SHEPPARD, D.J.:—This appeal is by Hope Hardware & Building Supply Co. Ltd. against the re-assessment of June 26, 1964, by the Minister for the taxation years 1960, 1961 and 1962 of the appellant’s distributive share of the profit received by the Corbett Lumber Company, a partnership, from the sale of timber sales X70216 on Peers Creek, X64664 on Dewdney Creek and X80974 on Boston Bar Creek in the Coquihalla watershed, British Columbia.
The appellant contends that the partnership was selling its business and therefore realizing on a capital asset but not making a sale in the course of its business. The facts follow.
Irvine Finlay Corbett and his wife held all the shares of the appellant and that company was one of the partners in Corbett Lumber Company, a partnership consisting of the appellant and three brothers of Irvine Finlay Corbett, and engaged in the business of logging in the Coquihalla watershed, and of operating a lumber mill at Hope, B.C. Irvine Finlay Corbett managed the partnership, and his brothers, the other partners, managed the logging. Irvine Finlay Corbett had been logging for some time in the Coquihalla watershed. In 1939 he leased a mill from his mother, in 1940 moved the mill to Hope, B.C. and operated there for one year. In 1941 the mill burned and he rebuilt. In 1947 fire again destroyed the mill and he rebuilt. In 1947 he incorporated the appellant company to engage in the retail sale of hardware and building supplies, and the company, with the three brothers, formed the partnership which continued to log in the Coquihalla watershed, and until destroyed by fire on March 11, 1958, continued to operate the mill at Hope, B.C.
Between 1952 and 1957 the Forestry Department allotted small areas for logging pending the settling of its policy. In the summer of 1956 the report of the Honourable Gordon MCG. Sloan was issued, recommending timber sales for the district including the Coquihalla. The policy of small allotments however continued to the extent indicated by the following letters. By letters of February 11, 1958 (Ex. 15), Corbett reported that he was given to understand by the Minister (of Lands and Forests) “that, until such time as policy has been worked out, large timber sales will not be held’’. In June 1958, a further inquiry was held by the Honourable Mr. Sloan, and in August 1958, his report (Ex. 82) was issued recommending the policy of sustained yield basis for timber sales in the Hope Region, including the relevant part of the Coquihalla watershed. By letter of September 24, 1958 (Ex. 29), Corbett wrote the Minister of Lands and Forests stating that he had applied in 1955 for a timber sale of Peers Creek (No. X70216) and inquiring about the delay in putting it up for auction. By letter of November 25, 1958 (Ex. 33), the Minister wrote to Corbett as to timber sale X64664, “The field work for the cruise of the area has been completed, and as soon as these notes have been compiled the timber sale will be advertised.’’
The fire of March 11, 1958, which destroyed the mill left the planing mill and the machine shop. Following that fire the partnership cleaned up the site as preliminary to rebuilding the mill, engaged an engineer to prepare plans for a new mill, bought a gang saw at a price in excess of $12,000, and looked over mills in Washington and Oregon for improvements to be incorporated into the new mill. Further, Corbett and the partnership had logged in the Coquihalla watershed for years, and to assist in acquiring timber and keeping others from bidding against them, he laid down roads and had acquired Crown lands with a view to blocking other persons going into the district. Following the Sloan report there was some interest in that district shown by other loggers. The Whonnock Lumber Co. Ltd. threatened to bid on timber sales in that district and offered to the Corbett partnership :
(1) a partnership for logging in the Coquihalla watershed ;
(2) a joint production of logs therefrom, or
(3) that the Corbett partnership sell.
As the Whonnock Lumber Co. Ltd. owed $40,000 for logs, Corbett concluded that if they were given an option to be accepted by paying cash, they would not have the funds to take it up, but that option while current would induce the Whonnock Lumber Co. Ltd. not to bid on timber sales and perhaps to persuade others not to bid. Therefore, Corbett orally agreed to give Whonnock such an option, which option was later reduced to writing. Also, Herman Singh threatened to bid on timber sales and as there was a timber sale advertised for December 8, 1958, Corbett agreed to sell him five million feet of cedar in each of the succeeding five years to be produced from the timber sale. On December 8, 1958, the Department offered for sale by public auction, timber sale X70216 (Peers Creek) (Ex. 34) containing approximately 66 million f.b.m., and that was bid in by Corbett. The Whonnock Lumber Co. Ltd. and Herman Singh attended at the sale but did not bid.
On December 16, 1958 (Ex. 35), the partners of Corbett Lumber Company gave Whonnock Lumber Co. Ltd., for the consideration of $500, an option for 120 days to purchase all their assets for $540,293.25 eash with the right to the Corbett Lumber Company to continue logging and to make expenditures for roads, all to be added to the purchase price. By an extension of option of April 15, 1959 (Ex. 36) in consideration of $1 that option was extended to May 31, 1959, to purchase at $607,293.25 with an addition that the option could be renewed for a further period of 120 days by paying $25,000 before May 31, 1959, and on acceptance, the optionors were to agree not to bid on timber sales for five years. The increased price was due to the deposits for two timber sales (X70216 and X64664) and for expenditures in building roads in the meantime. By extension of May 6, 1959, for the consideration of $1, the option was extended to June 15, 1959 (Ex. 37), and by payment of $25,000 the option was extended for 120 days from June 15, 1959.
Meanwhile the Department was advertising for sale by public auction on June 1, 1959, timber sale X64664 (Dewdney Creek). In May or June 1959, Pretty’s Limited, who had been logging south of Harrison, B.C. and running short of timber, examined the timber on X64664, and knowing that Corbett was logging in the Coquihalla District, Pretty called on Corbett at his residence to ask him if he objected to Pretty’s Limited bidding at the coming public auction. Corbett said that he did object, that he intended to bid in the timber sale and would endeavour to block Pretty’s getting into the Coquihalla District. Pretty thereupon said that he would not bid; he asked Corbett if he would give first refusal on the sale of the partnership business and Corbett refused, saying that it was not for sale.
On June 1, 1959, Corbett bid in timber sale X64664 (Dewdney Creek) of approximately 78 million f.b.m. (Ex. 38). Pretty and a representative of Whonnock Lumber Co. Ltd., attended the sale but neither bid.
In October 1959, the option to Whonnock Lumber Co. Ltd. expired (Ex. 39). The Whonnock Lumber Co. Ltd. asked for an extension but was refused. On October 19, 1959, and after the Whonnock option had expired, the Department at the request of a third person, put up for auction timber sale X80974 (Boston Bar Creek). Corbett agreed to sell the third person the cedar produced from the timber sale and bought in the timber sale as the sole bidder.
From April to November 1959, the Corbett Lumber Company employed David Thompson, a graduate forester, to do forestry work in the Coquihalla District. That work included the following :
(1) Preparing plan for the location of a logging road for right-of-way to Peers Creek (Ex. 43) and for interviews with the departmental officials for approval.
(2) Preparing a cutting plan for timber sale X70216 (Peers Creek) (Ex. 80), which laid down a cutting plan for the timber sale for each of the years 1959 to 1970 inclusive, showing in colour the part to be cut in each year, the location of the truck road which would permit all the merchantable timber to be reached, the settings, including the location of the spar trees whereby the logs of the area would be cold decked, the location of any swing by skyline to log merchantable timber beyond ground too rough for a truck road. It is apparent that such a plan could be laid down only by a competent forester thoroughly familiar with the topography of the timber sale, the location of the merchantable timber thereon and the proper methods of logging.
(3) Laying out of a truck road into Sowaqua Creek and into timber sale X64664 (Dewdney Creek) (Ex. 46).
(4) Laying down a truck road across a mountain by a route that would permit reaching the booming grounds without going on the public highway and thereby avoid paying $3.00 per thousand f.b.m.
In November 1959 Pretty called on Corbett and made an offer of $700,000 for the business of the Corbett Lumber Company. Corbett said he would think it over and Pretty had his superintendent call on the brothers. That resulted in the agreement (Ex, 49) of December 9, 1959, between the Hope Hardware & Building Supply Co. Ltd., Norman Arthur Corbett, Edward Vernon Corbett and Gilbert Roy Corbett, carrying on business under the firm name and style of Corbett Lumber Company at Hope (hereinafter called the Corbett Co.), and Pretty’s Limited, whereby for $700,000 payable $25,000 in cash, $325,000 on or before January 1, 1960 and the $350,000 on January 1, 1961 to 1965, both inclusive, with interest of $11,000 on the same dates, the Corbett Co. sold its assets enumerated in Parts I to IV, agreed not to compete for 25 years in the logging business in the Coquihalla watershed (para. 18), and that the parties would apply to the Department for a ruling as to the liability of the vendors for income tax and any income tax payable by the vendor would be assumed by the purchaser (para. 3).
The Corbett Co. continued logging until the day of the sale, building new roads into timber sale X64664 on Dewdney Creek ; on December 8, 1959, the day before the sale, they were working on that road and had taken in timber for the bridge across the creek but the bridge was not built.
This appellant, Hope Hardware & Building Supply Co. Ltd., contends that the timber sales in question were bought for the use of the partnership to be logged in future and not for the purpose of resale; that the timber licences were a capital asset, and that the sale to Pretty’s Limited was a sale of the business and not a sale in the course of the business and therefore not taxable.
