Fletcher Challenge Canada Limited (Appellant) v. Her Majesty the Queen (Respondent)

2000 DTC 6437
Federal Court of Appeal
July 5, 2000

(Court File No. A-739-97.)

Characterization of certain timber licences as "timber resource properties" or as "timber limits and cutting rights" -- In 1979, exercising certain statutory rights under the British Columbia Forest Act, corporate taxpayer exchanged certain original timber cutting licences for certain replacement licences covering identical areas to the original licences -- During the taxpayer's 1987 taxation year the Province of British Columbia acquiring from it the replacement licences in exchange for other timber cutting licences -- Whether such exchange involving a disposition of "timber limits and cutting rights" as contended by taxpayer, or a disposition of "timber resource properties" acquired by the taxpayer at no cost, as contended by the Minister -- Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 13(21)(d.1), 20(1)(a), 39(1) and 65 -- Income Tax Regulations, ss. 1100(1)(e), 1200 to 1209, and 1212; Schedule II, Class 33, and Schedule V.

In 1963, the corporate taxpayer, a forestry company in British Columbia, acquired certain renewable Special Timber Licences, 8044P and 8045P (the "original licences"), for $259,178. These original licences (also known as "Pacific Rim Licences" ) entitled the taxpayer to cut certain standing timber subject to the terms and conditions of tree farming licence TFL 27. In 1979, exercising certain statutory rights under the British Columbia Forest Act, the taxpayer exchanged the original licences for Timber Licences T0005 and T0007 ("the replacement licences") which covered identical areas to the original licences, and were also subject to TFL 27. On March 3, 1987 (during the taxpayer's 1987 taxation year), the Province of British Columbia acquired from the taxpayer the replacement licences in exchange for Timber Licences T0910 and T0911. 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. In its 1987 return, the taxpayer treated the said exchange as a disposition of "timber limits and cutting rights", i.e., capital assets with an ACB on Valuation Day of $4,697,491, so that, in the taxpayer's view, no gain or loss arose in respect of such disposition. Such treatment was tantamount to saying that the replacement licences were simply a continuation of the original licences. In reassessing the taxpayer for 1998, however, the Minister treated the replacement licenses not as "timber limits and cutting rights" but as "timber resource properties" which had been acquired by the taxpayer at no cost. Accordingly, the Minister: (a) allowed no additions to the UCC of the taxpayer's Class 33 assets in respect of the acquisition of the replacement licences; (b) treated the 1987 exchange as a disposition, thereby subtracting $4,697,492 from the taxpayer's UCC of its Class 33 property; and (c) added $3,442,675 to the taxpayer's Class 33 balance, representing the cost to it of licences T0910 and T0911. As a result, the taxpayer's Class 33 balance was reduced to a negative figure of $60,094 (which was added to its income), and the taxpayer's CCA claim of $169,908 was denied. In allowing the taxpayer's appeal in part (98 DTC 1048), the Tax Court of Canada determined, inter alia: (i) that the taxpayer's (1979) replacement licences had been properly classified by the Minister as "timber resource properties" (within the meaning of subparagraph 13(21)(d.1)(ii) of the Act) since they had been acquired as extensions or renewals of, or substitutions for, the original licences; (ii) that the UCC of the replacement licenses was the original cost to the taxpayer of the original licences, i.e., $259,178 (this was 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 (iii) that the value of the UCC of the licences was $259,178. The taxpayer appealed to the Federal Court of Appeal.

Held: The taxpayer's appeal was dismissed. The taxpayer's position was that the 1979 exchange of the original licences for the replacement licences either did, or did not, give rise to a disposition. If it did, then the proceeds of disposition would have to be adjusted in accordance with the provisions of subsection 20(1) of ITAR. If it did not, then 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. Subsection 20(1) of ITAR provides that where, after 1971, a taxpayer disposes of depreciable property acquired prior to 1972, and owns it without interruption from December 31, 1971 until such time after 1971 as he disposes of it, the proceeds of disposition are to be determined in accordance with a specific formula if the original cost of the depreciable property is less than both the actual proceeds of disposition and the V Day value. On the other hand, the taxpayer also conceded that the replacement licences in this case had been properly classified as "timber resource properties" by both the Minister and the Tax Court Judge. This concession, however, was irreconcilable with the argument that subsection 20(1) of ITAR was applicable. That subsection only applies if depreciable property is owned by a taxpayer "without interruption" from December 31, 1971 until 1987, which was not the case here. In this case the replacement licences could only be "timber resource properties" if they had been acquired after May 6, 1974 (the effective date of the legislation amending paragraph 13(21)(d.1) of the Act). This was because, to have a "timber resource property", a taxpayer must have acquired a right to cut timber in Canada after that date, whereas the taxpayer's timber cutting rights (which were extended in 1979, and after May 6, 1974) were considered to have been "acquired" by it in 1979 (in accordance with the ratio in The Queen v. Kettle River Sawmills Limited et al. (92 DTC 6525) (FCA)). As a result, the replacement licenses were not owned by it without interruption after December 31, 1971. It was obvious, therefore, that, having in mind the taxpayer's concession (with regard to the characterization of the replacement licences as "timber resource properties"), subsection 20(1) of ITAR could not apply. As mentioned, the taxpayer's second proposition was that (in the absence of a disposition in 1979) the cost of the replacement licences was equal to the fair market value of the original licences at the time at which they were given in exchange. In support of this proposition, the taxpayer was contending that it had "given up" the value of the original licences to acquire the replacement licences. Such an argument, however, ran contrary to what was decided by the Federal Court of Appeal in the Kettle River Sawmills Limited case. In that case the Federal Court of Appeal found that the taxpayers had not given up anything at all to obtain the renewed licences forming the subject matter of the appeal. Similarly, in the case at bar, the taxpayer had not given up anything to get the replacement licences. Under sections 20 and 33 of the British Columbia Forest Act, the original licences were made to expire by statute. This required that the replacement licences be issued automatically. And they gave the same rights to cut over the same area as the original licences. In light of all of the foregoing, the decision of the Tax Court Judge had to remain undisturbed, as did the Minister's reassessment which had been ordered by the Tax Court Judge.

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