Daishowa-Marubeni International Ltd. v. Canada

Daishowa-Marubeni International Ltd. v. Canada
Court (s) Database
Federal Court of Appeal Decisions
Date
2011-09-23
Neutral citation
2011 FCA 267
File numbers
A-287-10
Notes
Reported Decision
Decision Content
Date: 20110923
Docket: A-287-10
Citation: 2011 FCA 267
CORAM: NADON J.A.
LAYDEN-STEVENSON J.A.
MAINVILLE J.A.
BETWEEN:
DAISHOWA-MARUBENI INTERNATIONAL LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on May 3, 2011.
Judgment delivered at Ottawa, Ontario, on September 23, 2011.
REASONS FOR JUDGMENT BY: NADON J.A.
CONCURRED IN BY: LAYDEN-STEVENSON J.A.
DISSENTING REASONS BY: MAINVILLE J.A.
Date: 20110923
Docket: A-287-10
Citation: 2011 FCA 267
CORAM: NADON J.A.
LAYDEN-STEVENSON J.A.
MAINVILLE J.A.
BETWEEN:
DAISHOWA-MARUBENI INTERNATIONAL LTD.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NADON J.A.
[1] Before us are an appeal and a cross-appeal from a Judgment dated June 11, 2010, 2010 TCC 317, 2010 DTC 1216, by Mr. Justice Campbell J. Miller (the Judge) of the Tax Court of Canada, wherein the Judge allowed in part the appellant’s appeals from the Minister of Revenue’s (the Minister) reassessments of its 1999 and 2000 taxation years.
[2] More particularly, the Judge concluded that the Minister was correct to include, in the calculation of the appellant’s proceeds of disposition of two sawmill operations which included the transfer of forest tenures, the appellant’s silviculture liabilities assumed by the purchasers as part of the sales of the sawmill operations. However, the Judge concluded that the amounts of $11,000,000 and $2,996,380 included by the Minister constituted an error on his part.
[3] As a result, the Judge determined that the amounts that should have been included in the appellant’s proceeds of disposition under subsection 13(21) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the Act) were amounts which represented the current reforestation liability and the long-term reforestation liability discounted by 80%. The Judgment reads as follows:
1. On the sale to Tolko [the High Level Division], an amount equal to the current silviculture liability of $2,057,498 plus 20% of the long-term silviculture liability of $9,238,727, for a total of $3,905,244; and
2. On the sale to Seehta [the Brewster Division], an amount equal to the current silviculture liability of $558,615 and 20% of the long-term silviculture liability of $2,407,693, for a total of $1,040,153.
[4] Both the appellant and the respondent take issue with the Judge’s decision. The appellant, on its appeal, takes the position that the Judge erred in including the assumption of silviculture (or reforestation) liabilities in the proceeds of disposition. In the alternative, the appellant says that it was entitled to an offsetting deduction equal to the amount included in the proceeds of disposition. On its cross-appeal, the respondent says that the Judge erred in ignoring the values attributed by the parties to the silviculture liabilities pursuant to their respective contracts, adding that it was not open to the Judge to arrive at values other than those agreed to by the parties.
The Facts
[5] During the 1990s, the appellant operated pulp mills in Peace River, Alberta and in Quesnel, British Columbia, from which it supplied pulp to its two shareholders, Daishowa Paper Manufacturing Co. Ltd. and Marubeni Corp.
[6] Two of the appellant’s subsidiaries, namely High Level Forest Products Ltd., situated in High Level, Alberta and Brewster Construction Ltd., situated near Red Earth, Alberta, carried on the business of harvesting logs and manufacturing finished timber and other goods.
[7] On January 1, 1999, the appellant amalgamated with its subsidiaries, which became divisions thereof, namely the High Level Division (High Level) and the Brewster Lumber Division (Brewster). The Peace River pulp operation (Peace River) became the appellant’s third division. With respect to High Level and Peace River, the appellant and the Province of Alberta entered into a Forest Management Agreement (FMA). With respect to Brewster, the appellant held a timber quota. Both the FMA and the timber quota (jointly, the timber rights) included a right or licence to cut or remove timber from a limit or area in Canada for the purposes of the definition of a “timber resource property” found in subsection 13(21) of the Act.
