28 November 2001 Internal T.I. 2001-0107717 - REASONABLE EXPECTATION OF PROFIT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1 - Reasonable expectation of profit from growing trees

2 - Does section 68 apply to separate the proceeds of disposition from the sale of treed land between the trees and the land?

Position:

1 - General comments.

2 - No

Reasons:

1 - Question of fact.

2 - It has been our long-standing position that timber is not an asset distinct form the land on which the timber stands.

		November 28, 2001

Mr. Phil Jolie	HEADQUARTERS
	Co-ordinator	Jacques E. Grisé
	Manufacturing & Service Industry	957-2059
	Large Business Audit Division
	Audit Directorate
		2001-010771

Reasonable Expectation of Profit

This is in reply to your E-mail of October 25, 2001, requesting clarification with respect to the position taken in our memorandum of October 23, 2001 to Mr. Guy Rocheleau.

The basic rules for determining Part I income tax are contained in sections 3 and 4 of the Income Tax Act (the Act). The two provisions refer to a taxpayer's income from sources such as from an office, employment, business or property. In order to claim a loss from a particular activity, it is necessary for the taxpayer to establish that the loss stems from an office, employment, business or property. In the Supreme Court of Canada decision of William Moldowan v. The Queen, 77 DTC 5213, Dickson J. stated as follows:

"Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R. [1972] C.T.C. 151."

In view of the above, if the particular activities of a taxpayer cannot generate a profit within the taxpayer's expected life span, it is our view that there is no source of income from such activities and losses cannot be claimed.

It is doubtful that a taxpayer forging a partnership with a non-arm's length party to carry on the particular activity would change the above conclusion. However, since a reasonable expectation of profit can only be determined by reviewing the facts of each case, we could only offer our comments on an actual case where a partnership is involved.

It has long been our position that timber is not an asset distinct from the land on which it stands. Thus, it is our view that section 68 of the Act does not apply to deem a certain portion of the proceeds of disposition of treed land to be allocated to the land and the remaining portion to the trees.

John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate

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