Counsel for the Minister has contended that on the sustained yield basis for tax sale contracts there was greater interest shown in the Coquihalla District and therefore greater competition to be expected at the public auctions by the Department, which would result in the amount payable by the logger being increased and his profits to be derived being reduced. For that reason the Corbett Co. had bought the three timber sales in question in order to make its equipment more readily saleable, hence the timber sales had been acquired for the purpose of resale, and the profit realized by the resale to Pretty’s Limited was taxable income within Sections 3, 4 and 139(1) (e) of the Income Tax Act.
There is direct evidence by Corbett to the effect:
(1) that he planned to log in spring of 1960 and in subsequent years ;
(2) that the sustained yield basis and increased competition in bidding were not reasons for the sale, but the sole reason was that the offer of $700,000 was as much as the business was worth, therefore the Corbett Co. decided to sell the business.
The direct evidence is in favour of the appellant and the question is whether the evidence is borne out by the surrounding circumstances.
(1) It is contended for the Minister that the Whonnock option is some evidence that the appellant did wish to sell. On the other hand, Corbett testified that the Whonnock option was not given because of any intention to sell, but rather because he wished to remain in business. Corbett was of the opinion that the Whonnock Co. could not pay the option price in eash and by giving the option he would induce the Whonnock Co. not to bid at the public auctions, and probably as optionees they would persuade others not to bid. After he had acquired the timber sales X70216 and X64664, when the options expired in October 1959, he refused a renewal requested by Whonnock. In addition, under the option, Corbett Co. had reserved the right to continue operations, which operations had been continued, and the price had been increased to include the amounts for deposits on two timber sales and for the building of roads in the meantime. That inerease of the price to $607,293.25 payable in cash, increased the difficulty of Whonnock Co. in accepting the option.
(2) On October 19, 1959, and after the option to the Whon- nock Co. had expired, the Corbett Co. bid in at public auction timber sale X80974 at Boston Bar Creek (Ex. 47). That timber sale had been put up at the request of a third person but Corbett Co., having holdings in the Coquihalla watershed, was entitled to bid. When Corbett found that that timber sale could be reached from an extension of their logging road he therefore offered to sell to this third person the cedar to be produced from that timber sale. As a result the third person did not bid. The Corbett Co. thus acquired the timber sale and precluded another getting a timber holding on the Coquihalla and thereby interfering with the operations of the Corbett Co.
(3) Further, the work during 1959 indicated an intention to carry on logging operations indefinitely. During that year the Corbett Co. built roads for logging in the future. Pretty gave evidence that at Dewdney Creek they had taken in timber for a bridge but had not built the bridge by December 8, 1959. Thompson was employed from April to November 1959, when he laid down a plan for the logging of X70216 up to and including the year 1970, located new roads into the holdings, and a further road which would avoid using the public highway and reduce the cost of production in future years. That could only coneern Corbett Co. if it intended to operate in future. The laying down of plans of the logging operations, which was done by Thompson, would involve making all merchantable timber available, the roads to be built, the location of the spars to cold deck available merchantable timber, and for swing by skyline (or tractor) to reach timber beyond ground too rough for a truck road. Pretty stated that the Corbett Co. was logging up to the day before the sale and that they had in hand 1,500,000 f.b.m. of logs felled and bucked, for which Pretty had to pay. Thompson has testified that another might locate some roads elsewhere. That seems a matter on which loggers may differ. The work of Thompson, while no doubt competent, as approved by Corbett and the Department, nevertheless might not add to the value for a purchaser, because he might as an experienced logger prefer his own, a different method of logging, as for example by a relocation of the roads. Hence the Thompson work was of a kind that indicated an intention by Corbett Co. to log in future years. Further the work was beyond that required to hold the business together as a going concern but rather showed a like intention of the partnership for future logging.
(4) After the mill burned in March 1958, the Corbett Co. had bought equipment which indicated an intention to operate in the following years. That equipment included a Skagit mobile crane ($9,000) and a Michigan loader ($14,000) which were sold to Pretty’s Limited; two tank retrievers for portable spars which were not sold to Pretty’s Limited as that company had two. A purchaser would presumably take only the equipment he needed, in addition to his own, and in any event, a person would not buy new equipment in order to sell it at secondhand. Hence the purchase of equipment by Corbett Co., together with the work laid out by Thompson and that carried out by the Corbett Co., particularly the truck road towards the booming ground to avoid a cost of $3 per thousand f.b.m. for using public highways, are consistent with a plan for future economical logging operations by the Corbett Co. rather than with an expenditure with the intent to resell.
(5) The mill was burned in March 1958 and had not been rebuilt. However, the initial intention was to rebuild, as the Corbett Co. had bought a gang saw for a sum in excess of $12,000 which they resold after the sale to Pretty at a loss of $2,000. They had employed an engineer to get out plans for the new mill, had made trips through Oregon and Washington to examine mills there. They had made a profit on logging in every year except possibly the year 1958, and, as testified by MeCannel and others, the holdings were a profitable economic unit for logging operations. Under the circumstances Corbett decided to wait to see whether conditions warranted the expenditure for rebuilding the mill. The decision not to rebuild the mill immediately did not preclude the partnership carrying on a profitable logging business. In addition, the site for the mill, the planing mill and the machine shop were retained
(6) The Corbett Co. did not at any time advertise their business for sale, did not consult a broker and gave no listing. In 1952 to 1954 they were asked if they would sell by another company and stated their business was not for sale. Twice brokers had made offers which were refused. The Whonnock option did not become a sale and was given for the purpose of preventing a stranger going into the district or making it uneconomical by competitive bidding. The offer was made by Pretty unsolicited by Corbett and was accepted because, as Corbett has said, the amount was all that the business was worth. The passive role played by Corbett Co. in the offer by Pretty’s Limited and in fixing the amount is ‘‘the antithesis of what one would expect from a trader under like circumstances”: M.N.R. v. Valclair Investment Co. Ltd., [1964] Ex. C.R. 466; [1964] C.T.C. 22, Kearney, J. at p. 477.
The surrounding circumstances support the Corbett Co. in contending that the intention was to log in the following years and that the three timber limits in question were purchased for the purpose of such future logging by this partnership and not for the purpose of resale. The purchase by Pretty’s Ltd. was unsolicited and unforeseen until Pretty made the offer in November 1959.
It is contended for the Minister that the sale was not of the business but of assets, as assets were set forth in the schedules to the agreement (Ex. 49). As against that there was one entire consideration for all the assets and a covenant not to compete. In selling an asset the seller does not usually covenant not to compete, but such a covenant is common in the sale of a business. The Corbett Co. had purchased the three timber sales which afforded them the basis for logging operations until the conclusion of 1970. It was therefore not proven that the increased competition had caused the Corbett Lumber Co. to sell. The mill had burned on March 11, 1958, but it had burned on other occasions and there was an economic logging business quite apart from the mill.
On the evidence the Corbett Co. has effected a sale of its business, as the timber sales were acquired for the purpose of logging by the Corbett Co. in future years. The timber sales were therefore a capital asset for the reasons in Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77; [1953] C.T.C. 237.
The cases cited for the Minister are distinguishable. In Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384, the plan was to develop a shopping centre but that plan was frustrated by the failure to interest a department store, and thereupon the land was sold in three parcels at a profit. It was held to be taxable as a venture in the nature of trade. Judson, J. at pp. 907 and 389 said :
There is no evidence that these promoters had any assurance when they entered upon this venture that they could interest any such department store. Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made. There is ample evidence to support the finding of the learned trial judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land.
In "Warn ford Court (Canada) Limited v. M.N.R., [1964] C.T.C. 175, Jackett, P. said at p. 176:
As I understand Regal Heights Limited v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384, there was, at the time of acquisition by the appellant of the property there involved, two alternative intentions, one being the proposed development of a shopping centre and the other being re-sale in the event that it became impossible to carry out that development.
The case of M.N.R. v. Taylor, [1956-60] Ex. C.R. 3; [1956] C.T.C. 189, is also distinguishable. There the general manager bought lead with the knowledge and consent of the company and with the intention of reselling to the company. Thorson, P. at pp. 30 and 215 said:
The respondent could not do anything with the lead except sell it and he bought it solely for the purpose of selling it to the Company. In my judgment, the words of Lord Carmont in the Rheinhold case (supra) that “the commodity itself stamps the transaction as a trading transaction” apply with singular force to the respondent’s transaction.
The Corbett Co. did not buy the timber sales with the intention of reselling to Pretty or to anyone.
In Frankel Corporation Limited v. M.N.R., [1959] C.T.C. 244, the appellant company dealt in scrap metals, smelted and refined non-ferrous metals, carried on wrecking and salvage operations and erected structural steel. It sold the non-ferrous metals operation, including the inventory, at a price in excess of that carried on the company’s books. It was held the profit was not taxable. Martland, J., in delivering the judgment of the Court, at pp. 252, 253 said:
To be taxable the profit must be one from the exercise of trading activity, not the profit from a sale of capital as such. Mere realization of assets does not constitute trading. Commissioner of Taxes v. British-Australian Wool Realization Association, Ltd., [1931] A.C. 224.
In the case at Bar there was the sale of a business, and the realization of capital assets, and not a sale in the course of business; therefore the profit from the resale of the timber licenees to Pretty’s Limited was not taxable income.
In conclusion the appeal should be allowed and the re-assess- ment by the Minister of June 26, 1964, should be vacated.