Judgments

[2001] 1 F.C. 89

A-739-97

Fletcher Challenge Canada Limited (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Fletcher Challenge Canada Ltd. v. Canada (C.A.)

Court of Appeal, Desjardins, Létourneau and McDonald JJ.A.—Vancouver, May 2; Ottawa, July 5, 2000.

Income tax — Income calculation — Capital cost allowance — Taxpayer acquiring timber cutting licences in 1963 — Renewed in 1972 — Exchanged in 1979 for licences governed by new provisions of Forest Act — Provincial government acquiring licences in 1987 in exchange for licences to cut timber in different location — Total consideration $4,697,491 comprising replacement licences, valued at $3,442,675, plus $1,254,816 cash — Taxpayer treating 1987 exchange as disposition of “timber limits and cutting rights”, characterization of timber cutting rights prior to 1974 — 1974 amendment to Income Tax Act, creating “timber resource property”, defined in s. 13(21)(d.1) as extension or renewal of original right — Reassessment treating replacement licences as “timber resource properties” acquired at no cost — Effect of reassessment was to deny taxpayer’s 1988 claim for capital cost allowance — Appellant conceding T.C.C. correctly holding replacement licences “timber resource properties — Under s. 13(21)(d.1) replacement licences “timber resource properties” only if acquired after May 6, 1974 — “Acquired” if extended, renewed, substituted after May 6, 1974 — Replacement licences thus acquired in 1979 — Income Tax Application Rules, s. 20(1), requiring property be acquired prior to 1972, not applicable — Taxpayer not “giving up” value of original licences to acquire replacement licences — Original licences expiring, replaced by operation of statute.

This was an appeal from a decision of the Tax Court of Canada. Taxpayer acquired the original licences to cut timber in British Columbia in 1963. Those licences were renewed for seven years in 1972. In 1979 taxpayer exchanged those licences for new licences (the replacement licences) which covered identical areas, but were governed by the 1978 amendments to the provincial Forest Act. In 1987 the province acquired the replacement licences, needed for the establishment of the Pacific Rim National Park, in exchange for licences relating to timber located elsewhere. The replacement licences were valued at $3,442,675, plus $1,254,816 cash for a total consideration of $4,697,491.

Prior to 1974, timber cutting rights were characterized in the Income Tax Act as “timber limits and cutting rights”, a form of depreciable property on which deductions could be claimed on a depletion basis, although taxpayer never claimed any depletion in respect of the capital cost of those licences. In 1974, the Act was amended creating “timber resource property”, another form of depreciable property, which was defined in subparagraph 13(21)(d.1)(ii) as a right or licence to remove timber from an area if that right or licence could reasonably be regarded as an extension or renewal of, or was acquired in substitution for, an original right of the taxpayer. Taxpayer never claimed any capital cost allowance on the replacement licences. The 1974 amendment applied to timber resource properties acquired after May 6, 1974.

In its 1987 tax return, taxpayer treated the exchange of licences as a disposition of “timber limits and cutting rights”, or capital assets having an adjusted cost base equal to the valuation day value of $4,697,491, therefore giving rise to neither a gain nor a loss. The implication was that the replacement licences were simply a continuation of the original licences. The Minister did not reassess taxpayer for its 1987 taxation year within the statutory limitation period, but reassessed the 1988 taxation year by treating the replacement licences as “timber resource properties” acquired by the appellant at no cost. Thus no addition to the undepreciated capital cost of class 33 in respect of the acquisition of the replacement licences was allowed, and the 1987 exchange was treated as a disposition whereby $4,697,492 was subtracted from the appellant’s undepreciated capital cost of property in class 33; and $3,442,675 representing the cost of licences was added to that class. In the result, taxpayer’s claim in 1988 for a $169,908 capital cost allowance was denied. In allowing taxpayer’s appeal in part, the Tax Court found that the replacement licences were “timber resource properties”, and the undepreciated cost of the replacement licences was the original cost to taxpayer in 1963 of $259,178, and the value of the undepreciated capital cost of the licences was $259,178. Taxpayer conceded that the Tax Court correctly determined that the replacement licences were “timber resource properties”. Income Tax Application Rules, 1971 subsection 20(1) provides that where, after 1971, a taxpayer disposes of depreciable property acquired prior to 1972, and owned by him “without interruption” from December 31, 1971 until he disposed of it, then if the original cost of the depreciable property was less than both the actual proceeds of disposition and the V-Day value of the property, the proceeds of disposition shall be the aggregate of its capital cost and the amount by which the proceeds of disposition exceeds the fair market value of the property on valuation day. In order for subsection 20(1) to apply there must not have been a disposition of the property between 1971 and 1987.

The issue was whether the 1979 exchange of the licences gave rise to a disposition.

Held, the appeal should be dismissed.

In view of the taxpayer’s concession that the Tax Court Judge correctly concluded that the replacement licences were “timber resource properties”, ITAR, subsection 20(1) did not apply. The replacement licences could only be “timber resource properties” if they were acquired after May 6, 1974 because, under paragraph 13(21)(d.1) and the transitional provisions, in order to have a “timber resource property”, a taxpayer must have acquired a right to cut timber in Canada after that date. It has been held that timber cutting rights which have been extended, renewed or substituted after May 6, 1974 are “acquired” after that date. Thus taxpayer acquired the replacement licences in 1979.

Taxpayer contended that it “gave up” the value of the original licences to acquire the replacement licences and that the cost of the replacement licences was equal to the fair market value of the original licences at the time they were given in exchange. The fact was that it did not give up anything to get the replacement licences. Forest Act, sections 20 and 33 made the original licences expire and required that the replacement licences be issued automatically. The replacement licences gave the same rights to cut over the same area as the original licences.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

An Act to amend the statute law relating to income tax, S.C. 1974-75-76, c. 26, s. 6(7),(9).

Forest Act, R.S.B.C. 1979, c. 140, ss. 19, 20, 33.

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 13(5),(21)(d.1) (as am. by S.C. 1974-75-76, c. 26, s. 6), 20(1)(a).

Income Tax Application Rules, 1971, S.C. 1970-71-72, c. 63, Part III, s. 20(1).

Income Tax Regulations, C.R.C., c. 945, s. 1101(1)(e), Sch. VI.

CASES JUDICIALLY CONSIDERED

APPLIED:

Kettle River Sawmills Ltd. v. Canada, [1994] 1 C.T.C. 182; (1993), 94 DTC 6086; 164 N.R. 241 (F.C.A.); confg [1992] 2 C.T.C. 276; (1992), 92 DTC 6525; 56 F.T.R. 191 (F.C.T.D.).

APPEAL from a Tax Court of Canada decision that timber cutting licences acquired in 1979 as replacements for the original licences acquired in 1963, and renewed in 1972, were “timber resource properties” within the meaning of Income Tax Act, subparagraph 12(21)(d.1)(ii) having an undepreciated capital cost of the original cost of the licences (Fletcher Challenge Canada Ltd. v. R., [1998] 1 C.T.C. 2279; (1997), 98 DTC 1048 (T.C.C.)). Appeal dismissed.

APPEARANCES:

Warren J. A. Mitchell, Q.C. for appellant.

O. Brent Paris for respondent.

SOLICITORS OF RECORD:

Thorsteinssons, Vancouver, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

[1]        Desjardins J.A.: At issue in this appeal[1] is the proper tax treatment, for the appellant’s taxation year 1988, of two successive timber licence transactions, in 1979 and 1987, and their respective impacts on the “undepreciated capital cost” of the regulatory class of property (class 33) under which the said timber licences fall.

The facts[2]

[2]        In 1963, the appellant, a forestry company in British Columbia, acquired Special timber Licences 8044P and 8045P (the original licences) for $259,178. The original licences, also known as “Pacific Rim Licences”, afforded the appellant the right to cut the standing timber in a defined area, subject to the terms and conditions of tree farming licence TFL 27. The appellant sought and obtained renewal of the Pacific Rim Licences in 1972. Each renewal was for a period of seven years and each licence continued to be governed by the same tree farming licence. In 1978, the British Columbia Forest Act[3] was amended and the system of granting and renewing provincial forest tenure was altered substantially. Holders of existing rights and privileges such as the original licences became entitled to replace their existing rights with new timber licences governed by the new provisions of the Forest Act.

[3]        In 1979, the appellant, exercising this right of replacement, exchanged the original licences for timber licences T0005 and T0007 (the replacement licences). These licences covered identical areas to the original licences and were also subject to TFL 27. They were issued in accordance with section 20 of the amended Forest Act.

[4]        In 1986, the province and the appellant entered into an exchange agreement whereby the province obtained the replacement licences required for the establishment of the Pacific Rim National Park in exchange for timber licences T0910 and T0911. The closing date of the exchange agreement was extended to March 3, 1987, at which time the exchange of property took place. The replacement licences were valued at $3,442,675, plus a cash amount of $1,254,816, for a total consideration of $4,697,491. The transaction closed in the appellant’s 1987 taxation year. Licences T0910 and T0911, which were obtained in the exchange, related to timber in a different location than the timber governed by the replacement licences.

[5]        Prior to 1974, all timber cutting rights of the type acquired by the appellant in 1963 were characterized in the Income Tax Act (the Act) as “timber limits and cutting rights”, a form of depreciable property on which deductions could be claimed on a depletion basis (i.e. “on the basis of the volume of timber actually harvested”).[4] The appellant never claimed any depletion in respect of the capital cost of those licences. In 1974, the Act was amended creating “timber resource properties”, another form of depreciable property which was defined as meaning a right or licence to remove timber from an area if that right or licence could reasonably be regarded as an extension or renewal of or was acquired in substitution for an original right of the taxpayer.[5] The appellant never claimed any capital cost allowance on the replacement licences.

[6]        In its return of income for its 1987 taxation year, the appellant treated the exchange of the replacement licences for timber licences T0910 and T0911 as a disposition of “timber limits and cutting rights” being capital assets having an adjusted cost base equal to their December 31, 1971 (valuation day) value of $4,697,491, therefore giving rise to neither a gain nor a loss. Implicit in the appellant’s treatment was that the replacement licences were simply a continuation of the original licences.

[7]        The Minister failed to reassess the appellant for its 1987 taxation year within the statutory limitation period. However, the Minister reassessed the 1988 taxation year treating the replacement licences not as “timber limits and cutting rights”, but instead as “timber resource properties” acquired by the appellant at no cost.

[8]        As a result, the Minister:

(a) allowed for no addition to the undepreciated capital cost of class 33 in respect of the acquisition of the replacement licences;

(b) treated the 1987 exchange as a disposition whereby $4,697,492 was subtracted from the appellant’s undepreciated capital cost of property in class 33; and

(c) added $3,442,675 to that class representing the cost of licences T0910 and T0911.

[9]        The effect of the reassessment of the appellant’s 1988 taxation year was to reduce the balance of class 33 to a negative $60,094, which was added to the appellant’s 1988 income, and to deny the appellant’s claim in 1988 of capital cost allowance of $169,908.

[10]      The appellant objected to the reassessment and then appealed to the Tax Court of Canada. In its notice of appeal, the appellant stated it had determined the valuation day value of the original licences to be equal to the value of the cash and licences T0910 and T0911 ($4,697,492), and argued that:

(a) the replacement licences were not “timber resource properties” within the meaning of paragraph 13(21)(d.1) of the Income Tax Act; and

(b) if the replacement licences were “timber resource properties”, those licences were acquired for a cost equal to the value of the original licences at the time of the exchange in 1979.

The judgment below

[11]      In allowing the appeal in part, the Tax Court Judge found that:

(a) the 1979 replacement licences were properly classified by the respondent as “timber resource properties” (as defined in subparagraph 13(21)(d.1)(ii) of the Income Tax Act) because they were acquired as extensions or renewals of or substitutions for the original licences;

(b) the undepreciated capital cost of the replacement licences was the original cost to the appellant of the original licences, or $259,178 (a conclusion consistent with subsection 13(5) of the Act, which requires a transfer of original capital cost between classes of depreciable property upon a reclassification); and

(c) the value of the undepreciated capital cost of the licences was $259,178.

The appellant’s position

[12]      The appellant now concedes that the Tax Court Judge was correct in his determination that:

(a) the replacement licences received by the appellant on the extension or renewal of or substitution for the original licences were “timber resource properties” as defined in subparagraph 13(21)(d.1)(ii) of the Act;

(b) the undepreciated capital cost of the replacement licences to the appellant was not the fair market value of the original licences of which the replacement licences were a renewal or extension, or for which the replacement licences were substituted, but instead was $259,178, being the cost and undepreciated capital cost to the appellant of the original licences.

[13]      Accepting that the replacement licences are “timber resource properties” having a cost and undepreciated capital cost of $259,178, the only issue raised by the appellant is whether the trial judge erred in determining the tax consequences on the exchange of the replacement licences for licences T0910 and T0911 in 1987.

[14]      The appellant’s submission on this matter is the following.

[15]      If, as determined by the Tax Court Judge, the replacement licences were a continuation of the original licences having as their cost the $259,178 paid in 1963, then Income Tax Application Rules, 1971[6] subsection 20(1) is applicable. ITAR, subsection 20(1) provides that where, after 1971, a taxpayer disposes of depreciable property acquired prior to 1972, and owned it without interruption from December 31, 1971 until such time after 1971 as he disposed of it, then if the original cost of the depreciable property was less than both the actual proceeds of disposition and the V-Day value of the property, the proceeds of disposition are to be determined in accordance with a specific formula provided in that rule.

[16]      If, on the other hand, this Court should determine that the replacement licences obtained in 1979 were not a continuation of those original licences, it necessarily follows that there was a disposition of those original licences, and that the cost of the replacement licences equalled the fair market value of the original licences. It then becomes necessary to determine their value in 1979. The appellant asserted at trial that such value was $4,697,491.

[17]      In brief, says the appellant, either the 1979 exchange of the original licences for the replacement licences did not give rise to a disposition, in which case the proceeds of disposition in 1987 must be adjusted in accordance with ITAR subsection 20(1), or the exchange did give rise to a disposition, in which case the cost base of the replacement licences (to be added to class 33) was equal to the value of the original licences in 1979, which was $4,697,491.

