Twin Islands Estates Ltd v. The Queen

Twin Islands Estates Ltd v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-04-02
Neutral citation
2004 TCC 141
File numbers
2002-3698(IT)G
Judges and Taxing Officers
Theodore E. Margeson
Subjects
Income Tax Act
Decision Content
Docket: 2002-3698(IT)G
BETWEEN:
TWIN ISLANDS ESTATES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on November 20 and 21, 2003, at Vancouver, British Columbia.
Before: The Honourable Justice Theodore E. Margeson
Appearances:
Counsel for the Appellant:
Craig C. Sturrock
Counsel for the Respondent:
Margaret E. T. Clare
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is allowed. The Part I reassessment and the Part III reassessment are vacated in their entirety. The Appellant shall have its costs of this appeal to be taxed.
Signed at Ottawa, Canada, this 2nd day of April, 2004.
Margeson, J.
Citation: 2004TCC141
Date: 20040402
Docket: 2002-3698(IT)G
BETWEEN:
TWIN ISLAND ESTATES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson, J.
[1] This is an appeal from a reassessment, notice of which was dated September 19, 2002 under Part I of the Income Tax Act (Canada) ("Act") in respect of the Appellant's 1999 taxation year ("Part I reassessment"). The Appellant also appealed from an assessment, notice of which was dated October 31, 2001, by which the Minister of National Revenue (the "Minister") assessed the Appellant for tax under Part III of the Act ("Part III assessment").
[2] In computing income for the 1999 taxation year, the Appellant reported the sale of Twin Islands Estates Ltd. ("Twin Islands") on capital account. In assessing the Appellant for the 1999 taxation year, the Minister treated the sale of Twin Islands on income account. The Minister contended that at the time of its acquisition, the Appellant had in mind the possibility of resale at a profit and that possibility was an operating motivation for its acquisition.
[3] Further, as there was no capital gain on disposition, the capital dividend paid exceeded the amount of the Appellant's capital dividend account immediately before the time any part of the capital dividend was paid and the Appellant was assessed accordingly.
Issues
[4] The main issue in this case is whether or not the sale was on account of capital or income. The answer to this question determines the answer to the second question with respect to the capital account. The two issues may be characterized in another way:
1. Did the Appellant realize a capital gain in its 1999 taxation year in the amount of $5,536,329 as a result of the disposition of this land or did it earn business income from the sale of land inventory?
2. Was the Appellant entitled to refund of tax on its 1999 taxation year under subsection 129(3) of the Act in the amount of $1,072,201?
3. Did the capital dividend paid by the Appellant exceed the amount of its capital dividend account immediately before the time any part of the capital dividend was paid?
[5] The Appellant called Penny Ledoux, who was a team leader ("auditor"), from Canada Customs and Revenue Agency ("CCRA"). This witness was called under the provisions of Rule 146(3) of the Tax Court of Canada Rules, General Procedure and was cross-examined by counsel for the Appellant.
[6] She said that she conducted a standard audit on the Appellant company. This matter was brought to her attention as a result of a joint adventure audit being done with respect to this company and two other companies. They made assumptions, viewed documents and issued the 1998 and 1999 reassessments. One assumption was that the Appellant company was not in the logging business.
[7] She was referred to questions 48, 49 and 50 of the examination for discovery evidence. She basically said the same thing. In Court, she indicated that the Appellant had income from the sale of logs, but it was not in the logging business as far as she was concerned.
[8] Prior to 1998 there were no sales of land or chattels by the Appellant. In 1998 some chattels were sold and the company paid logging tax in 1998 and 1999. It claimed costs against the income from the sale of the timber in 1998 (its write-off). In 1999 the company was reassessed to include those deductions and the profit on the sale. In 1998 it was not considered to be depreciation because the land was in inventory and not under schedule 6. The amount of $14,000 was disallowed as capital cost allowance ("CCA") with respect to equipment sales. The amount (cost of sales) was not disallowed. It was allowed as cost of sales because there were logs sold. She considered this to be a portion of the inventory cost.
[9] There were sales of about $114,000 in that period of time, but the log sales income was not from the business of logging. She was then asked why she would not give the company the tax benefit. She answered that the Minister concluded that it was income from the sale of land. She then concluded that it was income from the sale of inventory. She said that it was income from a logging activity but the company was not in the logging business.
[10] She was referred to question 122 of the discovery evidence with respect to the year 1998 and said that they did not change the income from logging activity amounts reported. At questions 134 and 135, she indicated that this was a business in the nature of trade. It was involved in the sale of real property.
[11] She was referred to Exhibit A-1, Tab 25, which was a letter from CCRA to Twin Island Estates Ltd. following the review of the 1998 and 1999 T2 income tax returns for the property. In that letter they proposed to add back in the timber land write-off of $1,423,125. Sales were left alone in 1998. In questions 134 and 135 of the discovery, she indicated that the Minister considered the actions of the Appellant to be a one-time thing. It was the sale of real property. It was land bought and sold and was not a timber limit.
[12] Questions 146 and 147 of discovery evidence indicated that the term, "timber limit write-off" is not a good term. At question 149 she indicated that they did not reassess 1998 correctly. They could have but they did not. In question 154, she took the position that it was just a timing thing. It was a grey area as to how they were to treat it: as a reduction of inventory or cost of logs sold. The impact on the sale of the property the next year would have been the same.
[13] In questions 164 and 165 she indicated that in 1998 the CCA was allowed for the timber limit. Counsel put to her that if she admitted that if it were claimed and allowed as a timber limit, her actions were inconsistent with the decision in 1999. She then said that she has reviewed the legislation and does not now believe that their actions were inconsistent and she does not believe it was CCA.
[14] She referred to a letter from CCRA to Smythe Radcliffe dated July 17, 2001 in which the Minister expressed the opinion that even after a review of the material and after having considered all relevant factors and circumstances surrounding the transaction, they had determined that the profit on the sale of Twin Islands was business income rather than a capital gain. They indicated that they would be proceeding with the proposed reassessments in due course.
[15] She was referred to questions 221 to 224 of discovery and agreed that interest was deducted in 1998 and 1999 and this deduction was allowed. She said that did not make any difference what they did in 1998 as they could take it into account in 1999. It was further pointed out that Royal Bank interest was allowed in 1998 with respect to the logging loan and that property tax deduction was allowed. In the year 1999 the same allowances were made. She said it was an adventure in the nature of trade since the "get go".
[16] She was referred to subsection 18(2) of the Act and said that this subsection prohibits deductions of interest and property tax for adventures in the nature of trade. She was then asked why they allowed it in this case. She said it was a grey area and it would not matter in 1999.
[17] She was referred to Tab 32, which was the report on the objection. With reference to question 239 of the discovery, she said that today she is aware that the company does do investigations as was indicated in the report on objection. It indicated that the company conducted planning and investigations to confirm that the islands would be suitable for logging. It did an initial field examination and detailed timber cruise. Zoning investigations confirmed that logging was permitted. Logging revenue projections were prepared. The taxpayer also investigated the cost of restoring the lodge. It obtained roofing estimates, appraisals of the existing furniture and equipment and estimates of costs to replace furniture.
[18] She further confirmed at question 247 that the company did not offer Twin Islands for sale and they never advertised it for sale. As the report on the objection indicated, the Minister believed that the reassessment should be confirmed.
[19] There was a mistake in the initial report where it said that the objection should be confirmed. The report indicated that it was a question of fact whether Twin Islands was a timber limit or inventory of the taxpayer. Due to the quantum, the matter should be litigated. This appeared to be the Minister's position.
[20] The length of time of the holding was a factor and the amount received for the property was a factor. She was aware of protesting that took place and she was aware of the fact that the purchase offer of $10,000,000 was an unsolicited one. It was a foundation that purchased the property.
[21] She referred to her discovery evidence and to the financial statements of the company as shown in Tab 6 and she admitted that you could make a profit of $3,300,000 on the logs. There was some serious logging taking place and the financial statements showed sales of $3,201,385.
