted in July of 1997. When the interim agreement was signed, he did not take any steps to determine the amount of logs as was set out at Tab 38. There is a waste of about 10 to 15 cubic meters per acre. They were usable logs but they were all over the map. There is no such thing as a typical lot or typical logging operation.

[69]     He referred to the agreement at Tab 39 as the first agreement that Coastland had with Mike Jenks. This was with respect to Twin Islands. He told the lawyer what he wanted in it. Don Longstaff probably had input into it but he was not certain. This is a logging agreement but the words logging and timber do not appear in it. The words development plan mean a logging plan and that is common in British Columbia.

[70]     With respect to the agreement between Twin Islands and Coastland as set out at Tab 47, he said that this was quite specific about logging. The completion of the logging was to be done by December 1, 1998, which was a period of one year. The agreement at Tab 39 was the agreement between Michael Jenks and Coastland. The lawyer drew it up, although he told the lawyer generally what he wanted in it. He did not remember if he saw it. He then said that he cannot say specifically that he had input into this specific agreement. It was referred to as the so-called interim joint venture agreement between Coastland and Jemi Holdings Ltd. dated the 15th day of November, 1996. This was the final document.

[71]     The other documents at Tabs 34 and 35 were both joint venture agreements and both refer to logging or timber. This is in contrast to the document at Tab 39 which makes no mention of logging or timber. This was not followed up with a joint venture agreement. They only had the documents at Tabs 8, 39, 47 and 14 with respect to Twin Islands. The documents at Tabs 47 and 14 are dated December 1, 1997.

[72]     It was suggested to him that in other deals that he did with Jemi, they did the joint venture structure but they did not do it with respect to Twin Islands. He said it was a different structure. Coastland and Jemi both became shareholders in a new company (Twin Islands). He was referred to his discovery evidence at question 158 which asked why they used the corporation and he said it was to give them a buffer agreement.

[73]     He was referred to questions 159 and 160. It was suggested to him from the outset that they were all aware of the possible protests. He said that it is a fact of life in that area, specifically with respect to Island properties. Twin Islands is located three miles from Cortez and four miles from Ferando. It is possible to see both of them from Twin Islands. In reference to question 165 of the discovery evidence, he said that the protest was with respect to destroying the visibility and the lands. This protest possibility was there from the very outset. There was first and second growth forest on it but it was mostly second growth. It was suggested to him that before they acquired it, it was used basically as a retreat and contained a resort, two to three other houses, plus the lodge and the caretaker's shack. He said that he was unaware of it being a resort.

[74]     Ferando Island residents would have their view affected by logging on Twin Islands. He thought that the protest would come from Courtney Island. He was referred to question 237 of the discovery evidence and said that there was a subdivision plan in effect for the lodge property. This was one lot only. Mike Jenks made the application. There were five titles. He understood that it was for 10-acre zoning but you could make them bigger.

[75]     He identified his handwriting at Tab 48. They were looking at a 10-acre lot size for the 63 lots. They had input from Mike Jenks. They talked about what waterfront lots would bring. It was on the back of a cigarette package. The whole development discussion took 15 to 20 minutes. At discovery the document at Tab 40 was attached to Tab 48. It was in his handwriting. They were doing a quick assessment of the land residual. It looked like about $15 million net of timber land.

[76]     He was referred to question 42, which indicated that it could have been quite a good deal. He agreed with this. He then said that the principal of Coastland was harassed at the Vancouver Yacht Club.

[77]     He was questioned about the joint venture agreement regarding Cortez Islands in September of 1998. He only looked up the purchase price, the sale price and the listing price. He was not sure of the log sales and agreed that there was $200,000 of timber taken off, net.

[78]     He was questioned with respect to Gabriola Island and the 700 acres purchased for $4.2 million. This property was not listed for sale except on Mike's web site because it could not be listed high enough for them to obtain, from the sale, the money they had invested in it. They had subdivision advice on it. They hoped to get more out of it by holding it longer.

[79]     With respect to Reed Island (Number 1), he was referred to the various figures regarding that development. He said that as a logging operation, it lost money. He said that "I still say it lost money if you took it as a single property. It was rolled into another property." He was referred to the price for Reed (Number 2) which was in the $300,000 range with respect to the logging operation. Gabriola Island was a very successful logging operation.

[80]     He agreed that they had adopted the two-shareholder format for Twin Islands whereas Jemi and Coastland had no shareholder's agreement as far as he knew.

[81]     In redirect, he said that the subdivision application with respect to the lodge was abandoned because it straddled another lot and could not be a contiguous lot. If one joint venture is rolled into another it is not put into the same company. He did the calculations located at Tab 40 on September 16. With respect to the log value and land value seen at Tab 48, he prepared those in January of 1998. The information contained in the calculation at Tab 48 was never given to the Board of Directors for consideration.

[82]     Michael David Jenks described himself as a logger. He was the sole shareholder of Jemi Holdings Ltd. which was a logging company. He had been involved in logging since he was 17. His only formal education was up to grade 8. Jemi Holdings has been involved in logging lands, doing contract logging, bidding on lands, bidding on logs and selling lands since 1987. He usually got 50% of the original costs from the sale of the land but, optimistically, he would get 100%.

[83]     He admitted that he had a joint venture agreement with Coastland with respect to Twin Islands, referred to at Exhibit A-1, Tab 8. It was a multiple-listing agreement. They had flown over this property a number of times and they spoke to the representatives of the owner about logging it. The agreement was drawn up in April and amended so as to be completed in December. Noel Paget signed for Ulloa Resorts Ltd. The date was changed from September 1 to December 1 because he approached Coastland to come in on the deal and they wanted the closing date changed as they did not want the logs until later.

[84]     He was referred to the letter written by George C. Reifel which is contained at Tab 9 and he said that he thought Mr. Reifel was trying to intimidate them and he believed that the timber was worth more than that. With respect to the document at Tab 10, he was told that George Reifel should get lost.

[85]     The timber inventory cruise figures found at Tab 10 went nowhere as far as he was concerned. The agreement at Tab 14 between Twin Islands and Mill & Timber Trading Inc. was a normal form of agreement. The proposal by George Reifel to purchase all of the outstanding shares of Twin Islands Estates Ltd. for the sum of $11,000,000 was only one of many offers. He had concerns about George Reifel all along. He felt that he was trying to stop them from logging. He did not sign the sheet referred to in the letter from George Reifel found at Tab 20. He did sign the document found at Tab 21. It was a formal offer and there was money in trust. Montreal Trust was involved so it was a legitimate offer insofar as he was concerned. They intended to sell the land after they had logged it.

[86]     Reed Island joint venture agreement at Tab 35 was similar. Tab 36 was the web site for Jemi Holdings Ltd. They would usually get a real estate company to list the property and sell it. If they had a response to the web site they would refer them to the listing agent. Regarding Tab 37, they visited the property at Twin Islands to come up with those figures. Tab 38 contained a pro forma by Barry Simpson. At Tab 39 they assigned 50% of the interim agreement to Coastland. This was a joint venture agreement to log the property and sell the lands. Tab 40 contained Mr. Simpson's estimate and Tab 41 was an independent calculation. Tab 42 was a letter to the bank. They hoped to get $4,000,000 for the land. They used the high-end when talking to the bank.

[87]     With respect to the agreement at Tab 47 between Twin Islands and Coastland, Twin Islands agreed to sell the logs to them at market price. The calculations at Tab 48 were done because they were trying to get George Reifel to make a serious offer or go away. It took 20 to 30 minutes to make it up. The figures are not realistic. He did not log Twin Islands as his equipment was busy. He did not sign the document at Tab 52 and he signed no term sheet as set out at Tab 53.

[88]     He did not engage George Reifel or anyone else to sell the land. They thought that they might have to subdivide it to get their money after the trouble that ensued. He visited Twin Islands when it was being logged. They were "hi-grading". They took all the timber that had marketable value and left the low-grade timber in pockets. He saw the news release which is found at Tab 55. Neither he nor anyone else made any presentation to the Board to buy Twin Islands and subdivide it or sell it.

[89]     In cross-examination he agreed that he was a logging contractor in the Prince George area between 1975 and 1976. He moved to south-western British Columbia in 1991. He did not remember when he incorporated his first company. In the years 1997 and 1998 he was involved in 10 different companies.

[90]     Jemi was incorporated in 1987. It had no logging assets. They were kept in a company called "Duel Enterprises Limited". He has 50% of the shares.

[91]     He has 100% of the shares in Jemi. He moved to south-western British Columbia to slow down and take it easy. He has not done so. He has become involved in land development about five years ago. He did one development prior to 1997. This is located north of Parksville. It involved 187 acres. It was called "Taio Investments Limited". They developed 31 lots and sold them. They did not sell them through the web site. They sold lots through real estate agents.

[92]     He made money on this development. Tab 36 referred to his web site. They had it before 2001 but not in the year 1997. With respect to the properties, they would put them on their web site, list them or do both after he had his own web site. He did a number of joint ventures with Coastland and used a bare trustee company for this purpose. This was usually one of the numbered companies.

[93]     Taio Investments Limited with respect to the Parksville development was not a joint venture. He had 30% of the shares and then 90% of the shares. He had joint venture agreements with companies other than Coastland. His involvement was mostly in timber properties. He did four joint ventures as well as the one with Coastland. Predominantly the lands were on Vancouver Island. He never did joint ventures in Prince George. He tended to hold properties for long periods of time before he could sell them. Sales happened faster in this area than they did in Prince George. He was not aware that he was referred to as a land developer.

[94]     He made three offers for Twin Islands. The first one was sent to Ulloa in April. He sent it to the director in Victoria. The other two offers were made two years earlier. The offers were for $1.8 and $2.2 million.

[95]     He discovered the property in question by flying over it. He never met the prince who owned it. He learned that George Reifel had some contact with him. Mr. Reifel was very disappointed that Jenks was able to purchase the property. Jenks has been quite successful. His first offer was rejected. A year later he made another. Mr. Paget said the same thing and he had the same result. He was told that the owner was not interested in selling. When he sent the document at Tab 8 to him the offer was for $4 million. He drew it up. He started to line up financing with Barry Simpson (Coastland) in April and asked him if he was interested. He said that they probably would be. Barry Simpson wanted the closing date to be extended. He went to the vendor and he agreed to this.

[96]     After the agreement was signed on July 28, 1997 he discussed the purchase with Barry Simpson and Coastland. They did this deal in a different way than before where he used one of his numbered companies because he did not want to have any publicity. He was told by the lawyers that this was a better way to do it. He did not know about it being used as a retreat when he purchased it but he did before the time of closing. He did not know about it being advertised as a retreat.

[97]     He started out offering $1.8 million in about 1994 or 1995. He did not know what its value was but it would be in excess of $1 million. The second offer for $2.8 million was made in 1997. Asked what he considered to be the value, he said in excess of $2 million. He had no specific figure in mind for the land.

[98]     He did not know what the value of the timber was when he made the offer of $4 million. It was based solely on what he saw from the air. When he talked to Barry Simpson before the site visit he did not talk about the value. He told them that he was wanting to log it and then sell it. Timber had to be of a certain value or he would not be interested in it. When he saw the area from the air he did not estimate how long it would take to log it. He became aware of Mr. Reifel's interest the night before he faxed the first offer which was September 30, 1997.

[99]     In Exhibit R-1 dated November 18, 1997, there was a fax from Reifel. In the document he was talking about valuing the furnishings and asking if they were interested because these articles were not in the agreement.

[100] Twin Islands Estates Ltd. did not do any business after the property was sold. They did declare dividends on the proceeds of sale. He found no difference in price of land that they recovered whether it was waterfront or not.

[101] He referred to the document at Tab 34, paragraph 5(b). They wanted to do the minimum development or to sell it. Part of his concern was to sell it as quickly as possible after it was logged. That was his interpretation.

[102] He referred to the ticket invoice at Tab 37. The first time he went there was with Barry Simpson on August 1, 1997. He had not gone earlier by himself. He referred to the estimate at Tab 42 and the figure of $4 million on the land and he said that would be the top end and if they could recover that amount of money from the sale of the land, that would be great. Regarding the figures created by Barry Simpson at Tab 48, he said this was done in a telephone call. A lot value of $4 million to $6 million as shown there is not realistic. Other estimates put it at $3.2 million to $4 million and $4 million was at the high end for the lot value. They were just trying to give George Reifel some figures so he would go away. It was no more than fiction. They might have received $150,000 to $200,000 per lot if they were lucky. In 1967 he had more than one lot for sale. He did not know how many he has for sale now.

[103] He did not know whether his web site currently shows 250 lots for sale. He sometimes acquires property that has no logs on it. He completed one deal with two developers out of Victoria. It was not a similar structure to the deal completed with his numbered company. The other two owned their own companies who held their interests. They did not complete a subdivision on that property. It contained two titles. He still owns them. He thinks the listing may have run out. One parcel was 56 acres and the other was 120 acres.

[104] The land was logged before they bought it but they did not log it themselves. It was carried as inventory. Realtors sometimes contact him about properties. For the most part they are logging properties that he deals with.

[105] He referred to a project in November 1996 in Queen Charlotte Islands and he said that it was a joint venture. He could not remember the company but the purchase price was $607,000. It was subdivided into eight lots or seven lots. One house and lot were sold in 1997 for $220,000. All the lots were logged.

[106] With respect to Twin Islands, when he flew in he was aware that there was a building on it. He never considered any use of the lodge building. He did not know anything about its commerciality.

Argument on behalf of the Appellant

[107] Counsel said that the Respondent's case is not that the Appellant was going to subdivide the property in question or that it had a secondary intention to do so, but that this was "an adventure in the nature of trade".

[108] The Respondent takes this profit intention from Mr. Jenks' earlier history in buying and selling properties at a profit. There was a complete misunderstanding of the law by the Respondent.

[109] He compared this process to a corn farmer who grows corn, sells it and then sells the land for $1,000,000. In such a situation you would not say that the purchase price of $1,000,000 was for the land and the rest was for the corn. The subject-matter of this case is a "timber limit". A timber limit is depreciable capital property. The owner claims depreciation in accordance with the regulations. The auditor here is talking about recapture. The question that must be asked is, "What is the beast?" Are we talking about land or trees? In taxation matters it is not land or trees, it is depreciable capital property. The term timber limit is in the Act. He referred to the case of Highway Sawmills Limited v. M.N.R., 66 DTC 5116 (S.C.C.) (in support of this proposition).

[110] The witness produced by the Crown said that the selling of the logs was the selling of a portion of the land. It was not. It was a depreciable capital property. It is one for which the taxpayer has been allowed capital cost allowance. This was allowed in 1998.

[111] The Respondent alleges that it was the cost of sales. It does not matter. Ms. Ledoux calls it recapture. It was not. It was not an "adventure in the nature of trade". It was the purchase of a timber limit. In 1999 it sold the timber limit. The auditor combined the two businesses. This was a timber limit. Three-quarters was included in income in 1999. Ms. Ledoux wants the other one-quarter included for taxation purposes.

[112] The Minister claimed that this was a "land flip". The Minister further claimed upon a further submission that the capital dividend paid by the Appellant exceeded the amount of the Appellant's capital dividend accounts before the time any part of the capital dividend was paid and therefore the corporation should be taxed under Part III. Then the Minister added penalties.

[113] The evidence disclosed that the Appellant paid $300,000 in British Columbia logging tax. Ms. Ledoux did not tell the British Columbia Government about it. She said that it was income from a business. If it was income from a business, what was the business?

[114] The Crown's theory is that the property was bought for the purpose of selling. It was sold at a profit. However, all of the evidence is clear. Nothing of significance can be gleaned from the fact that the Appellant had some knowledge of possible protest. There will always be a knowledge of protestors. In this case it was more the normal. The offer made was purely fortuitous and one that could not be refused.

[115] If the Appellant had wanted to flip it, it would have taken the $1,000,000 that was offered to it earlier. They wanted to log it. This was their purpose up to the time that the final offer was received. There is no evidence here that the Appellant was dealing in timber limits.

[116] The fact that one of the partners did a number of subdivisions does not make it an adventure in the nature of trade. One is merely taking steps to maximize the profit.

[117] In written argument counsel for the Appellant said that a "timber resource property" is defined in subsection 13(21) of the Act. That definition requires an acquisition of a right to extend or renew. A "timber limit" is not defined in the Act but paragraph 20(1)(a) of the Act, subsection 1101(3) and paragraph 1100(1)(e) in Schedule VI of the Regulations provide for deductions in respect of the capital cost of a timber limit or a right to cut timber from other than a timber resource property. Unlike land on which might be located specific depreciable property, for example, a building, land which is acquired as part of a timber limit is a timber limit under Schedule VI and does not, therefore, exist as a separate property for the purposes of the Act.

[118] The result of that is that any proceeds derived "from the sale of the land" up to cost must be credited to the class and will result in a recapture of capital cost allowance if the credit exceeds the undepreciated capital cost of the timber limit prior to sale. A sale of a timber limit or cutting right, unlike the sale of a timber resource property, may result in a capital gain. Paragraph 39(1)(a) of the Act does not exclude timber limits from capital gains treatment as is the case with respect to timber resource properties. In this regard counsel for the Appellant referred to Highway Sawmills Ltd. v. M.N.R. and Interpretation Bulletin IT-481, paragraph 5, dated July 23, 1997.

[119] He also argued that the subject timber limit was depreciable capital property and capital cost allowance was "allowed" by the Minister. He then referred to the case of Bosa Bros. Construction Ltd. v. The Queen, 96 DTC 6193 (F.C.T.D.) and Technical Interpretation Bulletin, dated July 28, 1995 referable to paragraphs 20(1)(a), subsections 13(21), 39(1), section 54 and Regulations 1102(1)(b) and (c). In his scenario sale of capital property as defined in section 54 gives rise to a capital gain or loss. See Friesen v. The Queen, 95 DTC 5551 (S.C.C.).

[120] To the extent that the proceeds of disposition exceed the capital cost of depreciable property the taxpayer will realize a capital gain. Pursuant to subsection 13(1) of the Act, proceeds up to original costs are included in income as recapture. See The Queen v. Golden et al., 86 DTC 6138 (S.C.C.).

[121] When the logging company acquires a timber limit (land containing merchantable timber) for the purpose of using it to earn income from its logging business and incurs expenses and undertakes work in furtherance of that purpose, the disposition of the timber limit will be a transaction on capital account unless the evidence shows that the company was engaged in the business of dealing in timber limits. See Sutton Lumber and Trading Company Limited v. M.N.R., 53 DTC 1158 (S.C.C.). Also, Hope Hardware & Building Supply Co. Ltd. v. M.N.R., 67 DTC 5085 (Ex. Ct.).

[122] In respect to the adventure in the nature of trade argument counsel again said that the evidence in this case is clear. The Appellant corporation acquired the subject property (timber limit) for the purpose of logging. It, of course, intended to sell the residue of the timber limit ("land") but did not anticipate doing so out of profit, that is, for an amount greater than $4,000,000, an intention to sell but not at a profit is not an adventure in the nature of trade.        See Farmer Construction Ltd. v. The Queen, 84 DTC 6331 (F.C.T.D.).

[123] Twin Islands had finished logging and had sold the already existing five parcels ("titles") and did some more subdivision, but only to the minimum extent necessary to realize a maximum return of capital so the proceeds would still be on capital account. He referred to Hays et al. v. M.N.R., 89 DTC 334 (T.C.C.) and Mackinnon v. M.N.R., 88 DTC 1651 (T.C.C.).

[124] Paragraph 13(7)(a) and subsection 45(1) of the Act, which provide for deemed dispositions regarding the sale of capital property and depreciable capital property, only apply to required deemed dispositions of properties when a property was acquired for the purpose of gaining or producing income and at a later time was used for some other purpose or vice versa. The tax liability arises in the year of the deemed disposition (change in use).

[125] When capital property is converted to inventory the conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). However, the common law and CCRA assessing policy derived therefrom considers there to have been a notional disposition at the time of conversion although the tax consequences therefrom (recapture up to original cost pursuant subsection 13(1) and capital gain for proceeds in excess of the original cost) only arise at a later date, that is, upon an actual sale of the property. See Moluch v. M.N.R., 66 DTC 5463 (Ex. Ct.), Roos et al. v. The Queen, 94 DTC 1094 (T.C.C.) and Interpretation Bulletin IT-218R, paragraphs 15 and 18.

[126] The Appellant concluded that the appeal should be allowed, with costs.

Argument on Behalf of the Respondent

[127] The Respondent presented written argument in which she indicated that the issue before the Court is whether the Appellant, Twin Islands, sold Twin Islands as a residue of a timber limit, with proceeds on capital account, or whether the Appellant corporation was engaged throughout in an adventure in the nature of trade, for the sale of Twin Islands, giving rise to income.

[128] The Minister's position was that the facts clearly show that the Appellant purchased Twin Islands with the intention of resale of all of its components at a profit in the course of an adventure in the nature of trade. The two shareholders of the Appellant were both engaged in joint ventures for the purchase and sale of land with standing timber. The land is logged and then developed and sold. Twin Islands owned no logging equipment. This type of joint venture was engaged in by both owners before and after the purchase of the Twin Islands. According to the agreement between the parties, their intention was "to be joint venturers to use and development [sic] the lands". There was no reference whatsoever in the agreement to logging the Twin Islands. The Minister contends that the intention of the parties is to be determined from the objective evidence, and the evidence showed a clear intention to acquire and develop Twin Islands, realizing on both the standing timber and land.

[129] The Appellant was a shelf company acquired by Mr. Jenks. It carried on no previous business and no business subsequent to the sale of the Twin Islands. The Appellant was a single purpose corporation formed with the intention of acquiring, clearing and reselling the Twin Islands, which is what occurred and which was the sole activity of the Appellant.

[130] Counsel referred to what she called the classical case with respect to "timber limits", as the Supreme Court of Canada decision in Highway Sawmills Ltd. However, she distinguished that case and the present case as Twin Islands had not, prior to acquiring this property, carried on any business whatsoever, let alone a logging business. She further opined that the company's name does not connote a Logging Operation. No timber cruise was carried out to determine the value of the timber on Twin Islands prior to entering into the agreement to purchase it. Indeed, the agreement to purchase was not even made subject to a timber cruise.

[131] The significance to her was the fact that in its financing application the Appellant attributed a value to the land of $4,000,000, which equals the purchase price formula, and exceeds the additional value attributed to the timber of $3.5 million, for a total of $7.5 million. Contrary to the facts in the Highway Sawmills Ltd. case, supra, the Appellant did not intend to let the property go for taxes once the timber was removed. The property was more valuable than the timber and the intention was to sell the land once the timber had been harvested and this is where the profit for the Appellant could clearly be realized.

[132] She made little of the argument by counsel for the Appellant that the entity had income from logging operations, stating that the entity does not need to be in a logging business to have income from logging operations as the Appellant had here. To the Minister's mind, the land, including the standing timber, was inventory of an adventure in the nature of trade. The timber was described as "inventory" in the financial statements of the Appellant filed in its 1998 return. A portion of the inventory was allowed as cost of sales. This amount was shown as cost of sales in the financial statements.

[133] She said that even though a timber limit is not defined in the Act, paragraph 20(1)(a) of the Act and Regulations 1100(1)(e) and 1101(3) in Schedule VI provide for deductions with respect to the capital cost of a property which is a timber limit. However, those properties described in Part XI (capital cost allowance) in the Regulations in respect of which CCA is deductible in computing income under paragraph 20(1)(a) of the Act do not include property listed in Regulation 1102(1). According to Regulation 1102(1)(b) the classes of property described in Part ll do not include property "as is described in the taxpayer's inventory". The Appellant described the timber as inventory in its financial statements and therefore is not entitled to a deduction of the capital cost of the timber limit (even if one were to presume that counsel for the Respondent was conceding that this was a timber limit).

[134] She made little of the Appellant's argument that capital cost allowance was "allowed" by the Minister and that Twin Islands therefore was within the designation of "depreciable property" in subsection 13(21) of the Act. She contended that the Appellant claimed only a small amount of capital cost allowance with respect to some equipment acquired as part of the Twin Islands purchase and that claim was disallowed. The Appellant claimed cost of sales with respect to timber (calculated in a manner consistent with capital cost allowance calculation), but did not claim capital cost allowance with respect to the timber. Thus, the Appellant is not within the definition in subsection 13(21) of the Act and Brosa Bros. Construction Ltd., supra, has no application here.

[135] She also said, in spite of the Appellant's position, that it was engaged in a logging business, that Twin Islands was a timber limit and that the sale of Twin Islands was a sale of the residue of a timber limit; no reference to the Appellant's claim that Twin Islands was a timber limit appeared anywhere in the Appellant's T-2 income tax returns. In spite of the evidence given at trial that the Appellant paid provincial logging tax, received logging tax credits, obtained burning permits, timber marks and Aboriginal scrutiny, none of these actions demonstrate that the Appellant was solely engaged in a logging business.

[136] An entity does not have to be in a logging business to be liable for logging tax in British Columbia. In fact, sale of land with standing timber is subject to logging tax even if the trees are not cut. Further, anyone with income for the year from a logging operation as defined in Part VII of the Income Tax Regulations is entitled to both the credit against Part I federal income tax payable and the credit against provincial income tax payable in respect of provincial logging taxes paid. In addition, anyone who wishes to remove timber from the land where the timber is cut is required to obtain a timber mark.

[137] Allowing deduction of interest expenses and property taxes paid in 1998, to the extent of the income from the land in that year, (being the sale of part of the timber and the land) is normal assessing treatment allowed by subsection 18(2) of the Act and in no way indicated inconsistent treatment by the Minister or acceptance of the Appellant as a company engaged in a logging business.

[138] The Appellant knew long before the acquisition of the property that the timber was worth at least $3.3 million. By that scenario there would have been a loss in the acquisition of the Twin Islands if the land alone had no value, and the loss would exceed the difference between $4,000,000 paid and the $3.3 million estimated value of the timber, as cost of harvesting must also be taken into account. As a matter of fact timber to a value of $3.2 million was harvested according to the Appellant's 1998 taxation year return while cost of sales amounted to $2.8 million.

[139] Harvesting of the trees was expected to pay for the acquisition cost for Twin Islands, while sale of the underlying land would reap a profit for the Appellant. The sale of Twin Islands was intended from the outset. The Appellant expected to complete the logging of Twin Islands by December 31, 1998. An application for the subdivision of a lot containing the lodge was made by the Appellant, although withdrawn once a decision to sell by Twin Islands was made.

[140] The draft news release, approved by both Barry Simpson and Don Longstaff of Coastland, stated that the intention was to develop Twin Islands, offering lots for sale. It was clear, according to Mr. Jenks, that protests of timber cutting were anticipated and is a fact of life in the forests of British Columbia. The sale of Twin Islands did not come about because of an intention frustrated by logging protests, but was always the intention of the Appellant. The offer that was accepted was advanced to stop the Appellant's land clearing operations which were originally intended to increase the Appellant's total return from the property. That sale price represented a faster return on the property with less associated costs than if the land clearing had proceeded to completion and marking of the property had taken place.

[141] In the end result the appeal should be dismissed and the assessments should be confirmed.

Reply

[142] In a written reply the Appellant accepted counsel for the Respondent's position that the real issue is whether or not the Appellant sold Twin Islands as a residue of a timber limit, with proceeds on capital account, or whether the Appellant was engaged throughout in an adventure in the nature of trade with the sale of Twin Islands giving rise to income. In it he pointed out that, as the Notice of Reassessment and related documentation indicated, the Appellant reported as income recaptured depreciation and reported as a capital gain the gain derived on the sale over and above the original cost of the timber limit, which is the correct way to report for tax purposes the sale of a depreciable capital property with a gain.

[143] Counsel took issue with the reference by the Respondent, in its written argument, to the sale of the subject asset as a sale of "the Twin Islands", whereas the real fact is that the subject-matter of the transaction, for tax purposes, was a timber limit. The land and the merchantable timber standing thereon, comprised one asset for tax purposes, that is, a timber limit.

[144] He took issue with the argument of counsel for the Respondent that the facts demonstrated that the Appellant "purchased the Twin Islands with the intention of resale of all components" at a profit in the course of an adventure in the nature of trade. The "components" include some old equipment and furniture. It would be hard to conclude that this old equipment and furnishings were acquired for the purpose of selling at a profit and thus became inventory.

[145] He was prepared to admit that the Appellant did intend to sell the residue of the timber limit as soon as reasonably possible after completion of logging. However, it did not purchase the timber limit in contemplation of or for the purposes of selling at a profit. This is an absolute pre-requisite for an adventure in the nature of trade and it was not present here.

[146] It was also pointed out that the evidence given was to the effect that only on two occasions had Jemi embarked upon a pure land subdivision project and that on all other occasions Jemi has been either involved on its own account or as a joint venturer with Coastland in acquiring logging land and then disposing of the residue.

[147] Coastland carries on the principal business of operating a veneer mill. The fact that Jemi did not own any logging equipment is insignificant because Mr. Jenks gave evidence that all of the logging equipment was owned by another company, Dual Enterprises Limited, which Jemi uses for the purpose of carrying on logging operations. Further, Jemi did not log Twin Islands because at that time Mr. Jenks and Jemi Holdings were involved in a logging operation elsewhere. Twin Islands was logged by Logan Logging Limited, a contract logging company.

[148] It was the position of counsel for the Appellant that the joint venture agreement between Coastland and Jemi involving lands on Gabriola Island did not "foreshadow" Twin Islands. That operation, even after six years, has not been sold. This will be another loss on a timber limit residue.

[149] He would not agree with the allegation by the Respondent that the offer was not made subject to a timber cruise. Indeed, the offer was made subject to arranging suitable financing within 90 days of acceptance and subject to viewing within 30 days of acceptance. The offer was accepted on July 28, 1997 and on August 1, 1997 Mr. Jenks and Mr. Simpson flew to Twin Islands and viewed the property. They are both experienced at valuing timber. Mr. Simpson did his own cruise of the timber and Coastland commissioned Huock Resource Consultants Limited to cruise and evaluate the timber.

[150] He disagreed with the Respondent's suggestion that it was significant that there was no reference in the agreement to logging and that there was no stated intention of acquiring Twin Islands to realize on the standing timber and the land. The whole purpose of the joint venture carried on by the Appellant Corporation was to realize on the standing timber and the land but it intended to log the standing timber at a profit, and by selling the residue of the timber limit, (the land) the value realized for land might be something approximating 50% of the original cost, or in the best case scenario, for the original cost of approximately $4,000,000. But they were not being sold so as to realize "a profit from the residue". Too much could be taken of the language in the agreement because, as Mr. Jenks said, its purpose was simply to record their one-half interest in the contract to purchase Twin Islands and to fund the company equally which could take into account the deposit of $100,000 paid by Mr. Jenks.

[151] The evidence of Mr. Longstaff, the chief financial officer of the Appellant Corporation at the time, was to the effect that the evaluation of the land at $4,000,000 "was rosy" and Mr. Jenks said that the $4,000,000 value of the land after logging was "top end" and that if "we could recover that it would be great".

[152] It is clear from the evidence that the Appellant Corporation and the two corporate shareholders undertook all of the risk inherent in carrying on the logging operation and all of the liability with the Royal Bank. The Appellant hoped to make a profit from logging and Coastland hoped to obtain a supply of logs to feed its veneer plant. These were the clear purposes of the two corporate shareholders of the Appellant.

[153] If this transaction was nothing more than a real estate speculation with the hope of a huge inherent profit, as the Respondent suggests, it is difficult to understand why Mr. Jenks, who the Respondent tried to paint as a real estate developer, would sell a one-half interest in the contract to purchase at cost, that is, for one-half of his initial $100,000 deposit, especially when the agreement was made on August 25, 1997, some four months after the offer to purchase was put to the vendor.

[154] Nothing turns on the company's name even though counsel for the Respondent would appear to have suggested that there was some meaning to the fact that the name "logging" or that type of business did not appear in the company's name. It was obvious that this name was used because the parties wanted a buffer to remove them one more step from the protest that usually surrounds any logging activity in the Province of British Columbia.

[155] He was of the opinion that the Respondent failed to understand the facts of this case and how they relate to the law. Ms. Ledoux gave evidence that the sale of the timber (logs), was the sale of part of the land. However, once the timber is harvested it is separate from the land and the logs form part of the inventory of the Appellant Corporation. When a farmer harvests land and sells a crop, he or she is not selling a part of the land. The income that was to be earned by the Appellant was to be income from a logging business. There would be sufficient income to generate a profit from that business.

[156] Ms. Ledoux said that one does not need to be in the logging business to have income from logging operations. She pointed to the Income Tax Regulations, Part VII, Regulation 700(1)(b). This was a reference to the definition of "income for the year from logging operations in the Province" under subparagraph (b) which includes the sale of standing timber in the Province or the right to cut standing timber. However, counsel for the Appellant's took the position that the use of the word "income" would indicate that there must be income from a source. This is not a reference to proceeds on capital account, otherwise anyone who sells a home in the Province of British Columbia with the trees standing on the lot would be subject to logging tax and would be entitled to a logging tax credit for income tax purposes.

[157] The Respondent incorrectly interpreted the financial statements of the Appellant Corporation and in particular the Appellant's cost of sales with respect to timber. This write-off (cost of sales) was based on the evaluation obtained from the timber cruise and calculated in accordance with Schedule VI of the Regulations regarding CCA for timber limits. He referenced to Mohawk Oil Company Limited v. The Queen, 90 DTC 6434 (F.C.T.D.) and suggested that the real genesis of the issue in this case is that the Minister has taken the position that insofar as the Appellant Corporation was concerned, what had occurred was an acquisition of real property. It might have been sold for land title purposes and that is how the transaction is reflected, but for tax purposes what the Appellant acquired was a timber limit. This seems to be recognized in the report of Ms. Ledoux where she states:

The Company treated the property as a "timber limit", took cca against logging revenues in 1998, recaptured cca in 1999 and reported the excess as a capital gain.

She concluded by saying that the property was inventory from inception rather than depreciable capital property as proposed by the Appellant. However, the property cannot be inventory, that is, the subject-matter of an adventure in the nature of trade, unless the facts disclose that the subject property was acquired for the purpose of being sold at a profit. There is absolutely no evidence of that. The same errors were made in the Notice of Confirmation because the confirmation was founded on the basis that the "activity of buying and selling real estate" is a "business" and that is what the Appellant was involved in. But for tax purposes, what was bought was a timber limit and what was sold was a residue of that timber limit.

[158] Counsel suggested that the reason for the assessment was a knee-jerk reaction because of the quantum of the gain that brought about the conclusion that this must have been an adventure in the nature of trade. Here counsel referred to the last page of the T-401 report on objection (Appellant's documents, Tab 32) and the statement, "due to the quantum, the matter should be litigated". Even if the subject property was not a timber limit, there is no evidence that the property was acquired for the purposes of being sold for a profit.

[159] Ms. Ledoux took the position that the Appellant was engaged in an "activity" and was not engaged in a logging business but was liable to pay logging tax in British Columbia and that the sale of the land and standing timber is subject to logging tax even if the trees are not cut. That may be so, however, there must still be "income" from logging, that is, the proceeds must not be on capital account, otherwise anyone who sells a cottage with trees on it would be liable to pay this tax. In this case it was the Appellant that logged the timber limit. It was the Appellant that applied for the burning permit. It was the Appellant who obtained a timber mark and filed B.C. logging tax returns. It was the Appellant who was assessed for logging tax and paid logging tax in the 1998 and 1999 taxation years.

[160] Ms. Ledoux testified that in spite of the fact that there was a federal-provincial agreement or arrangement whereby CCRA is to notify its provincial counterpart, the Ministry of Finance, of an assessment denying a logging tax credit with respect to B.C. logging tax, she did not do this with respect to the Appellant. The result was that the Appellant paid approximately $435,000 in B.C. logging tax. The B.C. Government took that amount as income from a logging operation at the same time that CCRA was denying that the Appellant was engaged in a logging business.

[161] Counsel referred to the Respondent's argument on page 9 which indicated that on the basis of the Appellant's own documents, it was well known that the value of the timber was at least $3.3 million. There would have been a loss on the acquisition if the land had no value and that loss would exceed the difference between $4 million paid and the $3.3 million estimated value of the timber, as costs of harvesting have to be taken into account. In fact, timber of a value of $3.2 million was harvested in the 1998 taxation year while cost of sales amounted to $2.8 million.

[162] Harvesting of the trees was expected to pay the acquisition costs of Twin Islands, while sale of the underlying land would reap a profit for the Appellant. But, the Respondent has combined the sale of the land with the income from the logging business (the sale of the farm with the income from the farming business). That loss arises on the sale of the capital asset.

[163] In the case at bar the Appellant Corporation thought that the best case scenario or the "rosiest picture" would be that after harvesting all of the timber, the residue of the limit (the logged off land) could be sold for the original purchase price of $4,000,000, but that was not a very realistic expectation. The uncontradicted evidence is that the value of the land dropped significantly after it had been logged.

[164] What we are debating in this case is the tax consequence that was attached to the fortuitous circumstances giving rise to a substantial gain on the sale of the logged off land because a group of concerned people, acting through an American foundation, who had very substantial resources, was interested in shutting down the remaining logging operations. This was so to such an extent that they paid $10,000,000 to accomplish that end. This is a classic capital gain versus income scenario described historically as the difference between the fruit and the tree with the tree being the capital and the fruit being the income. In this case the timber limit was a depreciable capital asset and the logs were the fruit.

[165] What the Minister is attempting to do here is to have it both ways, that is, only allowing capital losses when a timber limit (land residue) is sold at less than original cost but taxing as full business income any gain over original cost. If the land in this case was sold at a price less than the original cost but for an amount in excess of undepreciated capital cost, that amount would be fully taxable as recaptured income and the remaining loss would be a capital loss. Conversely if what happened in the case at bar should occur, the gain, that is, the amount in excess of the original cost, would be a capital gain. The Minister cannot have it both ways, that is, allowing only capital losses where the timber limit (land residue) is sold at less than original cost but taxing as full business income any gain over original cost.

[166] The application to subdivide is irrelevant. Evidence was given that the lot straddled a lot line and in order to effect a sale of the lots (Twin Islands consisted of three separate titles) or perhaps even consider the possibility of the Appellant keeping the lot containing the lodge, that lot line had to be changed. However, that subdivision application was withdrawn as soon as the offer came through which was ultimately accepted.

[167] Further, the Appellant did not make any application to subdivide these lands into additional lots and if there was a development scheme in mind one would think that would have been one of the first things that the Appellant Corporation would have done.

[168] The evidence in this case is that the Appellant Corporation would only do the very minimal amount required in order to effect a sale of the residue of the timber lot. Mr. Simpson gave evidence that no percolation tests were done on the property nor were any tests done to determine whether or not there was an adequate supply of potable water and no real estate agent had been contacted.

[169] In conclusion, counsel said the fact is that the Appellant did carry on a major logging operation and that the timber was harvested and logs sold and the profit derived therefrom was more or less in proportion to the profit anticipated by the Appellant Corporation. The operation was cut short by reason of the aggressive protestations making it difficult for the logging crews to obtain access to the property. Further, there is nothing whatsoever in the minutes of the Directors' Meetings of Coastland to even suggest or hint at land speculation or anything at all of that nature.

[170] Mr. Longstaff testified that no one ever presented any type of real estate development or subdivision plan to the Board. In fact all of the evidence in those minutes is consistent with the evidence of Messrs. Simpson, Longstaff and Jenks that this was nothing more than a logging operation which was the subject-matter of protester interference and negative publicity. This led to the comment in the Minutes of the Directors' Meeting of March 6, 1998 that "Coastland should give serious consideration to any real estate offer". This unsolicited offer, that eventually came to fruition, was quite unrealistic. It was too good to be true and one that could not be refused. This surely is hallmark of a capital gain. Here counsel referred to Sutton Lumber and Hope Hardware, supra.

Analysis and Decision

[171] The Court agrees with both parties that the issue before the Court is whether the Appellant sold Twin Islands as a residue of a timber limit, with proceeds on capital account, or whether the Appellant was engaged throughout in an adventure in the nature of trade with the sale of Twin Islands giving rise to income.

[172] It is also for the Court to decide the question of the intention of the Appellant Corporation at the time of the purchase. The position of the Respondent is that at all times the intention of the Appellant was for resale at a profit in the course of an adventure in the nature of trade and therefore was not a capital gain but is taxable on account of income.