Analysis

[18]      ITAR 20(1) reads:

20. (1) Where the capital cost to a taxpayer of any depreciable property acquired by him before 1972 and owned by him without interruption from December 31, 1971 until such time after 1971 as he disposed of it is less than the fair market value of the property on valuation day and less than the proceeds of disposition thereof otherwise determined, the following rules apply:

(a) for the purposes of section 13 of the amended Act, subdivision c of Division B of Part I thereof and any regulations made under paragraph 20(1)(a) thereof, the taxpayer’s proceeds of disposition of the property shall be deemed to be an amount equal to the aggregate of its capital cost to him and the amount, if any, by which the proceeds of disposition thereof otherwise determined exceeds the fair market value of the property on valuation day; and [Emphasis added.]

[19]      In order for ITAR subsection 20(1) to apply, one must determine whether the depreciable property was owned by the appellant “without interruption” from December 31, 1971 until 1987, the time it disposed of it. A determination as to whether the 1979 transaction was a disposition of valuable rights is therefore necessary.

[20]      The appellant alleges that the Tax Court Judge determined that the replacement licences were a continuation of the original licences. The Tax Court Judge did not make any determination to this effect. He concluded, however, after having quoted Hugessen J.A. in the Kettle River Sawmills Ltd. v. Canada[7] case, that the replacement licences were properly classified as “timber resource properties”. The Tax Court Judge said:[8]

The interpretation of subparagraph 13(21)(d.1)(ii) of the Act remains unchanged. A licence which was acquired prior to May 6, 1974 ceases to be TL & CR[9] and is a timber resource property if it is extended, renewed or substituted after that date. This of course is the case here with the extension renewed or substitution of the Pacific Rim Licences in 1979.

[21]      The appellant’s concession that this was a proper conclusion cannot be reconciled with its position that ITAR subsection 20(1) is relevant in calculating the proceeds of disposition of those licences. The replacement licences can only be “timber resource properties” if they were acquired after May 6, 1974 because, under paragraph 13(21)(d.1) of the Act and the transitory provisions of S.C. 1974-75-76, c. 26, subsection 6(9), in order to have a “timber resource property”, a taxpayer must have acquired a right to cut timber in a limit or area in Canada after that date.

[22]      In the Kettle River case, this Court reviewed and adopted the Trial Judge’s interpretation of the relevant provisions[10] and upheld his finding that timber cutting rights which were extended, renewed or substituted after May 6, 1974, were “acquired” after that date.

[23]      Thus the replacement licences were acquired by the appellant in 1979. They cannot be “depreciable property acquired [by the taxpayer] before 1972 and owned by him without interruption from December 31, 1971 until such time after 1971 as he disposed of it” [underlining added.] as that phrase is found in ITAR subsection 20(1). It is obvious, therefore, having in mind the appellant’s concession, that ITAR, subsection 20(1) cannot apply.

[24]      With respect to the second argument, the appellant, as we have seen, contends that it “gave up” the value of the original licences to acquire the replacement licences and that the cost of the replacement licences is equal to the fair market value of the original licences at the time they were given in exchange.

[25]      This runs contrary to what this Court decided in the Kettle River case where one of the issues was the cost of certain timber licences acquired by renewal. The appellants in that case contended, as in the present case, that the cost of the licences obtained or renewed was equal to the value of the replaced licences at the time of the renewal. This argument was based on the premise that the taxpayers had given up those previous licences to obtain the renewed licences.

[26]      This Court found, however, that the taxpayers had not given up anything at all to obtain the renewed licences. In reversing the Trial Judge on this point, this Court said:[11]

The trial judge was, of course, perfectly right to read the D’Auteuil Lumber case as standing for the proposition that the cost of an asset to a taxpayer is what he has given up to get it. He was, however, with respect, wrong to think that these taxpayers, the respondents, had given up the fair market value of their quotas when they renewed their licences. Indeed, far from giving them up, the respondents, by the renewal of their licences, were exercising and enjoying the rights which they had in virtue of their quotas. In D’Auteuil Lumber, the taxpayer had actually given up the right to compensation for expropriation but, as far as I can see, neither of these taxpayers gave up anything at all …. As the trial judge himself said, … the respondents “rolled over” their quotas and that is a very different thing from giving them up.

[27]      The appellant, in the case at bar, has not given up anything to get the replacement licences. Sections 20 and 33 of the Forest Act make it clear that the original licences were made to expire by statute and required that the replacement licences be issued automatically. The replacement licences gave the same rights to cut over the same area as the original licences.

[28]      Having rejected both of the appellant’s arguments, I would dismiss this appeal with costs.

Létourneau J.A.: I agree.

McDonald J.A.: I agree.

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