Avril Holdings Ltd. v. Minister of National Revenue, [1969] CTC 397, 69 DTC 5263

Kerr, J.:—This is an appeal from a decision of the Tax Appeal Board which upheld the Minister’s re-assessment of the appellant’s income tax for its 1962 taxation year. In making that assessment the Minister added to the appellant’s reported income the sum of $222,320.70 as recovery of capital cost allowances. The appellant’s primary objection is to that addition, which resulted in an increase in tax.

The appellant commenced business in 1956 as Twin Bridges Sand & Gravel Ltd., and thereafter carried on the business of mining, processing and selling sand and gravel, principally in the vicinity of Edmonton. Eventually, pursuant to a plan which played a part in this dispute, it changed its name to Avril Holdings Ltd. Its income tax returns for its taxation years ending March 31, 1957-61 are in its former name and for its taxation year ending March 31, 1962 in its present name. The latter year will be referred to hereinafter as its 1962 taxation year.

At the commencement of its 1962 taxation year the appellant owned or was entitled to become owner of certain parcels of land* [1] containing sand and gravel pits, known as Pit No. 1 East Side Lands, Pits Nos. 8, 4 and 7 Clover Bar Lands, and Pit No. 5 Entwistle Lands, in respect of which it had claimed and had been allowed deductions by way of capital cost allowances in previous taxation years. In its 1962 taxation year it sold or entered into agreements to sell all the lands and the remaining sand and gravel. It was from these transactions, 3 in number, that the Minister’s addition to the appellant’s reported income resulted.

One of the sales was to Calgary Power Ltd, for a right-of-way, at a price of $30,900. The appellant’s income tax return for its 1962 taxation year recites this disposal and selling price.

Mr. N. J. Hertz, Secretary Treasurer of the appellant company, explained and gave reasons for the other sales. In brief, it was that the appellant, a young company, wanted to ensure that it would have an adequate future supply of sand and gravel, and it was worried that its competitors would acquire the sand and gravel lands in the area in which it was operating. A plan was therefore conceived to form a new company (Clover Bar Land Co. Ltd.) which would acquire the needed lands from their respective owners. This new company would have no money at the outset to pay for the lands, but would issue long term debentures to each landowner in proportion to the value of the lands contributed by such landowner to the new company. The new company would receive royalties for sand and gravel removed from the land in subsequent years, and from such royalties and the proceeds of any future sales of land would in due course be put in funds to pay the debentures as they became payable. The plan was proposed to landowners in the area concerned, the largest being Bailey Farms Ltd., and members of the Bailey family, and they agreed to join in the plan.

In furtherance of the plan the appellant changed its name to Avril Holdings Ltd., as already mentioned, and caused a new company, Twin Bridges Sand & Gravel (1960) Ltd., to be incorporated. This new company would have the benefit of the former name of the appellant and would continue the sand and gravel business previously carried on by the appellant. It would obtain its supply of sand and gravel from the lands contributed to Clover Bar Land Co. by the appellant and by Bailey Farms Ltd. and other landowners. Then came the other 2 sales involved in this appeal, viz., (a) sale of sand and gravel, and (b) sale of lands.

Sale of sand and gravel. By an agreement (Exhibit A-9) dated December 20, 1961, between Twin Bridges Sand & Gravel Ltd., as vendor, and Twin Bridges Sand & Gravel (1960) Ltd., as purchaser, the appellant sold to the purchaser all its right, title and interest both at law and in equity in and to all sand and gravel contained in, upon or under the said lands, as of the 31st day of January A.D. 1962”, and granted to the purchaser a right to enter upon the lands and remove the sand and gravel, etc. In consideration thereof, the purchaser agreed to pay to the appellant the book value of the sand and gravel as disclosed on an interim balance sheet of the appellant as at January 31, 1962, to be prepared. A memorandum signed by officers of the companies on March 2, 1962 acknowledged and confirmed that the said book value and consideration payable was $194, 716. 91. The appellant’s income tax return for its 1962 taxation year shows the sale price of gravel deposits January 31, 1962, at that amount.