[173] The question of the intent of a taxpayer at the time of a purchase is a question which must be answered from a careful scrutiny of the viva voce evidence, and the documentation presented. It is also of some significance to view the manner in which the taxpayer has treated the property from the time of the purchase up to the time of sale. Sometimes taxpayers allege that when they purchased a property they intended to keep it and hold it as a capital asset but only at some time later, as circumstances changed, did they decide to sell the property. Their treatment of the property during the time they hold it is often consistent with such an avowed position but often other evidence indicates that their avowed intention was indeed to purchase the property and turn it over at a profit. That then clearly puts the property within the realm of income and not capital.

[174] In the present case the Court is satisfied that the actions of the Appellant Corporation from the time of the purchase to the time of the sale, including the manner in which the Corporation addressed the property in its financial statements and in its income tax returns, were consistent with the avowed intention argued by counsel for the Appellant. That avowed intention was also consistent with the evidence given by the various witnesses who were familiar with this property.

[175] On the other hand, the Respondent's treatment of this corporation was not always consistent with the position taken that this was an adventure in the nature of trade. In this regard the Court refers to the following findings:

1.        The Respondent treated the Appellant's sale of the timber and sale of part of the land separately, rather than considering the land and the trees as one unit.

2.        The Respondent tended to take the position that the Appellant was not in the logging business in spite of the considerable evidence that they were and that they carried out logging operations on this property.

3.        The Respondent admitted that the Appellant had income from logging business during the year but said that it does not need to be in the logging business to have income from logging operations. However, this would appear to be corroborative evidence of the logging business being carried on by the Appellant as it declared.

4.        The Respondent was aware that the Appellant paid provincial logging tax, received logging tax credits, purchased burning permits, timber marks and obtained Aboriginal scrutiny but said that none of these actions demonstrate that the Appellant was solely engaged in the logging business. This appears to overlook the cogent and direct evidence that the company was involved in a logging business.

5.        Several documents of the Respondent referred to actual recapture of timber right-offs and in the Notice of Confirmation the Respondent referred to the "activity of buying and selling real estate" as a "business". However this failed to take into account that there was no evidence whatsoever of this company selling real estate until such time as the final offer was accepted in this case.

6.        The quantum of gain that was realized on the sale would appear to have been an important consideration by the Respondent in making the assessment that it did. Indeed, that reference is found in the report on objection completed by Ms. Ledoux. There she says, "Due to the quantum, the matter should be litigated." This is hardly a reason for raising an assessment for various and obvious reasons.

7.        There was no direct evidence that this property was acquired for the purpose of being sold for a profit.

8.        Ms. Ledoux said that the Appellant was engaged in an "activity" but would not admit that it was engaged in logging operations. This, again, would appear to be contradicted by the evidence.

9.        The Respondent, although recognizing it, failed to consider it significant that the Appellant paid logging tax to the Province of British Columbia under its legislation. That must have indicated that there was income "from logging". These proceeds were not on capital account. Clearly it was the Appellant who logged this land.

10.      Ms. Ledoux gave evidence that there is a federal-provincial agreement in existence whereby the CCRA is to notify the provincial counterpart at the Ministry of Finance of an assessment denying a logging tax credit with respect to B.C. logging tax. Ms. Ledoux gave evidence they did not do this in this case. The result was that the Appellant had paid approximately $435,000 in B.C. logging tax. The B.C. government must therefore have been taken to have received that payment as income from the logging operation at the same time that CCRA was denying that the Appellant was engaged in a logging business and was only carrying on an "activity".

11.      The Minister would appear to be trying to have it both ways, that is, only allowing capital losses when the timber limit (land residue) is sold at less than original cost but taxing as full business income, a gain over original cost.

12.      The Minister appears to have paid a considerable amount of attention to the fact that the lot containing the lodge was subdivided. No evidence was given at trial with respect to the reason for doing so.

13.      The Respondent appears to have paid too much attention to the expectation that harvesting the trees was expected to pay the acquisition costs for Twin Islands while the sale of the underlying land would reap a profit for the Appellant, since one evaluation placed the value of the remaining land at about $4,000,000.

14.      The Respondent seemed to place some significance in the name of the company and the fact that the name did not refer to logging.

15.      The Respondent took the position from the beginning that the subject property was acquired for the purpose of being sold at a profit and that the property was therefore inventory from inception rather than depreciable capital property. There was no evidence to support that.

[176] The Court finds that the evidence given by all of the witnesses called on behalf of the Appellant was credible and reliable. Nothing in the evidence of any witness was indicative of any intention except that the property was purchased for the business of a logging operation. That was the Appellant's intention throughout until such time as a fortuitous circumstance arose which basically allowed an offer to be made which "they could not refuse".

[177] None of this evidence was seriously contested on cross-examination. Neither was there any documentary evidence that could reasonably lead the Court to conclude that the sale of Twin Islands was intended from the outset as an adventure in the nature of trade. It is a fact that an application for subdivision of the lot containing the lodge was made by the Appellant, but the evidence clearly showed that this was withdrawn.

[178] Even though a news release, approved by both Barry Simpson and Don Longstaff of Coastland, stated that the intention was to develop the Twin Islands, and even though other agreements suggested the same thing, that conclusion is inconsistent with the bulk of the evidence.

[179] In this regard it is significant that the Appellant did not make any application whatsoever to subdivide the lands into additional lots. The evidence was that the Appellant Corporation would only do the very minimal amount required in order to effect a sale of residue of the land after the timber was harvested.

[180] Mr. Simpson testified that no percolation tests were done on the property and no tests were done to determine whether or not there was an adequate supply of potable water, even though a number of wells were dug. The Court is satisfied that these wells were dug for the purposes of allowing a logging operation to take place.

[181] No real estate agent had been contacted with respect to the sale and the offer for purchase came out of the blue, so to speak. There can be no question that the Appellant intended to sell the residue of the land after the logging had taken place. This is only normal in this type of business, when such logging operations take place, according to the evidence. This, however, in no way entitles the Court to conclude, as they were going to sell the residue of the land after the logging operation took place, that what the Appellant was involved in was an adventure in the nature of trade, that is, that it purchased the land, then waited for a convenient opportunity to sell it at a profit, a "quick flip", so to speak.

[182] The Respondent indicated that the Appellant was aware from the beginning that protests were taking place in that area and this was one of the considerations they took into account when they purchased the property. However, the Court is satisfied that the protests of the nature and to the extent that took place in this case were not expected by the Appellant from the beginning. These protests became so serious and aggressive that it interfered with the logging operations and access to the property. Further, protests took place at the Royal Bank in Campbell River, at Mr. Clayhorn's office and at the head office of the Royal Bank. Even Mr. Shields (Chairman of the Board of Coastland) suffered abuse as well as some of his fellow members at a golf club.

[183] It is also notable that there was nothing in the Minutes of the Directors' Meetings of Coastland to even suggest or hint at land speculation or anything of a similar nature. Evidence was given by Mr. Longstaff, who attended all of these meetings, that no one ever presented any type of real estate development or subdivision plan to the Board. In fact all of the evidence given by him is consistent with the position taken by the Appellant. This was nothing more than a logging operation which was the subject matter of protester interference and negative publicity and at that point they would be better off giving serious consideration to any offer which might be realistic. Certainly the offer that was made fell into that category.

[184] The Court makes no unfavourable inference against the Appellant's position because of the fact that it was owned 50% by Coastland Wood Industries Ltd. whose principal business was operating a veneer mill and Jemi Holdings Ltd., a corporation which was engaged in the purchase and sale of land, sometimes but not exclusively.

[185] In the agreement of the 25th day of August 1997 between Michael Jenks and Coastland Wood Industries Ltd., with respect to the intended incorporation of the Appellant, in paragraph 2, it says that the company will be incorporated for the purposes of purchasing and holding the land as bare trustee for Coastland and Jemi who intend to be joint venturers to use and develop the lands. However, evidence was given by several witnesses with respect to what this meant. The Court is satisfied that when they were talking about the development they were talking about the logging operation and not the purposes of purchasing the land and hoping to turn it over at a profit.

[186] The Court does not agree with counsel for the Respondent that the joint venture agreement entered into between Coastland Wood Industries Ltd. and Jemi Holdings Ltd., with respect to the Gabriola Island lands, was to "foreshadow" the Twin Islands' project. It was stated therein that the activities would be limited to the project to purchase, log, clean up, subdivide and resell the lands. However, at paragraph 5(e) it is stated: "Unless otherwise agreed, the development of the lands will be the minimum required to resell the lands after logging."

[187] The Court is satisfied that the most significant aspect of the agreement was the logging operation, but that did not prevent them from selling the residue of the land later on. There is nothing else in the agreement that would allow the Court to conclude, from the objective evidence, that the Appellant's clear intention was to acquire and develop the lands realizing on both the standing timber and the land.

[188] The Court concludes that the Appellant was not involved in an adventure in the nature of trade for purchase and sale of the land. This was not the primary objective.

[189] Counsel have referred to case law with respect to this matter, but it is trite to say that the case at bar must be decided on the basis of the individual facts. Other cases, of course, are of some use but they are not on all fours with the facts in the present case.

[190] Counsel for the Appellant relied on the case of Highway Sawmills Limited, supra, and the Respondent did likewise. They submitted that the case supported their position even though there were some differences in the facts of that case and the one at bar, particularly where the Appellant in that case intended to let the property go for taxes once the timber was removed. The Court finds that that case is helpful here even though there is that difference. However, the factual situation as shown by the evidence in this case supports the position taken by the Appellant rather than that of the Respondent.

[191] The Court is satisfied that the facts in this case are different from those in Sutton Lumber and Trading Company Limited, supra. In that case the Court was satisfied that the Appellant intended to acquire timber limits with a view to dealing in them and turning them to account for its profit. It would, in effect, buy and sell a timber limit at a profit and therefore the profit was income and not a capital gain. The case at bar is completely different from that.

[192] The case of Hope Hardware & Building Supply Co. Ltd., supra, was also a case where the issue was whether or not the Appellant was dealing in timber limits. The Court held that the sale was the sale of a business and the realization of capital assets and not a sale in the course of business. In that case it was clear from the evidence that the partnership intended to continue logging indefinitely. The timber limits in question were purchased for the purpose of such future logging, not for the purposes of resale and the limits were resold by acceptance of an unsolicited and unforeseen offer for the business.

[193] The case of Farmer Construction Ltd. v. The Queen, 84 DTC 6331 said as follows:

The facts upon which I rely in reaching my conclusion relate to the intention of the purchaser upon acquisition of the property and the fortuitous nature of the ultimate disposition of it. During his submissions, I suggested to counsel for the Crown that in order for him to succeed, I must find that the taxpayer not only acquired the property for resale but that he in fact acquired it with the intention of resale at a profit. In his response, counsel argued that rather than having a particular profit in contemplation at the time of acquisition, the question should be whether it was an investment, or whether the transaction was speculative in nature. In my view, by either standard the result is the same.

[194] The Court found that the taxpayer purchased the property with no thought of resale at a profit and therefore the profit was on account of capital.

[195] Again, this case is not on all fours with the case at bar and, as indicated earlier in these reasons for judgment, this case must be decided upon the facts found by this Court, particularly the facts relating to the intention of the purchaser upon acquisition of the property and the fortuitous nature of the ultimate disposition of it.

[196] In the case at bar the Court is satisfied that what the Appellant purchased was a "timber limit" and it was depreciable capital property. Disposition of this capital property is defined in section 54 of the Act and gives rise to a capital gain or loss. This Court is satisfied that the evidence points clearly to the fact that the Corporation acquired the property for the purpose of logging it. There can be no doubt that they intended to sell the rest of the land after the logging had been completed but there is insufficient evidence for the Court to conclude that its purpose in purchasing it was to sell it at a profit. This conclusion is supported by the direct evidence and is consistent with the manner in which the Appellant Corporation treated this asset in its financial statements for the purposes of its income tax returns.

[197] As indicated earlier, the Court is satisfied that the Minister probably overreacted in this case when he saw the size of the gain and was obliged to contest the position of the Appellant.

[198] The Minister was unable to gather and present any real evidence which would support his conclusion. The only reasonable conclusion that the Court can come to after hearing the relatively uncontradicted evidence of the witnesses called on behalf of the Appellant, is that the Appellant, Twin Islands, sold Twin Islands as a residue of a timber limit, with proceeds on capital account, and that the Corporation was not engaged throughout in an adventure in the nature of trade.

[199] With respect to the second question raised in the appeal, the Court is satisfied that the capital dividend of the Appellant Corporation did not exceed the amount of the Appellant's capital dividend account immediately before the time any part of the capital dividend was paid, and accordingly, subsection 184(2) of the Act does not apply to impose tax on the amount of that dividend.

[200] In the end result, the appeal is allowed, the Part I reassessment and the Part III reassessment are vacated in their entirety. The Appellant shall have its costs of this appeal to be taxed.

Signed at Ottawa, Canada, on the 2^nd day of April, 2004.

Margeson, J.

CITATION:

2004TCC141

COURT FILE NO.:

2002-3698(IT)G

STYLE OF CAUSE:

Twin Islands Estates Ltd. v. The Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

November 20 and 21, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice T. E. Margeson

DATE OF JUDGMENT:

April 2, 2004

APPEARANCES:

Counsel for the Appellant:

Craig C. Sturrock

Counsel for the Respondent:

Margaret E. T. Clare

COUNSEL OF RECORD:

For the Appellant:

Name:

Craig C. Sturrock

Firm:

Thorsteinssons

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada