October 07, 2011

Northwood Pulp and Timber Limited (Appellant) v. Her Majesty the Queen (Respondent)

98 DTC 6640
Federal Court of Appeal
October 22, 1998

(Court File No. A-155-96.)

Deductions — Silviculture costs — Corporate taxpayer in the business of harvesting logs, and required, under its provincial timber licenses, to produce new free growing crops of trees within specified periods of time — Whether taxpayer entitled to include in its timber harvesting costs an estimate of the cost of its reforestation obligations, even though such costs not becoming payable until subsequent years — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 9(1), 18(1)(a) and 18(1)(e).

The corporate taxpayer was in the business of harvesting logs. Hence it was required, under its provincial timber licenses, in accordance with its silviculture obligations, to produce new free growing crops of trees within specified periods of time. For tax and accounting purposes, for its 1987 to 1991 taxation years, the taxpayer computed its cost of timber harvested by including therein an estimate of the cost of its silviculture obligations with respect thereto, thereby increasing its cost of sales for the said taxation years by the said estimates. In assessing the taxpayer for 1987 to 1991, the Minister disallowed the said estimates included in its cost of sales, allowing only those costs for silviculture to the extent that an actual outlay had been made in respect thereof. In dismissing the taxpayer’s appeal (96 DTC 1104), the Tax Court of Canada concluded that the taxpayer’s reforestation costs were a period cost or expense, and that the deduction of estimated reforestation costs was prohibited by paragraph 18(1)(a) of the Act. The taxpayer appealed to the Federal Court of Appeal.

Held: The taxpayer’s appeal was dismissed. The Tax Court Judge properly found, on the basis of the accounting evidence before him, that silviculture expenses were period or running expenses, rather than costs to be added to the cost of inventory, and accordingly, that such costs should be deducted only when incurred. This statement by the Tax Court Judge was a correct one because the actual expense would not be incurred until a subsequent period, and the estimates thereof made in advance by the taxpayer might turn out to be inaccurate. Furthermore, the taxpayer’s treament of the said expenses was not necessarily correct for tax purposes, simply because it was generally acceptable for accounting purposes. Finally, the taxpayer’s approach was inconsistent with “established case law principles” . In light of the foregoing, the Minister’s assessments were affirmed accordingly.