[22] She was referred to Tab 6 and to the discovery questions at 107 and 282 and she admitted that the company claimed B.C. Logging credit amounts and that it indicated that its major business was logging. She did not agree with this. She said that this report was for the company's first seven months of operation. She was asked what the company's business was in 1998 and she said it was land development. She was then asked if the company developed real estate and she did not give any responsive answer.
[23] She was referred to the financial statements at page 7, line 640, which showed that the company had claimed a federal logging tax credit from Schedule 21 in the amount of $7,618. This amount was not denied. Likewise there was a federal logging tax credit claim for the year 1999. She was also referred to the 1999 return in Schedule 005 that showed that the company was paying B.C. logging tax in a significant amount.
[24] She was referred to other parts of the Book of Exhibits, including the notice of assessment; the election for capital gains; a 1999 original assessment; auditor's report; and the adjustments that were made at page 3 of the audit report. She said that this was her work. On page 4 of the report she indicated that the matter was referred to the tax collection section. She said that she, as a team leader, was not rewarded as a result of the larger tax assessment. The amount involved was only one factor in deciding whether or not it was on capital account or income account. She was also referred to the capital gain versus income report, which is found at page 5 of the auditor's report. If it is a timber limit, then the land and the timber are treated as one and you just write-off the value of the timber.
[25] She was asked that if she assumed that at the time the land was purchased, it was worth so much that it could be flipped at a $6,000,000 profit. She answered that she had some experience that Michael Jenks would only pay that price for it if he believed he could get enough timber off of it to pay the purchase price. She had no knowledge that some of this land was not sold and some was sold at a loss.
[26] She referred to the Corporation Notice of Reassessment found at Tab 29. They considered the whole thing as capital property and one could not claim CCA on inventory. The used tools and backhoe were inventory, as well, and they were trying to flip those too.
[27] She was referred to Tabs 30 and 31 containing the Notice of Reassessment from 1999 and the Part III tax on excess of dividend paid on October 29, 1999 over the balance in the Capital Dividend account relative to the T2054 election submitted. She said that this amount was due because the Appellant paid an excessive dividend.
[28] She was also referred to Tab 33, the Notification of Confirmation by the Minister; Tabs 49 and 50, the B.C. returns for logging operations and Tab 51, which was a letter she wrote December 6, 2001 with respect to her audit on the Appellant. In that letter she, again, confirmed that the proceeds on the sale of land were not logging income for purposes of the logging tax deduction found in section 127 of the Act. "Income for the year from logging operations" is defined under Regulation 700. She confirmed this conclusion in Court. People who pay logging tax do not have to be in the business of logging. The sale of land with timber on it is also subject to logging tax. She was asked if she was saying that the Appellant should not have paid logging tax because they were not involved in logging operations when they bought and sold the land and timber in question. She replied that their involvement with the provincial governments is that they would advise the province that this was not a logging operation and therefore they should not have paid the logging tax. When asked if she advised the provincial logging tax authority in British Columbia to this effect regarding the Appellant, she said that she would check it out at the break.
[29] She was referred to Tabs 57 to 62, which were Minutes of Directors' Meetings of Coastland Wood Industries Ltd. ("Coastland"), and she said that Twin Islands was mentioned therein. There was nothing in these Minutes to refer to selling, flipping, etc. but only in relation to logging.
[30] Upon her return she said that she found nothing in her file to indicate that she passed the information on to provincial authorities that this was not a logging operation.
[31] In re-examination by counsel for the Respondent, she said that there was a federal tax credit arising out of the provincial logging tax. You do not have to be in the business of logging to pay logging tax. She was referred to Tab 7, which included a T2 Corporation Income Tax Return for 1999, and particularly to the inventory of the year 1998 which showed a value of $919,155. This return indicated that timber was not charged off to sales. Here we have commercial land, timber, buildings, equipment as inventory, which were all acquired in the purchase of land. The Appellant was referring only to this timber in its term "inventory".
[32] She was referred to question 165 of the discovery and she said that the Minister's position was that the amount was not claimed or allowed as a timber limit. It was claimed as cost of sales. With respect to property tax and interest claimed, this was not an issue because there was income in that year. It is not inconsistent to allow this to the extent that there was income in the year.
[33] In redirect she was asked about the year 1999 when there was no income. She said it would be deductible because the property was sold.
[34] Donald Longstaff testified that before he retired two years ago he was the chief financial officer for Coastland. He was also vice-president of finance. He dealt with banks. He was familiar with Twin Islands.
[35] He was referred to the document at Tab 42 and he said that the purpose of that letter was to obtain financing to acquire the property in question. Tabs 57 to 61 were Minutes of Directors' Meetings of Coastland. Coastland gets its logs on the open market or by trades. Tab 59 referred to certain protests that were taking place with respect to the subject land. Tab 60 was with respect to a possible sale of the property. Real estate development never came into play in consideration of this project. They were primarily interested in producing veneer and wood was not available to make it. They dealt with the bank in the same way that they would in other cases. They never were able to gain financing on the basis of land value. The bank made it clear to them that they wanted to be paid off when the timber was sold. They did not want to take the chance on possible development.
[36] In cross-examination he said that there was an interim agreement in place for the purchase of the land. It is shown at Tab 8. At the time he approached the bank he had intended to go into this agreement subject to financing. The $4,000,000 figure for the land referred to in the document following Tab 42 was someone's estimate that it might be worth that. He believed that it was a pretty good deal that they were getting into but they did not know if they would realize $4,000,000 for the land or when it might be realized.
[37] They were looking at possibly having it completed within nine months but they had flexibility and did not know if they could have the land ready for sale in nine months. The Bank's greatest interest was in getting their money when the logs were sold. He had previous dealings with Mike Jenks whose name was on the interim agreement. He referred to the Interim Joint Venture Agreement, Tab 34, between Coastland and Jemi Holdings Ltd. John McKay signed it. These lands were timbered and located at Gabriola Island. The land is still unsold. There is no market for it as far as he is concerned. Their intention was to log it and then sell the land. It contained a number of legal parcels but Coastland did not intend to go further with development in spite of the agreement to subdivide. To subdivide would only be to the extent of selling it as one lot or for seasonal purposes.
[38] With respect to Twin Islands, he did not remember Mr. Jenks coming in to discuss it with him. He referred to Tab 56, which was the Vendor's Statement of Adjustments for Twin Islands. He recalled it. His writing is on it at the bottom. The bank telephoned him. There were protests and demonstrations outside the Royal Bank and someone had written to the Bank's head office about the project. They were asked by the public relations people at the Bank to make some response. He wanted the company to peruse it and make sure that there was nothing in it that they disagreed with.
[39] This letter refers to developing the property and selling lots. This was an attempt to get them off their back. The Board had never seriously considered development. There were five separate parcels. The intention was to sell the five parcels at some point.
[40] He was referred to the Agreement between Michael Jenks and Coastland, which is found at Tab 39, which talks about the intent to use and develop the lands. He said that this could be referring to the logging development and not otherwise. They never intended to get into development or sub-dividing. They intended to sell it after it was logged.
[41] In 1999 they probably needed 400,000 to 500,000 cubic meters of board to produce their veneer. They would use primarily the Douglas Fir. They would sell some off. They would sell cedar and all hemlock. They might use about 60 percent of the wood or 40,000 to 50,000 cubic meters. To a small degree, it was self-financing.
[42] In the year 1999 they probably would have used about one month's supply of wood from this project for producing their veneer. As far as this witness was concerned, he understood Mr. Jenks to be primarily in the business of logging. In this project it was considered that Mr. Jenks' company would do the logging, but his equipment was busy and they had to use someone one else's.
[43] In redirect, he was referred to Tab 42 and the $4,000,000 figure that was quoted. He said that his figure was optimistic. The land was not too appealing after logging had taken place on it. There were a few bad locations on it. He was referred to paragraph 5 at Tab 34, and he said that the minimum of four years would be required after logging to develop the land. He had to look at many sources of supply. This project would be ten percent of their supply requirements.
[44] Barry Simpson testified that he was the vice-president of forest operations for Coastland. He had been a 50 percent owner of Twin Islands since 1992. He was the first employee of Coastland. The mill is located at Nanaimo. It has used 100 percent Douglas Fir since the last two to eight years. There are seven acres of land at the site. It employs 200 people, including 40 people in Vancouver and 160 at Nanaimo. It works 24 hours a day, six days a week. It produces a product to the value of $100,000,000 per year. The cost of fiber is $75,000 to $80,000 per year.
[45] Logs are 75 to 80 percent of the plant's cost. They have a drying plant and five percent of the material goes to plywood manufacturing and 70 percent is made into 4' x 8' sheets which is mostly used in construction of wooden trusses. He was responsible for obtaining the logs. They have no provincial quota. They obtain the logs from sales from the Government, from individuals who are clearing land and from other large companies who have quotas. They finance others to clear the land and sell them the logs. They also buy logs and land. They have purchased land before but it did not do well and they have been directed never to buy land. They finance others to buy it.
[46] Tab 1 was a typical plan for a log operation. This was taken from his file. Tab 8 contained the Agreement of Purchase and Sale in issue here. They obtained a three-month's delay for the completion of the agreement because they did not need the logs until the first quarter of 1998.
[47] Tab 9 contained an offer to purchase by the Reifel Cooke Group Limited for $1,000,000. This witness said that the offer infuriated him. He told the offeror to get lost.
[48] Tab 10 was a reply to the Reifel Cooke Group Limited's offer of purchase for $1,000,000 in which Mr. Jenks discloses no interest whatsoever in flipping the real estate but indicates that the potential was for long-term investment which probably exceeded the offer to purchase. However, he did indicate that the party might re-offer.
[49] Tab 11 contained the Timber Inventory Cruise report on the property. Nothing came out of it. Tab 12 was an agreement between Ulloa Resorts Ltd. and Twin Islands for purchase of the backhoe and tools. The purchase and sale at Tab 13 was an agreement for the purchase and sale of the lodge and its contents. Tab 14 was an agreement of purchase and sale for the timber between Twin Islands and Mill & Timber Trading Ltd. It provided for a $500,000 advance. It was an agreement to log the cedar on the property first as their Douglas Fir inventory was high. The price of cedar would go down in the new year as far as their calculations were concerned. Tab 21 contained the final agreement between Montreal Trust Company and the Appellant for a purchase price of $10,000,000.
[50] Tab 34 contained the Interim Joint Venture Agreement between Coastland and Jemi Holdings Ltd. for eight parcels of land contiguous to the 11,000 acres. The date on the agreement is the 15th day of November, 1996. This witness said that logging commercially commenced shortly thereafter. It took nine months for the bulk of the wood to be harvested. One piece was harvested the following year, and one other piece this year. They still have the land. It is for sale. They paid $4.4 million for it. It was their intention to take four years to log it but they needed the wood and logged it immediately.
[51] Tab 36 contained documents with respect to another joint venture agreement of Jemi Holdings Ltd. Coastland collects income and pays it to Jemi. They must undertake to sell the lands. He was referred to the term development and sale as referred to in some of the documents. He did not know what it meant. He said that their aim was to get rid of the lands.
[52] The document at Tab 37 was a report of an on-site viewing of Twin Islands. This was completed by Mr. Jenks and him on August 1, 1997. Tab 38 contained his own handwriting. This was his draft. It indicated the quality, volume and species and what was involved in logging it. It is referred to as an on-site visit report. This is an estimate only. No costs of financing were considered. They did not finish and some high volume logs were not taken. It was never proved.
