Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Would there be any capital cost allowance, depletion allowance, or/and other deductions to be claimed by a taxpayer in respect of the cost of the planted seedlings in his/her tree-growing operation when there is tree loss each year due to natural causes. This tree-growing operation includes planting certain types of tree seedlings on the taxpayer's land and growing the trees from these seedlings to a certain height. These trees would be sold on a wholesale distribution basis to nurseries and greenhouses and, in turn, these trees would be re-sold to landscape contractors and other customers for planting.
Position:
No capital cost allowance and depletion allowance in respect of the planted seedlings would be allowed. There might be inventory deduction in respect of tree loss, depending upon the circumstances of the situation.
Reasons:
Similar to the situation in a Christmas tree growing operation as described in paragraph 14 of Interpretation Bulletin IT-373R2, in the case at hand, a stand of trees is not viewed as a timber limit since the output is trees, not timber or similar products. Therefore, the depletion allowance provisions in Schedule VI of the Regulations are not applicable. Furthermore, there is no other depletion allowance or capital cost allowance that would be available for deduction under the Act or Regulations. When the accrual method for income reporting is used and some of the inventory of trees that were being grown for sale are lost due to natural causes, it is expected that the value of the inventory would be affected. Depending upon the particular inventory valuation and inventory reporting that is used, there may or may not be a deduction available. This determination would have to be made by examining the relevant facts of the actual situation. The case at hand can be differentiated from the case of Northwood Pulp and Timber Limited wherein the Court decided that silviculture expenses would be considered as period costs and not inventory costs. The case at hand is similar to a nursery operation and it is not considered as a timber harvesting operation. (See also file #E58517 dated September 19, 1989, wherein we opined that tree seedlings were inventory in a nursery operation.)
2000-001875
XXXXXXXXXX Peter Lee
(613) 957-8977
July 20, 2000
Dear XXXXXXXXXX:
Re: Capital Cost Allowance and Depletion Allowance For Tree-Growing Operation
This is in reply to your letter of March 31, 2000, wherein you have requested our views in respect of the subject matter.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to provide the following general comments which may be assistance to you.
Hypothetical Situation of a Tree-Growing Operation
1. A taxpayer has planted certain types of tree seedlings on his/her land and has grown the trees from these seedlings to a certain height. These trees would be sold on a wholesale distribution basis to nurseries and greenhouses and, in turn, these trees would be re-sold to landscape contractors and other customers for planting. The issue is whether there would be any capital cost allowance, depletion allowance, or/and other deductions to be claimed by the taxpayer in respect of the cost of the planted seedlings in this tree-growing operation when there is tree loss each year due to natural causes.
2. The above-noted tree-growing operation could be considered as a farming business provided that it is carried on with a reasonable expectation of profit. (See paragraphs 8 and 9(c) of the Interpretation Bulletin IT-433R entitled Farming or Fishing - Use of Cash Method, and paragraphs 12 to 14 of the Interpretation Bulletin IT-373R2 entitled Woodlots.) This is a question of fact to be determined.
3. When there is a farming business, pursuant to section 28 of the Income Tax Act (the "Act"), the taxpayer may elect to report income from this tree-growing operation on the cash basis. The cash basis means that the expenses are deductible when paid. Under this method, the cost of seedlings in the above-noted situation would have been deducted when payment was made for the seedling purchases whereas under the accrual method, these costs would not have been deducted, generally until the trees are sold. Under subsection 28(3) of the Act, once the taxpayer has elected to use the cash basis method, the same method must be used each year except as provided by this subsection. When the accrual method is used and some of the inventory of trees that were being grown for sale are lost due to natural causes, it is expected that the value of the inventory would be affected. Depending upon the particular inventory valuation and inventory reporting that is used, there may or may not be a deduction available. This determination would have to be made by examining the relevant facts of the actual situation.
4. The above-noted tree-growing operation appears to be similar to a Christmas-tree-growing operation that is described in paragraph 14 of Interpretation Bulletin IT-373R2. It is stated in paragraph 14 as follows:
A stand of Christmas trees is not viewed as a timber limit since the output is trees, not timber or similar products, and the depletion allowance in Schedule VI of the Income Tax Regulations is not applicable.
Similarly, it is our view that the depletion allowance in Schedule VI of the Income Tax Regulations (the "Regulations") would not apply to this tree-growing operation and there is no other depletion allowance or capital cost allowance that would be available for deduction under the Act or Regulations in respect of the planted seedlings in this operation that are lost due to natural causes.
Other than as expressly stated above, our comments do not apply to the other different types of assets, equipment or structures that may be involved in this type of operation. We hope that our comments are helpful to you. These are only our general views on the matter and do not constitute an advance income tax ruling and accordingly they are not binding on the Canada Customs and Revenue Agency in accordance with paragraph 22 of Information Circular 70-6R3 as amended.
Yours truly,
John Chan, CA
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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