2003 Ruling 2003-0007093 - Gravel-Pit Dependent on use or production

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: Gravel Pit - Dependent on use or production

1) Does paragraph 12(1)(g) apply?

2) What is the cost of the property being sold?

Position:

1) Paragraph 12(1)(g) does not apply.

2) We are unable to rule on the value of the property being sold.

Reasons:

1) The company received a lump-sum payment for a one-time contract over a specified period of time for the removal of all of the gravel.

2) The Directorate does not comment on valuation issues.

XXXXXXXXXX 2003-000709

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

RE: XXXXXXXXXX
Gravel Pit - Dependent on Use or Production
Advance Income Tax Ruling

This is in reply to your letter of February 18, 2003, in which you have requested an advance income tax ruling on behalf of the above-noted corporation. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with this matter.

The mailing address for XXXXXXXXXX business number is XXXXXXXXXX files its federal corporate tax returns at the XXXXXXXXXX Tax Centre and is serviced by the XXXXXXXXXX Tax Services Office.

We understand that, to the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this ruling:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) is under objection by one or any of the taxpayers or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX is engaged in the business of XXXXXXXXXX. In addition, XXXXXXXXXX earns income from the renting of its agricultural land to a related sister corporation that is in the business of XXXXXXXXXX farming ("Farmco"). XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation within the meaning of these terms under subsections 89(1) and 125(7) of the Act, respectively. XXXXXXXXXX is the president and sole owner of XXXXXXXXXX owns XXXXXXXXXX acres of farmland and purchased an additional XXXXXXXXXX-acres of farmland on XXXXXXXXXX for $XXXXXXXXXX. The XXXXXXXXXX acres consists of XXXXXXXXXX acres of workable land, XXXXXXXXXX acres of gravel ("gravel land") and XXXXXXXXXX acres of bush ("bush land"). XXXXXXXXXX does not currently use the gravel land and bush land, as it cannot be used in the XXXXXXXXXX operation nor rented to Farmco. The XXXXXXXXXX acres of workable farmland is zoned as agricultural land.

Proposed Transactions

2. At all relevant times, XXXXXXXXXX deals with XXXXXXXXXX at arm's length for the purposes of the Act. Pursuant to a purchase agreement, XXXXXXXXXX has offered to purchase from XXXXXXXXXX the gravel from the gravel land. The purchase price of the gravel is $XXXXXXXXXX ("purchase price"), which will be paid as a lump sum and will entitle XXXXXXXXXX access to the gravel land to exhaust the "total and whole amount of granular material" up to the limit allowed by the provincial government in the site plan of the gravel land. XXXXXXXXXX has XXXXXXXXXX years to exhaust the gravel from the gravel land and must rehabilitate the land. XXXXXXXXXX will pay all costs relating to the rehabilitation of the gravel land area. XXXXXXXXXX is not entitled to a refund on the $XXXXXXXXXX payment or part thereof if not all of the granular material is extracted within the time limit, subject to the bonus and penalty payments referred to in 3 below.

3. The purchase agreement stipulates:

XXXXXXXXXX shall pay to XXXXXXXXXX the sum of XXXXXXXXXX per calendar year for every full calendar year that the property is rehabilitated prior to the XXXXXXXXXX calendar year ("Bonus Payment"). XXXXXXXXXX shall pay XXXXXXXXXX a further payment of XXXXXXXXXX for each and every full and part calendar year past the XXXXXXXXXX calendar year that the pit lands are not rehabilitated ("Penalty Payment").

4. XXXXXXXXXX, who sold the gravel land together with the other lands to XXXXXXXXXX as described in 1 above, holds the extraction licence issued by the XXXXXXXXXX. This licence was issued on XXXXXXXXXX and has no expiry date. The licence would be cancelled if there is a default in the payment of the $XXXXXXXXXX annual fee. The XXXXXXXXXX issues extraction licences to qualified companies that are in the business of gravel extraction. XXXXXXXXXX has been engaged in the businesses of gravel extraction and construction for many years and will obtain an extraction licence from the XXXXXXXXXX upon cancellation of the licence held by XXXXXXXXXX will pay the $XXXXXXXXXX/ton annual fee to XXXXXXXXXX for each ton of gravel removed in each year. The current extraction licence restricts the removal of material to a maximum of XXXXXXXXXX tonnes in any one calendar year.

Purpose of the proposed transactions

5. The purpose of the proposed transactions is to allow XXXXXXXXXX to recover some of the purchase price of the property and to expand the land used in the XXXXXXXXXX operation.

6. XXXXXXXXXX is in the business of XXXXXXXXXX and is entering into the proposed transactions to secure the supply of gravel required in its business.

Rulings requested and given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we rule as follows:

Paragraph 12(1)(g) of the Act would not apply to XXXXXXXXXX on the disposition of the gravel to XXXXXXXXXX as described in paragraphs 2 to 4 above.

The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency (the "Agency") on May 17, 2002, as amended, and is binding on the Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto which, if enacted, could have the effect on the ruling as provided herein. Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Nothing in this ruling should be considered as implying that the Agency has agreed to the cost or fair market value at any particular time of any property referred to herein.

Yours truly,

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