30 June 2000 External T.I. 2000-0026075 - Woodlot Management

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: What is the appropriate tax treatment of "silviculture" treatment to a stand of timber?

Position: Question of fact.

Reasons: A review of silviculture expenditures will be made at the time they are incurred to determine the appropriate tax treatment.

						2000-002607
XXXXXXXXXX 								A. Seidel
(613) 957-8974
Attention: XXXXXXXXXX 

June 30, 2000

Dear Sirs:

Re: Woodlot Management

This is in reply to your letter dated May 6, 2000 concerning the deductibility of silvicultural treatment in a forest for tax purposes. This silvicultural treatment could include such activities as thinning a stand of planted softwood trees, selective tree removal to create patches of light in a high value hardwood stand to promote future growth and using existing trees for seed and shade to regenerate a stand of timber that has been harvested.

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local tax services office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R3 ("IC 70-6R3") dated December 30, 1996 issued by the Canada Customs and Revenue Agency (CCRA). Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments.

The determination of how a taxpayer's income from a particular woodlot will be taxed is dependent upon the relevant facts in a particular situation and the intent of the woodlot owner. As indicated in paragraph 4 of Interpretation Bulletin IT-373R2 ("IT-373R2"), some of the factors that are relevant to such a determination include the determination of whether the woodlot is a commercial or a non-commercial woodlot, whether the commercial woodlot is operated as a farm and, if so, whether farming is the chief source of income. Paragraphs 5 through 10 of IT-373R2 discuss the factors relevant to the tax treatment of a commercial woodlot and paragraph 11 of IT-373R2 discusses the tax treatment of a non-commercial woodlot. In the situation where a woodlot is determined to be a capital property and a commercial woodlot, it will be a "timber resource property", as defined in paragraph 13(21)(d.1) of the Income Tax Act (the "Act"), or a "timber limit", which is not defined in the Act.

Interpretation Bulletin IT-481 ("IT-481") discusses the tax treatment of a "timber resource property" and a "timber limit". For income tax purposes, the cost of a timber limit or a right to cut timber from a limit (hereinafter collectively referred to as a "Timber Limit") or a timber resource property is deductible pursuant to the capital cost allowance ("CCA") provisions in the Act. A timber resource property is included in Class 33 of Schedule II of the Income Tax Regulations (the "Regulations"), which has a maximum CCA rate of 15% per year while a Timber Limit is deductible pursuant to the provisions described in Schedule VI of the Regulations. The write off for a Timber Limit is generally computed by reference to the number of cords, board feet or cubic metres cut in a year from a particular Timber Limit. The tax treatment of a timber resource property is also distinguishable from a Timber Limit in that its disposition for proceeds in excess of its capital cost does not result in a capital gain. Generally, the proceeds of disposition of a timber resource property that exceeds the unclaimed costs in Class 33 (the undepreciated capital cost of Class 33) would result in an income inclusion by virtue of G in the definition of "undepreciated capital cost" in subsection 13(21) of the Act and subsection 13(1) of the Act. As stated in paragraph 8 of IT-481, because of the significant difference in the income tax treatment of a timber resource property and a Timber Limit it is important to determine whether an acquired property is a timber resource property or a Timber Limit. Generally speaking, a determination is made as to whether an acquired property fits the definition of a timber resource property and then, in those situations where the requirements of the definition are not satisfied, the property is classified as a Timber Limit.

In the situation where a portion of a timber resource property or a Timber Limit is harvested and sold as part of a "thinning" process or a process designed to discourage invasion by lower value trees, any proceeds from the sales of timber and the related expenses would be included in computing the income of the taxpayer for the year.

In addition, a portion of the original cost of the timber resource property or Timber Limit would also be deductible in accordance with Class 33 or Schedule VI of the Regulations, as the case may be.

Alternatively, in the situation where a woodlot is not held as capital property and the harvesting of timber for sale is part of a normal commercial harvest, the harvesting expenses would be treated as a cost of sale such that these costs would be included in the timber inventory of the woodlot owner.

Whether expenditures in respect of silviculture are deductible in the year they are incurred or a capital cost in respect of future years is a question of fact that can only be determined after a review of all of the circumstances relating to a specific situation. Paragraph 22(a) of IT-373R2 discusses the income tax rules for a commercial non-farm woodlot. Generally speaking, recurring expenditures are deductible in the year they are incurred. Whether a particular planting, thinning or fertilizing expenditure is a recurring expense or on account of capital will depend on the circumstances of each particular case.

Therefore, the management of a stand of timber to maximize the future value thereof will not cause an income inclusion or create a deductible expense in respect of the trees that have not been removed as part of the "thinning" process or as part of a process to control any potential decrease in the value of the trees. The subsequent harvesting of the remaining timber will determine the timing of an income inclusion and the deduction of the related expenses for tax purposes.

Similarly, leaving certain trees to provide natural seeding to replace a stand of timber that is being harvested does not create a deductible expense for tax purposes in respect of those trees left behind. Any subsequent harvesting of these trees and the harvesting of the subsequent new stand of timber will result in an income inclusion and deduction of expenses for tax purposes at the time that they are harvested.

These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on the CCRA.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch