MacMillan Bloedel (Alberni) Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Collier J.—Vancouver, B.C.,
December 13, 1972; Ottawa, May 10, 1973.
Income tax—"Income from logging operations", mean-
ing—Interest on borrowed money—Income Tax Act, s. 41A.
Initial cost of new tires—Whether business expense or
capital outlay—Income Tax Act, s. 12(1)(a).
Held, interest paid to a logging company (1) by a pulp and
paper company on money borrowed to purchase its mill, and
(2) by independent loggers on money borrowed by them, is
not "income ... from logging operations" within the mean
ing of section 41A of the Income Tax Act.
New tires which came with the trucks are all part of units
shown as capital cost and the appellant cannot deduct them
as a business expense.
APPEAL.
COUNSEL:
P. Thorsteinsson and C. Sturrock for
appellant.
W. Hobson for respondent.
SOLICITORS:
Thorsteinsson, Mitchell, Little and O'Keefe,
Vancouver, for appellant.
Deputy Attorney General of Canada for
respondent.
COLLIER J.—This appeal was heard at the
same time as another appeal (MacMillan Bloe-
del Industries Limited v. Minister of National
Revenue, T-1634-71). In this case there are two
points to be decided. In the other case there is
only one point to be decided but it is identical to
one of the points in this appeal. To that extent it
was agreed that the evidence adduced would be
common to both appeals.
I shall deal first with the issue peculiar to this
appeal: whether amounts of interest received by
the appellant in 1966 and 1967 ought to be
included in its income for the purpose of cal
culating logging tax deductions or credit pursu
ant to section 41A of the Income Tax Act,
R.S.C. 1952, c. 148 and amendments.
Counsel have agreed that the relevant statu
tory provisions are as follows:
41A. (1) There may be deducted from the tax otherwise
payable by a taxpayer under this Part for a taxation year an
amount equal to the lesser of
(a) â of any logging tax paid by the taxpayer to the
government of a province in respect of income for the
year from logging operations in the province; or
(b) 6 3 % of the taxnayer's income for the year from
logging operations in the province referred to in paragraph
(a).
(2) In subsection (1),
(a) "income for the year from logging operations in the
province" has the meaning given to that expression by
regulation;
Regulation 700(1):
700. (1) ... "income for the year from logging operations
in the province" means the aggregate of
(d) where standing timber is cut in the province by the
taxpayer or logs cut from standing timber in the province
have been acquired by the taxpayer, if the taxpayer
operates a sawmill, pulp or paper plant or other place for
processing logs in Canada, the income of the taxpayer for
the year from all sources minus the aggregate of
(i) his income from sources other than logging opera
tions and other than the processing and sale by him of
logs, timber and products produced therefrom,
The precise point is whether the interest was
income from sources other than logging opera
tions and ought to have been deducted from the
calculation in order to arrive at the logging tax
credit. The appellant did not deduct the
amounts. The Minister by re-assessment did so.
Prior to January 1, 1966, the appellant (under
a slightly different name) carried on integrated
logging operations on Vancouver Island. It con
trolled timberlands and carried on logging, a
sawmill, a shingle and plywood plant, and a pulp
and paper mill, all in the Alberni area. For
reasons not relevant to this case it sold as a
going concern its pulp and paper mill to a
wholly owned subsidiary, Alberni Pulp and
Paper Ltd. Thereafter the latter company car
ried on the pulp and paper operation. The pur
chase price was $76,077,140.18. A demand pro
missory note dated December 30, 1966 was
given for that amount by the purchaser to the
vendor. The interest rate was 6%.
In 1966 the sum of $4,564,628 interest was
paid. In 1967, the sum of $4,552,300 was paid.
In 1966 as well the appellant received amounts
totalling $2,625 described as interest from loans
to independent loggers and other miscellaneous
rental income. In 1967 these sums amounted to
$1,659. The respondent in his re_ =assessment
deducted all of these amounts for the years in
question.
Counsel for the appellant contends it is not
sufficient to look at the mere receipt or descrip
tion of the money, and from that to say it was
income of the taxpayer "... from sources other
than logging operations ..." and therefore must
be deducted from its total income. Counsel con
tends one must look through the transaction and
determine the real source of the funds. In this
case it is said the real source was from the
logging operations of the purchaser subsidiary
and the other payers of interest or rent. Refer
ence is made to two cases in support of the
contention that one may look beyond the mere
receipt of income in order to characterize its
source. (M.N.R. v. Hollinger North Shore
Exploration Company, Limited [1963] S.C.R.
131; Bessemer Trust Company and Ogden
Phipps as Trustee (1957 Trust) v. M.N.R. [1972]
F.C. 1176 (reversed on appeal [1972] F.C.
1398).) Those two cases are quite different on
their facts and on the sections of the Income
Tax Act under consideration. I do not find them
of much assistance in respect of the issue here.
It seems to me the appellant's contention can
be answered in a number of ways.
(1) There is no evidence that the monies paid
were actually generated by logging operations.
The large amounts paid by the subsidiary com
pany may, for all I know, have come from bank
loans. I think, however, it is fair to infer the
monies paid were realized from the proceeds of
logging operations.
(2) I shall assume the monies paid to the
appellant were all realized from logging opera
tions carried on by the purchaser and the bor
rowers or renters. As I interpret subparagraph
700(1)(4)(i), the income which need not be
deducted is income which came from logging
operations carried on by the taxpayer (in this
case the appellant and not the subsidiary com
pany). Here the appellant did not process logs
or timber and sell the products produced. The
subsidiary did and the income referred to in the
subparagraph was its income, not "his" income
("his" meaning in this case the appellant).
(3) I cannot think it was intended that the
income to be deducted by the taxpayer by virtue
of the subparagraph in question should be deter
mined by the particular type of business carried
on by some third person or company which is
indebted to the taxpayer and out of those third
person profits payment of those debts is made.
Investment income in the everyday sense in
which that term is used would seem automati
cally to be deducted by virtue of the subpara-
graph, but if the appellant here had invested in
the shares of and received dividends from a
company in the logging business, then if the
appellant's argument is correct, those particular
dividends would not be excluded. In my view,
the "sources" referred to are the sources car
' ried on or operated by the taxpayer and not
some third person.
The appeal in respect of the first issue is
therefore dismissed.
I turn now to the second issue here which, as
I have said, is the only issue in the other appeal.
During 1966 and 1967 the appellant purchased
new logging trucks and other units. These were
delivered fitted with tires. The appellant sought
to deduct as an expense under paragraph
12(1)(a)' the initial cost of the tires. In 1966 this
amounted to $140,350.16, in 1967 the cost was
$52,756.97 2 . The respondent, in his re-assess
ments, disallowed the deductions and added the
amounts into the Class 10 assets of the appel
lant, on the basis the new tires were part of
automotive equipment, and the taxpayer could
then, if it desired, claim capital cost allowance
under paragraph 11(1)(a) of the Act and section
1100 of the Regulations.
Prior to 1966 the appellant had, in fact, treat
ed new tires which came with new equipment in
the way the respondent maintains they should
be treated for the years in question. In 1966 the
appellant determined that in its logging division
where these units operated over very rough
roads tires lasted on the average slightly over
twelve months. The figures given were 12.2 or
perhaps 12.7 months. The initial cost of the tires
fitted on the new unit was roughly 10% to 15%
of the total cost of the truck (which averaged
$50,000 to $60,000 each in the years under
review).
The appellant contends that because of the
short life of the tires on these particular units
their initial cost and replacement cost is a recur
ring annual expense which - is deductible. Mr.
Rushton, the Manager of the Tax Section of the
appellant and its associated companies, and also
a chartered accountant, expressed the view that
treating the initial cost of the tires as an expense
incurred in the year of purchase of the unit was
in accordance with ordinary commercial princi
ples or well accepted principles of business and
accounting practice. The appellant says its
method is in accordance with the "matching"
principle, that is the proper matching of revenue
and expense in the years in question.
In my view, the method adopted by the appel
lant here is not a true application of the match
ing principle. It is not disputed that the logging
units are capital assets. They cannot function
without tires. It is also admitted there is other
equipment or materials that require replacement
or repair within the first year. Some examples
are fan belts and lubricating oil of various kinds.
No attempt has been made by the appellant to
claim those items as an initial expense, presum
ably because the cost is small in respect to the
overall cost of the unit. In my view it is purely
an arbitrary procedure to segregate these tires
from the rest of the unit. This equipment was
purchased as a package, not as a number of
individual parts later assembled to form an
operational machine.
In its financial statements to its shareholders
in the years in question the units were all shown
as a capital cost, including the initial cost of the
tires. It is true that the way a transaction is
handled in the books of a taxpayer is not deter-
minative of the result from an income tax point
of view. Mr. Rushton conceded that the Minis
ter's contention is in accordance with generally
accepted accounting practice. This is further
apparent by the way the appellant itself treated
the tires in its own financial statements.
It is unnecessary to cite any authority for the
proposition that the onus is on the taxpayer to
show that the assessment of the Minister is
wrong. In this case the assessment by the Minis
ter is based on acceptable commercial principles
and generally accepted accounting practices.
The appellant has not, in my view, discharged
the onus of showing that the use of those meth
ods in this particular case is wrong.
The appeal on this issue is therefore
dismissed.
1 12. (1) In computing income, no deduction shall be
made in respect of
(a) an outlay or expense except to the extent that it was
made or incurred by the taxpayer for the purpose of
gaining or producing income from property or a business
of the taxpayer,
2 In the other appeal the cost for 1966 was $109,348.09;
for 1967, $159,471.44.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.