Fletcher Challenge Canada Ltd. v. Minister of National Revenue, (2000) 257 N.R. 269 (FCA)

• Judge: Desjardins, Létourneau and McDonald, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: July 05, 2000
• Jurisdiction: Canada (Federal)
• Citations: (2000), 257 N.R. 269 (FCA)

Fletcher Challenge Can. Ltd. v. MNR (2000), 257 N.R. 269 (FCA)

MLB headnote and full text

Temp. Cite: [2000] N.R. TBEd. JL.045

Fletcher Challenge Canada Limited (appellant) v. Her Majesty The Queen (respondent)

(A-739-97)

Indexed As: Fletcher Challenge Canada Ltd. v. Minister of National Revenue

Federal Court of Appeal

Desjardins, Létourneau and McDonald, JJ.A.

July 5, 2000.

Summary:

In 1963, the corporate taxpayer acquired two timber licences for $259,178. The licences were renewed in 1972. In 1978, amendments to the Forest Act required the taxpayer to replace the licences with new licences. In 1979, the taxpayer exchanged the licences for two new licences. In 1986, the taxpayer agreed to exchange the two licences (province needed land for a national park) for two replacement licences valued at $3,442,675 plus $1,254,816, for a total consideration of $4,697,491. Before 1974, the taxpayer's timber cutting rights were characterized by the Income Tax Act as depreciable property which could be deducted on a depletion basis. The taxpayer never claimed any depletion respecting the capital cost. In 1974, the Income Tax Act was amended to create "timber resource properties", another form of depreciable property. The taxpayer never claimed capital cost allowance. In 1987, the taxpayer treated the licence exchange as a disposition of "timber limits and cutting rights" with an adjusted capital cost base equal to their "valuation day" value of $4,697.491, giving rise to neither a gain nor a loss. This treat­ment was based on the replacement licences being merely a continuation of the original licences. In 1988, the Minister reassessed the replacement licences as "timber resource properties" acquired by the taxpayer at no cost. In the result, $60,094 was added to the taxpayer's 1988 income and a $169,908 claim for capital cost allowance was denied. The taxpayer appealed to the Tax Court of Canada.

The Tax Court of Canada, in a judgment reported 98 D.T.C. 1048, allowed the appeal in part. The court ruled that the replacement licences were "timber resource properties", the undepreciated capital cost of the replace­ment licences was the original cost ($259,178) and the undepreciated capital cost of the licences was also $259,178. The taxpayer appealed. Although accepting that the replacement licences were "timber resource properties" and that undepreciated capital cost was $259,178, the taxpayer challenged the tax consequences of the licence exchange, submitting that the pro­ceeds of disposition should have been deter­mined under Income Tax Application Rule 20(1) (depreciable property acquired before 1972 and owned without interruption from December 31, 1971, until disposed of).

The Federal Court of Appeal dismissed the appeal. Accepting that the replacement licences were "timber resource properties", it was obvious that Income Tax Application Rule 20(1) could not apply.

Income Tax - Topic 1039

Income from a business or property - Income from property - Timber resource property - The taxpayer acquired two timber licences for $259,178 (1963) - In 1979, the taxpayer exchanged the licences for two new licences (required by statute) -In 1986, the taxpayer exchanged the two licences (land needed for national park) for two replacement licences valued at $3,442,675 plus $1,254,816, for a total consideration of $4,697,491 - 1974 Income Tax Act amendments created "timber resource properties", a form of depreciable property - The taxpayer never claimed capital cost allowance - In 1987, the taxpayer treated the licence exchange as a disposition of "timber limits and cutting rights" with an adjusted capital cost base equal to their "valuation day" value of $4,697.491, giving rise to neither a gain nor a loss - In 1988, the Minister reassessed the replacement licences as "timber resource properties" acquired by the taxpayer at no cost - In the result, $60,094 was added to the taxpayer's 1988 income and $169,908 capital cost allow­ance was denied - The Tax Court of Canada ruled that the replacement licences were "timber resource properties", the undepreciated capital cost of the replace­ment licences was the original cost ($259,178) and the undepreciated capital cost of the licences was also $259,178 - The taxpayer appealed the tax conse­quences of the licence exchange, submit­ting that the proceeds of disposition should have been determined under Income Tax Application Rule 20(1) (depreciable prop­erty acquired before 1972 and owned without interruption from December 31, 1971, until disposed of) - The Federal Court of Appeal dismissed the appeal - Accepting that the replacement licences were "timber resource properties", it was obvious that Income Tax Application Rule 20(1) could not apply.

Cases Noticed:

Kettle River Sawmills Ltd. v. Minister of National Revenue (1993), 164 N.R. 241; 94 D.T.C. 6086 (F.C.A.), refd to. [para. 20, footnote 7].

Kettle River Sawmills Ltd. v. Minister of National Revenue (1992), 56 F.T.R. 191; 92 D.T.C. 6525 (T.D.), refd to. [para. 22, footnote 10].

Statutes Noticed:

Income Tax Act, S.C. 1970-71-72, c. 63, sect. 6(9), sect. 13(21)(d.1) [para. 5, foot­note 5].

Income Tax Act, Income Tax Application Rules (1971), rule 20(1) [para. 18].

Income Tax Application Rules - see Income Tax Act.

Counsel:

Warren Mitchell, Q.C., for the appellant;

Brent Paris, for the respondent.

Solicitors of Record:

Thornsteinssons, Vancouver, B.C., for the appellant;

Morris Rosenberg, Deputy Attorney Gen­eral of Canada, Vancouver, B.C., for the respondent.

This appeal was heard on May 2, 2000, at Vancouver, B.C., before Desjardins, Lé­tourneau and McDonald, JJ.A., of the Feder­al Court of Appeal.

On July 5, 2000, Desjardins, J.A., delivered the following judgment for the Court of Appeal.