28 April 2000 GST/HST Interpretation 13392 - Sale of 311 Acres of Forested Land -

We refer to the e-mail from XXXXX of November 5, 1999, to Darryl Hooley concerning the case noted above. We would like to offer the following comments.

All legislative references are to the Excise Tax Act.

Our understanding of the situation is as follows:

1. You received a request for a GST/HST ruling from XXXXX[.]

2. The XXXXX purchased certain real property in XXXXX which consisted of XXXXX acres of land on which was situated a house. The property is designated as "residential farm". A portion of the property is located in an Environmental Protection Zone. No explanation was provided as to the meaning of that term.

3. The XXXXX listed their residence for sale in XXXXX[.] There is no indication how many residences the XXXXX occupied or where the residence that was listed for sale was located.

4. The XXXXX representative has made the following statements:

(a) The XXXXX intent on acquiring the property was to build a new home on the land, enjoy the forest that formed part of the property, and the wildlife therein, and perhaps to use the land as a non-commercial hobby farm.

(b) In XXXXX, the XXXXX severed approximately XXXXX acres of the property, which included the house and sold the severed lot to their daughter and son-in-law. There was no profit realized on this sale. (No evidence was presented to substantiate that statement, nor was there any indication of when or why the XXXXX formed the intention to sell a portion of the property).

(c) The XXXXX selectively logged approximately XXXXX acres of the property in XXXXX. In XXXXX, approximately XXXXX additional acres were selectively logged. The XXXXX engaged in the logging activity solely upon advice received from an individual who works for the XXXXX and on information obtained from attendance at several forestry meetings. (It is not clear whether that individual is XXXXX or whether the advice was offered in such a capacity. At any rate, that individual purportedly advised the vendors to selectively log the subject property and to attend the forestry meetings. It is also not clear whether the forestry meetings the XXXXX attended were for the purpose of teaching personal conservation or were for the purpose of teaching commercial conservation (i.e. "the proper way to manage and conserve a forest" from the point of view of improving or maintaining the forest as a commercial resource).

(d) As a result of the individual's recommendation and from information garnered from the forestry meetings, the XXXXX decided that if they were to be good stewards of the forest, they should follow the recommendation to selectively log the forest.

(e) The XXXXX believe that they were not required to carry out the logging activities based solely on the property being located in an Environmental Protected Zone.

(f) The residence which the XXXXX listed for sale in XXXXX did not sell. In view of this and for financial and health reasons, and due to proximity to services, in XXXXX the XXXXX entered into an agreement for sale of the remaining XXXXX acres.

5. You have indicated that the XXXXX realized a net gain (i.e. proceeds from the sale of timber in excess of the costs incurred to make such supplies) of approximately XXXXX with a possible additional sum of XXXXX gross) pursuant to the agreement sale). Further, the XXXXX reported the gain as income on their income tax returns, each claiming XXXXX of the revenue generated.

In this case, in order to provide a ruling on whether the sale of the land is taxable or exempt, it is necessary to determine whether the land was, immediately prior to its sale, capital property used primarily in a business carried on by the vendors with a reasonable expectation of profit. If immediately before the sale, the land was not capital property used primarily in a business carried on by the individuals, provided none of the other exclusions in subsection 9(2) of Part I of Schedule V apply, the sale will be exempt and it is not necessary to determine whether the individuals had a reasonable expectation of profit from the business. Conversely, if immediately before the sale, the property was capital property used primarily in a business carried on by the individuals, it will be necessary to determine whether the individual had a reasonable expectation of profit from that business.

Essentially the representative is asking us to provide a ruling on whether the selective logging and associated activities including the receipt of proceeds from a contract logger, constitute a "business carried on" by the XXXXX.

GST/HST Memoranda Series Chapter 1.4, "Goods and Services Tax Rulings", provides for circumstances where rulings should not be issued. The follows excerpts are considered relevant to the case at hand:

It is our view that based upon the information provided such a determination of fact cannot be made. The primary reasons for our view are that:

1. There are insufficient facts upon which to make what is essentially a determination of fact, and

2. Some statements of fact appear, on their face, to be contradictory and, as a result, not all of these facts are likely to prevail.

This is a case where a person's motives for engaging in certain activities are not reasonably clear even though these activities clearly result in a monetary gain for individual land owners. Due to the particular facts of this case, it would likely be necessary to conduct an audit or other examination to establish the relevant facts and to analyze such facts for the purpose of establishing the vendor's motives for having undertaken the logging activity.

The representative has stated that as a result of the individual's recommendation and from information garnered from the forestry meetings, the XXXXX decided that if they were to be good stewards of the forest, they should follow the recommendation to selectively log the forest. However, such a motivation does not preclude the XXXXX from having a concurrent motive of earning income from the sale of the timber to be removed from the subject property.

The representative also stated that the XXXXX decision to log the land was voluntary as they have stated that they were under no legal obligation to selectively log the land. Further there is no evidence that the XXXXX acted out of necessity arising from such considerations as a risk of fire, disease or a similar calamity with respect to the forest.

It is our view that the statements made by the representative in reference to the XXXXX purpose or motive for having logged the land, when taken together with the other pertinent facts, are insufficient to establish whether the XXXXX had, as either a primary or secondary intent, logged the land for the purpose of earning income.

The following facts serve to bring into question whether the XXXXX were motivated to carry out the selective logging strictly for the purposes they have stated:

•   the XXXXX realized a net gain (i.e. proceeds from the sale of timber in excess of the costs incurred to make such supplies) of approximately XXXXX (with a possible additional sum of XXXXX (gross) pursuant to the agreement of sale);

•   the XXXXX reported such a gain as income on their income tax returns, each claiming XXXXX of the revenue generated;

•   the uncertainty as to whether the XXXXX meetings the vendor attended were for the purpose of teaching personal conservation or were for the purpose of teaching commercial conservation (i.e. "the proper way to manage and conserve a forest" from the point of view of improving or maintaining the forest as a commercial resource);

•   since in this case the forest is privately owned, the activity of selective logging, which may be carried out for the purpose of proper management and conservation of the forest, may also be carried out for the complimentary purpose of earning income and/or the realization of a capital gain. For example, the earning of income might occur where the harvested timber is supplied as inventory of a business and the realization of a capital gain might occur where the forest resource is sold together with the land. In other words, the presence of a conservation purpose and the conduct of good forestry practices (i.e. selective logging) does not, in and of itself, provide a reasonable basis for determining whether property was used primarily in a business for purposes of paragraph 9(2)(a) of Part I of Schedule V.

At this stage, based upon the representations made, to make a determination of fact as to whether the logging activity constitutes a business that was carried on by the XXXXX would require a subjective reliance upon some facts at the exclusion of others.

Therefore, in our view the response provided should be limited to a general interpretation of the application of paragraph 9(2)(a) in the context of section 9 of Part I of Schedule V. Such an interpretation could provide a general discussion on the concept of a reasonable expectation of profit and the inclusion of policy P-176R, "Application Of Profit Test To Carrying On A Business", in the response to the client.

Should you require further information, or have any questions on this matter, please do not hesitate to contact me at (613) 954-4393.

Hugh Dorward
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate