The taxpayer sold the assets of a timber operation (including a timber licence) for a cash purchase price of $169 million, but with the purchase price subject to a corresponding adjustment if a final determination of the value of the obligation of the purchaser to reforest the purchased property (which was an obligation which the province required the purchaser to assume on every such sale) was ultimately determined to be more or less than $11 million. Pursuant to this price adjustment clause, the auditors provided a reforestation statement indicating that in their view, the reforestation liability was approximately $11.2 million, so that cash portion of the purchase price was required to be adjusted by $0.2 million.
The Minister argued that the assumption of these obligations by the purchaser was part of the consideration paid. In agreeing instead with the taxpayer's position that the obligations were intrinsic to the forest tenure being sold, Rothstein J likened the reforestation obligations to "property that is in need of repair" (para. 28), and stated (at paras. 31-32):
The effect of Alberta's scheme is to embed the reforestation obligations into the forest tenure, such that the obligations cannot be severed from the property itself. As such, the reforestation obligations are simply a future cost tied to the tenure that depresses the value of the tenure. ... Under no circumstances could DMI have received [the unencumbered value] for the forest tenure.
This distinguishes the reforestation obligations tied to a forest tenure from a mortgage, which does not affect the value of the property it encumbers.
Rothstein J found (at para. 45) that although the parties had determined the value of the reforestation obligations:
Any amount that the parties assigned to the reforestation obligations in the sale agreement was simply a factor in determining the fair market value of the forest tenures....