A J Frost:—This is an appeal from three income tax assessments each dated October 30, 1969 in respect of the appellant’s taxation years 1966, 1967 and 1968, wherein tax in the amounts of $80, $253 and $2,512.88 was levied. Upon Notices of Objection duly signed and filed, the Minister of National Revenue confirmed the assessments on January 25, 1971. The appeal was heard at Penticton, BC, on September 16, 1971 by the Tax Appeal Board as it was then constituted.
The appellant company was incorporated under the laws of the Province of British Columbia on November 16, 1962, with the sole object of acquiring and operating a logging and sawmill business.
Prior to June 1965 the appellant was engaged in the business of logging and pole producing. After June 1965 the appellant carried on a pole business, having disposed of all its logging equipment and all of its timber except for timber in the Scotch Creek and Celista Creek areas. The change in operations came about when Bell Pole Company Ltd (hereinafter referred to as “Bell”) purchased all the outstanding shares of the appellant.
According to the evidence Timber Sale Contract No TSX 93564, owned by the company, was situated on the east fork of Scotch Creek. The company did not wish to operate in this area as it was a considerable distance from its other operations which were at Celista Creek. It therefore sold the timber sale contract to Tappen Valley Timber Ltd for $5,000 on May 31, 1966. On reassessment the proceeds of sale amounting to $5,000 were included in the appellant’s income for 1966.
The basic question in issue is the characterization of proceeds of the sale of cutting rights under the Tappen Valley Timber Sale Contract TSX 93564. The history of the appellant indicated that prior to 1965 it was interested in acquiring timber sales contracts as a source of supply of saw logs and poles, and endeavoured to purchase a number of timber sales contracts in the Tappen Valley area but was unsuccessful.
After Bell purchased the outstanding shares of the appellant, the two companies integrated their operations and concentrated on the production of poles only. The new owner was only interested in poles. Timber Sale Contract TSX 93564 was of no further use to the appellant company, as the number of trees in the area suitable for the production of poles was not sufficient to make the area profitable. The area could have produced saw logs in sufficient quantity but not poles. A pole is different from a log and has a different market. A tree suitable for the production of a saw log may not be suitable for pole production. When it became uneconomical for the company to operate in the area, the appellant either had to operate TSX 93564 at a loss or lose its deposit for non-performance. In order to resolve this dilemma, the appellant sold its cutting rights but retained its identity as licensee under the contract.
To determine whether or not the net gain from the proceeds of assignment of the contract in question is a capital gain or income in the hands of the appellant it is necessary to apply three tests:
1. Why did the appellant buy the asset in question?
2. Why did the appellant sell the asset?
3. What is the pattern of dealing with this type of asset?
These three areas all involve questions of fact. It is clear from the evidence that the appellant acquired the timber contract as a capital asset, spent money building a road, endeavoured to acquire further rights to cut timber, and logged the area for poles and saw logs. It sold the contract when it was no longer useful or profitable to operate. It is also clear that the appellant was not engaged in the selling of timber cutting rights as part of its regular business. It had sold another contract for quota purposes, but this sale, in my opinion, did not stamp the appellant as a trader. In my view, the appellant clears these three hurdles.
One question remains: Why did the appellant retain its identity as a licensee under the contract? The point is reflected in two of the Minister’s assumptions, which read as follows:
By virtue of the acquisition of Timber Sale Contract X 93564 aforementioned, the Appellant acquired the right to cut and remove timber in an area therein designated in a manner therein prescribed, together with the right to acquire replacement timber upon having removed or disposed of the timber designated in the contract, and to acquire thenceforth rights successively to further replacement timber so that the Appellant as long as it continued to be a timber contract holder would be possessed in perpetuity with a supply of timber about equal to that provided for in Timber Sale Contract X 93564.
By virtue of an Agreement dated 31st May, 1966, which speaks for itself, the Appellant sold for $5,000.00 the rights only to cut timber on Timber Sale Contract X 93564, thereby retaining its right to replacement timber and its identity as licensee under the contract.
The evidence indicated that no quota was attached in 1966 to the Tappen Valley contract and for this reason the sale covered virtually everything of value. Changes in Forest Service policy subsequent to the assignment of the Tappen Valley contract did confer some benefit on the licensee but this did not occur until 1969. This benefit, according to the evidence adduced, was fortuitous and not foreseen. For these reasons, counsel in his argument contended that the Minister’s assumptions were based on a misunderstanding. He stated:
I submit, again, that is a misunderstanding, because there were no rights to replace the timber at the time of May thirty-first 1966, and it was not contemplated, and it’s only through hindsight that these statements have any relevancy, and I submit that the hindsight effect should not affect the intentions of the parties at the time they made it.
I base my decision primarily on the fact that the appellant did not assign the Tappen Valley contract until after Bell had acquired it at which time the integrated operations of the two companies forced the appellant company to change direction and abandon its saw log business thus creating an asset which it was no longer profitable to retain. The fact that the appellant retained its identity as licensee is not, in my opinion, of great significance. The appellant kept a residual string on the contract as a matter of sound business. Forest Service policy could change and did change, but this circumstance per se is not sufficient ground for concluding that the proceeds of sale of an unwanted capital asset are in the nature of a revenue receipt under any of the provisions of the Income Tax Act.
Appeal allowed.