7 August 2002 External T.I. 2002-0128475 - Woodlots

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: Whether the revenue from the sale of trees is on account of income or capital.

Position: It is a question of fact. General comments given. Based on the facts provided in this situation the revenue would be on account of income.

Reasons: The individual's activities have a sufficient degree of commerciality to consider the revenue to be income.

2002-012847
XXXXXXXXXX D. Shugar
(613) 957-2134
August 7, 2002

Dear XXXXXXXXXX:

Re: Woodlots

This is in reply to your letter of March 4, 2002 wherein you requested our views on the income tax treatment of the revenue you will receive on the sale of trees from your woodlot. In your letter, and in your conversations with us on May 29 and May 30, 2002 (Shugar/XXXXXXXXXX), you provided us with the following information:

In XXXXXXXXXX, at a cost of approximately $XXXXXXXXXX you planted XXXXXXXXXX tree seedlings on XXXXXXXXXX acres of farmland to enable you to use the land for recreational purposes. You also planted XXXXXXXXXX trees as a windbreak along a road on your property. Your property consists of approximately XXXXXXXXXX acres of land, of which XXXXXXXXXX acres surrounds your house, XXXXXXXXXX acres is bush, XXXXXXXXXX acres is woodlot, and the remaining land, approximately XXXXXXXXXX acres, is farmland that is leased to a farmer. You are retired and have no previous farming experience or experience with woodlots. You stated that, at the time the trees were planted, the only purpose for planting them was to enhance the usability of the property for your own recreational activities.

You have recently learned that the trees were planted too close together and the woodlot should be thinned in order to give the remaining trees room to grow. You intend to have approximately half of the trees dug up and wrapped in burlap and wire baskets so they can be sold and replanted. You expect that the harvest will take between five and six years to complete.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. The procedure for making an advance income tax ruling request can be found in Information Circular IC-70-6R5 which is available on our website (www.ccra-adrc.gc.ca) under Income Tax, Technical Publications. The determination of whether payments made to a taxpayer are on account of income or capital is a question of fact that can only be made after reviewing all of the facts in a particular situation. Such issues are generally best resolved by officials of your local Tax Services Office, as they are in a better position to appreciate all the facts of each case. However, we are prepared to provide the following comments based on the information you provided.

Interpretation Bulletin IT-373R2, Woodlots, (Consolidated) ("IT-373R2"), addresses the taxation of woodlot owners and operators. How a taxpayer's income from a woodlot will be taxed is dependent upon the facts of a particular situation and the intent of the woodlot owner. As indicated in paragraph 4 of 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.

If a taxpayer operates the woodlot as though it were a business, it is a commercial woodlot. Factors relevant in determining the existence of a business include the planning involved in the operation, effort made, time spent, and extent of the activity. As indicated in paragraph 4 of IT-373R2, a taxpayer can also have business income with respect to a woodlot if the taxpayer has income from an adventure or concern in the nature of trade. The primary consideration in determining whether an activity is an adventure or concern in the nature of trade is whether the taxpayer's actions with regard to the property in question were essentially what would be expected of a dealer in the same property. Interpretation Bulletin IT-459, Adventure or Concern in the Nature of Trade ("IT-459"), which is also available on our website, provides details on how to determine whether an activity is an adventure or concern in the nature of trade.

Based on the information you provided in your letter and our conversations, it is our view that the activities you intend to carry out, of harvesting and selling trees over a period of five or six years, constitute a commercial woodlot operation. The activities you intend to carry out have a degree of commerciality that leads us to conclude that there is a source of income which is taxable under subsection 9(1) of the Income Tax Act. However, a final determination can only be made following a review of all the facts of the situation. Reasonable expenses related to the sale of the trees would be deductible in computing income.

We hope our comments are helpful.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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