Sale of lands. By an agreement (Exhibit A-ll) dated February 2, 1962, between Twin Bridges Sand & Gravel Ltd. and Clover Bar Land Co. Ltd., which referred, inter alia, to the sale of the right-of-way to Calgary Power, to a mortgage on the said lands in favour of the Industrial Development Bank and to an issue of debentures by Clover Bar, the appellant agreed to sell its interest in the lands to Clover Bar. Paragraphs numbered 1, 2 and 3 of the agreement read as follows:

1. Twin Bridges hereby agrees to sell, transfer and assign to Clover Bar all its right title and interest both at law and in equity in and to the lands described in Schedules A , “B”, and “C” hereto excepting thereout the Calgary Power right-of-way and for a total consideration of Seven Hundred Sixty One Thousand Eight Hundred Forty One ($761,841.00) Dollars allocated as between the said lands as follows:

As to the Clover Bar lands—One Thousand Dollars per acre.

As to the East Side lands—One Hundred Dollars per acre.

As to the Entwistle lands—Thirty Thousand Dollars.

2. Clover Bar hereby agrees to issue and allot to Twin Bridges debentures as aforesaid in the principal amount of Seven Hundred Sixty One Thousand Eight Hundred Forty One ($761,841.00) Dollars being the total purchase price as provided for in paragraph 1 herein, and Twin Bridges hereby agrees to accept such debentures as payment in full for all the said lands herein referred to.

8. Clover Bar hereby agrees to issue and allot to Twin Bridges or its nominee Four Thousand One Hundred Ninety (4,190) fully paid up shares of no par value in the capital of Clover Bar at and for the nominal sum of One Cent ($0.01) per share (representing 5.5 such shares for each One Thousand Dollars worth of debentures accepted by Twin Bridges in consideration of this sale).

Mr. Hertz said that the sale price of $1,000 per acre for the so-called Clover Bar lands was arrived at pursuant to negotiations with the Baileys to establish values for their own lands and all the other lands that were to be acquired by Clover Bar Land Co. The sale price of $30,000 for the Entwistle lands was similarly agreed upon. The appellant did not engage an appraiser to appraise the value of the lands.

Paragraph numbered 6 of the agreement reads in part as follows:

6. It is agreed that

(a) In effecting the transfer of the said lands contemplated by this Agreement Twin Bridges may except the Calgary power right-of-way, or include the same . . .

In paragraph numbered 8 the parties agreed to execute and deliver all further documents deemed necessary to give force and effect to the agreement.

The appellant’s income tax return for its 1962 taxation year shows this disposal of land at a selling price. of: $761,841. (A capital gain therefrom of $685,614 is claimed in the return.)

The plan involved another agreement (Exhibit A-10) dated December 20, 1961, between Twin Bridges Sand & Gravel Ltd., as vendor, and Twin Bridges Sand & Gravel (1960) Ltd., as purchaser, whereby the appellant sold as of January 31, 1962 to the purchaser all its assets, excepting the said lands, but including the sand and gravel, at book value as at January 31, 1962; and-in consideration thereof the purchaser agreed to assume certain liabilities of the appellant and to pay to the appellant the difference between the book value of the assets sold and the amount of the liabilities so assumed. A memorandum signed by officers of the companies on March 2, 1962, shows the said amounts as follows:

The appellant’s income tax return for its 1962 taxation year states ‘ The company ceased operations and disposed of its assets on January 31, 1962”.

In furtherance of the plan Twin Bridges Sand & Gravel (1960) Ltd. entered into two agreements with Clover Bar Land Co. Ltd. (Exhibits A-19 and A-20) dated Mary 10, 1962, whereby Twin Bridges (1960) Ltd. (a) sold to Clover Bar all its interest in the sand and gravel which it had acquired from the appellant (by the agreement — Exhibit A-9 — dated December 20, 1961) ; (b) received in return from Clover Bar a grant of a right to enter upon the said lands and to remove the sand and gravel; and (c) agreed to pay royalties to Clover Bar for sand and gravel removed from the lands thereafter.

Mr. Hertz testified that negotiations with the Baileys respecting the debentures to be issued by Clover Bar continued into the appellant’s 1963 taxation year, and in confirmation thereof produced a letter (Exhibit A-18) from Field, Hyndman, Solicitors for Bailey Farms Ltd., dated March 26, 1962, suggesting conditions to be included in the terms of the debentures. Debentures in the name of the appellant were signed and issued on June 28, 1963, with an effective date of issue of February 2, 1962, having a total face value of $760,000. They contain a recitation that they were issued under authority of a resolution of the directors dated January 31, 1962. Registration was effected under Section 99 of The Compames Act of Alberta on July 14, 1963 (Exhibit A-26).

The debentures are shown in the assets column of the March 31, 1962, balance sheet of the appellant, submitted with its income tax return for that taxation year, at $761, 841, although they had not been issued by that date; and an accompanying note of the chartered accounts reads as follows:

Note 2: On January 31, 1962, the company ceased operations and

sold all of its assets, except certain lands, to Twin Bridges Sand & Gravel (1960) Ltd. for $774,232.87. As partial consideration, the purchaser assumed liabilities of the vendor of $732,462.00. The remaining $50,770.87 was re- ceivable by the company at March 31, 1962.

The remaining lands were sold to Clover Bar Land Co. Ltd. for $761,841.00 with the company accepting longterm debentures in payment.

Mr. Hertz said that, before exercising options to purchase the lands which it acquired, the appellant had tests made to estimate their quantities and areas of sand and gravel, and that the exercise of such options was dependent upon the results of the tests. Each of the pits involved was acquired separately as a source of supply for the company’s business. The capital cost of each parcel of land as shown in the income tax returns is the capital cost of the land with its sand and gravel. Hertz also gave a description of the sand and gravel operations, which involved the removal of overburden or topsoil, piling it elsewhere on the land, and the extraction of the sand and gravel by means of loaders and drag lines. When extraction took place the land would have trenches, mounds, depressions, and a lower level than surrounding lands, and work would be involved in making it level and covering it with topsoil or otherwise making it fit for building or other use.

In its 1960 income tax returns the appellant provided a Schedule of Land and Gravel Deposits and Accumulated Depletion, set forth next, which shows as of March 31, 1960 accumulated depletion, book value of gravel deposits, residual value of the lands, etc.

The depletion rate per yard was arrived at by taking (a) the cost of the land and gravel, less the stated residual value of the land, and dividing the resulting figure by (b) the estimated total number of yards of gravel recoverable.

As to the residual values of the lands, Mr. Hertz said that he had talked with officers of the Department of National Revenue and they agreed on a residual value of $1,600 or approximately $10 per acre for the Entwistle lands (Pit No. 5). This figure is shown in Exhibit A-14, D.N.R. income adjustment for the 1959 taxation year. He also said that a residual value of $100 per acre had been agreed with officers of the Department for the Clover Bar lands (Pits 3, 4 and 7). Pit No. 1 was fully depleted by March 31, 1960, a total of 653,145 cubic yards having been extracted, but depletion allowance was claimed on only 635,000 yards.

An investment dealer, Mr. Ritchie, gave his opinion that the Clover Bar Land Co.’s debentures which were issued to the appellant had no market value as of February 2, 1962. In his opinion the interest was out of line, the company had no liquidity and no assets except the lands, which were heavily mortgaged, and the company was a private company whose debentures could be marketed only within the company. In cross examination, he said that he was not qualified to give an estimate as to the value of the lands and he did not know what their value was; and he had no knowledge of any intention on the part of the appellant to sell the debentures.

Mr. Hertz signed the various sales agreements on behalf of the appellant and Twin Bridges Sand & Gravel (1960) Ltd. and Clover Bar Land Co. Ltd. These companies were not dealing at arm’s length in the transactions.

The appellant’s Notice of Appeal to this Court contains a Statement of Facts, as follows :

1. Avril Holdings Ltd. (hereinafter called “Avril”), the name of which was then Twin Bridges Sand and Gravel Ltd., had carried on a sand and gravel business for a number of years. Avril purchased land containing sand and gravel deposits in the Clover Bar area immediately east of the City of Edmonton. To improve its competitive position, Avril endeavoured to acquire additional land in the vicinity which might contain sand and gravel.

2. As the costs of acquiring the necessary lands appeared beyond Avril’s resources, Avril proposed to Bailey Farms Ltd., the largest owners of land in the area, that a land development company be formed to acquire the land surface ownership rights of Avril and the Baileys and perhaps adjacent parcels owned by others. A separate operating company would acquire the sand and gravel rights.

3. Avril’s sand and gravel undertaking, including sand and gravel at its undepleted value of $194,716.91, was sold at book value by Avril to Twin Bridges Sand and Gravel (1960) Ltd. When Avril had acquired the lands originally, in each case engineers had been retained to determine the extent of the sand and gravel reserves. Capital cost or depletion allowance was claimed on the sand and gravel as so estimated but none was claimed on the residual land.

4. Avril then sold its residual land to Clover Bar Land Co. Ltd. Clover Bar Land Co. Ltd. had no money and would not have for a number of years until money was realized from their lands, and the agreement for sale of the land provided for the price to be paid according to a schedule contained in a series of debentures to be given by Clover Bar Land Co. Ltd. The Schedule provided that the debentures would bear interest at 3% per annum from five years from issue and principal payment would begin six years from issue with a payment of 2% of the original principal sum, and similar payments of 2% for the next four years, 5% for each of the next 10 years and 8% of the principal sum for the last five years.

5. The Minister issued Notice of Re-Assessment to Avril for the year ended March 31, 1962, adding to its reported profit $222,320.70, stated to be a portion of the price of the land constituting recovery of capital cost or depletion allowances previously claimed. Notice of Objection was filed by Avril, and on August 15, 1966, the Minister gave notice confirming the re-assessment. Notice of Appeal was filed by 4 Avril, and on April 18, 1968, the Appeal was dismissed.

In its Notice of Appeal the appellant also stated that the statutory provisions upon which it relies and the reasons which it intended to submit are as follows:

1. (a) Avril sold sand and gravel for the undepreciated capital

cost to Twin Bridges Sand and Gravel (1960) Ltd. Avril sold its land to Clover Bar Land Co. Ltd. for a value greater than its original residual value.

(b) The sale of sand and gravel attracted no tax as there was no recapture of any capital cost allowance.

(c) Section 20(1) provides for “recapture” of capital cost allowance only where “depreciable property . . . of a prescribed class . . .” is disposed of and the proceeds exceed the “undepreciated capital cost” of “depreciable property of that class’.

(d) Depreciable property is defined in Section 20(5) to include only property in respect of which the taxpayer “has been allowed” or “is entitled to” a deduction under Section 11(1)(a) and regulation 1100(1)(g). Further Schedule E specifically provides that in computing the allowance in respect of an industrial mineral mine the “residual value” of the land must be excluded.

(e) Avril’s tax returns and its correspondence with the Minister indicate that Avril was not allowed to and did not claim capital cost allowance in respect of the residual value of its land, and this residual value was deducted in computing the capital cost allowance on sand and gravel.

(f) In the result, the land was not “depreciable property”, but instead was property on which Avril did not and could not claim capital cost allowance. Thus there was no disposition by Avril of ‘‘depreciable property” and Section 20(1) could not have operated in this case.

2.. In the alternative, if there was any disposition of depreciable

property, no “proceeds of disposition” of such property were received or receivable in 1962. Avril agreed that it would be paid over a period of 25 years, and received security for such payment. Section 24(1) provides that receipt of a security for an indebtedness constitutes payment if the debt was “then payable”. In this case the debt was not then payable” but was payable periodically in the future.

. In the further alternative, if the debentures were “proceeds

of disposition” within the meaning of Section 20(1), the evidence does not indicate that any debentures were in fact delivered in 1962. If and when the debentures were delivered, the only amount which would constitute “proceeds of disposition” would be their actual market value at the time, and at that time, they had no market value.

4. In the further alternative, Section 85B(1) (d) (ii) clearly applies

and the Minister should have allowed a reserve thereunder. Capital cost allowance, as an allowed deduction from income, must be of the nature of income when recaptured, so that the word “profit” in this section includes recaptured capital cost

allowance. While Avril’s business had changed in character, it was still in existence and the transaction was therefore in the course of business.

At the hearing of the appeal the submission of counsel for the appellant was to much the same effect, except that argument was not pressed for a reserve under Section 85B of the Act.

The Minister’s Reply to the Notice of Appeal contains the following paragraphs, which set forth the position taken by him on this appeal :

3. In assessing tax on April 24th, 1963, the Respondent acted, inter alia, upon the following assumptions:

(a) at the commencement of its 1962 taxation year the Appellant owned in fee simple five gravel pits known as Pit No. 1 East Side lands, Pits No. 3, 4 and 7 Clover Bar lands and Pit No. 5 Entwistle lands;

(b) each of the parcels of land upon which the gravel pits were situate was an industrial mineral mine and was depreciable property in respect of which the Appellant had been allowed and was entitled to deductions in computing its income under Section 1100(1) (g) of the Income Tax Regulations and Schedule E thereto:

(c) the Appellant in its 1962 taxation year disposed of the five industrial mineral mines by sale, and in so doing entered into two Agreements as follows:

(i) an Agreement in writing dated December 20th, 1961, with Twin Bridges Sand & Gravel (1960), Ltd.;

(ii) an Agreement in writing dated February 2nd, 1962, with Clover Bar Co. Ltd.;

(d) the proceeds of disposition of the industrial mineral mines includes the following sums which were the sale prices stipulated in the Agreements referred to above: Twin Bridges

Pit #1.	Pit #3	Pit #4	Pit #7	Pti #5
East Side				Entwistle
Lands		Clover Bar Lands		Lands

Sand & Gravel

(1960) Ltd.	—	$19,888.61 $ 67,538.48 $107,289.82	—
Clover Bar
Land Co.
Ltd.	$1,591.00 $80,000.00 $468,020.00 $182,230.00 $30,000.00

(e) the proceeds of disposition of each industrial mineral mine exceeded the undepreciated capital cost to the Appellant of the mine immediately prior to the disposition and accordingly the computation attached hereto and marked Schedule I correctly reflects the amounts required by the provisions of Sectioon 20(1) of the Income Tax Act to be included in computing the Appellant’s income for 1962.

B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS WHICH HE INTENDS TO SUBMIT

4. The Respondent relies, inter alia, upon Sections 11(1) (a), 20(1) and 20(5) of the Income Tax Act, Part XI of the Regulations and particularly Section 1100(1) (g) of the Income Tax Regulations and Schedule E thereto.

5. The Respondent states that each industrial mineral mine so sold by the Appellant was depreciable property; and that the proceeds of disposition of the industrial mineral mines include the amounts agreed to be paid to the Appellant by Twin Bridges Sand & Gravel (1960) Ltd. and Clover Bar Land Co. Ltd.

6. The Respondent states that by virtue of Section 20(5) (c) (i) of the Income Tax Act the proceeds of disposition of each industrial mineral mine include the sale price of the property as set forth in the Agreement dated February 2nd, 1962, between the Appellant and Clover Bar Land Co. Ltd.

7. The Respondent states that Section 85B of the Income Tax Act does not apply to an amount which is included in computing income pursuant to Section 20(1) of the Income Tax Act. The Appellant is not entitled to deduct as a reserve under Section 85B (1) (d) of the Income Tax Act any portion of the sale price of the property as set forth in the Agreement dated February 2nd, 1962, between the Appellant and Clover Bar Land Co. Ltd. because:

(i) such sale price has not been included in computing the Appellant’s income from the business for. the year or for a previous year in respect of property sold in the course of the business within the meaning of Section 85B(1) (d) of the Income Tax Act;

and

(ii) the reserve contemplated by Section: 85B(l)(d) is in respect of profit upon the sale of property, while the amount included in computing income pursuant to Section 20(1) of the Income Tax Act is not profit on the sale of property but “recaptured depreciation” (i.e. the difference between cost and undepreciated capital cost) in respect of the sale of such property.

Schedule I, referred to in paragraph 8(e) of the Minister’s Reply to the Notice of Appeal is as follows:

There is no dispute as to the amounts of the capital cost of the lands, which were acquired in fee simple by the appellant as a capital asset to secure a supply of sand and gravel to be used in earning its income; or as to the amounts claimed and allowed as capital cost allowances or that in claiming such allowances the appellant used as a basis the capital cost of the lands less amounts attributed to the ‘‘residual value” of the respective lands; or as to the sale prices involved in the various transactions by which the land and sand and gravel were sold.

The relevant provisions of the Act and Regulations chiefly concerned in this appeal are :

Income Tax Act

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

(b) such amount as an allowance in respect of an oil or gas well, mine or timber limit, if any, as is allowed to the taxpayer by regulation;

12. (1) In computing income, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

20.(1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of

(a) the amount of the excess, or

(b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer,

shall be included in computing his income for the year.

(5) In this section and regulations made under paragraph (a) of subsection (1) of section 11,

(a) “depreciable property” of a taxpayer as of any time in a taxation year means property in respect of which the taxpayer has been allowed, or is entitled to, a deduction under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for that or a previous taxation year;

(b) “disposition of property” includes any transaction or event entitling a taxpayer to proceeds of disposition of property; (c) “proceeds of disposition” of property. include

(i) the sale price of property that has been sold,

(d) “total depreciation” allowed to a taxpayer before any time for property of a prescribed class means the aggregate of all amounts allowed to the taxpayer in respect of property of that class under regulations made under paragraph (a) of subsection (1) of section 11 in computing income for taxation years before that time; and

(e) “undepreciated capital cost” to a taxpayer of depreciable property of a prescribed class as of any time means the capital cost to the taxpayer of depreciable property of that class acquired before that time minus the aggregate of

(i) the total depreciation allowed to the taxpayer for property of that class before that time,

(ii) for each disposition before that time of property of the taxpayer of that class, the least of

(A) the proceeds of disposition thereof,

(B) the capital cost to him thereof, or

(C) the undepreciated capital cost to him of property of that class immediately before the disposition, and

(iii) each amount by which the undepreciated capital cost to the taxpayer of depreciable property of that class as of the end of a previous year was reduced by virtue of subsection (2).

Regulations, Part XT

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

(g) such amount as he may claim not exceeding the amount calculated in accordance with Schedule E in respect of the capital cost to him of an industrial mineral mine, other than a coal mine or a resource described in paragraph

(a) of subsection (1) of section 1201:

1101. (4) For the purpose of this Part and for the purpose of Schedule E, where a taxpayer has an industrial mineral mine or more than one industrial mineral mine in respect of which he may claim an allowance by virtue of paragraph (g) of subsection

(1) of section 1100, each such mine shall be deemed to be a separate class of property.

Schedule E

1. For the purpose of paragraph (g) of subsection (1) of section 1100, the amount that may be deducted in computing the income of a taxpayer for a taxation year in respect of an industrial mineral mine described in paragraph (g) of subsection (1) of section 1100 is the lesser of

(a) an amount computed on the basis of a rate (computed under section 2 of this Schedule) per unit of mineral mined in the taxation year, or

(b) the undepreciated capital cost to the taxpayer as of the end of the taxation year (before making any deduction under section 1100) of the mine.

2. The rate for a taxation year is

(a) if the taxpayer has not been granted an allowance in respect of the mine for any previous year, an amount determined by dividing the capital cost to the taxpayer minus the residual value by the total number of units of commercially mineable material estimated as being in the property, and

(b) if the taxpayer has been granted or is deemed to have been granted an allowance in respect of the mine for a previous year,

(i) if no rate has been determined under subparagraph (ii), the rate employed to determine the allowance for the most recent year for which an allowance was granted, or

(ii) where it has been shown to the satisfaction of the Minister before the taxation year that the quantity commercially mineable material is, in fact, a different quantity from that employed in determining the rate for the previous year, a rate determined by dividing the capital cost minus the residual value by the quantity so shown.

3. In lieu of the deduction otherwise determined under this Schedule, a taxpayer may elect that the deduction for a taxation year be the lesser of

(a) $100, or

(b) the amount received by him in the taxation year from the sale of mineral.

4. In this Schedule, “residual value” means the estimated value of the property if all commercially mineable material were removed.

In this appeal it is first necessary to determine whether the land sold by the appellant to Clover Bar Land Co. Ltd. was ‘‘depreciable property’’, within the meaning of that expression in Section 20 of the Act. The appellant submits that the land was not ‘‘depreciable property’’. The respondent says that it was.

The Tax Appeal Board held that there was a disposition of a depreciable property involved in the transactions and, therefore, the appellant received a consideration which is subject to recapture. In that respect, the Board said, in part, as follows:

When the legislator in Section 20(1) says: “Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of . . .” it must be construed as meaning any property described in Section 139(1) (ag) of the Act:

‘property’ means property of any kind whatsoever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action;”

Therefore “land” may become depreciable property and cannot be separated from sand and gravel deposits to be found in beds in various locations. It is not so much the nature of the property which is taken into consideration but the fact that the property is giving rise to capital cost allowance. The taxpayer did not purchase the deposits of sand and gravel. It purchased a land containing such deposits of sand and gravel and as owner of the land it had the advantage of a capital cost allowance which was claimed for each taxation year to take care of depletion of the land by way of exploitation of sand and gravel deposits.

“Capital cost allowance” means an amount deductible to cover depreciation of some capital assets as well as depletion of other capital assets. Montgomery’s Auditing, 8th edition, this this to say, at page 267 :

“This chapter deals principally with the methods of computing provisions for depreciation and depletion in accordance with generally accepted accounting principles. Such methods

do not necessarily coincide with methods acceptable for federal income tax purposes.”

And at page 278:

“Depletion represents the absorption of investment in natural resources through amortization of its cost by charges to operations over the period during which the quantities or units of such resources are extracted or exhausted.

An allowance for depreciation is identified with the amortization of cost of productive facilities, but an allowance for

depletion is identified with the amortization of cost of natural resources. Enterprises exploiting depletable assets generally employ both depreciable and depletable assets.

When plant and equipment remain idle, depreciation not only continues, but may be accelerated. Cessation of operations does not ordinarily affect the units of natural resources since they remain to be extracted in the future.”

Having this in view, in tying together capital cost allowances under paragraphs (a) and (b) of subsection (1) of section 11 the legislator intended to treat both depreciation and depletion on the same level in making no difference as to the application of the Act. Land was made “depreciable” by exception under paragraph

(b) of section 11(1). The reason is that oil, gas, mines are natural resources to be exploited from deposits in depth and for the same purpose timber limits growing on land are’treated alike. Mines and timber limits, for income tax purposes, cannot in any way be distinguished one from the other. When it is said in paragraph (b) of Section 11(1) “as is allowed to the taxpayer by regulation” it is meant that allowances under (a) and (b) would receive the same treatment. Under Section 1100(1) (g) of the Income Tax Regulations sand and gravel pits come under the designation “industrial mineral mine”.

Section 1100(1) of the Regulations reads:

“1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to . . .”

and 1100(1)(g):

“such amount, not exceeding the amount calculated in accordance with Schedule E, as he may claim in respect of the capital cost to him of a property that is an industrial mineral mine or a right to remove industrial minerals from an industrial mineral mine where the mine is not a coal mine or a resource described in paragraph (a) of subsection (1) of section 1201;”

It is obvious that an industrial mineral mine comprises the land which is a real property. Both the property (land) and the property (right to remove) have the same taxation advantage, i.e. the benefit of a capital cost allowance.

On the evidence in this appeal I am satisfied that the lands concerned were purchased by the appellant because of their sand and gravel content and with the object of extracting the sand and gravel. The sand and gravel in situ was part and parcel of the land. What was being extracted was part of the land. The lands were used and worked by the appellant solely as sand and gravel pits. As so worked, each of the parcels of land was an industrial mineral mine within the meaning of Section 1100

(1) (g) of the Regulations and Schedule E. The mine was not merely the sand and gravel. The appellant claimed and was allowed deductions in respect of each mine under Section 1100

(1) (g) calculated in accordance with Schedule EK. Reading Sections 11(1) (a) and (b) of the Act and Section 1100(1) (g) of the Regulations with Schedule E, it appears to me that the amount of the deductions allowable in a taxation year pursuant to Schedule E is computed on the basis of a rate per unit of mineral mined in that year, but that the allowance is nevertheless in respect of the capital cost of the mine to the taxpayer. The residual value’’, as defined in Section 4 of Schedule E, which is an estimated value only, is one of the factors used in determining the rate per unit to be applied to mineral mined and it is deducted from the capital cost of the property for the purpose of arriving at that rate, but the fact that such residual value is thus used does not cause the deduction to be a deduction in respect of the minerals only rather than a deduction in respect of the capital cost of the mine.

The words ‘mine” and ‘‘timber limit’’ are found side by side in Section 11(1) (b) of the Act, and the provisions respecting capital cost allowances for timber limits and industrial mineral mines are so similar that the jurisprudence in cases involving timber limits is relevant in dealing with the present case.

In the case of timber limits, similarly to the case of industrial mineral mines, the ‘ residual value ’ ’ of the property is deducted from the capital cost of the limit in fixing the rate basis for the amount of deductible capital cost allowances.

The words “depreciable property’’, as they appeared in Section 20(2) of the Act, as amended by chapter 25, Section 7, of the Statutes of 1949, were held by the Supreme Court of Canada to refer to property such as a timber limit, the value of which depreciates as the timber is cut, Caine Lumber Co. Ltd. v. M.N.R., [1959] S.C.R. 556 at 561; [1959] C.T.C. 221 at 226. In that judgment the court also outlined the scheme of the Act and Regulations which affords a means of properly ascertaining the trading profit of persons engaged in such businesses as mining and lumbering, where capital assets are depleted by the operations.

In the judgment delivered by Cartwright, J., as he then was, in Highway Sawmills Ltd. v. M.N.R., [1966] S.C.R. 387 ; [1966] C.T.C. 150, it was said that the phrase “timber limits” describes a parcel of land with merchantable timber standing upon it, that under the scheme of the relevant sections of the Act and the Regulations a timber limit is treated as a class of depreciable property, an asset the total capital cost of which the owner is entitled to deduct in calculating his taxable income, and it was held that an amount received by the taxpayer for timber limit land from which the merchantable timber had been removed was the proceeds of disposition of depreciable property within the meaning of the applicable sections of the Act and Regulations, including Section 20(1) of the Act.

In my opinion, each of the parcels of land in question in the present case was an industrial mineral mine when it was owned and disposed of by the appellant and, as such, was “depreciable property’’ within the terms of Section 20(1) and (5) of the Act, 1.e., property in respect of which the appellant was allowed and was entitled to deductions under Section 1100(1) (g) of the Regulations, and, consequently, the proceeds of the disposition of each of those parcels fall within the provisions of those sections.

The next question, also related principally to the sale of lands by the appellant to Clover Bar Land Co. Ltd., is whether the lands were “disposed of’’, within the meaning of those words in Section 20 of the Act, in the appellant’s 1962 taxation year. The evidence does not show what documents were executed and delivered to transfer the lands to Clover Bar Land Co. subsequent to the execution of the Agreement Re Sale of Land (Exhibit A-ll), but it appears to me that from the evidence it is reasonable to infer that the lands were disposed of to Clover Bar in the appellant’s 1962 taxation year. In that respect counsel for the appellant submitted that the appellant did not in that year receive any money or proceeds from the land transaction, that no debentures were issued by Clover Bar Land Co. or received by the appellant in that year, that the appellant was not entitled* [1] in that year to the proceeds of disposition of the lands, that no “‘proceeds of disposition’’ of the lands were received or receivable in that year, and, consequently, that there is no case for recovery of capital cost under Section 20(1) in that year. There is no doubt that the appellant received neither money nor debentures from Clover Bar Land Co. in that year and that negotiations with Bailey Farms Ltd. as to the terms of the debentures were not concluded in that year. However, the sale price of the lands is stated in Exhibit A-ll as $761,841; Clover Bar agreed to issue and allot debentures to the appellant to that amount and the appellant agreed to accept them as payment in full for the lands; the appellant’s income tax return for its 1962 taxation year shows disposal of the lands at a selling price of that amount and the appellant claimed a capital gain on such dis- posl; debentures in that total amount are shown in the assets column of the appellant’s March 31, 1962 balance sheet submitted with its income tax return for its 1962 taxation year; and the debentures which were issued in 1963 to a total amount. of $760,000 had on their face an effective date of issue of February 2, 1962. The appellant also, as of January 31, 1962, transferred all its assets to Twin Bridges Sand & Gravel (1960) Ltd. If the lands were disposed of by the appellant, not in its 1962 taxation year but subsequent thereto, it should have been a simple matter for the appellant to have shown that such was the case in the course of the various steps taken in objecting to the Minister’s re-assessment and in the appeals to the Tax Appeal Board and this Court.

On the evidence it is my opinion that there was a disposition of the lands by the appellant in its 1962 taxation year and that the proceeds of the disposition included the sale prices thereof, even if payment was to be made in whole or in part in later years or under the terms of the debentures. There was a sale price of $761,841 for the lands sold to Clover Bar Land Co. Ltd., a sale price of $30,900 for the right-of-way sold to Calgary Power Ltd., and a sale price of $194,716.91 for sand and gravel sold to Twin Bridges Sand & Gravel (1960) Ltd. Those sale prices were proceeds of disposition of the depreciable property involved, by virtue of section 20(5) (e)*. [2]

I therefore find that the amount of $222,320.70 was properly added by the Minister in the re-assessment of the appellant’s income for its 1962 taxation year, as capital cost recovery on disposal of Schedule E assets.

The appeal will be dismissed, with costs to be taxed.