[53] Tab 39 was an agreement between Michael Jenks and Coastland. Tab 40 contained the figures of this witness which were only an estimate and were completed after obtaining more information on the types and number of trees. He also considered market changes. These were tighter numbers. On the right of his figures were numbers which were completed by G. Childs. Tab 41 also contained Childs' estimate. Tab 46 contained five applications for timber marks and included one for each title. Tab 47 was a logging agreement between Twin Islands and Coastland. This was standard. There was no schedule B. These specs were given directly to the logger. The price is fixed for a quarter.
[54] Tab 48 was a calculation for the value of Twin Islands. They were getting a lot of pressure and telephone calls from protestors who wanted them to stop logging immediately and to take offers. He did that in order to come up with the ridiculous figure to make the offeror go away (George Reifel). There was no real value to these figures and they were just figures in the air.
[55] Tab 52 was a letter from George Reifel which did not materialize in the signing of a listing agreement with him. At the end of the day George Reifel did get a finders' fee from Twin Islands. Tab 53 was a so-called "term sheet" prepared by George C. Reifel and directed to Twin Islands. This witness said that neither himself nor Mark Jenks every signed a term sheet.
[56] Tab 54 was a letter alleging that they were clear-cutting the property. They were not. They took the high value timber and left low value timber behind. Tab 55 contained a "Standby Statement". When this was composed, there were heavy protests going on. The major shareholder of Coastland was being harassed at home and at his club. The Royal Bank was picketed as well.
[57] They did no perk tests on the property and no water tests. Tabs 58 to 61 contained the Minutes of Coastland. There were never any development plans presented to the board of Coastland. No proposal was ever put to Coastland except the logging operation.
[58] Coastland entered into the joint venture with Jenks in December, 1996. The Gabriola project was for $4.4 million. It was logged. It is now listed for sale. They logged 70% the first year and tried to sell it but could not. In 2000 or 2001 they listed it for sale at $2.6 million. It has not sold. They had a draft agreement to sell it in December, 1998 for $2.6 million.
[59] The joint venture agreement with Mr. Jenks for Cortez was for 80 acres. It was bought September of 1998 for $249,000. It was logged and sold. It was listed at $220,000 and sold for $130,000 in 2001. It was logged in 1998.
[60] With respect to the joint venture on Gambier, this property was purchased in January of 2000 for $4,200,000. It was logged. It took nine months to one year to log it. They still own it. They cannot sell it. They went in the hole on it. Companies will not list it for enough for them to break even. They hoped to sell it at $3.5 million.
[61] With respect to the Reed Island project, it was for 170 acres and was purchased in January, 2000. The purchase price was $685,000. It was logged. It was listed for sale. It was sold on October 1, 2003 for $500,000.
[62] With respect to the Nelson Island project it was bought in February, 2000 for $485,000. It was logged. It was listed. It was not sold. It was also listed on a web site but they received no offers for it. They logged it within three months. The Reed Island Project (Number 2), had a purchase price of $800,000. It was purchased in the year 2000. It was logged. It was listed for sale and it was not sold. It was listed for $549,000 which was less than the purchase price. The Gabriola Island project for 2001 was for 90 acres. The purchase price was $250,000. It was cut into four pieces. They had to drill four wells on it. They obtained water. They sold one lot in October of 2001 for $224,000. The other three acres are still for sale. The logging operation brought in approximately $255,000.
[63] Coastland entered into its own venture as well. This was the Orton farm project. It paid $850,000 for it. They logged it. They sold it for $640,000. The property in question could not be sold for the $3,000,000 to $4,000,000 referred to. It was not cashable. After logging a property the value is reduced by about one-half.
Cross-Examination
[64] Barry Simpson had been Vice-President of Coastland since 1992. He was also Secretary of Twin Islands Estates Ltd. He was aware of the offer of $1,000,000 for purchase of the interest in the agreement by the Reifel group. He was referred to Tab 9 and he was asked why he was upset. He said that Coastland is the largest company in British Columbia which manufactures logs and it is not easy to find logs. The mill could be shut down for two to three weeks and cost it $2,000,000 to $3,000,000 if it did not have a sufficient supply of logs. He never heard of Reifel before. There was a threat implicit in the offer. He did not think that "Mike" knew him before.
[65] He was referred to the agreement between Montreal Trust Company of Canada and Twin Islands Estates Ltd. for the purchase price of $10,000,000. There was no set-off for timber taken against it. He was referred to the document found at Tab 19 which was an offer for $11,000,000. He did not consider this to be a real offer in spite of the fact that the offer that finalized was from the same source. All of the lots in Twin Islands are waterfront lots. This makes it more valuable.
[66] With respect to the Gabiola Island project, the joint venture, he agreed that they paid $4.4 million for it. They had logging expenses and they had income from it. It was suggested to him that the net income from logging was $3 to $3.5 million so that only left $1.4 million to recover. Since they have $500,000 worth of logs remaining, this left about $1,000,000 in unrecoverable costs. He did not agree because the "net logging" does not include "holding costs". He did not really know about land values or holding costs. His side was the logging side.
[67] He was referred to Tab 35, the Read Island project (Number 2) or the second property which was a joint venture with Jemi, in particular with respect to paragraphs 7 and 8. He said that Mike Jenks' advice is always sought. He is more educated in the land part of the matter than he is. He flew up a number of times to see the property. The first was on August 1, 1997. In April of 1997 Mike told him that he was negotiating on this property.
[68] He referred to his discovery evidence which indicated a later date than April, 1997. Then he said the later date was the date when he first flew up. The interim agreement was accepted in July of 1997. When the interim agreement was signed, he did not take any steps to determine the amount of logs as was set out at Tab 38. There is a waste of about 10 to 15 cubic meters per acre. They were usable logs but they were all over the map. There is no such thing as a typical lot or typical logging operation.
[69] He referred to the agreement at Tab 39 as the first agreement that Coastland had with Mike Jenks. This was with respect to Twin Islands. He told the lawyer what he wanted in it. Don Longstaff probably had input into it but he was not certain. This is a logging agreement but the words logging and timber do not appear in it. The words development plan mean a logging plan and that is common in British Columbia.
[70] With respect to the agreement between Twin Islands and Coastland as set out at Tab 47, he said that this was quite specific about logging. The completion of the logging was to be done by December 1, 1998, which was a period of one year. The agreement at Tab 39 was the agreement between Michael Jenks and Coastland. The lawyer drew it up, although he told the lawyer generally what he wanted in it. He did not remember if he saw it. He then said that he cannot say specifically that he had input into this specific agreement. It was referred to as the so-called interim joint venture agreement between Coastland and Jemi Holdings Ltd. dated the 15th day of November, 1996. This was the final document.
[71] The other documents at Tabs 34 and 35 were both joint venture agreements and both refer to logging or timber. This is in contrast to the document at Tab 39 which makes no mention of logging or timber. This was not followed up with a joint venture agreement. They only had the documents at Tabs 8, 39, 47 and 14 with respect to Twin Islands. The documents at Tabs 47 and 14 are dated December 1, 1997.
[72] It was suggested to him that in other deals that he did with Jemi, they did the joint venture structure but they did not do it with respect to Twin Islands. He said it was a different structure. Coastland and Jemi both became shareholders in a new company (Twin Islands). He was referred to his discovery evidence at question 158 which asked why they used the corporation and he said it was to give them a buffer agreement.
[73] He was referred to questions 159 and 160. It was suggested to him from the outset that they were all aware of the possible protests. He said that it is a fact of life in that area, specifically with respect to Island properties. Twin Islands is located three miles from Cortez and four miles from Ferando. It is possible to see both of them from Twin Islands. In reference to question 165 of the discovery evidence, he said that the protest was with respect to destroying the visibility and the lands. This protest possibility was there from the very outset. There was first and second growth forest on it but it was mostly second growth. It was suggested to him that before they acquired it, it was used basically as a retreat and contained a resort, two to three other houses, plus the lodge and the caretaker's shack. He said that he was unaware of it being a resort.
[74] Ferando Island residents would have their view affected by logging on Twin Islands. He thought that the protest would come from Courtney Island. He was referred to question 237 of the discovery evidence and said that there was a subdivision plan in effect for the lodge property. This was one lot only. Mike Jenks made the application. There were five titles. He understood that it was for 10-acre zoning but you could make them bigger.
[75] He identified his handwriting at Tab 48. They were looking at a 10-acre lot size for the 63 lots. They had input from Mike Jenks. They talked about what waterfront lots would bring. It was on the back of a cigarette package. The whole development discussion took 15 to 20 minutes. At discovery the document at Tab 40 was attached to Tab 48. It was in his handwriting. They were doing a quick assessment of the land residual. It looked like about $15 million net of timber land.
[76] He was referred to question 42, which indicated that it could have been quite a good deal. He agreed with this. He then said that the principal of Coastland was harassed at the Vancouver Yacht Club.
[77] He was questioned about the joint venture agreement regarding Cortez Islands in September of 1998. He only looked up the purchase price, the sale price and the listing price. He was not sure of the log sales and agreed that there was $200,000 of timber taken off, net.
[78] He was questioned with respect to Gabriola Island and the 700 acres purchased for $4.2 million. This property was not listed for sale except on Mike's web site because it could not be listed high enough for them to obtain, from the sale, the money they had invested in it. They had subdivision advice on it. They hoped to get more out of it by holding it longer.
[79] With respect to Reed Island (Number 1), he was referred to the various figures regarding that development. He said that as a logging operation, it lost money. He said that "I still say it lost money if you took it as a single property. It was rolled into another property." He was referred to the price for Reed (Number 2) which was in the $300,000 range with respect to the logging operation. Gabriola Island was a very successful logging operation.
[80] He agreed that they had adopted the two-shareholder format for Twin Islands whereas Jemi and Coastland had no shareholder's agreement as far as he knew.
[81] In redirect, he said that the subdivision application with respect to the lodge was abandoned because it straddled another lot and could not be a contiguous lot. If one joint venture is rolled into another it is not put into the same company. He did the calculations located at Tab 40 on September 16. With respect to the log value and land value seen at Tab 48, he prepared those in January of 1998. The information contained in the calculation at Tab 48 was never given to the Board of Directors for consideration.
[82] Michael David Jenks described himself as a logger. He was the sole shareholder of Jemi Holdings Ltd. which was a logging company. He had been involved in logging since he was 17. His only formal education was up to grade 8. Jemi Holdings has been involved in logging lands, doing contract logging, bidding on lands, bidding on logs and selling lands since 1987. He usually got 50% of the original costs from the sale of the land but, optimistically, he would get 100%.
[83] He admitted that he had a joint venture agreement with Coastland with respect to Twin Islands, referred to at Exhibit A-1, Tab 8. It was a multiple-listing agreement. They had flown over this property a number of times and they spoke to the representatives of the owner about logging it. The agreement was drawn up in April and amended so as to be completed in December. Noel Paget signed for Ulloa Resorts Ltd. The date was changed from September 1 to December 1 because he approached Coastland to come in on the deal and they wanted the closing date changed as they did not want the logs until later.
[84] He was referred to the letter written by George C. Reifel which is contained at Tab 9 and he said that he thought Mr. Reifel was trying to intimidate them and he believed that the timber was worth more than that. With respect to the document at Tab 10, he was told that George Reifel should get lost.
[85] The timber inventory cruise figures found at Tab 10 went nowhere as far as he was concerned. The agreement at Tab 14 between Twin Islands and Mill & Timber Trading Inc. was a normal form of agreement. The proposal by George Reifel to purchase all of the outstanding shares of Twin Islands Estates Ltd. for the sum of $11,000,000 was only one of many offers. He had concerns about George Reifel all along. He felt that he was trying to stop them from logging. He did not sign the sheet referred to in the letter from George Reifel found at Tab 20. He did sign the document found at Tab 21. It was a formal offer and there was money in trust. Montreal Trust was involved so it was a legitimate offer insofar as he was concerned. They intended to sell the land after they had logged it.
[86] Reed Island joint venture agreement at Tab 35 was similar. Tab 36 was th