T-6109-81
Lor-Wes Contracting Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Dubé J.—Vancouver, November 5;
Ottawa, November 18, 1982.
Income tax — Investment tax credit — "Qualified proper
ty" — S. 127(/0)(c)(vii) of the Act requires that property be
acquired by taxpayer primarily for logging — Plaintiff is
road-building firm engaged as subcontractor by logging oper
ators in British Columbia to build access roads on timber
limits — In 1976 plaintiff acquired heavy machinery specially
outfitted for use only in operations on timber blocks, not in
building of highways elsewhere, and claimed tax credit under
s. /27(10)(c)(vii) in respect of such machinery as "qualified
property" used primarily for purpose of logging — Whether
acquired primarily for logging or for purpose of building
roads in forest — Whether operations carried out by plaintiff
constitute "logging" within meaning of s. 127(10)(c)(vii) —
Appeal from reassessment dismissed — Taxpayer must bring
himself squarely within four corners of exemption before he
can successfully claim it — Subject equipment not acquired by
logging operator but by taxpayer primarily in business of
road-building — While "logging" is sum total of several
operations, each of which when performed by operators are
part of logging, construction of logging roads, by itself, carried
out by independent contractor who has no general interest in
logging, but is specialist in own limited field, cannot be said to
be logging — If Parliament had intended to extend tax benefit
to all subcontractors engaged by logging operators it would
have said so — Income Tax Act, S.C. 1970-71-72, c. 63, s.
127(10)(b),(c)(vii), as am. by S.C. 1974-75-76, c. 71, s. 9; 1979,
c. 5, s. 40.
CASES JUDICIALLY CONSIDERED
APPLIED:
Lumbers v. Minister of National Revenue (1943), 2 DTC
631 (Ex. Ct.).
CONSIDERED:
Deschatelets v. The Minister of National Revenue, 81
DTC 885 (T.R.B.); Ouimette v. The Minister of Nation
al Revenue, 81 DTC 886 (T.R.B.).
COUNSEL:
Ian Pitfield for plaintiff.
Gaston Jorré for defendant.
SOLICITORS:
Thorsteinsson, Mitchell, Little, O'Keefe and
Davidson, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DUBÉ J.: The central issue to be resolved here is
whether the building of access roads, fireguards
and landings on timber limits by a contractor for a
logging operator is "logging" within the meaning
of subparagraph 127(10)(c)(vii) of the Income
Tax Act, R.S.C. 1952, c. 148, as am. by S.C.
1970-71-72, c. 63, s. 1; 1974-75-76, c. 71, s. 9;
1979, c. 5, s. 40.
•
For the 1976, 1977, 1978 and 1979 taxation
years the plaintiff company, a small British
Columbia road-building firm, was engaged by
three successive logging operators in the Clearwa-
ter and Lillooet areas of British Columbia. In its
1976 and 1977 income tax returns the plaintiff
described the nature of its business as "road build
ing"; in 1978 as "contract road builder"; and in
1979 as "logging road building".
During the relevant period the plaintiff acquired
a 1976 P&H hydraulic excavator, a 1976 D8K
Caterpillar tractor and a 235 Caterpillar excava
tor. It claimed an investment tax credit for those
heavy units as "qualified property" acquired by
the taxpayer to be used by him primarily for the
purpose of logging. The above-mentioned provision
of the Income Tax Act reads as follows:
127. ...
(10) For the purposes of subsection (9), a "qualified proper
ty" of a taxpayer means
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975
that has not been used for any purpose whatever before it was
acquired by the taxpayer and that is
(c) to be used by him in Canada primarily for the purpose of
(vii) logging,
By notices of reassessment for the relevant years
the investment tax credits claimed were disallowed
on the ground that the plaintiff was "in the busi
ness of road building which is not a designated
activity under subparagraph 127(10)(c)(vii)."
It is common ground that the equipment was
acquired for the plaintiff's operations on the
timber blocks, which are limits designated by the
Province of British Columbia for logging purposes.
The equipment was never used, and was never
intended to be used, for the building of highways
elsewhere: additional features were procured by
the plaintiff to adapt the equipment to forestry
operations (i.e., bull hooks, wide padding, extra
guards, lifting tongs, etc.). It is also agreed that
the plaintiff's sole occupation during that period
was as contractor for logging operators on the
timber limits.
The owner of the plaintiff company described to
the Court in some detail the type of work carried
out by his firm during that period, namely the
building of forest access roads, landings, fire-
guards, skidtrails, the clearing up of debris, scarifi-
cation. In the course of road-building the contrac
tor has to fell trees and to dispose of them
according to specific instructions laid down by the
operator. The contractor is paid by the linear
meter for roads and by the cunit' for cut timber.
The importance of a good quality network of
forest roads in a successful logging operation is
well known to the industry. An experienced logger
from Squamish, B.C., Norman R. Barr, testified
as an expert on behalf of the plaintiff. He outlined
' In its notices of reassessment the Minister held that the
logging activity based on revenue reported was 17.2% in 1977
and 6.7% in 1978, "indicating the company's equipment was
not primarily for the use of logging".
for the Court the method followed by his own
logging company in its operations. At the outset, a
reconnaissance cruise is conducted to determine
the economic viability of a proposed cutting area;
then, cutting rights are obtained; contracts are
concluded; a chart area is established, followed by
a five year development plan and a two year
logging plan. Those plans must be approved by
provincial forestry officials; a road plan detailing
road and bridge locations is also submitted for
approval. Upon approval, the first step is to build
access roads, fireguards and landings in accord
ance with the approved road plan; then the fallers,
buckers and yarders move in to cut and gather the
timber for transport to a mill, or to tidewater.
According to the expert, some operators perform
all those operations with their own equipment and
employees; others contract out some, or all of the
various phases of the logging operations. In coastal
logging areas, roads often comprise the second
largest physical and financial phase of logging,
being exceeded only by the yarding and loading
functions. According to Mr. Barr's observations,
many small operators have experienced financial
failures because of their inability to build good
quality and well located roads. Consequently,
many operators contract the construction of log
ging roads to specialists in the field.
The expert concludes that logging roads, fire-
guards and landings are an integral part of logging
in British Columbia and that the equipment used
in any of the aspects of logging operations is used
for the purpose of logging "whether or not it is
owned or used by the person who owns the cutting
rights, the person who has the contract to cut on
those rights, or the person engaged to do the
specific task of logging area road construction on
their behalf".
Undoubtedly, road-building is an important,
indeed an essential aspect of logging. I would not
hesitate to find that such road-building equipment
as required by a logging operator was acquired by
him primarily for the purpose of logging, road-
building being an integral part of his whole opera
tion. However, the equipment in question was not
acquired by the operator, but by a road-building
firm. That being so, was the equipment acquired
by the taxpayer primarily for the purpose of log
ging, or was it not acquired by him primarily for
the purpose of building roads in the forest? There
is no jurisprudence in the matter emanating from
this Court but the Tax Review Board has had to
resolve some issues akin to this problem.
In Deschatelets v. The Minister of National
Revenue 2 the Board held that a truck acquired by
the taxpayer to transport logs by contract for a
paper company was not used by the taxpayer
primarily for the purpose of logging. The taxpayer
was driving the truck himself on the first daily
shift and another person employed by the company
drove it during the second shift. M. J. Bonner,
Member, concluded as follows [at page 886]:
The position seems clear. Subparagraph 127(10)(c)(vii) of
the Act looks to the Appellant's purpose in using the truck.
That purpose was the transportation of logs. Although the
transportation of logs by the Appellant formed part of the
company's logging operation it did not, standing alone, consti
tute logging by the Appellant. The Appellant did not possess
any interest in the timber limits or in the logs moved and he
was not interested in any way with the disposition of those logs.
The purpose of the Appellant in the use of the truck and the
broader purpose of the company must not be confused.
Although I am not, of course, bound by that
decision, it is nevertheless difficult to disregard the
very valid points underlined by the Member in his
decision. The instant case presents a parallel situa
tion: the plaintiff acquired the equipment primari
ly for the building of forest roads which, although
an integral part of the operator's logging opera
tions, does not, standing alone, constitute logging.
In the present instance as well the plaintiff holds
no interest in the wood limits nor in the disposition
of the timber.
2 81 DTC 885 (T.R.B.).
In Ouimette v. The Minister of National
Revenue' the same Member of the Board decided
that the transportation of logs, while part of log
ging, was not by itself logging. There the taxpayer,
an employee of a paper company, acquired a truck
and trailer for the purpose of hiring it to the
company for the transport of logs to the mill. This
quote from Mr. Bonner, reported at page 887,
bears reproduction:
The evidence plainly showed that it was Great Lakes and not
the Appellant who was engaged in logging. The transportation
of logs may well be a part of logging, but the transportation of
logs by itself is not logging. The argument advanced on behalf
of the Appellant ignored the statutory words "by him" and
must therefore fail.
Again, in the case before me the equipment was
not acquired by the logging operator, it was
acquired "by him", the taxpayer, who is not
primarily in the lumber business but primarily in
the road-building business.
It is trite law that the exempting provisions of a
taxing statute must be construed strictly and the
taxpayer must fit his claim squarely within the
four corners of any exemption if he is to benefit
from it. He must show clearly that "every constitu
ent element necessary to the exemption is present
in his case and that every condition required by the
exempting section has been complied with" [at
page 635]. 4
If Parliament had intended to extend the tax
benefit to all subcontractors in the industry, it
would have said so. By any definition, "logging" is
the sum total of all the operations leading to the
felling of timber and the transporting of logs out of
the forest. In my view, the constructing of logging
roads, by itself, is not "logging", any more than
the building of fishing wharves is "fishing", or the
erecting of barns constitutes "farming", where
those operations are carried out by independent
contractors who have no general interest in log
3 81 DTC 886 (T.R.B.).
4 See Thorson J. in Lumbers v. Minister of National Revenue
(1943), 2 DTC 631 (Ex. Ct.).
ging, fishing or farming, but are specialists in their
limited fields.
For all those reasons, the appeal cannot be
allowed and the action is dismissed with costs.
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.