[8] Pursuant to the timber rights, the appellant was bound to provide reforestation plans to the Province of Alberta on an annual basis and to reforest all lands cut over by it (the silviculture liability or the reforestation obligations).
[9] At all times material to this appeal, Alberta law and the regulatory policies adopted pursuant thereto provided that a company’s silviculture liability was not satisfied until a sufficient reforested tree crop passed a free-growing growth point. Generally, this took between eight to fourteen years from the date of cutting.
[10] By 1999, the appellant had decided to sell both High Level and Brewster. First, in 1999, it sold High Level to Tolko Industries Ltd. (Tolko). Pursuant to the sale, the appellant’s FMA as well as various timber quotas, licence and permits were assigned to Tolko. Included in the sale was the disposition of a Timber Licence, a “timber resource property” for the purposes of subsection 13(21) of the Act.
[11] The sale of High Level was effected through a bid process with a submission date of September 23, 1999, resulting in the receipt of 5 separate bids for the purchase of High Level. After consideration of these bids, the appellant concluded that Tolko’s bid of $180,000,000 plus an amount equal to the estimated value of the net purchased working capital, less the estimated amount of the long-term reforestation liability, was the most favourable. As of September 24, 1999, the appellant decided to negotiate the final terms of the sale as quickly as possible so as to minimize the possibility that Tolko might withdraw or reduce its bid.
[12] Although Tolko was prepared to accept the long-term reforestation obligation, it wanted the final adjusted silviculture liability to be audited and quantified and thus proposed a pricing formula that set a gross price from which the amount that would be quantified for the long-term silviculture liability would be deducted.
[13] The appellant and Tolko signed their Agreement (Agreement or Contract) on October 6, 1999, with a closing date scheduled for November 1, 1999. As part of the Agreement, the appellant agreed to complete and produce a reforestation statement to confirm the quantification of the silviculture liability which Tolko would assume. In particular, the Agreement provided the following: (i) a purchase price of $169,000,000 for certain assets, plus (or minus); (ii) a net purchased working capital estimated at $16,628,400 plus (or minus) any difference between a preliminary and a final calculation; (iii) the assumption of $11,000,000 of estimated silviculture liability by Tolko, plus (or minus) any difference between a preliminary and a final estimate of assumed silviculture liability.
[14] On November 1, 1999, Tolko made a cash payment of $185,628,400 to the appellant.
[15] Pursuant to information provided by the appellant, the reforestation statement which it had agreed to produce was completed by PricewaterhouseCoopers LLP, Canada (the Accountants) on November 19, 1999. Based on this statement, the calculation of the silviculture liability was quantified at $296,225 more than the original estimate of $11,000,000. As a result, the appellant issued a bank draft in favour of Tolko in the amount of $296,225 plus interest.
[16] Consequently, as of October 31, 1999, the silviculture liability of $11,296,225 was classified by the appellant as a long-term liability of $9,238,727 – an amount that would not be expended within the 12 months following October 31, 1999 – and a current liability of $2,057,398 – an amount that would be expended within the 12 months following October 31, 1999. Of the $11,296,225 silviculture liability, a sum not exceeding $400,000 would have been spent during the appellant’s 1999 tax year.
[17] Between the years 2000 and 2008, Tolko spent no less than $4,733,184.50 with respect to the silviculture liability it assumed when it purchased High Level.
[18] It is agreed by the parties that if Tolko had not assumed the appellant’s silviculture liability, the amount of cash or other consideration that it would have paid to the appellant would have been greater.
[19] I now turn to the facts pertaining to the sale of Brewster. In the year 2000, the appellant sold Brewster to Seehta Forest Products (Seehta). The sale included the disposition of a Timber Licence, a “timber resource property” for the purposes of subsection 13(21) of the Act. The Agreement with Seehta was signed on August 11, 2000, with a closing date scheduled for November 24, 2000. Prior to the sale of Brewster, the appellant commissioned an independent valuation prepared by CIBC World Markets. The valuation was completed on June 30, 1999 and provided two valuations to the appellant. The first one provided for an amount “as low as $10,250,000” based on “limited assumptions” by the purchaser. The second valuation, based on “unlimited assumptions” by the purchaser, was for a figure “as high as $35,406,000”.
[20] The purchase price for Brewster was $6,100,000 cash for certain assets (plus or minus) any difference between a preliminary estimate of the net purchased working capital of $4,919,000 and a final estimate of the net purchased working capital (plus or minus). The terms of the sale of Brewster to Seehta also included the assumption of the silviculture liability. In that regard, the appellant’s accounting estimate of its reforestation obligations, which appeared on its interim financial statements dated October 31, 2000, was $2,996,380. In its income tax return for the 2000 taxation year, the appellant indicated that its silviculture liability pertaining to Brewster was $2,996,380, which, as of December 31, 1999, the appellant classified as a long-term liability of $1,837,995 – an amount that would not be expended within the 12 months following December 31, 1999 – and a current liability of $558,615 – an amount that would be expended within the 12 months following December 31, 1999.
[21] Most of the silviculture liability assumed by Seehta as of November 24, 2000, i.e. the date of the Brewster disposition, was a long-term liability and not a current liability. Finally, of the portion of the silviculture liability that was current, only a small portion thereof could have been spent on silviculture during the appellant’s 2000 taxation year.
[22] A few more facts to complete the picture will be helpful.
[23] The parties to the sales of both High Level and Brewster did not allocate any value to goodwill. Although the appellant could have sold both of its divisions without the Timber Licences, these licences were considered to be essential elements of the sales in the industry. Also of relevance is the fact that the Province of Alberta consented to the assignment of the Timber Licences to Tolko and Seehta. When giving its consent to the assignment of a Timber Licence, as in this case, the Province of Alberta took the position that, pursuant to the Forests Act, RSA 2000, c.-F-22, and the Timber Management Regulations, Alta. Reg. 60-1973, the assignee assumed the reforestation liability corresponding to the forest tenure and that, as a result, the assignor was no longer liable.
[24] In reporting its income for the 1999 and 2000 taxation years, the appellant did not include in its proceeds of disposition any amounts pertaining to the silviculture liabilities assumed by the purchasers.
[25] The Minister reassessed the appellant in respect of both sales by including, in the calculation of its proceed of disposition of “timber resource properties”, the following amounts of estimated silviculture liability: $11,000,000 in respect of High Level and $2,966,301 in respect of Brewster.
The Tax Court Decision
[26] Other than brief remarks to the effect that the factual situation of the Brewster sale was indistinguishable from that of the High Level sale, the Judge’s Reasons deal exclusively with the sale of High Level to Tolko.
[27] In allowing the appellant’s appeal in part, the Judge found that Tolko’s assumption of the appellant’s reforestation obligations constituted consideration that could properly be included in the appellant’s proceeds of disposition under subsection 13(21) of the Act (Judge’s Reasons, paras. 24 to 27). In so concluding, the Judge noted that the appellant had admitted that it would have received additional consideration had Tolko not assumed its silviculture liability as part of the sale. He further noted that the applicable provincial legislation effectively forced all purchasers of forest tenures in Alberta to assume any corresponding reforestation liability.
[28] The Judge then analyzed the appellant’s claim that the value of the purported benefit was so uncertain that it could not be included for tax purposes in its proceeds of disposition. More particularly, he found that although the deal was based on an audited estimate setting the value of the silviculture liability at $11,000,000, the parties did not actually agree that the appellant would receive additional consideration of $11,000,000 by reason of Tolko’s assumption of the silviculture liability.
[29] Considering the realities of the timber industry, the Judge was satisfied that the reforestation liability arose as soon as a stand of trees was cut, but that the corresponding reforestation costs would not be known until the reforestation expenses were actually incurred. Although he did not accept that the authorities shielded the assumption of the appellant’s silviculture liability from taxation, he found that only a portion of the estimated liability would be subject to tax. In so concluding, he noted that considerable uncertainty existed in estimating the value of the reforestation liability in that it was spread over many years, the appellant had little control over the forces that would render the amount more certain, only when the amount became certain did it become deductible in that it was spent, and there was a significant tax impact of including the whole amount (Judge’s Reasons, para. 39).
[30] It is clear that the Judge understood that Tolko had been successful in negotiating an $11,000,000 deduction in regard to the purchase price that it had originally offered, as a result of its assumption of the appellant’s silviculture liability. However, in his view, the parties had not agreed that this amount constituted the actual value of the liability, the value of the benefit to the appellant by reason of the assumption of liability, or the value of the consideration that Tolko was actually offering. Rather, the Judge concluded that, in the circumstances, a proper disposition of the issue was to include in the appellant’s proceeds of disposition an amount equalling the current reforestation liability of $2,057,498, and the long-term reforestation liability discounted by 80% so as to reflect six factors which he outlined at paragraph 40 of his Reasons.
[31] The Judge then dealt with the appellant’s argument that, in the event he found that any amount fell into the proceeds of disposition, it was entitled to an offsetting deduction because of its payment to Tolko of assets (the forest tenure) to assume the reforestation liability. The Judge found this argument to be without merit because of his view that the transaction was one for the sale of capital assets and that the assumption of the reforestation liability was “simply part of that capital transaction” (Judge’s Reasons, para. 44).
[32] The Judge further held that subsection 18(9) of the Act had no application to the transaction. At paragraph 49 of his Reasons, he dealt with that issue in the following terms:
49. The Respondent argues that this [subsection 18(9) of the Act] expressly precludes the deduction of any amount paid by Daishowa to Tolko as it was for services to be rendered after the end of the taxation year. The Appellant counters that this approach looks at what the payment was received by Tolko for, not, more accurately, according to the Appellant, what the payment was made by Daishowa for: the payment was made to Tolko to assume the liability to render services. This is a somewhat fine distinction, but what it does highlight for me is that this is simply not a prepaid expense situation. No payment was made by Daishowa for services to be rendered to Daishowa: that was not the nature of the payment, even if I were to consider the transfer of the forest tenures as payment. In brief, section 18(9) is a red herring.
[33] Finally, the Judge, at paragraph 52 of his Reasons, indicated that he saw “no difference in the fact situation of the Seehta matter to reach any different conclusion”. As a result, he rendered the Judgment which I have reproduced above at paragraph 3.
The Issues
[34] In order to dispose of the appeal and the cross-appeal, a number of issues must be addressed:
a. What is the applicable standard of review?
b. Did the Judge err in concluding that the silviculture liabilities assumed by the purchasers were to be included in the appellant’s proceeds of disposition for the 1999 and 2000 taxation years? If the Judge made no error in so concluding, did the parties to the Agreements of sale of both High Level and Brewster agree to attribute a value to the reforestation liabilities assumed by the purchasers and, if so, what consequences flow from attributing values thereto?
c. Was the Trial Judge correct in concluding that only 20% of the long-term reforestation liability should be included in the appellant’s income as proceeds of sale in the relevant tax years?
d. Was the appellant entitled to claim either a deduction from its income or include the capital expenditure amount paid for having the purchasers assume the reforestation liability in its adjusted cost base?
e. Did the judge err in allocating the $11,000,000 in respect of the silviculture liability to the timber resource property as opposed to goodwill?
f. Were the Judge’s Reasons adequate?
g. Were the respondent’s pleadings sufficient to ground the Judge’s findings?
Relevant Legislative Provisions
[35] Before addressing the issues which arise in the appeal and the cross-appeal, it will be helpful to reproduce a number of provisions of the Act which are relevant to the determination of those issues.
13. (1) Where, at the end of a taxation year, the total of the amounts determined for E to J in the definition “undepreciated capital cost” in subsection 13(21) in respect of a taxpayer’s depreciable property of a particular prescribed class exceeds the total of the amounts determined for A to D in that definition in respect thereof, the excess shall be included in computing the taxpayer’s income for the year.
…
(21) In this section,
“proceeds of disposition” of property includes,
(a) the sale price of property that has been sold,
…
“timber resource property” of a taxpayer means
(a) a right or licence to cut or remove timber from a limit or area in Canada (in this definition referred to as an “original right”) if
(i) that original right was acquired by the taxpayer (other than in the manner referred to in paragraph 13(21) “timber resource property” (b)) after May 6, 1974, and
(ii) at the time of the acquisition of the original right
(A) the taxpayer may reasonably be regarded as having acquired, directly or indirectly, the right to extend or renew that original right or to acquire another such right or licence in substitution
therefor, or
(B) in the ordinary course of events, the taxpayer may reasonably expect to be able to extend or renew that original right or to acquire another such right or licence in substitution therefor, or
(b) any right or licence owned by the taxpayer to cut or remove timber from a limit or area in Canada if that right or licence may reasonably be regarded
(i) as an extension or renewal of or as one of a series of extensions or renewals of an original right of the taxpayer, or
(ii) as having been acquired in substitution for or as one of a series of substitutions for an original right of the taxpayer or any renewal or extension thereof;
…
“undepreciated capital cost” to a taxpayer of depreciable property of a prescribed class as of any time means the amount determined by the formula
(A + B + C + D + D.1) - (E + E.1 + F + G + H + I + J + K)
where
A is the total of all amounts each of which is the capital cost to the taxpayer of a depreciable property of the class acquired before that time,
…
G is the total of all amounts each of which is the proceeds of disposition before that time of a timber resource property of the taxpayer of the class minus any outlays and expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition,
…
18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
…
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
…
(e) an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund except as expressly permitted by this Part;
…
20. (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
…
39. (1) For the purposes of this Act,
(a) a taxpayer’s capital gain for a taxation year from the disposition of any property is the taxpayer’s gain for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read without reference to the expression “other than a taxable capital gain from the disposition of a property” in paragraph 3(a) and without reference to paragraph 3(b), be included in computing the taxpayer’s income for the year or any other taxation year) from the disposition of any property of the taxpayer other than
…
(iv) a timber resource property;
…
248. (1) In this Act,
…
“amount” means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing…
13. (1) Tout contribuable doit inclure, dans le calcul de son revenu pour une année d’imposition, l’excédent éventuel à la fin de l’année du total des sommes représentées par les éléments E à J de la formule figurant à la définition de «fraction non amortie du coût en capital» au paragraphe (21) sur le total des sommes représentées par les éléments A à D de cette formule, concernant ses biens amortissables d’une catégorie prescrite.
…
(21) Les définitions qui suivent s’appliquent au présent article.
«produit de disposition » Le produit de disposition de biens comprend:
a) le prix de vente de biens qui ont été vendus;
[…]
«avoir forestier»
a) Droit ou permis de couper ou de retirer du bois sur une concession ou un territoire du Canada (appelé «droit initial» à la présente définition) si:
(i) d’une part, le contribuable a acquis ce droit initial (mais non de la manière visée à l’alinéa b)) après le 6 mai 1974,
(ii) d’autre part, au moment de l’acquisition du droit initial:
(A) soit il est raisonnable de considérer que le contribuable a acquis, directement ou indirectement, le droit à la prolongation ou au renouvellement de ce droit initial ou le droit d’acquérir un autre droit ou permis de ce genre pour le remplacer,
(B) soit dans le cours ordinaire des choses, le contribuable peut raisonnablement s’attendre de pouvoir obtenir la prolongation ou le renouvellement de ce droit initial ou de pouvoir acquérir un autre droit ou permis de ce genre pour le remplacer;
b) droit ou permis de couper ou de retirer du bois sur une concession ou un territoire du Canada dont le contribuable est propriétaire s’il est raisonnable de considérer ce droit ou ce permis :
(i) soit comme une prolongation ou un renouvellement d’un droit initial ou comme l’une de plusieurs prolongations ou l’un de plusieurs renouvellements d’un tel droit du contribuable,
(ii) soit comme ayant été acquis en remplacement d’un droit initial du contribuable ou en remplacement d’un renouvellement ou d’une prolongation de celui-ci ou lors de l’un de plusieurs remplacements d’un tel droit, ou d’un renouvellement ou d’une prolongation d’un tel droit.
[…]
«fraction non amortie du coût en capital»
S’agissant de la fraction non amortie du coût en capital existant à un moment donné pour un contribuable, relativement à des biens amortissables d’une catégorie prescrite, le montant calculé selon la formule suivante:
(A + B + C + D + D.1) - (E + E.1 + F + G + H + I + J + K)
où:
A représente le total des sommes dont chacune est le coût en capital que le contribuable a supporté pour chaque bien amortissable de cette catégorie acquis avant ce moment;
[…]
G le total des sommes dont chacune est, pour une disposition, avant ce moment, d’un avoir forestier de cette catégorie dont le contribuable est propriétaire, le produit de disposition de cet avoir moins les dépenses engagées ou effectuées en vue de la disposition;
[…]
18. (1) Dans le calcul du revenu du contribuable tiré d’une entreprise ou d’un bien, les éléments suivants ne sont pas déductibles :
[…]
b) une dépense en capital, une perte en capital ou un remplacement de capital, un paiement à titre de capital ou une provision pour amortissement, désuétude ou épuisement, sauf ce qui est expressément permis par la présente partie;
[…]
e) un montant au titre d’une provision, d’une éventualité ou d’un fonds d’amortissement, sauf ce qui est expressément permis par la présente partie;
[…]
20. (1) Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien pour une année d’imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu’il est raisonnable de
considérer comme s’y rapportant:
a) la partie du coût en capital des biens supporté par le contribuable ou le montant au titre de ce coût ainsi supporté que le règlement autorise;
[…]
39. (1) Pour l’application de la présente loi:
a) un gain en capital d’un contribuable, tiré, pour une année d’imposition, de la disposition d’un bien quelconque, est le gain, déterminé conformément à la présente sous-section (jusqu’à concurrence du montant de ce gain qui ne serait pas, compte non tenu du passage « autre qu’un gain en capital imposable résultant de la disposition d’un bien», à l’alinéa 3a), et de l’alinéa 3b), inclus dans le calcul de son revenu pour l’année ou pour toute autre année d’imposition), que ce contribuable a tiré, pour l’année, de la disposition d’un bien lui appartenant, à l’exception:
[…]
(iv) d’un avoir forestier;
[…]
248. (1) Les définitions qui suivent s’appliquent à la présente loi,
[…]
«montant» Argent, droit ou chose exprimés sous forme d’un montant d’argent, ou valeur du droit ou de la chose exprimée en argent…
Analysis
1. What is the Applicable Standard of Review?
[36] As the issues before us arise from an appeal and a cross-appeal from a decision of the Tax Court, questions of law are reviewable on a standard of correctness and questions of fact and mixed fact and law are reviewable only if the Judge made a palpable and overriding error, unless the question of mixed fact and law contains an extricable question of law (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235), which then makes it reviewable on a standard of correctness.
[37] In my view, the principal issue before us is whether and how to value reforestation liabilities as “proceeds of sale” under subsection 13(21) of the Act. The resolution of this issue involves both statutory and contractual interpretations. Thus, it is a question of law which must be reviewed on the standard of correctness.
[38] The respondent argues that the standard of review with respect to the determination of whether the parties agreed on the value to be attributed to the silviculture liabilities is correctness. The appellant, on the other hand, takes the position that whether the parties agreed that the fair market value of the assumed obligations was equal to the accounting estimates, was a finding of fact entitled to deference. It then refers to the Judge’s Reasons, including his determination found at paragraph 30 thereof, that “[t]here is nothing in the Sale Agreement that constitutes an agreement between the Parties that Daishowa received additional consideration of $11,000,000 by Tolko’s assumption of the reforestation liability”, and argues that this constitutes a factual finding on the part of the Judge deserving of deference.
[39] I cannot agree. In my view, there can be no doubt that the Judge, correctly in my view, considered this aspect of the case to be an issue of contractual interpretation. Such an issue is clearly one that is to be reviewed on a standard of correctness (see: Canada v. Calgary (City), 2010 FCA 127, 2010 G.T.C. 1043, at para. 54; leave to appeal granted, 2010 SCCA 277; and Canada v. General Motors of Canada, 2008 FCA 142, 2008 D.T.C. 6381, at para. 31). In other words, the determination of what the parties agreed to on the plain language of their contracts is clearly a question reviewable on the basis of the correctness standard.
[40] The issue pertaining to the adequacy of the Judge’s Reasons, being an issue of procedural fairness and natural justice, is also reviewable on the basis of the correctness standard. This Court will only intervene if the Judge’s Reasons fail to disclose a logical connection between the evidence and the decision that permits meaningful appellate review (see: R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3, at paras. 53 and 57) (R.E.M.). Although R.E.M. dealt with a criminal law matter, this Court has, on the basis of the principles enunciated in R.E.M., found Reasons of the Tax Court to be inadequate (see: Mahy v. Canada, 2004 FCA 340, [2004] 327 N.R. 28, at paras. 13 to 16).
[41] The other issues before us pertain to the application of legal principles to the particular facts of the case and, thus, stand to be determined on the palpable and overriding error standard. Consequently, determining whether consideration received in the form of an assumption of the appellant’s silviculture liability was contingent or uncertain, whether it was received on income or capital account and whether it was properly allocated to goodwill, are all questions reviewable on the palpable and overriding error standard. Finally, because the function of pleadings is to “define the issues that have to be determined and to give each party notice of the case he or she has to meet” (M.A.N. & W. Diesel v. Kingsway Transport Ltd., (1997) 33 O.R. (3d) 355, [1997] O.J. No. 1523 (CA) (Q.L.), at para. 10), the question of whether pleadings are sufficient to ground the Judge’s findings is an issue of procedural fairness or natural justice reviewable on the basis of correctness (see: The Queen v. Nunn, 2006 FCA 403, 2007 D.T.C. 5111, at paras. 21 to 26).
2. Did the Judge err in concluding that the silviculture liabilities assumed by Tolko were to be included in the appellant’s proceeds of disposition for the 1999 and 2000 taxation years?
[42] As I indicated earlier, the Judge’s Reasons deal exclusively with the sale of High Level to Tolko. The following analysis will therefore deal with the Judge’s findings in regard to that sale. As to the issues pertaining to the sale of Brewster, I will deal with them separately as they raise questions of a different nature.
[43] Before addressing the first question, a few preliminary remarks regarding the statutory context to which the proceeds of disposition of the sale of High Level and the transfer of the forest tenure are subject will be useful. Subsection 13(21) of the Act defines a “timber resource property” as “a right or licence to cut or remove timber from a limit or area in Canada…”. The forest tenure included in the sale of High Level therefore constitutes a timber resource property within the meaning of subsection 13(21), which property is depreciable capital property included in class 33 of Schedule II of the Income Tax Regulations (the Regulations).
[44] Ordinarily, the proceeds of disposition of a depreciable capital asset in excess of its capital cost constitute a capital gain (see IT 481 (Consolidated) – Timber Resource Property and Timber Limit). However, subparagraph 39(1)(a)(iv) of the Act excludes a timber resource property from capital gain treatment. Consequently, by reason of subsection 13(1) and the definition of “undepreciated capital cost” found at subsection 13(21) (variable G), the proceeds of disposition of a timber resource property in excess of the capital cost thereof are included in the vendor’s income (see: Kettle River Sawmill Ltd. v. The Queen (1994), 1 C.T.C. 182, [1993] F.C.J. No. 1190 (Q.L.) (FCA), at para. 4).
[45] I now turn to the question of whether the Judge made any error in determining that Tolko’s assumption of the appellant’s silviculture liability constituted consideration and, thus, ought to have been included in the appellant’s proceeds of disposition. There is no real debate between the parties that, as a matter of principle, the assumption of a liability by a purchaser may constitute a consideration which can be included in the proceeds of disposition. However, there is considerable debate as to the value, if any, of the liability assumed by Tolko.
[46] In my view, the Judge made no error in determining that the assumption of the appellant’s silviculture liability by Tolko constituted consideration which ought to have been included in the appellant’s proceeds of disposition. The Judge dealt with this question at paragraphs 24 to 27 of his Reasons. He began by pointing to the fact that the appellant had admitted that “if Tolko had not assumed the appellant’s silviculture liability, the amount of cash or other consideration it would have paid the appellant would have increased” (see: Statement of Admitted Facts, para. 28, Appeal Book, Vol. 2, p. 168). This led the Judge to remark, at paragraph 24 of his Reasons:
[24] ….. Given that acknowledgement and admission, it is difficult to find the assumption of liability is not part of the consideration in the deal notwithstanding Daishowa took great pains to have that element of the deal removed from the definition of purchase price in the final agreement.
[47] The Judge, at paragraph 25, then referred to subsection 13(21) of the Act, which defines the “proceeds of disposition” as including the sale price of property sold. After stating that “[p]rice is commonly defined to include consideration” and after adopting one of the definitions of “consideration” proposed by the learned author of Fridman’s The Law of Contract in Canada, 4th ed. (Toronto: Carswell, 2006) at p. 83, i.e. "some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other" (this definition was the one enunciated by the English High Court in Currie v. Nisa, (1875), L.R. 10 Ex. Ch. 153; affirmed 1 App. Cas. 554), the Judge held that an assumption of liability and a promise to indemnify clearly fell within the meaning of the word consideration. In that regard, the Judge had in mind article 3 of the Agreement of sale which provided, inter alia, that Tolko would be responsible for the reforestation liability and that it would hold the appellant harmless in respect of that liability.
[48] The Judge then made the following remarks at paragraphs 26 and 27 of his Reasons:
[26] What is the nature of the liability, the relief of which leads to some benefit to Daishowa? It is not one that, as I initially thought, passes automatically with the forest tenures. From a careful review of the Alberta legislation and the Parties’ agreed facts, it is clear that the Province of Alberta will not approve of a transfer of the forest tenures, unless a purchaser assumes the reforestation liability. This is quite different from any suggestion that the liability, simply by the operation of Alberta statutes, flows with the property; in other words, whoever owns the forest tenures is legally responsible for the reforestation obligation. No, the situation in Alberta is that the Province effectively forces the purchaser to assume the reforestation liability: no assumption – no transfer of forest tenures. Does the fact that a third party, the Government of Alberta, forces an assumption of liability, make the assumption of that liability any less consideration? No, it does not affect the nature of the assumption of liability as consideration, though it may affect the value of that assumption.
[27] Does the fact that the final agreement between the Parties specifically excluded the assumption of liability from the purchase price have the legal effect of removing it from the consideration for the forest tenures and consequently from the proceeds of disposition? Further, does the fact that the Parties, in that agreement, only allocated the cash purchase price amongst the assets, likewise have the legal effect of removing the assumption of the liability as part of the consideration? I would answer no to both those questions. To answer positively would put form over substance in the interpretation of contracts which is not a supportable approach.
[49] I can find no error in the Judge’s reasoning. As the Judge clearly explained, the sale price of a property is commonly defined to include any consideration received by a seller from a buyer, including cash, property and/or the assumption of liabilities: see: Krauss v. Canada, 2009 TCC 597, 2009 D.T.C. 1394, at para. 30; Telus Communications (Edmonton) Inc. v. Canada, 2009 FCA 49, (2009) 386 N.R. 354, at para. 28; Loyens v. The Queen 2003 TCC 214, (2003) D.T.C. 354, at paras. 31 and 33.
[50] I would add, as a matter of relevance, that the other bids made for High Level specifically included the assumption of reforestation liability as a separate portion of the consideration. The appellant itself, when it purchased High Level in 1990, also included the assumption of reforestation liability as a separate portion of the consideration given (see: Appeal Book, Vol. 5, pp. 715-716, art. 8: “Assumption of Obligations and Liabilities” of the contract between Canadian Forest Products Ltd. and Daishowa Canada Ltd. of February 23, 1990). Further, as the Judge noted in his Reasons, it was admitted by the appellant that if Tolko had not agreed to assume its silviculture liability, the amount of cash or other consideration paid to the appellant would have been greater.
[51] Thus, I have no difficulty concluding that the Judge did not err in finding that the assumption of the appellant’s silviculture liability by Tolko constituted consideration which had to be included in the appellant’s proceeds of disposition. The more difficult question, however, is the one concerning the value of that consideration and that is the issue to which I now turn.
3. Did the appellant and Tolko agree to attribute a value to the reforestation liability assumed by Tolko and, if so, what consequences flow from that agreement?
[52] The Judge began his analysis by noting the appellant’s ar